Document ofThe World Bank

Report No: 24146-PK

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED CREDIT

IN THE AMOUNT OF SDR 16.1 million (US$20.0 million equivalent)

TO THE

ISLAMIC REPUBLIC OF PAKISTAN

FOR

AJK COMMUNITY INFRASTRUCTURE AND SERVICES PROJECT

May 9, 2002

Energy and Infrastructure Sector UnitSouth Asia Regional Office

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CURRENCY EQUIVALENTS

(Exchange Rate Effective May 1, 2002)

Currency Unit = Pakistan Rupee (Rs.)Rs 1.0 = US$0.02

US$1.0 = Rs 60.1

FISCAL YEARJuly I -- June 30

ABBREVIATIONS AND ACRONYMS

CAP Community Action PlanCBO Community Based OrganizationCAS Country Assistance StrategyCDS Community Development SchemesCIS Community Infrastructure SchemesDO District Office (of LGRDD)CISP Community Infrastructure and Services ProjectDFID Department for Intemational Development (UK)EMF Environmental Management FrameworkFMM Financial Management ManualGoAJK Government of Azad Jammu and KashmirGoP Government of PakistanHESA Health and Environmental Sanitation AwarenessKKP Kushal Kashmir ProgramLGRDD Local Government and Rural Development DepartmentMC Municipal CouncilMOA Memorandum of AgreementNWFP CIP Northwest Frontier Province - Community Infrastructure ProjectNGO Non Governnent OrganizationOM Operational ManualPMCC Project Management and Coordination CommitteePS Project SecretariatPSC Project Steering ConmuitteePPAF Pakistan Poverty Alleviation FundRWSS Rural Water Supply and SanitationSA Social Assessment

YAP Youth Academy of Pakistan

Vice President: Mieko NishimizuCountry Manager/Director: John W. Wall

Sector Manager/Director: Sonia Hammam/Vincent GouameTask Team Leader/Task Manager: Julie G.Viloria-Williams

PAKISTANAJK COMMUNITY INFRASTRUCTURE AND SERVICES PROJECT

CONTENTS

A. Project Development Objective Page

1. Project development objective 22. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 32. Main sector issues and Government strategy 33. Sector issues to be addressed by the project and strategic choices 5

C. Project Description Summary

1. Project components 72. Key policy and institutional reforms supported by the project 83. Benefits and target population 94. Institutional and implementation arrangements 11

D. Project Rationale

1. Project altematives considered and reasons for rejection 142. Major related projects financed by the Bank and other development agencies 153. Lessons learned and reflected in the project design 164. Indications of borrower commitment and ownership 175. Value added of Bank support in this project 18

E. Summary Project Analysis

1. Economic 182. Financial 193. Technical 214. Institutional 215. Environmental 236. Social 267. Safeguard Policies 29

F. Sustainability and Risks

1. Sustainability 30

2. Critical risks 313. Possible controversial aspects 33

G. Main Credit Conditions

1. Effectiveness Condition 332. Other 33

H. Readiness for Implementation 34

I. Compliance with Bank Policies 35

Annexes

Annex 1: Project Design Summary 36Annex 2: Detailed Project Description 41Annex 3: Estimated Project Costs 48Annex 4: Cost-Effectiveness Analysis Summary 54Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 54Annex 6: Procurement and Disbursement Arrangements 61Annex 7: Project Processing Schedule 76Annex 8: Documents in the Project File 77Annex 9: Statement of Loans and Credits 78Annex 10: Country at a Glance 81Annex 11: Organization Chart 83Annex 12: Environmental Management Framework (EMF) Social Assessment Summary 84

MAP(S)not applicable

PAKISTANAJK Community Infrastructure and Services Project

Project Appraisal Document

South Asia Regional OfficeSASEI

Date: May 9, 2002 Team Leader: Julie G. Viloria-WilliamsCountry Director: John W. Wall Sector Director: Vincent GouarneProject ID: P071454 Sector(s): MC - Community Action Program, UY - Other

Urban DevelopmentLending Instrument: Specific Investment Loan (SIL) Theme(s): Rural Development; Urban

Poverty Targeted Intervention: Y

Project Financing Data[ Loan [X] Credit ] Grant [ Guarantee [ Other:

For Loans/Credits/Others:Amount (US$m): 20

Proposed Terms (IDA): Standard CreditGrace period (years): 10 Years to maturity: 35Commitment fee: 0.50%Financing Plan (US$m): Source Local Foreign TotalBORROWER 3.80 0.00 3.80IDA 19.00 1.00 20.00LOCAL COMMUNITIES 3.35 0.00 3.35Total: 26.15 1.00 27.15

Borrower: ISLAMIC REPUBLIC OF PAKISTANResponsible agency: LOCAL GOVERNMENT RURAL DEVELOPMENT DEPARTMENT (LGRDD)Local Government and Rural Development DepartmentAzad Jammu and Kashmir (AJK)Address: Muzafarrabad, PakistanContact Person: Sardar Riaz Ahmad Khan, Secretary of Local Government, Rural Development Department (LGRDD)Tel: 0092-58810-33124 Fax: 0092-58810-33125 Email: Riaz_Sec@Hotmail.com

Estimated Disbursements ( Bank FY/US$m):FY 2003 2004 2005 2006

Annual 3.00 6.00 6.00 5.00Cumulative 3.00 9.00 15.00 20.00

Project implementation period: up to 4 yearsExpected effectiveness date: 07/15/2002 Expected closing date: 12/31/2006

OCS PAD F: R. Md 2WO

A. Project Development Objective

1. Project development objective: (see Annex 1)

The objective of the proposed project is to improve the well-being of unserved and underserved low incomecommunities through the delivery of cost effective and sustainable community development schemes, andbasic infrastructure and services, using participatory community-based approaches. This would beachieved by: (i) strengthening the role and capabilities of local governments at the district and lower levelsto extend technical, financial, and management support to community-based organizations (CBOs); (ii)mobilizing and building the capacity of CBOs to increase their participation in development activities; and(iii) effective governance, transparency, and accountability through improvements in operational,monitoring and evaluation, and financial and budgetary procedures for project implementation.

In the context of the Government's plan to decentralize administration to local governments, the Project willsupport the development of a participative development framework to be implemented by the district andother lower levels of government working closely with communities and their community-basedorganizations (CBOs).

2. Key performance indicators: (see Annex 1)

The monitoring and evaluation (M&E) system proposed for the Project will determine the benchmarkswhich all stakeholders feel are critical for successful project implementation and their own learning. Adraft set of key indicators have been agreed in principle during project appraisal and a final set ofindicators has been agreed at negotiation.

Summary of Output/implementation indicators:

CBOs formed and registered;Community and local government training conducted;Community action plans (CAPs) prepared and approved;Community infrastructure (CI) scheme layout plans completed;Community development (CD) activities completed;Beneficiary contributions and counterpart funds deposited, as a percentage of the annual cost of CIschemes; andO&M fund mobilized and deposited by CBOs/user committees.

Summary of Outcome/impact indicators:

Number and distribution of communities which implemented CI and CD schemes;Proportion of infrastructure facilities in working condition;Lower unit cost of CI schemes completed, compared with standard government schemes;Strong CBOs and women groups as evidenced by new development activities initiated independently ofCISP;Increase in the percentage of GoAJK investment budgets managed by district and other lower units ofgovenmment; andImproved planning, budgeting, and reporting of investment in CI and CD schemes and services bylower levels of government.

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B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex l)Document number: 15115 Date of latest CAS discussion: 12/29/1998

The Board also discussed the Progress Report on June 12, 2001 (Document number R2001- 76:IDA/R2001-73). The Interim Poverty Reduction Strategy Paper was discussed at the Board on December 4, 2001(Document number IDA/SecM2001-0677). Poverty reduction has been accorded the highest priority inPakistan's Country Assistance Strategy (CAS) distributed to the Board on December 29, 1998. This is to beachieved through: (i) improved macroeconomic management; (ii) a more efficient govemance structure; and(iii) a stronger institutional structure to deliver services and infrastructure to low income groups. Theproposed project will make an important contribution to the overall objective of reducing the effects ofpoverty by: (i) supporting the Govemment's efforts to decentralize administration effectively with greaterreliance on public participation for community development; and (ii) helping to create a more effectiveinstitutional structure for the delivery of infrastructure and services to low income communities.

It is in keeping with the ongoing decentralization efforts that the new CAS for Pakistan is being prepared,with consultations at the district and village levels. A key reform that is called for is to build the institutionalcapacity of local governments and make them more accountable to their citizens. Not only is the proposedproject directed towards achieving this goal; it will also build the capacity of communities for participatoryplanning and management of pro-poor community development and infrastructure investments in rural,peri-urban, and urban areas. It proposes to do so by building upon a number of successful experiences withthese types of interventions in Pakistan.

2. Main sector issues and Government strategy:

Forty percent of Pakistan's population live in conditions of absolute poverty, manifested by low levels ofliteracy, high incidence of malnutrition and diseases, and low labor force participation. Low income rural andurban communities live in unserved or underserved settlements with poor environmental conditions.Residents suffer from a range of diseases caused by polluted drinking water, poor sanitation, and inadequateprovision of health care. Seasonal illnesses, like colds and flu, as well as malaria, diarrhea, and dysentery arecommon. A 1998 census shows that only 34.58 percent of the rural population has access to piped watersupply (house connection) while more than 65 percent fetch water from communal sources. These indicatorsof poverty are particularly pronounced among women who suffer from deeply rooted cultural andinstitutional constraints that prevent them from attaining their full potential and in playing a significant role incommunity development. However, the Govemment of Pakistan (GoP) has now realized the urgent need fora new policy approach and strategy to address this problem. Several positive actions have already been takenin this direction since the beginning of this decade, including the Govemment's recent effort to promote and/or improve women's education and place in the society.

Poverty. Azad Jammu and Kashmir (AJK) suffers many of the same problems as the rest of Pakistan, asrevealed in a Social Assessment study prepared as part of project preparation (see Annex 12). Around 88percent of the territory's 2.9 million people live in rural areas and are dependent on forestry and agriculturefor their livelihood. Reduced agricultural productivity has greatly affected the traditional lifestyle andstimulated an increase in out-migration for off-farm employment. Unemployment remains a major problem,ranging between 35 and 50 percent. Women have had to undertake many tasks previously performed by menand, in spite of extemal remittances, the average annual per capita income in AJK is only between US$ 185and 200, half the average income of a Pakistani. With its mountainous terrain, its small scattered ruralsettlements (and hence the lack of major urban centers), poverty is widely and fairly evenly distributed acrossAJK, with only Mirpur district in slightly better socioeconomic conditions.

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Lack of basic infrastructure and services. Some progress in increasing access to basic infrastructure andservices has been made in AJK in the last few years. The RWSS project in AJK has provided access topotable water to almost 35 percent of the population. This still leaves a significant deficit in water supplycoverage. Moreover, deficiencies in sanitation, solid waste collection and disposal facilities, and drainage,which were not covered by the RWSS project, remain very high. Literacy has increased in some districts asevidenced by the 1998 census data which show a 48 percent literacy rate in four districts, a significantincrease from only 10 percent in the last 20 years. Despite recent successes, however, much more remains tobe done to improve existing low levels of infrastructure and services. More than 60 percent of the populationstill has no direct access to water supply. Most settlements have dirt roads which are impassable during therainy season, thereby limiting economic opportunities, as well as access to market and other inputs.Residents are not able to obtain skills training and micro-credit, which are needed to help them improve theirincome. A declining number of students (particularly girls) in secondary education and the absence of girls'middle and high schools in most areas are major drawbacks in efforts to improve female education.

Inadequate mechanismsfor sustained infrastructure and service delivery. Local governments at thedistrict and municipal levels lack the institutional, technical, and financial resources needed to addressexisting deficiencies in local infrastructure and services, let alone expand them to meet increasing demands.Faced with these constraints, they continue to depend on the Government of AJK (GoAJK) for theiroperational requirements. Where infrastructure exist, local governments fail to ensure their effectiveoperations and maintenance (O&M), partly due to financial constraints, partly due to institutionalweaknesses, and partly due to unwillingness on their part and on the part of communities to accept O&Mresponsibilities for works completed by higher levels of government.

GovernmentStrategy. The GoP, in its Poverty Reduction Strategy Paper (November 2001), posits afour-pronged approach to alleviating poverty: (i) implementing macroeconomic policies that foster growthand employment generation; (ii) achieving higher growth through an efficient governance structure; (iii)implementing programs that deliver infrastructure and services to low income groups; and (iv) establishingstronger social safety nets. The proposed project directly supports objective (iii). It will also contribute to acertain extent to objectives (ii) and (iv) by strengthening the capacity of local governments for infrastructureand services delivery, the cohesion of communities through participatory processes, and the role of women incommunity development.

The Government has adopted several poverty alleviation initiatives, including the Pakistan PovertyAlleviation Fund (PPAF), an NGO-supported program that has successfully financed smaller projects, suchas the establishment of a micro-credit bank (Kushali Bank), and its food support program. It has alsoimplemented some significant policy reforms under the Social Action Program (SAP), which promotes moreeffective locally-based and demand-driven programs. The Government is also committed to decentralizeauthority to the district, tehsil, and union council levels to enable them to work more closely withcommunities in developing and implementing local projects. Its decentralization plan calls for new localgovernance structures and elections at the local level to mobilize communities to participate more actively intheir own development, and to induce more responsiveness from local officials and politicians. The NationalReconstruction Bureau, which is spearheading the devolution program, has requested the Bank for assistancein propagating community-based initiatives. As part of the new local government structure, a Citizens'Board will be established in each local council to strengthen the communities' role in decision-making.

In addressing deficiencies in infrastructure and services, some of the Government's previous effortsencountered problems because the communities were not involved in planning and decision-making. In somecases, residents rejected the government-provided infrastructure and services; in others, the latter were notmaintained and the residents did not pay their share of the costs. However, recent projects have successfullyaddressed these problems. The Bank-supported RWSS Project, which closed on June 30, 2000, has

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developed a promising approach to delivering rural water and sanitation services in AJK and Sindh. AnotherBank-assisted project, the Community Infrastructure Project (CIP) in Northwest Frontier Province (NWFP),has effectively organized local communities to plan, finance, and implement community infrastructureprojects at considerably lower cost than other comparable government projects. Other examples ofsuccessful demand-driven approaches to the provision of local infrastructure are the Orangi Pilot Project inKarachi, the upgrading of "katchi abadis" (informal settlements on government land) in Sindh, and therecently completed Faisalabad Upgrading Project in Punjab supported by the Department for InternationalDevelopment (DFID).

In its effort to promote a nationwide community development program and reach as many low incomecommunities as possible, the GoP initiated the Kushal Kashmir Program (formerly Integrated Rural andUrban Development Program or IRUDP), in March 2000 and allocated funds of about Rs. 21 billion,initially for community infrastructure projects. Unfortunately, the program was prepared hastily and did notdraw on the lessons leamed from the above-mentioned successful programs. In particular, its procedures didnot take into account the need for community participation and mobilization in advance of physical works,and for building community ownership of infrastructure investments by encouraging community contributionsto capital costs and community responsibility for operation and maintenance.

More recently, the GoP has stated its renewed interest in a more refined, more participatory version of theKushal program. It has recognized that it is necessary to build community programs from the bottom up,maximizing participation of local communities. The Government has requested the Bank to work with it inassisting the countrywide Kushal program of delivering demand-driven infrastructure and services tocommunities. It has made a policy decision to proceed with the program on a province-by-province basis toraise public awareness, mobilize participation, and develop the necessary institutions to effectively carry itout. With the good practices that have evolved in such projects as the RWSS and CIP-NWFP, theGovernment has requested the Bank to develop similar operations first in AJK, then in the Sindh Province,under the umbrella of the Kushal program. Interests to undertake the same in Punjab and Balochistan havealso been raised. Therefore the key issue now for the Government is how to put into operation as quickly aspossible an effective, countrywide, demand-driven, decentralized program of infrastructure and servicesprovision for low income communities, while ensuring their acceptability and sustainability in thesecommunities.

3. Sector issues to be addressed by the project and strategic choices:

The proposed project will directly address the key issue of delivering basic infrastructure and services tolow income rural, peri-urban, and urban communities in AJK, and building community and localgovernment capacity for community-based development. It will embody the good practices of participativedevelopment as have been successfully demonstrated by the RWSS project, the CIP-NWFP, and othersimilar community-driven initiatives in Pakistan. A strategic choice has been made to build on theseexperiences and incorporate their successful features in the proposed project by: (a) adoptingcommunity-based, participatory approaches through which all members of the community, includingtraditionally disadvantaged groups, such as women and youth, are represented in identifying localinfrastructure and community development needs, as well as in the planning, design, and implementation ofcommunity schemes to address these needs; (b) selecting beneficiary communities on the basis of theircommitment to participate in the project, as evidenced by their willingness to share its costs and to organizethemselves into CBOs or user committees for its implementation; and (c) providing an integrated physical,social, and economic services to maximize benefits to communities.

The CISP will also be in direct support of the Government's decentralization policy, and will addressinstitutional weaknesses at the district, tehsil, and lower levels of government. It will do so by incorporating

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capacity building and institutional strengthening of local governments as a fundamental component of theProject (see C. I below on Project Components).

CISP would also address several other issues, such as:

Harmonization with other Governmentprograms. Various projects that seek to foster the developmentof rural and urban communities in Pakistan are being implemented. As mentioned earlier, one is thePakistan Poverty Alleviation Fund (PPAF), which is oriented to micro-projects, largely in remote areas,designed and implemented with very little Government involvement. Another is the CIP in AJK'sneighboring province, the NWFP, which implements community-contracted infrastructure at lower costs(average 35%) than Government-contracted schemes, given the same level of service and constructiondesign standards.

CISP will harmonize its operations with the approaches of these ongoing programs not only to make moreefficient use of available government resources, but also to ensure its complementarity with these otherdevelopment interventions. It will focus on community infrastructure and community developmentactivities to be provided in a highly participative manner in partnership with local governments.

Community contribution and government subsidy. The proposed financing under CISP is designed tomake it affordable both to the Govenmment and the communities. As experience with the RWSS projectand CIP-NWFP shows, communities have made contribution in excess of 20 percent of the cost ofcommunity infrastructure. Affordability, therefore, is not a problem. Experience also shows that servicelevels adapt to comnmunity income so that adjustments in service design take care of the problem ofdifferential ability of communities to pay. The proposed project will therefore rely on variable designstandards to deal with differential capacity to pay by different communities. It will assist communities inidentifying altemative levels of infrastructure with costs that are not beyond their capacity to mobilizehousehold contributions or pay user charges, and that are appropriate for community-level maintenance.The Project will make sure that the communities fully understand the recurrent cost implications and theO&M requirements of the community infrastructure (CI) and complementary community development(CD) schemes they select.

Consistency/convergence ofpolicy on infrastructure and service delivery. CISP is designed such thatthe policy framework within which it proposes to operate (see C.2 below) would be consistent with those ofthe other aforementioned community-based, infrastructure-related projects being undertaken by the GoP.

CISP has also made the strategic choice to respond to the GoP's request for assistance in strengthening itsKushal program which it (GoP) seeks to achieve by developing and executing as rapidly as possible aseries of decentralized projects, to be administered at the district and lower (tehsil) levels. CISP in AJK isproposed to be the first of these projects, and would seek to help put into operation the countrywideprogram. It envisages that in the medium and long term, its operations and those of the other ongoingrelated projects in AJK would merge or evolve into the more unified Kushal program that would financedifferent types and levels of infrastructure in different types of low income communities nationwide.

Attending to the needs of urban and peri-urban areas. While the population of 'urban' areas (centerswith more than 4,000 people) makes up only 10 percent of AJK's total population, it is growing rapidly inthe periphery. All urban areas, however, are small (Mirpur, with 100,000 population, is the largest city).They are mainly market centers, with bazaars and local administration offices fonning a small urban core,and the peri-urban settlements lining the access roads. The latter have a somewhat higher populationdensity and are faced with more environmental problems, most notably the lack of basic environmentalfacilities, such as water supply, sanitation, drainage, and internal pathways. The proposed project hasmade the strategic choice of applying the models on which it is based (i.e, RWSS, CIP-NWFP, and other

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successful community operations) in a small number of urban and peri-urban communities, given thatthere is only very limited experience with decentralized operations in these communities. Based oninformation from the study being conducted by the Environmental Protection Agency (EPA) of GoAJK onthe urban sewerage and drainage system in AJK, CISP would ensure linkage of its schemes in urban andperi-urban communities with the main (trunk) infrastructure projects being implemented or planned forimplementation by the GoAJK, the district governments, and/or the urban local bodies.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

The Project will have three complementary components, briefly described as follows:

(a) Decentralized planning and implementation assistance (US$ 3.08 million). This componentwill develop the capacity of the state, district, communities/CBOs through: (i) specialized services andtraining assistance in institutional strengthening through improved procedures for project implementation,monitoring and evaluation, and training and capacity building activities; (ii) project implementationsupport, through incremental staff cost for state, district and field staff; (iii) operating costs and recurrentcost; (iv) Pakistan and overseas learning visits; and (v) Studies on; (i) water quality testing and (ii)baseline/time savings including time bound knowledge attitude practice (KAP) surveys. This componentwill finance capacity building activities and services by consultants and other service providers (such aslocal consulting groups, private sector firms, NGOs, training and academic institutions).

(b) Community development (US$ 2.133 million). This component will include: (i) mobilization,organization, and capacity building through training and technical assistance in the development ofCommunity Action Plans (CAP) as the basis for the active participation of communities in the planning,implementation, and management of their development programs including systematic training on variousparts of the scheme cycle including survey design, construction technologies and community initiatives, andfield support activities; (ii) health and environmental sanitation awareness (HESA) program to reducemorbidity by generating demand for safe water, sanitation, and other basic infrastructure, and for theimprovement of the overall environment; and (iii) support to women and children (SWC) in areas of health,skills and management training, economic/functional literacy, and livelihood improvement through linkageswith economic and micro-credit facilities. A complementary economic literacy (or functional literacy)assistance as appropriate will be provided for 10 to 15 percent of participating community households;emphasis will be on adult literacy and in activities to help deal with other emerging urban challengesespecially for the youth living in many urban low income areas. This component will finance mostlycapacity building and training activities for the CBOs and their members, and related equipment as needed.

(c) Community infrastructure (US$ 21.94 million). This component will involve investments inbasic infrastructure and services, with priorities to be established in partnership with the conmnunitiesthrough their CBOs. This operation is designed in such a way that the actual locations of the proposedinterventions are not identified at this stage since a demand-driven planning approach will be used duringimplementation. A menu of infrastructure to be provided includes: (i) water supply; (ii) communitylatrines; (iii) drainage; (iv) street pavements; (v) street lighting; (vi) primary solid waste collection; (vii)internal pathways; (viii) foot bridges; and (ix) tagging/numbering streets. Trunk and other specializedinfrastructure facilities will also be included to ensure that basic infrastructure functions efficiently.Particular attention will be given to ensuring the integration of community programs, e.g., water supplyand/or sanitation schemes with health and sanitation activities. The Project will finance civil works and

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related equipment, technical services for pre-feasibility studies and infrastructure design, and capacitybuilding in supervision of works, operation and maintenance, project monitoring, etc.

Costs shown below have been. agreed at the conclusion of negotiations.

Indicative Bink- % ofComponent Sector Costs % of financing Bank-

(US$M). Total (US$M) financingDecentralized Planning and 3.08 11.3 3.00 15.0Implementation AssistanceCommunity Development 2.13 7.8 2.00 10.0Community hifrastructure & Services 21.94 80.8 15.00 75.0

Total Project Costs 27.15 100.0 20.00 100.0Total Financing Required 27.15 100.0 20.00 100.0

2. Key policy and institutional reforms supported by the project:

Policy Reforms

The proposed project will develop for GoAJK a consistent policy and operational framework for thedelivery of affordable and sustainable infrastructure and services to low income communities, utilizing aparticipatory and decentralized approach. The salient features of this framework within which theproposed project will operate (as already agreed with the GoP and GoAJK) are:

* provision of integrated social, economic and physical infrastructure and services to low incomecommunities in rural and urban low income communities of AJK;

* priority to those communities which demonstrate commitment to participate in the project throughtheir capacity for social organization, ownership, and cost sharing;

* communities organized into Community Based Organizations (CBOs) or user committees toparticipate in and be jointly responsible for the identification, design, and implementation ofcommunity development activities, and infrastructure and services, and to be fully responsible forsubsequent O&M; CBOs and user committees to be registered under an appropriate registrationmechanism;

* communities to contribute the land required for CI schemes and at least a 20 percent share of thecapital costs of these schemes in a cost sharing arrangement (other than trunk infrastructure) withthe project, plus 100 percent of the O&M costs of these schemes. Final cost sharing arrangementswill be included in a Community Financing Agreement signed by all household members;

* individual households choosing a higher level of service will pay a cash fee for covering theincremental capital costs;

* facilitation of access to small scale credit for home improvement, utility connections, and smallbusiness development under existing government and private programs;

* use of service providers and NGOs for specific community organization and capacity buildingactivities and other support services, as needed; and,

* convergence of policies, criteria, and procedures of the proposed operation with those of the otherprograms undertaken by the government and/or other donors, particularly the Kushal KashmirProgram.

The outcome of the proposed AJK operation, along with lessons learned from the successful experienceswith the RWSS Project and the CIP-NWFP, will provide a sound basis for the application of the approach

to the Kushal Pakistan Program to other provinces of the country.

Institutional Reforms

The GoP is committed to decentralizing development administration to local governments and has in factadopted decentralized project operations in recent years. Under the proposed project, capacity building oflocal governments is a major component. Intensive training efforts will be undertaken, and these will bedirected at: (i) local governments at the district, tehsil, and union council levels to strengthen their capacityto extend technical, financial, and management support to communities; and, (ii) the communities toimprove their skills at such participatory processes as Community Action Planning (CAP) so that theirinvestment decisions sufficiently reflect their actual needs and priorities, and to build their capacity forproject and financial management, project operations and maintenance, monitoring and evaluation, andother complementary community development activities (e.g., undertaking community hygiene activities tocomplement water supply and sanitation projects).

The AJK component of the completed RWSS project which has an overall satisfactory rating, wasconsidered most successful compared to its operations in Sindh and Balochistan provinces, particularly indevolving responsibilities to lower tiers of Government, The CIP-NWFP is being implemented reasonablywell, though there were a number of management and project design issues earlier which have now beenresolved. The Kushal Pakistan Program has developed fast track administrative procedures, some of whichGoAJK is considering to use under the proposed project without sacrificing quality and the participatoryaspects of the operation. Because of considerable lessons learned from experiences with these projects,decentralized operations of rural infrastructure and services projects under CISP is expected to gorelatively smoothly. However, since there is very limited experience with decentralized operations in urbancommunities, a relatively small number of communities will be included and appropriate modalities fororganizing them for infrastructure and other community development activities, and for working with urbanlocal bodies (municipal corporations, municipal committees, and town councils), will start at the secondyear of CISP operations, to ensure that the start up activities needed to undertake the approach in the urbanareas are working well.

It would extend the successful features of earlier RWSS and CIP infrastructure by: (a) relying on thecommunity-based approach whereby the men, women and children define the problems and issues of thecommunity and design practical solutions; (b) competitively selecting communities based on their humanand financial commitment; (c) integrating physical, social and economic component, managed and mediatedby the CBOs; and (d) continuing to incorporate and strengthen the role of women through specific activitiesto ensure that potential benefits to women are achieved (e.g. reflection of gender issues, orientation, trainingand development of women through relevant socioeconomic, skill and management training programs).

3. Benefits and target population:

The main benefits from the proposed operation can be grouped into:

(a) Increased access to basic infrastructure and services in low income rural and urban communities. Improved water supply, drainage, solid waste collection, and sanitation facilities, along with communityhygiene and environmental awareness programs, lead to improvement in health, which in turn wouldincrease productivity. Clean water supply lessens the incidence of waterborne disease, and so doesimproved sanitation facilities. Drainage prevents the accumulation of used water, which is a source ofgroundwater contamination and a breeding ground for disease carriers, improve the quality of the

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environment, and prevent drains and sewers from clogging. Positive impact on productivity also resultsfrom time savings owing to better access to facilities, i.e., from reduced time spent on collecting water (withbetter access to water supply) or on commuting (with improved roads). In addition, the Project will have adirect positive impact on income, e.g., from employment-generating infrastructure work in communities,and indirectly from increased access to markets.

(b) Strong community capacityfor participation in and management of developmentprojects.Supporting comrnmunity organizations and their internal organizations and procedures are a key to creatingstrong communities. Strengthened community capacity is a prerequisite not only to a more efficientexecution of infrastructure and other community development activities, but also to a more equitabledistribution of benefits and more sustainable results. In addition, participatory approaches also ensure thatthe needs and priorities of traditionally disadvantaged groups are represented in community developmentefforts. The monitoring and evaluation (M&E) system, along with beneficiary assessments and impactstudies to be supported under CISP, will place due emphasis on the impact of the Project on these groups.

(c) Greater local government capacity. Providing technical assistance, training, and otherinstitutional support to local governments, and improving their internal management and financialprocedures, will enhance their capacity for decentralized administration and their ability to lend assistanceto community operations. By decentralizing decision-making authority and funds to the local level forproject implementation, CISP would also help facilitate the Government's decentralization efforts.

The proposed project is envisaged to bring the above benefits to rural, urban, and peri-urban low incomecommunities, with emphasis on those which have a serious lack of essential infrastructure and services.Although in principle, the beneficiary communities are inclusive of all poor, unserved and underservedcommunities, priority will be given to those which demonstrate a willingness to directly and activelyparticipate in project implementation and abide by the policy framework within which the Project proposesto operate (see C.2 above on Policy Reforms).

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4. Institutional and implementation arrangements:

Institutional and implementation arrangements. The proposed project will utilize the existinginstitutional structure of LGRDD -- its district offices (DOs) covering its rural wing, and municipalcouncils (MCs, i.e., municipal corporations, municipal committees or town councils) for urban activities --without creating any add-on project implementation unit. The management of the project will be based ona decentralized, demand-responsive structure that will grant local DOs, MCs and participating CBOs asmuch decision-making authority as possible, and will promote community ownership of and responsibilityfor operation and maintenance of infrastructure investments. The key features of the proposedorganizational structure and functional responsibilities are described below:

At the highest level in AJK a small advisory committee, to be called the Project Steering Committee(PSC), will be convened from time to time under the Additional Chief Secretary (ACS), Development, toadvise on policies and provide overall guidance for project implementation. The PSC would compriseSecretary level representation from the relevant departments, such as the departments of Finance, LGRDD,and others, as appropriate, to ensure coordination among these line agencies. The LGRDD, headed by theSecretary, will have overall responsibility for project implementation, to be assisted by a ProjectSecretariat (PS) which will be responsible for project management, and will provide technical andadministrative support to the Program Management and Coordination Committee (PMCC). ThePMCC to be chaired by the Secretary, LGRDD will be set up to agree on the details and updating of thepolicy framework, and to approve community schemes for funding support. The members of the PMCCwould include the Director, LGRDD; Secretary, Local Government Board; Director, AJK EnvironmentalProtection Agency; representatives from the departments of Planning and Development (P&D), PublicHealth, Audit/Account; and at least two representatives from NGOs, academic/research/training institutes,and the private sector the PS's Coordinator serving as secretary.

The PS, to include a Coordinator, under the Secretary LGRDD will manage the financial resources of theProject; allocate funds to individual DOs and MCs on a demand driven basis; implement acceptableaccounting procedures, financial reporting and internal control systems; provide technical assistance andarrange for training for DO, MC and other lower level officials (Markaz level), CBOs, and localconsultants or 'service providers' (private firms, university, training institutions, NGOs, etc.) to becontracted under the Project in project implementation, financial management, monitoring and evaluation,and other project operations as needed; monitor and evaluate project implementation and consolidate M&Ereports from the districts/municipalities into a statewide progress and evaluation report(s). The PS willhave about 7-9 staff/specialists and support drawn from existing units of LGRDD will provide supportand assistance in the area of: (i) infrastructure and services; (ii) finance and administration; and (iii)monitoring & evaluation and capacity building. The role of the PS will be mainly managerial,administrative and coordination, and some technical oversite of CD and CI schemes for final approval.The main operational work are to be done by the existing LGRDD departmental units, and, the project willbe supplemented by contract operations staff, to be employed for various durations, and other consultantsor service providers depending on the nature of project assistance needed. Some short-term technicalassistance will also be required to refine and or establish operational systems and procedures, and to trainstaff in their use.

At the district level, the existing DOs of LGRDD will be the main unit responsible for the RuralCommunity Infrastructure and Services (RCIS) subcomponent, while the MCs (including the municipalcorporation, town committees etc), will be the main unit for the Urban Community Infrastructure andServices (UCIS) subcomponent of the Project. The CBOs will be the implementing partners at thecommunity level. The DOs and MCs will maintain a staff of community development, financial and

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technical, personnel, which will select communities on a demand driven basis; raise awareness andmobilize/organize CBOs; assist communities in the preparation of the CAPs and in the planning, design,and implementation of their selected schemes; provide training programs for CBOs and service localconsultants or 'service providers' contracted to assist communities in project implementation;establish/facilitate linkage of CBOs/service providers with other support agencies, including micro-creditorganizations and local banks for the purpose of accessing other services (health, education, skills training;loan finance for productive activities and home improvements; etc.); and monitor progress of CD and CIschemes, as well as performance of CBOs.

Financial management arrangements. At project start up, appropriately qualified and experiencedaccounting and financial staff will be put in place at all levels of the project to ensure that requirementswith regards to intemal controls, accounting, fnancial reporting, procurement, and disbursements are met,and that independent audit issues and questions are resolved. As part of the PS, a full time officer, who isexperienced in IDA's reporting requirements, disbursement procedures, and the operation of the SpecialAccount, has been involved from the beginning of preparation including a full time officer from theAG-GoAJK.(see Annex 6 for details on financial management arrangements.

Procurement. Except for procurement of pipes and fittings to be procured at the headquarters level,management of procurement of works and small value goods would be decentralized according to the typeof contracts, and would involve the DOs/MCs and the CBOs. The DOs responsible for RCIS, the MCsresponsible for UCIS, and the CBOs, with assistance from consultants and with formal training in theWorld Bank's guidelines, will carry out procurement of works/small value goods and contractadministration envisaged under the Project. Small community infrastructure works will be carried out bythe communities themselves, while larger works will be contracted to private sector construction firms bythe DOs/MCs. Procurement of pipes, pipe fittings and pumps will be carried out in district-wise packagesby LGRDD's central office in Muzaffarabad. LGRDD will engage two individual procurement consultants(one each for RCIS and UCIS) for at least the first year of the project to serve initially as the focal pointfor all procurement matters related to their respective schemes, and to provide comprehensive procurementsupport, including procurement planning and monitoring, preparation of bidding documents, evaluation ofbids and contracts, and overall guidance in complying with the project's overall procurement procedures.One procurement consultant has already been engaged before negotiations. The Bank will provideprocurement training before and during implementation of the project. (see Annex 6 for details onprocurement arrangements).

Disbursement. The flow of funds from the Bank and the financial management procedures for the Projectare detailed in Annex 6. Initially, the GoAJK will make funds available in advance through the AccountantGeneral (AG) in the form of 'Revolving Funds' to the spending unit at the State, Districts / Municipalitiesand registered Community Based Organizations (CBOs). This advance will be deposited in a bank accountto be operated jointly by the designated officials at three levels: (i) at the AJK level, the Secretary,LGRDD, or his designated staff or Accounts Officer (AO); (ii) at the DOIULB level, the AssistantDirector (AD), and the District or Municipal Accounts Officer (DAO / MAO); and (iii) in the case of theJoint Scheme Bank Account, the President of the CBOs and the Social Organizer (SO) of the DOs/MCs.The Revolving Funds shall be adjusted on completion of the respective schemes or the final completion ofthe Project at the AJK level from the information provided by the Districts. Direct payments from the IDASpecial Account would be made by PS/LGRDD to the contractors/suppliers and the spending units at theGoAJK level, DOs/MCs, CBOs, and Accountant General (for advance payments) against the provision offull documentation.

The conditions for the release of the Revolving Fund include: (i) an approved Annual Work Plan; (ii) copiesof the administrative approval of schemes by the Secretary, LGRDD; and (iii) evidence (for cash

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contribution: bank certificate/bank statement duly verified by the bank official) that the CBOs havedeposited their share of contribution as per the terms and conditions laid down in the Memorandum ofAgreement (MoA), which also includes the Community Financing Agreement (CFA). Subsequently, theAG shall release the funds on the basis of pre-audited and certified consolidated statement of expendituresto the extent of GoAJK's share in the Project.

Retroactive Financing. Retroactive financing up to an amount of US$ 1 million (SDRs 0.804 millionequivalent) would cover eligible expenditure for implementing activities after June 30, 2002. Retroactivefinancing would support mostly civil works and goods (e.g, pipes).

Financial Auditing, Reporting, and Monitoring. For internal auditing, the two Senior Auditors at theAJK level will submit internal audit reports on a regular basis directly to the Secretary, LGRDD. They willalso be responsible for undertaking a physical stock count of the Project's fixed assets and ensure completemaintenance of the books of accounts. They will liaise with the Government Auditors, respond to auditobservations, and organize Departmental Accounts Committee (DAC) meetings. The accounts andfinancial statements of the Program for each fiscal year ending June 30 will be audited by the AuditorGeneral of Pakistan under the usual ToR acceptable to the Bank. The auditors shall commence the audit bySeptember 30, and submit the audited accounts and their report thereon by December 31 each year. Thefollowing audit reports will be monitored in Audit Reports Compliance System (ARCS) of the Bank:

Implementing Entity Audit Report AuditorLGRDD Project financial statements/ SOE Auditor General of PakistanLGRDD Special Account Auditor General of Pakistan

A Financial Monitoring Report (FMR) has been developed in an acceptable format and will be animportant part of the financial management system. An FMR will be submitted to IDA on a quarterlybasis, not later than 45 days after the full quarter/period from the time the credit took effect. The auditreports of RWSS Project implemented by LGRDD have generally been submitted on timely basis.However, there have been delays in holding DAC meetings. There were several outstanding auditobservations which mainly pertains to: non-deduction of income tax at source from the payments made tosuppliers; non-adjustment of advances to staff on timely basis; and materials purchased and retumed fromsites are not properly accounted for in the stock register. A letter from OAG and LGRDD, reported thatmost of the outstanding audit observations have been resolved. The weaknesses in the system will beminimized through improved financial management system currently being prepared including a financialmanagement manual which will include specific check and balances.

Monitoring and evaluation arrangements. A participatory and flexible M&E system for the Projectbased on the model already established in the RWSS project has been designed and field tested and will bemainstreamed under the project. The system relies largely on beneficiary input with quality controlprovided by Project staff. The system will serve: (a) as a tool for capacity building at the local level; and(b) as a tool for project decision-makers to use in monitoring project implementation. Performanceindicators, an intemal Management Information System (MIS), and guidelines for yearly assessments ofbeneficiary impact have been established, and will be utilized and refined with continuous feedback. Inaddition, independent baseline surveys with mid-term and end-of-phase follow-up will be carried out toevaluate impacts on the socioeconomic (poverty reduction) and environmental conditions, as well asinstitutional capacity of beneficiary communities and the implementing agency.

The PS/LGRDD with support from the existing departments will be responsible for monitoring progressagainst agreed-upon output, as well as performance and impact indicators. It will submit quarterly and

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annual progress reports to IDA. Biennial reviews through stakeholder workshops, and a mid-term reviewtwo and a half years after credit effectiveness, would be jointly conducted by GoAJK and IDA. Externalevaluation and some monitoring functions as necessary may be contracted out to a local academic/researchinstitutions, NGOs, or private consulting firms.

At the community level, progress in the execution of CD and Cl schemes (in terms of input, output, andoutcome data) will be collected by the CBOs themselves. To do so, the CBOs will receive training in M&E.Monitoring data will be used to assess achievements at each phase of the project cycle against the targetsand schedules spelt out in the communities' CAPs. They will be collected by the CBOs and will be madeavailable to the DOs/MCs. At the district/municipal level, monitoring information from the CBOs will beused to review the districts' work program and will be the basis for supervision and monitoring by the DOsand MCs, for approval of new investment budget as necessary (e.g., for further technical assistance ortraining for communities), etc. All these data will be entered into the Project's MIS, and will be aggregatedand sent to the M&E staff of the PS, which in tum will consolidate them into progress reports forsubmission to IDA. Please see Annex 1 on Project Design Summary and key performance indicators. Afinal list of monitoring indicators have been agreed at negotiations.

The Project will pay particular attention to gender and participation issues. Experience in both the RWSSand CIP-NWFP indicate that much more effort need to be done to ensure women's participation ininfrastructure and community development activities. A process monitoring team will look at how suchparticipation is integrated into community action planning (CAP) and project execution at each stage of itscycle.

.,

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

A number of design alternatives were considered during project preparation:

4 nationwide program. The option of developing the project as a nationwide initiative that wouldsupport community programs throughout Pakistan was considered. Both the Government and Bankstaff, however, felt that this approach was too ambitious and would have a high risk of failure, giventhe considerable tasks of strengthening institutions, developing procedures, and creating publicawareness. Also, different provinces have their own distinct peculiarities which need to be reflected inproject design. A strong consensus reached was that a province-by-province approach would have the

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highest probability of success, instead of a countrywide program; and

Local government capacity building. Another option considered involved an approach focusing onlyon strengthening district / municipal governments (excluding communities at the outset) to be directlyresponsible for the delivery and financing of local infrastructure and services. However, localgovernments have historically been very weak and it will take many years for them to develop as stronglocal bodies with their own sources of finance.

The Government, therefore, opts to develop both community and local government capacity as rapidly aspossible to deliver participation-based CD and CI schemes to the community/village level. Collaborationamong GoAJK, district and other lower level governments, and communities as reflected in the proposedproject design is considered an optimal arrangement for achieving this objective, judging from the successof previous experiences in Pakistan and elsewhere.

2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).

Latest SupervisionSector Issue Project (PSR) Ratings

(Bank-flnanced proJects only)Implementation Development

Bank-financed Progress (IP) Objective (DO)

1. Increase productivity and NWFP Community S Swell-being of low income groups in Infrastructure ProjectNWFP by improving their living (on-going) (Cr.2829-PAK)conditions and providing basicinfrastructure and services.2. Overcome serious environmental Sindh Special Development U Uand infrastructure problems besetting Project (closed) (Cr.558-PAK)Karachi and the interior cities of Sindhand strengthen urban local authorities.3. Improve rural productivity and AIK Rural Water Supply and S Shealth and reduce poverty and Sanitation Project (RWSS)deprivation in rural AJK, Balochistan, (closed)and Sindh by increasing coverage andservice level of RWSS4. Increase water supply, and improve Second Karachi Water Supply U Usanitary conditions in the city of and Sanitation Project (closed)Karachi through the improvement of (Cr. 1 987-PAK)sewerage services5. Strengthen the capacity of local Lahore Urban Development S Sinstitutions to prepare and implement Project (closed) (Cr. 1348-PAK)integrated urban development programs

6. Improve the provision of basic Karachi Special Development S Surban services in Karachi and Project (closed) (Cr.1652-PAK)strengthen the institutional and financial

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capacity of local agencies to deliversuch services.7. Generate economic activity and Pakistan Poverty Alleviation S Screate employment opportunities, Fund (PPAF) (on-going)especially in poverty-stricken areas;develop infrastructure and services,including roads, education, irrigation,etc., and engage NGOs as partnerorganization.Other development agencies1. Multi-city, multi-sector urban Punjab Urban Improvementdevelopment (ADB) Project (proposed)2. Water supply and sanitation in Rawalpindi Water andRawalpindi (ADB) Sanitation Project (ongoing)3. Raw water transmission from Water Source DevelopmentKhanpur dam to Rawalpindi Project (ongoing)4. Low-income area upgrading in Faisalabad Area UpgradingFaisalabad (DFID) Project (ongoing)

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in the project design:

The ICR of the completed AJK-RWSS has the following key lessons learmt: (i) project rules need to ensureexclusion of political interference in scheme selection; (ii) response to the needs of low income communitiesrequires an integrated approach to infrastructure and services delivery offering a menu of complementaryinterventions from which they can choose according to their priorities and affordability; and (iii) localschemes of which communities share the costs, based on the concept of component sharing, promotecommunity ownership and project sustainability.

The mid-term review of the CIP-NWFP project in May 1999 recognized that the CIP model is successful inpromoting local participation and delivering quality, low cost infrastructure to low income communities.However, implementation was significantly constrained by over-centralization of project management andstaff weaknesses in the Project Management Unit / Project Implementing Units (PMU/PIUs), cumbersomeadministrative and budgetary procedures leading to delays in requisite approvals. The most importantlessons were the need to decentralize and streamline administrative procedures, out-source training andoutreach activities to NGOs/CBOs and/or local consultants, and promote more public information andcommunity support in developing public health and sanitation programs in the communities. This is nowbeing tested in 7 pilot sites within the context of the decentralized local government units.

The National Workshop on Community Based Approaches to Delivery of Basic Infrastructure and Servicesheld in July 2000 reviewed a number of existing programs, including the Kushal program, and drew thefollowing conclusions: (i) local participation is the key to successful local programs; (ii) a stronger povertyfocus is required; (iii) community development efforts can be effective only with active communityinvolvement in planning and implementation; (iv) clear objectives and procedures for accountability mustbe in place; (v) community responsibility for operation and maintenance is a prerequisite to projectsustainability; (vi) government officials need to develop a much stronger service orientation; (vii) theGovernment's administrative, budgetary, and contracting procedures need to be simplified, streamlined, anddecentralized; and (viii) there is a need for clear responsibilities, training, incentives, accountability andcoordination of all field staff. The Workshop also concluded that the future success of such programs will

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require "a massive and immediate program of public information, community organization and training,which will in turn require a major effort to build up institutional capacity to deliver these essential,supporting services."

Several other lessons from experience which the proposed project seeks to incorporate in its design includethe following:

Reorientation of government officials and the need for public information and training: TheFederal Facilitation Component of the ongoing CIP-NWFP aims to enable the GoP to developprograms in close collaboration with provincial governments to address this need. Under thiscomponent, assistance for public information and training at all levels is being provided. TheGovernment's proposed devolution plan aims to make the citizens' voice heard and make publicofficials more accountable. This will be accomplished through: (i) the creation of a citizen'scommunity board to address the problem of lack of end-user power in the face of deficient governmentservice delivery (this board will grant official recognition to the monitoring role of citizens); and (ii)holding Government bodies responsible through regular performance evaluations linked to redesignedincentive systems;

The key is participation: The proposed project will draw from experiences with participatory,demand-driven approaches of the CIP-NWFP and RWSS models, with some modifications as needed;

Cumbersome procedures need to be improved: The Government will rely on decentralizedbudgeting and operational procedures, along with strengthened financial controls and reportingsystems;

The need for accountability: Clear responsibilities for officials at the district and lower levels will bedefined, and a strong monitoring and evaluation system at the AJK level to monitor districtperformance, and at the district level to monitor community performance, will be put in place. CISPwill also encourage out-sourcing of community outreach and training to local NGOs/consultants, withclear contractual obligations and incentives for performance;

Concentrating resources for impact: Project investments will not be too thinly spread as to makelittle or no impact on the intended beneficiaries. The project will ensure an investment of a minimumlevel of funding per capita; and

Stronger Public Health and Sanitation Program: The proposed project will develop and integratesuch initiative with rural water and sanitation schemes, placing emphasis on training, publicconsultation and information, aided by a range of communication media and materials for differenttarget audiences (men, women, children, youth), along with logistical support at the community level.

4. Indications of borrower commitment and ownership:

The GoP has been carrying out participatory, community-based projects which it would like to expand withBank assistance. The GoAJK, through the Prime Minister, has already made the request to the Bank forsimilar operations. The GoP is also committed to decentralizing authority to district level governments, forwhich clear policies have already been issued, to enable these governments to work more closely withcommunities in developing and implementing local development projects. The proposed project, therefore,is to be the first of a series of decentralized projects that would lay the foundation for a countrywidecommunity based program to which GoP has repeatedly expressed strong interest and commitment.

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GoAJK has already shown strong ownership of CISP as evidenced by its creation of a preparation teamfrom its existing six full-time staff, which has since been very active in project preparation and appraisaland are expected to take an active role during implementation. During preparation of the environmentalmanagement framework (EMF), GoAJK assigned the head of the Environmental Protection Agency (EPA),to work full time to prepare the EMF which was subsequently designated by the Bank as a best practiceexample. Top GoAJK officials have already agreed to ensure convergence of the policies proposed for theProject with its Kushal Program for overall consistency of approach. A Departmental Order to authorizethis Policy Framework has been notified and endorsed by the Prime Minister. GoP has endorsed GoAJK'srequest for the Bank Group financing of the proposed project, for which a PHRD grant of US$ 400,000has already been secured for project preparation. Similarly, GoP endorsed other provincial requests forpreparation of similar operations in their areas (e.g., Sindh, NWFP).

5. Value added of Bank support in this project:

The Government is committed to work towards its goal of accelerating poverty reduction initiatives througha targeted program that will directly reach a substantial proportion of the poor. Taking advantage ofBankwide experience in similar operations, the Government has solicited the Bank's assistance inimproving the operations of its ongoing Kushal program. The Bank is best placed to support theGovernment's objective because of the good practices that have emerged from its funded projects (theRWSS, NRMP, CIP-NWFP, and the PPAF), and the confidence that the federal and provincial governmentofficials in Pakistan has in the capacity of Bank to help them develop a successful countrywide program.The Bank, therefore, has a comparative advantage in encouraging institutional and capacity development,and in ensuring that mechanisms for the long term sustainability of investments will be in place. Theproposed project would be fully consistent with the GoP's and GoAJK's objectives and would provide anappropriate and timely vehicle for the Bank to assist GoP in its devolution initiatives in ways that will havethe most positive impact on the rural and urban poor.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):o Cost benefit NPV=US$ million; ERR = % (see Annex 4)* Cost effectivenessO Other (specify)

Proposed CISP will provide technical and financial assistance to communities in AJK for a variety ofinfrastructure schemes. Beneficiaries will

* choose among the menu of options based on local priorities and affordability;* contribute a minimum of twenty percent to the capital costs of community infrastructure investments;* pay hundred percent of the incremental capital costs from choosing a higher service level than the basic

one; and* be fully accountable for the operation and maintenance of the assets installed.

A per household ceiling of total investment costs has been defined at Rs.20,000 (or US$308), of which amaximum of Rs.5,000 could be spent on trunk infrastructure. Since no beneficiary contributions arerequired for trunk infrastructure, the maximum subsidy any household could receive under the project isRs. 17,000 (i.e. Rs.5,000 plus 80 percent of Rs. 15,000).

Since the basket of infrastructure investments is not a priori known, a cost-effectiveness analysis has beendone for water supply investments pre-identified for implementation during the first year, with the purpose

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of defining per household cost thresholds to facilitate quick sub-project approval. Based on the analysisoutlined in Annex 4, the following conclusions can be drawn:

* For both gravity and pumping schemes, costs at or beyond Rs. 12,000 per household require a moredetailed review, since the adequacy of the expected economic return is uncertain.

* This costing threshold implies that about 20 percent of the gravity schemes (about 20 sub-projects) and50 percent of the pumping schemes (about 7 sub-projects), pre-identified for first year implementation,are being reviewed in detail by the implementing agency, which seems reasonable at given capacities.

* Under a similar set of conservative assumptions as of the recent ICR for the former PK- Rural WaterSupply and Sanitation Project, the expected economic rate of return for average cost of gravityschemes (about Rs.9,600 per household) will be about 23 percent if a mid-point of 4 hours of timesaved for collection water is assumed, or about 16 percent for pumping schemes (at a cost of aboutRs. 10,850 per household).

It is recommended that the costs for these schemes be monitored during the first year and threshold, ifnecessary, be revised once more information on actual cost data will become available. Similarly,comparative cost data for all other investment schemes would need to be acquired to assesscost-effectiveness before implementation of such schemes.

2. Financial (see Annex 4 and Annex 5):NPV=US$ million; FRR= % (see Annex 4)

The project size has been linked to GoAJK's capacity to finance its share of allocations to state and districtlevels. Project sustainability would be assisted by a minimum 20 percent community contribution tocapital cost, and commitment to finance 100 percent O&M costs of community infrastructure(internal/secondary/tertiary), with the district/local governments taking care of the extemal/primary (trunk)infrastructure. Past experience in the RWSS and the field work on the social assessment have determinedsome indications of affordability of infrastructure and services in AJK. Three concerns are beingaddressed: (i) that particularly low income communities be able to afford basic infrastructure and services;(ii) that communities that can pay more than 20 percent in fact do so; and (iii) the AJK Government has thefiscal capacity to support a program of the proposed size and with the proposed cost sharing arrangements.The field survey and social assessment and the ongoing fiscal study have determined the financialcapability of the communities to pay and the fiscal capacity of the AJK Government to finance theprogram. The size of the projects in each community will be limited by a per capita ceiling, beyond whichthe community would bear the full costs of investment. The level of services selected will vary with thecapacity of different communities to pay for different qualities of service.

Financial accountability will be assured by district level review of community proposals; supervision bydistrict staff; financial training of the LGRDD, district/municipal, and CBO staff; the establishment andoperation of effective monitoring and evaluation, accounting and auditing systems; and by comrmunityparticipation in financial monitoring.

The project will provide the link through their CBOs and their NGOs in assisting households to obtainhome improvement loans (as appropriate), including micro-credit loans (for productive purposes) throughthe existing local banks and other non-banking financial institutions (Poverty Fund, Micro-Credit Bank).As in the RWSS and the NWFP-CIP, and depending on demand, training and technical assistance wouldalso be provided to assist the cornmunities, in particular women to establish micro-credit associations.Financing loans under both these activities would not be promoted through the project, but would be linkingthese groups through existing channels.

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Fiscal Impact:

Viewed from the perspective of its total cost, the project is significant but affordable. Average annualexpenditure on the project of about Rs.324 million is equivalent to about 13 to 16 percent of GoAJK's totaldevelopment expenditures, about the same as the current size of LGRDD's development expenditure.Viewed from the perspective of GoAJK's contribution to the project of about Rs.50 million per annum,however, the project becomes only about 2 percent of GoAJK's total expenditure, equivalent to about 15percent of LGRDD's current development expenditures. LGRDD's implementation capacity shall requireto be strengthened, as the project's average annual expenditure approximately doubles its developmentbudget, and this is being planned in the context of its continued drive towards decentralization to Districtlevels, together with the improved financial reporting procedures being installed as part of the project.Furthermore, the adoption of the policy of community self-reliance for the operation and maintenance of itsinfrastructure helps reduce future financial liabilities for the Government.

Nevertheless, the total annual cost of the project does merit GoAJK's attention. Not all of AJK's 2.9million people shall be served by this and the earlier Rural Water project, so a backlog of unmet demandfor basic infrastructure will exist even after this project. Furthermore, annual population growth,particularly if accompanied by relocation to peri-urban areas, will place further demands on scarcedevelopment funds for these services. In this context, the importance of establishing and enforcing theuniform policy whereby communities contribute their 20 percent share of capital costs to basicinfrastructure development, and accept responsibility for the costs of operation and maintenance, is clearlynecessary for its fiscal as well as other social benefits.

AJK's Financial Performance

Like other sub-national govemments in Pakistan, AJK receives the majority of its income from the Federalgovermment. Nevertheless, AJK has increased the proportion of revenues it generates from its own sourcesfrom 24 percent in 1985-1990 to over 40 percent in 2000, giving the State more fiscal flexibility in theeventuality of changes in the amount of Federal govenmment transfers. This slightly strengthens AJK'sfinancial autonomy.

During the same period, Federal non-development income changed in structure, with Federal Grantsdecreasing in place of an increasing share of Federal taxes. The combined effect of these events hasreduced the share of Federal Grant in total income from 38 percent initially, to about 10 percent now.Development income comes mainly from Federal Grants, and these fell from about 35 percent of totalincome in 1985-1990 to about 20 percent thereafter, a change which has been matched by a fall in theproportion of development expenditure from 37 percent to about 25 percent of total expenditure.

An important factor in the outlook for Govenmment finances will be its success in establishing devolvedlocal government. AJK has a tradition of a devolved Local Government Department, plus the furtheradvantage of planning its devolution somewhat behind of the rest of Pakistan, which may make it easier toimplement this change while avoiding difficulties encountered elsewhere.

During the mid-part of the period in the 1990s, the Govemment ran a cash surplus, which appears to berelated to delayed development expenditure which also lagged development income at the time. The surplushas now been utilized, as development expenditure has caught up with income. A likely consequence is thatGovernment cash flow has become tighter and becomes more of a factor to take into account.

LGRDD's non-development expenditure has remained a constant of less than 1 percent of total Govemrnentnon-development expenditure. The main change in the Department's development expenditure over the

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period from 1985 until today, appears to have been driven by the recently completed RWSS Project(Cr.2228-PAK), which increased the proportion of Government and departmental development expendituregoing the rural water sector. In the latter case, from about one third of annual development expenditure tomore than half in the late 1990s, almost 10 percent of the total development expenditure of the whole ofGoAJK, the rural water sector's share has, however, fallen back to roughly its starting proportions in FY02development budgets.

Affordability. Average per capita annual income is reported between US$184 and $205 (Rs.1 1,960 andRs.13,325), with household size being 7.1 persons. Field survey data for AJK shows rural householdincome to be in the range of Rs.72,000 to 84,000 per year. Urban incomes are somewhat higher. Onaverage, rural households spend Rs. 1000 to Rs 2000 on self-help work for community benefit. Experiencein the CIP project in NWFP shows a higher willingness to contribute where the works can show asubstantially higher impact than the usual, ad hoc incremental improvements. Communities have alsoentered into partnerships with NGOs and donors where they have contributed for development works.People at all locations expressed a willingness to contribute in cash and in kind for sharing costs.Experience in these projects and in the RWSS has shown up-front community cash contributions rangingfrom 15 percent to almost 40 percent of on-site infrastructure costs. This project has estimated aconservative Rs.2,000 per household per year for 2 years as the 20 percent community contribution to thecapital costs. This represents 2.4 percent to 2.8 percent of yearly household income.

3. Technical:The Operational Manual establishes standards such that infrastructure schemes must demonstrateimprovements benefiting the majority of households lacking service; conform with planning, design,and construction standards suited and affordable to the community; and, have implementationarrangements consistent with proven implementation capacity. Efforts will be made to ensure thatcommunities have access to trained technical staff in each of the major areas where they planinfrastructure and services schemes. This will be particularly important in the area of health andsanitation. Since AIK has now had nine years of experience in community based rural water andsanitation projects, many of the LGRDD staff are already functioning under a decentralized operation.However, under CISP, it is expected that a number of skilled staff would be reassigned to thedistricts/municipal governments under the decentralization policy. Most of the PHRD funds whichhave now been secured for the project will be used to further strengthen the District/municipal staffand help them and CBOs prepare suitable CD and CI schemes. There is a need to: (i) continue toadopt appropriate and affordable technical standards; and (ii) develop procedures for directcommunity contracting (based on successful practices developed in RWSS and CIP-NWFP).

4. Institutional:Supporting the decentralization process is an important project objective. Striking an appropriate balancebetween the devolution to the District level (by streamlining administrative and financial procedures) withthe need for accountability has received careful attention during the preparation and appraisal missions.Institutional and financial management arrangements proposed under the Project are also based on a clearunderstanding of GoAJK's time table for devolution, and its implications for project implementation. Theproject design has been developed such that it is consistent with the existing devolved operations in AJK. Achallenging issue is to decentralize budgeting and financial decisions to lower levels, while at the same timeensuring reasonable accountability.

4.1 Executing agencies:

Under the proposed project, the LGRDD in AJK, which is the executing agency for the Project, would

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transfer funds quarterly to project accounts at the concerned DO and MC offices, based on projecteddemand for schemes, operating costs, and contract services. Payments relating to the Govenmment's shareof non-primary infrastructure would be disbursed into scheme accounts, maintained in a commercial bank,and operated jointly with cosignatories. There will be no provision for a new project management unit inthe institutional design of the project. Instead, it will operate on the principle that existing govemment unitswill be used for project implementation, with strong inter-departmental coordination, training and staffing,financial management, and monitoring and evaluation and using other service providers for specializedpurposes.

Because this is a multi-sectoral operation, coordination between collaborating sector institutions will alsobe key to the project's success. Special attention has been paid during project preparation to the role ofeach participating institution and devising simple and effective collaboration arrangements to ensuresmooth project implementation. A detailed Operational Manual has been prepared during appraisal, andwill be updated periodically, and all involved officials and staff will receive orientation on it.

Staffing and outsourcing requirements have been agreed at all levels. A detailed training program at thePS/LGRDD, district/municipal, and community levels has been developed during preparation (seeOperational Manual) and will be refined at various times of the implementation period.Please see section C4

4.2 Project management:

See section C.4.

4.3 Procurement issues:

Procurement capacity of the implementing agencies will be strengthened through the engagement ofconsultants and training. Goods and Works to be financed under the Project shall be procured inaccordance with Guidelinesfor Procurement under IBRD Loans and IDA Credits, January 1995, revisedJanuary 1999. Consultants Services shall be procured in accordance with the Bank's Guidelines forSelection and Employment of Consultants by World Bank Borrowers, January 1997, revised January1999. Details of the procurement arrangements under the Project are specified in Annex 6. In the event ofthere being a conflict with the Government's procurement procedures, IDA's procurement procedures shallprevail.

The Bank's Standard Bidding Documents for Intemational Competitive Bidding (ICB), Sample Biddingdocuments for National Competitive Bidding (NCB), and Sample Forms of Agreement for CommunityContracting, which are already being used on other Bank financed projects in Pakistan, will be used, asapplicable, for the procurement of Goods and Works under the project. The Bank's Standard Request forProposal document will be used in the selection of Consulting firms.

The procurement arrangements under the program are intended to facilitate maximum communityparticipation and empowerment in the procurement process. It is expected that CBOs themselves will carryout most of the procurement of works under the project. They will also participate substantively in allstages of the procurement process when procurement is to be carried out by the Government, provided theconflict of interest provisions of the Guidelines are complied with. Procurement capacity will bestrengthened through training and engagement of consultants under the project.

4.4 Financial management issues:

The Program will have an adequate Financial Management System (FMS) in place subject to thefulfillment of the conditions for negotiation and Board presentation.The financial management system used for Rural Water Supply and Sanitation (RWSS) Project (Pak Cr.

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2228) implemented by the AJK-Local Government & Rural Development Department (LG&RDD) whichworked well, would not suffice for the accounting and financial reporting requirements of the CommunityInfrastructure Services Program (CISP) because of expanded scope of work. Therefore, a morecomprehensive Financial Information System (FIS) have been developed for CISP by a FinancialManagement Consultant (FMC) hired under the PHRD Grant provided to the Department. The FIS havebeen structured to meet the accounting, financial reporting, auditing and intemal control requirements ofthe Bank and the GoAJK.

A Program Secretariat (PS) under the Secretary, LGRDD would be responsible for coordinating the overallimplementation of the CISP and for allocating funds to the districts on a demand driven basis;provide/arrange training; implement acceptable accounting procedures, financial reporting and internalcontrol systems.

The Project will be budgeted in the annual Public Sector Development Program (PSDP) of the GoAJK asan identifiable single head budget item each year showing both the local and foreign resources of funding ina lump sum manner. Initially, the GoAJK-Finance Department will make the funds available in advancefrom GoAJK budget resources (to meet at least 20% of the annual requirements) through the AccountantGeneral (AG) in the shape of "Revolving Funds" to the spending unit at the State, District and registeredCommunities Based Organizations (CBOs). This advance will be deposited in a bank account to beoperated jointly by the designated officials and adjustable on completion of the respective scheme orcompletion of the Program at the State level.

5. Environmental: Environmental Category: B (Partial Assessment)5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

The project is expected to contribute to the improvement of environmental conditions in rural, and urbanareas by providing and expanding basic infrastructures. For instance, some of the main environmentalhealth improvements expected under the water supply and sanitation component include: (i) time andenergy savings for women and children by bringing sources of water closer to the home; (ii) increasedwater supply for bathing, washing, and cleaning; (iii) improvements in hygiene and sanitation practices;and (iv) reduced bacterial contamination due to controlled disposal of human waste.

Typical investment components are expected to include: (i) water supply; (ii) latrines and public toilets; (iii)drainage; (iv) low-cost sewerage; (v) internal pathways and footbridges; (vi) street paving; (vii) streetlighting and sweeping; (viii) primary solid waste collection; and (ix) community centers and meeting rooms.The primary solid waste collection and any basic infrastructure will be linked to the municipal/citycollection system overall trunk infrastructure and will form part of the memorandum of agreement (MOA)between the community and the municipal/city govemment. These small-scale infrastructure are notexpected to generate major negative environmental effects. However, a number of adverse impacts couldoccur if the investments are not properly planned, sited, designed, constructed, and operated andmaintained.

Typical negative impacts that may arise include: (i) impacts from excavation, fill and disposal ofmaterials; (ii) disturbance and safety hazards during construction; and (iii) induced erosion caused byconstruction activities and improper drainage. For water supply and sanitation schemes negative impactsmay include: (i) contamination of the spring source during water supply development and construction; (ii)hydraulic interference between existing and new well sources; (iii) inadequate drainage and waste-waterdisposal causing cross-contamination of water supplies as well as mosquito breeding; and (iv) inadequateprotection of water sources from bacteriological and chemical contamination. Environmental issues at

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policy and implementation levels include: (a) water quality testing and monitoring, and institutionalmeasures to ensure that safe water is available to the community, including village-based water qualitycontrol programs, (b) sustainability of yield from water sources and potential for conflict with existingand/or downstream users; and (c) catchment protection, watershed management, and promotion ofintegrated management of local water resources.

To address the above issues, an Environmental Management Framework has been designed as part ofproject preparation activities and integrated in the project's Operational Manual (see a summary in Annex12, and the full document in the project's files). The main objectives of the Environmental ManagementFramework (EMF) are to: (i) ensure project compliance with the GoP, AJK and the Bank's environmentalregulations; and (ii) enhance the design of community infrastructure plans and sub-schemes. To this end,special emphasis was placed on "mainstreaming" environmental considerations by taking the followingactions:

* To ensure ownership, and to promote continuous dialogue on environmental issues during projectpreparation and implementation, the EMF was developed by GoAJK, using its own capacity andresources. The Head of the EPA, GoAJK, has been made a full member of the Project Managementand Coordination Committee (PMCC);

* Enviromnental capacity within both LGRDD (Assistant Director Environment - ADE) and the threeMunicipal Corporations (Muzaffarabad, Mirpur, Kotli) (Environmental Officers - EO) will be createdto support project design, implementation, and monitoring. A training program and materials will bedeveloped for use by project staff and communities;

* CISP will connect with ongoing and future environmental activities by GoAJK and will build uponthem (e.g., water quality survey, environmental awareness program, solid waste management program,etc.);

* CISP will gradually introduce systematic water quality testing and monitoring (which is not currentlyperformed in AJK); and

* The community development component of CISP will include hygiene and environmental sanitationawareness programs.

5.2 What are the main features of the EMP and are they adequate?

The EMF includes the following components (see details in Annex 12 and the project's file): (i) descriptionof baseline environmental conditions in AJK; (ii) a review of the policy, legal and administrative frameworkfor environmental protection and assessment; (iii) environmental issues, and current and future strategiesand initiatives by AJKEPA and GoAJK, (iv) potential environmental impacts and mitigation measures bysub-project type; (v) enviromnental management plan (EMP), that includes procedures and implementationarrangements for environmental screening, review and assessment; environmental supervision, monitoringand auditing; capacity building, training and technical assistance; institutional linkages and strengthening;and financial requirements; (vi) various checklists, formats and guidelines.

The environmental management process for CIS schemes will include the following steps: (i) projectidentification; (ii) screening and categorization of sub-schemes (Environmental Category El, E2, or E3);(iii) environmental assessment (EIA for Category El, Limited EA for Category E2, and environmentalreview for Category E3); (iv) application of mitigation measures; and (v) environmental supervision andmonitoring during construction, and operation and maintenance. Each CI schemes selected by communitieswill be evaluated and assessed for its environmental impact during field appraisal before it is approved forimplementation.

The roles and responsibilities for environmental management under CISP are described in the table below:

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TASK ResponsibilityCoordination and Policy Formulation Project Steering CommitteeApproval of the Annual Work Plan (under the ACS of the P&D Department)Overall management of the program Project Management and Coordination CommitteeDevelopment of policies, approval of sub programs (PMCC) of which the Director of AJK Environmentand schemes, and work plan of the implementing Protection Agency (AJKEPA) is a memberagenciesScreening of schemes -- to determine District/Municipal Level Field Staff, withenvironmental category, mitigation measures, involvement of CBOs and communities.monitoring arrangements & if scheme affects ESAs Assistance/review by Environmental Officers (EOs)

and Assistant Director Environment (ADE)Environmental Review (ER) of sub-projects District/Municipal Level Field Staff, with

involvement of CBOs and communities.Assistance/review by EOs/ADE

Limited Environmental Assessment (LEA) EOs/ADE with involvement of field staff and CBOs(EPA to assist as needed)

Environmental Impact Assessment (EIA) EPA/ contractorTechnical Assistance Environmental Specialist (ES consultant) and EPATraining and Capacity Building Training Coordinator (LGRDD), with assistance

from ADE, EOs, ES consultant and EPAEnvironmental Supervision and Monitoring1. Continuous 1. District/Municipal level field staff2. Quarterly 2. ADE/EOs and M&E Unit of CISP3. Six monthly 3. EPA4. Mid-term review 4. Independent audit

The above mechanisms and institutional arrangements for environmental screening and evaluation, alongwith the Project's M&E system that will monitor environmental compliance, reflect the adequacy of theenvironmental management process to be adopted for the Project.

5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft: 10/01/01

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EAreport on the environmental impacts and proposed environment management plan? Describe mechanismsof consultation that were used and which groups were consulted?

The key stakeholders are the participating low income communities in AJK, to be assisted by theircommunity based organizations, non-government organizations (to be contracted as consultants), andclearly designated local government staff and officials (from the district and state departments of LGRDD)and the AJK-EPA.

The processes involved in the preparation of the EMF included:

* Discussions with the staff of LGRDD and municipal corporations to assess current organizationalarrangements, organizational requirements, and training needs;

* Consultations among the relevant sectoral agencies of GoAJK, LGRDD, NGOs, CBOs, and thecommunities;

* Site visits to communities / scheme sites to identify and assess the environmental impact ofdifferent interventions made under previous similar projects; and

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* Discussions with communities and project staff to identify and assess the environmental impact ofdifferent interventions made under other similar projects.

Upon completion of the draft report, a consultative workshop attended by different stakeholders, includingNGOs, CBOs and representatives of the government and communities, was organized in Muzaffarabad onJuly 24, 2001. A second draft report was then disclosed in-country and at the Bank Infoshop (August 30,2001 and October 1, 2001). A second workshop was conducted during appraisal (November 2001). Therewill be more consultations on the EMF with the stakeholders at the district levelduring and after launch ofthe project.

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

Based on the identified environmental issues and impacts that need to be addressed and resolved during thedifferent stages of subproject design and implementation, a list of indicators has been developed during thepreparation of the EMF. In addition, the agencies responsible for environmental monitoring at differentlevels have been identified. A three-level environmental monitoring plan has been proposed, with acontinuous and quarterly monitoring to be done internally, and another six monthly monitoring to beconducted by an external agency (EPA). The timetable and levels of monitoring proposed are: (i) quarterlyenvironrnental monitoring by the M&E unit of CISP involving ADE/EO; and (ii) 6-month environmentalmonitoring by EPA as the external agency and by the project authorities. An independent audit will becarried out for the mid-term review of the project.

All the periodic progress monitoring reports prepared by the project staff will have a built-in section onenvironmental indicators to be reviewed by the M&E unit.

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

The project supports low income communities with special assistance to women's activities. A key socialissue that the Project seeks to address is how to secure the active participation of all social groups (e.g.,clan), gender, and economic groups in subschemes preparation, design, and implementation and ensuringthat CI and CD schemes respond to their genuine needs and demands. An overview of the main socialissues confronting the Project is summarized in the social assessment report carried out during projectpreparation (see Annex 12). In addition, the following social issues are anticipated arising out of projectobjectives: (i) ascertaining the ability and willingness of the community members to meet the cost sharingarrangements and O&M responsibilities as part of the community self-appraisal for each sub project; (ii)ensuring women's views are reflected in subproject design and implementation, and that project benefitsreach women and children; (iii) redressing current gender imbalances in access to basic infrastructure; and(iv) ensuring greater responsiveness of local government agencies to work with CBOs and women's groups.

To ensure that these objectives will be achieved, during project preparation, a detailed Operational Manualhas been prepared which describes clear policy, criteria, procedures and guidelines including a step by stepcommunity development cycle activities. The Project will undertake client satisfaction surveys which willtrack the quality of participation at all stages of the project cycle. Performance and process monitoring willbe designed to systematically monitor progress and generate systematic learning. This approach will alsohelp refine participatory processes to ensure that project benefits accrue to all groups in the community,particularly the traditionally disadvantaged (women and youth). Finally, social monitoring that employssuch methodologies as beneficiary assessment will be undertaken to evaluate project impact on various

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community groups.

Some of the key social development outcomes that the Project will include in its evaluation of the socialimpact of the Project are: (i) improvements in living conditions through enhanced access to communityschemes organized around social and community assets; (ii) reduced drudgery, improved convenience, andincreased community well-being; (iii) confirmed changes in local government attitude towardspartnership/collaboration with communities and their representative CBOs; (iv) sustained maintenance ofcommunity schemnes; (v) increased or new development activities initiated by CBOs and their members(e.g., linkage with other government programs and access to micro-credit sources); and (vi) increasedwomen's participation in community development activities and accrual of the benefits of these activities tothem. A complete list is detailed out in the Operational Manual.

6.2 Participatory Approach: How are key stakeholders participating in the project?

The stakeholders' workshops in AJK (December-January 2001; March 2001, May, 2001 and November,2001) were well-attended by stakeholders belonging to different income, ethnic, gender (men, women andyouth), and regional groups from rural, peri-urban, and urban areas. Other participants included officialsand staff of district level local governments and the state level LGRDD, other related sectoral agencies,NGOs, the academia, and the private sector. The consultations further indicated that all key stakeholdersare expected to participate in project activities, particularly those low income communities in rural andperi-urban locations. It is expected that communities will participate in project activities by joining CBOsin neighborhood, and block activities including arranging and organizing community and neighborhoodevents. A participatory framework has been developed with consensus and participation of all stakeholdersduring the Social Assessment workshop. The framework lays out participation all through the project cycleby the different stakeholders.

The proposed project will rely on the approach taken by the completed RWSS and the ongoing NWFP CIPand other successful community driven development programs in Pakistan in terns of: (i) following thecommunity driven approach where men, women and children define the problems and issues, and designpractical solutions through a community action planning process; (ii) selecting communities competitivelybased on human, financial, and O&M commitments; (iii) integrating physical, social, and economiccomponents managed and mediated by CBOs; and (iv) continuing to incorporate and strengthen the role ofwomen in all aspects of scheme preparation, implementation, and operation and maintenance activities.

Details of each CI and CD schemes including costing, financing and Implementation arrangements wouldbe documented in the Community Action Plan (CAP) to be prepared by each participating community.After the CAP is approved a Memorandum of Agreement (MOA), is signed between the CBO and theDistrict/Municipal government to ensure community participation and leadership in the decision-makingprocess, enhancement of women and girls' participation, and clear partnership between the CBO and thelocal government bodies. Prior to actual selection of eligible areas/communities, the first step is to carryout information dissemination campaigns and establishing initial contacts with the community to ascertainlikely community response and participation. The LGRDD and local authorities together with local NGOs,civil society groups, community leaders and representatives of various CBOs would confer with theirmembers in their areas that infrastructure development through government intervention is required, andthat the communities and users confirm that they are willing, in principle, to accept the responsibilities andcosts that they would incur if their communities would be served. During this stage, initial orientation andmotivational activities would be undertaken, with the final output of a written request from the communityagreeing in principle on responsibilities and commitments to be involved in project planning,implementation, and O&M. Following evaluation of the application of the District/Municipal and PSaccounting to the criteria established, the next stage is the community action planning exercise, which thenculminates in the signing of the MOA above. A detailed step by step process of the participatory process

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involving the stakeholders are included in the operational manual.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

The project is community driven and the participation of local NGOs and other civil society organizationsto support the CBOs is key to its success. These NGOs and other civil society organizations would beinvolved in the project as institutional partners and, along with the government, are expected to provide twotypes of assistance:

Working directly with CBOs to conduct needs assessment, coordinate where necessary the gathering ofbaseline information for monitoring and evaluation purposes; assist in the formation of CBOs(including assistance in CBO registration); identify the inputs and timing of assistance from agenciesregarding technical, financing, training, and other administrative requirements of CBOs; act ascommunity facilitator and train community leaders and members on management aspects; assist thecommunity in preparing their commnunity action plans and monitor and evaluate CBO performance;and

Providing specialized services to strengthen the capacity of: (i) local govemment personnel onspecialized training, awareness raising, participatory methods and techniques; and (ii) CBOs toimplement their CD activities, such as hygiene awareness campaigns and specialized training activitiesfor CBO members. (iii) improve skills and empower women through training (in collaboration withother NGOs and private sector) in basic literacy, management and vocational skills, and linkage tomicro-credit programs.

In order for CBOs to manage government funds advanced to them, the Govemment will facilitateregistration of the CBOs to provide them with a legal status. The CBOs will participate in and jointly beresponsible for the identification, design, and implementation of the community development activities,infrastructure and services, and be fully responsible for subsequent O&M.

NGOs and other civil society organizations would be invited to participate during public consultations, andin workshops where needs for training, funding, and institutional strengthening are being discussed, andpriorities drawn up in a participatory manner. They have participated in the Social Assessment study andtheir participation is also planned during client satisfaction survey and beneficiary assessment (socialmonitoring). Annex 12 describes the current situation of NGOs and CBOs in AJK.

6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomes?

The project will operate in accordance with a community based development principle wherebystakeholders will be empowered to take decisions affecting their own development. A participatory M&Eand a continuous feedback mechanism (through process monitoring) will be adopted for timely lessons tobe learned from experience with the project as it unfolds, and to continuously improve project approachesto maximize impact. In its initial phase, social mobilization will play a major role in raising awareness andin building capacity among community members, including women, to participate actively as partners indevelopment. Focus on women through women-specific community development schemes, along withmainstreaming women's participation in each phase of the project cycle, will help ensure that the needs ofthis group are addressed.

The project will support a multi-disciplinary team of staff from local governments, NGOs, and privategroups at the district and lower levels who will provide assistance to each participating communitythroughout the project development cycle of between two to three years. Activities include information

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dissemination, arrangement for community participation, needs assessment, establishment of arepresentative CBO, preparation and implementation of community action plan with detailedresponsibilities for implementation and O&M, and monitoring and evaluation. The Operational Manualand detailed project guidelines that have been developed will clarify the agreed criteria and the process forparticipation in the project, including the need for community action planning, selection and appraisal ofcommunities and schemes, the obligations of CBOs and partner organizations (local governments, NGOs,etc.), through signing of a Memorandum of Agreement (MOA), and specific Financing Arrangements andO&M responsibilities.

6.5 How will the project monitor performance in terms of social development outcomes?

As part of project implementation, a simple monitoring and evaluation system which includes a quarterlyand yearly review of progress will be in place. As mentioned in section 6.1 and 6.3 above, it is anticipatedthat several feedback mechanisms would be applied under the project: first, a community needs assessmentwould be an integral part of each CAP preparation providing baseline information on the community;second, a performance and process monitoring system would be designed to monitor performance andrefine processes through continuous and systematic learning, thus, ensuring participation at each stage ofthe project cycle; third, as a part of participatory monitoring, the project envisages exchange visits betweencommunities, as well as project sites, to encourage learning, sharing of knowledge and experience with theproject; fourth, a client satisfaction survey and beneficiary assessment of project impacts would beundertaken at scheduled mid-term review and after project completion. In addition, at various stages of theproject cycle, special studies would be carried out on specific aspects of the social development process(e.g., the impact of women's participation in the project's community development activities, etc.).

Specific social indicators have been identified for the project, namely: (i) enhanced access to communityinfrastructure organized around social and community assets; (ii) confirmed changes in local governmentattitude towards working in partnership with communities and NGOs; (iii) sound operation andmaintenance of CI schemes; (iv) increase in new development activities initiated by CBO members (e.g.,linkage to government and NGO programs other than CISP); and (v) increase women's participation inproject planning, implementation, and O&M, with particular emphasis on community developmentactivities (skills training, linkages to micro-credit schemes, etc). Specific indicators were identified duringappraisal at the community level and summarized in the Annex 12 summary of social assessment. This isfurther elaborated in the operational manual

7. Safeguard Policies:7.1 Do any of the following safeguard policies apply to the project?

Policy ApplicabilityEnvironmental Assessment (OP 4.01, BP 4.01, GP 4.01) * Yes 0 NoNatural Habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes * NoForestry (OP 4.36, GP 4.36) 0 Yes * NoPest Management (OP 4.09) 0 Yes * NoCultural Property (OPN 11.03) 0 Yes 0 NoIndigenous Peoples (OD 4.20) 0 NoInvoluntary Resettlement (OP/BP 4.12) 0 Yes 0 NoSafety of Dams (OP 4.37, BP 4.37) 0 Yes 0 NoProjects in International Waters (OP 7.50, BP 7.50, GP 7.50) 0 Yes * NoProjects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes 0 No

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7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

The applicability of the safeguard policies to the project have been determined in the social andenvironmental assessments.

OP 4.01 on environmental assessment applies to the project (see details on provisions to ensure compliancein section E.5. above)

OD 4.20 (formerly OD 4.30), on indigenous people does not apply as there are no indigenous groupsaccording to the social assessment study and the first year sites identified for the project. This wasconfirmed at the stakeholders workshops held subsequent to the social assessment conducted. However,during the screening process for CI schemes, the checklist developed ensures that in the event that any suchindigenous groups are found to be residing in selected project area, an Indigenous People's DevelopmentPlan will be prepared prior to the approval of the project application. Furthermore the project selection andapproval process will ensure that the indigenous groups: (i) have been consulted during the process ofproject preparation, and are in agreement with its objectives and contents; (b) are not being negativelyaffected in any way by the project; and (c) would obtain commensurate benefits from the project.

OP 4.12 on Involuntary Resettlement is not triggered by this project as only schemes in which land orproperty is donated or vacated on a fully voluntary basis would be eligible for project financing. TheSocial Assessment report states that voluntary land donation is a common feature of communitydevelopment activities in AJK. Furthermore, the project does not envisage involuntary land acquisition.Land transfer will be officially recorded in revenue registers through "Iqranamas". Procedures forvoluntary donation of land have been detailed out in the operational manual.

For purposes of OP 7.60, since AJK is a disputed territory, the standard disclaimer has been included in theproject documentation.

F. Sustainability and Risks

1. Sustainability:

The sustainability of the project will depend on strong leadership and commitment by all key stakeholders.Its success will also depend on how effective the participatory mechanisms for infrastructure and servicesdelivery at the district, municipal and community levels are operationalized. In AJK, there is a strongsupport for the proposed project from the highest to the lowest levels of government With considerableresources directed at institutional strengthening, and assured technical, financial, and institutional supportto local administration from GoAJK, a stronger capacity will be built within district and municipalgovermments. At the community level, sustainability will depend on the degree to which communitybeneficiaries have ownership of their CD and CT schemes. The contributions and obligations required fromthem under the Project will help achieve this sense of ownership. A high level of participation in projectplanning and implementation by the communities also helps in building this sense of ownership, and willtherefore support the sustainability of community investments.

There are four principal risks that could jeopardize the achievement of the project's objectives and itsexpected economic benefits (Government policy risk; possible fraud and lack of transparency in themanagement of funds at the local level; elite capture; and need to ensure an equitable and representativedecision-making process.). Please see below:

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2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1):

Risk Risk Rating Risk Mitigation MeasureFrom Outputs to ObjectiveOverall M 1. The National Government is committed to1. Commitment to devolution (involving decentralization and is undertaking, withfiscal and administrative decentralization assistance from IDA, an extensive trainingas well as community empowerment) is program for local elected officials. The GoAJKnot assured. and its officials are strongly committed to the

project, and the state has a strong history ofimplementing decentralized, participativeprograms. Fiscal decentralization is currentlyunder study. During the first years of theproject, the present system of fiscal transfers tolocal governments for development projects willcontinue.

2. The state, district, and local M 2. The project will provide for extensivegovernments are unable to develop capacity building and training activities at theinstitutions and procedures to support a all levels of government. The project's proposeddecentralized participative approach. mechanisms and modalities for local action have

been tried successfully in NWFP and AJK.3. A comprehensive, consistent, and M 3. The basic elements for projectdoable institutional framework is not implementation in AJK are already in place. Anadopted and implemented by the Operational Manual will codify a set of cleargoverrument. operational procedures; training in these

procedures will be provided to all relevantpersonnel.

4. In view of the weak financial, M 4. The funds to CBOs should be released inadministrative, and technical capacity of different phase in (e.g., four installments) as perCBOs and MCs, there is a risk of MOA/CFA. The release of funds will be mademisuse/misappropriation of funds at their only after the CBOs provide evidence of theirlevel and that these funds may not be contribution in the Joint Scheme Bank Account,accounted for properly. and a certification by the AE, LGRDD, of

progress of physical work done. The MCsshould be paid on submission of "expendituresclaim" supported by all documents of physicalwork done, as certified by the ExecutiveEngineer/Assistant Engineer, LGRDD, andpre-audited by the senior auditors on deputationto the AG's office.

5. Initial availability of fimds in the M 5. Written confirnation from the GoAJK'Revolving Fund' bank accounts at the Finance Departmnent that adequate funds will beState and District/Municipal levels and in disbursed to the Project.the CBOs''Joint Scheme' Bank accountsby GoAJK.

From Components to Outputs6. The communities will not develop M 6. The proposed Community Development andstrong CBOs that can prepare and capacity building activities would support

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implement high priority projects providing specific interventions to build the capacity ofbroad benefits to the community and its CBOs and their members. Efforts would bemembers; women members are unable to made to strengthen the capacity of local levelparticipate actively and benefit from governments and other support organizations toproject activities; possibility of elite provide the communities with the necessarycapture not avoided. organizational and technical skills, and the

selective demand driven approach should greatlyenhance the chances for success. In order tohelp ensure the participation of women, theproject will require that in addition to be part ofthe overall CBO, women members form theirown women's groups and, in addition, at leasttwo women will be represented on the CBO;particular attention will be also given to trainingwomen in relevant skills. The risks will bechecked during the planned social andinstitutional assessment, and will be monitoredwith the following measures built in to theproject's policy and operational guidelines:(i) CBO representation must show that womenare represented and that the CAP addresses theirneeds; (ii) a community map must show plothousehold size and location, existing servicesand right of way. Improvements on the typesand location will be designed and checked toshow how they serve the low incomehouseholds; and (iii) affordability of membercontribution will include a check on low incomehouseholds' ability to pay or to contribute to theproject.

7. Infrastructure schemes encounter M 7. The Project includes a strong trainingdifficulties due to poor design; component to ensure that all stakeholders followconvergence with other government the guidelines and procedures of the Operationalprograms is not ensured in a timely Manual, in particular on technical criteria andmanner. designs. AJK has a good history of coordinated

programs being carried out by variousdepartments. A policy framework to aligngovernment programs as a condition ofnegotiation has now been notified withendorsement from the highest level in GoAJK.

8. Lack of support organizations (local M 8. During project preparation andNGOs, private groups, training implementation, a list of NGOs and privateinstitutions) with adequate capacity to sector firms, which have experience andassist in the preparation of CAPs. capacity to provide assistance to CBOs and

local government staff for preparation of CAPs,have been prepared and will be maintained. Inaddition, the project will also provide trainingprograms for these consultants and serviceproviders.

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9. State and District/Municipal level M 9. Major efforts will be made to train stategovernments are not able to develop an district and municipal officials, in theeffective system to support communities techniques of community development andin raising awareness, organizing and develop an effective system to support it, basedincreasing skills. on existing good practices develop in similar

programs in AJK and Pakistan. Thegovernments concerned will be encouraged tooutsource many of the technical servicesrequired to NGOs and other privateorganizations.

10. Risk that supply of materials and M 10. The payment to supplier(s) should only begoods by Suppliers to CBOs are not in done once they submit the certificates of qualityaccordance with the contract assurance and quantities duly signed by the AEspecifications and incorrect delivery of and CBO's President.quantities and to wrong recipient(s).

Public display of scheme(s) status- receipts andpayments and periodic CBOs meetings alsoenhances the process of accountability.

Overall Risk Rating M

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

There are no controversial aspects under this project.

G. Main Credit Conditions

1. Effectiveness Condition

A. Standard legal conditions

2. Other [classify according to covenant types used in the Legal Agreements.]

1. AJK will, maintain the Program Management and Coordination Committee (PMCC) chaired by theSecretary LGRDD, and with representation from AJK relevant departments and the NGO/privatesector, and a small Secretariat to assist the PMCC consisting of LGRDD existing staff underarrangements satisfactory to the Association.

2. LGRDD will, prior to approving any CD and CI schemes proposed to be carried out under theproject, satisfy itself that the such scheme has met the selection criteria set out for such scheme in theOperational Manual.

3. LGRDD will, maintain policies and procedures adequate to enable it to monitor and evaluate on anon-going basis, in accordance with indicators satisfactory to the Association, the carrying out of theProject and the achievement of the objectives thereof.

4. LGRDD will, ensure that representatives of any CBO participating in the carrying out of any works,and in the operation and maintenance of the facilities in which such are to be carried out, will be invitedto participate in the procurement of civil works and goods for such CI works.

5. LGRDD will, ensure that procurement documentation and record keeping systems, all satisfactory tothe Association, will be developed and adopted not later than December 31, 2002.

6. LGRDD will, cause surveys to be carried out every twelve months, to determine the prevailing market

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prices of construction material used in the works required for CI schemes under the Project.7. LGRDD will, maintain a fnancial management system, including records and accounts, and prepare

financial statements, all in accordance with accounting standards acceptable to the Association,consistently applied, adequate to reflect its operations, resources and expenditures related to theProject.

8. LGRDD will prepare and furnish to the Association a financial monitoring report (FMR), in formand substance satisfactory to the Association

9. LGRDD will, implement the Project in accordance with the Operational Manual to be agreed duringnegotiations, and except as the Association shall otherwise agree, AJK shall not amend or waive anyprovision thereof if, in the opinion of the Association, such amendment or waiver may materially andadversely affect the implementation of the Project.

10. AJK not later than September 30, 2002, will constitute, a Project Steering Committee (PSC), chairedby the Additional Chief Secretary, Planning and Development Department of AJK, and including as itsmembers, among others, the Secretary, Finance Department, the Secretary LGRDD, the Secretary, theSecretary, Health Department and the Secretary, Education Department of AJK. The PSC shall meet atleast twice a year and more often if necessary.

11. AJK will take measures, satisfactory to the Association, to keep project staff turnover to a minimum,ensuring that key project staff are retained in their posts for at least two (2) years after appointment.

12. LGRDD will ensure that the first three memoranda of agreement proposed to be entered into with theconcerned communities will be furnished the Association for its prior review and concurrence.

13. AJK will ensure that: (i) the financial management staff of LGRDD will be trained in the financialinformation system mandated for the Project, in a manner satisfactory to the Association and not laterthan September 30, 2002; and (ii) the financial information system mandated for the Project will becomputerized in a manner satisfactory to the Association and not later than March 31, 2003.

14. AJK will make the proceeds of the Credit available to the communities for the purposes of the Projecton a non-reimbursable basis and in accordance with a funds flow arrangement acceptable to theAssociation. The agreed minutes of negotiations has specified the funds flow arrangementacceptable to the Association.

H. Readiness for Implementation

1 1. a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

D] 1. b) Not applicable.

1 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

FII 4. The following items are lacking and are discussed under loan conditions (Section G):

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1. Compliance with Bank Policies

1 1. This project complies with all applicable Bank policies.O 2. The following exceptions to Bank policies are recommended for approval. The project complies with

all other applicable Bank policies.

6 ie G. Viloria-Williams Vmcnent Gouan eeam Leader Sector Director try DireCtQw

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Annex 1: Project Design Summary

PAKISTAN: AJK Community Infrastructure and Services Project

Key Performance Data Collection StrategyHierarchy of Objectives Indicators Critical Assumnptions

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goat to Bank Mission)Contribute to poverty Reduction in rural and urban Poverty Assessment Reports, No gaps between macro and

expansion of sustainable poverty (PRSP etc) project objectives (see CAS)access of rural and peri urbancommunities to basicinfrastructure and services.

Project Development Outcome / Impact Project reports: (from Objective to Goal)Objective: Indicators:

Deliver cost effective and Policy and institutional Ex-post evaluation mission Local govemance is moresustainable community fr-amework fully established and other surveys specifically Lofcalgoernandelisein morelsustainable community . . ~~~~~~~~~~~~~efficient in delivering localdevelopment and suitable and operational, and formally designed for that purpose infrastructure and servicescommunity infrastructure approved by the AJK (including mid-termi and servicesschemes to low income rural authorities beneficiary report card, centralized oneandselectedperiurbanurbanpoverty surveys, beneficiarypcentra ndiselctied periurban ur # of local communities and assessments, etc.)communities through a (X) .Bsaeognie n uldecerntralized institutional CBOs are organized and fullyfradenork and (ii) using participating throughout the Mid-term reviewfarameork an m)usin project from planning toparticipatory communty operation and monitoring ICR

community development andInfrastructure schemes havereached # people in ruraland # people in peri-urbanand urban areas

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Key Performance. DatiCollection'Stratety yHierarchy of Objectives Indicators | __ Critical'AssumptioVns

Output from each Output Indicators: Project reports: (from Outputs to Objective)Component:C.1. (a): DecentralizedPlanning ImplementationAssistance lac Policy and institutional * Quarterly and annual (i) Continued commitment by(i) ector i oicies are i ple framework that will establish project management reports AJK to fiscal and administrativeincldingttuioall statewadoisric mechanisms for the (using MIS); decentralization;includingallstateanddistrictgovernment and other service * FMRs- (ii) Continued AJK to communitylevel organizations needed to . . . , participation and empowerment.provide planning and providers to work with low * Process Monitoring reports; (iii) Sustained political andimplementation services are income communities formally * Special Studies (opinion budgetary commitment to theofficially established and approved by negotiations, surveys) MTR; impact provision of communityoperational revisited and refined at evaluation; development and infrastructuremid-term review. schemes

(iv) Participation andi Established procedures for accountability mechanisms are(ii) strengthened capacities In local government and other sufficient to minimize local

planning and implementing service providers access to government capture by localCDD approaches at the capacity building and training elitesGoAJK, district/municipal (v) communities are willing toand community levels to carry out their roles and exert their democratic rights andachieved responsibilities (eg., # of to demand accountability fromLocal Government/NGO staff their elected representatives

received training andsuccessfully provided services

Number of schemes designed(iii) Community and implemented by (i)Infrastructure schemes average 106 per year; (ii) % ofdesigned and implemented households that directlyaccording to agreed policy, benefited from CI schemescriteria, standards andprocedures Sound monitoring reports

starting by December 30,(iv) Participatory monitoring 2002, and regular feedbackand evaluation systems in from community membersplace

C.1 (b): Community # and % of CBOs formed and Women are willing andDevelopment Activities operational with credible plan for allowed to participate activelyCommunity Based Organizations financial and O&M in these activities as well as in(CBOs) formally recognized and sustainability CBO and local governmentself sustaining with emphasis .ion the awareness of low-income # and % of men, women and activiteswomen on health and hygiene, children that received trainingskills for livelihood and benefited from it.improvement, etc.

(l) Appropriate, affordableC.1 (c): Community # and % of communities with solu(ions are possible in mostInfrastructures upgrading new, rehabilitated, or of Pakistan provincesand services upgraded infrastructure and (2) Infrastructure ownership1. Local infrastructure and services (106 per year) and responsibility of each

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services built, rehabilitated, to overment as well asupgraded according to agreed # necessary trunk lprocedures for sharing costs ofpolicy infrastructure built to serve construction and maintenance

requesting communities are clearly and legally definedand implemented(3) Necessary resources andprocedures for trunkinfrastructure construction,rehabilitation andmaintenance are available

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1 Key Performnance Data Collection Strategy .Hierarchy of Objectives Indicators Critical Assumptions

Project Components I Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)C.1 (a): Decentralized $2.78 million (note: SOE & Financial Budget, AJK commitment to fiscalPlaning and Implementation Includes base costs only) Audit Reports, quarterly and administrativeAssistance report, supervision mission decentralization; adequately

report, MTR, ICR skilled personnel can be hiredor further trained

1. Technical Assistance- $0.14 million Specific consultant reports, capacity building support inimplementation support supervision mission, mid-year partn with other

report stakeholders

2. Additional-Incremental $ 1.018million progress report, annual report, trained staff to communitystaff monitoring report infrastructure initiatives

3. National/Overseas Training $ 0.154 million supervision report, specific training is perceived asreports of knowledge gained beneficial to those receiving itand imparted

4. Studies $ .354 million specific report on baseline critical studies that will yielddata, comparison study -data results to improve operationsof time saved and KAP, MTR,ICR

C.1 (b): Community $ 1.93 million quarterly progressDevelopment Program reports,Bank supervision

mission, mid-term reviewreport, ICR impactassessment, audit

continued GoPakistan and1. Mobilization and Capacity $ 1.061 million do, opinion survey, comm itan toBuilding Program beneficiary assessment AJK commitment to

community participation andempowerment.

2. Health and Environmental $ 0.302 million do, special opinion survey, A.K commitment to improveSanitation Awareness beneficiary assessment quality of life through sound

HESA program3. Support to Women and $ 0.564 million do, special opinion survey, specific efforts by AJK toChildren Initiatives beneficiary assessment support women and their

children in various aspectsincluding skill developmentand linkage to micro-creditprograms

C.1 (c): Basic Infrastructure $ 21. 948 million quarterly progress AJK's commitment to adhereUpgrading and Services reports,Bank supervision to design and technical

mission, mid-term review standards and guidelines toreport, ICR impact lower CI costs to communitiesassessment, score card report,audit

1. Water supply schemes $14.4024 million do2. Community Latrines $.3375 million do3. Internal Pathways $1.9068 million do4. Foot Bridges $1.7998 million do

5. Street Pavements $.8999 million do

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6. Street Lighting $ .0225 million do7. Primary Solid Waste $.1350 million doCollection8. Tagging/Signage/Street $.0225 million donumbering/communityfacilities

9. Trunk Infrastructure $ .5697 million do

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Annex 2: Detailed Project DescriptionPAKISTAN: AJK Community Infrastructure and Services Project

Overview of the Proposed Project

This project operation will comprise three complementary components in support of low incomecommunities: (a) decentralized planning and implementation assistance; (b) community developmentactivities; and (c) basic infrastructure and services. The project would cost Rs. 1,764.87 billion (US$27.15 million equivalent) over four years. Each component is described in below (Costs breakdown areshown as base costs only).

By Component:

Project Component 1 - US$2.68 million

(A) Decentralized Planning and Implementation Assistance (US $2.68 million). This componentwould develop the capacity of state, districtltehsil staff and communities including other partners such asNGOs through:

(i) technical assistance for capacity building and training activities in the areas of participatory tools,awareness campaigns on community based and techniques, and promotional activities and institutionalstrengthening through improved procedures for project implementation, Operational Manual detailedguidelines, and monitoring and evaluation system, including process monitoring. Approximately 18 personmonths of senior advisors will be provided over a one to two-year period to help support the overallmanagement of the project, and in particular to strengthen the community development component of theproject. Given the skills requirement of the CISP team, the advisors should be specialists working with theprivate or voluntary sector, and should have strong skills in community development and participatorymethods. Also, about 40 person months of mostly local of short-term consultancies will include, but notlimited to community infrastructure, water and sanitation engineering, economic analysis,media/communications, social marketing, participatory development, and monitoring and evaluation. TAsupport will focus on refining the operational manual and detailed guidelines technical and capacitybuilding advice on management, social and community development issues, training and human resourcedevelopment, monitoring and evaluation and in refining and developing user-friendly participatory toolsand community action-planning kits, and audiovisual programs, which would be produced and distributedfor use by CISP. This will include the use of filmstrip and slide projectors designed for community use. Aproject information package will be designed, produced, and distributed to staff/NGOs, communities, andlocal government officials.

(ii) additional and incremental staff costs to support staffmg arrangements at state, district/municipal andcommunity levels through hiring of contract staff. Compensation includes salaries and benefits for staff.The CISP costs cover salaries and benefits for state staff/ and contract technical and support staff.

(iii) operational activities, including activities to support project management and coordination with otheragencies, as well as recurrent and operating costs. This will include: (i) administrative and overhead costsof state, district/municipal offices, vehicle rental, and travel allowances; and (ii) equipment and vehicleincluding the purchase/rental of vehicle, furniture, and fixtures for both CISP and district/ municipaloffices. It also includes computer equipment and requisite software and multimedia equipment.

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(iv) Pakistan and overseas cross visits in nearby countries with similar experience to act as participantobserver of field and management activities in community infrastructure and provision. Staff will also beencouraged to share their experience on their work in AJK through workshop, seminar and on-the jobparticipant observation/advisory activities. Subsequent staff training at state, provincial, and internationalsites will include cross visits to other community-based projects in Sri Lanka, Nepal, India, Philippines,Thailand and/or other countries with similar programs. Specific skills training in computers, projectmanagement, design of environmental components, participatory methods, and gender sensitivity will beincluded; and

(v) special studies in the area of: (i) water quality testing; and (ii) baseline surveys including knowledgeattitude practice (KAP). For water quality testing, this will cover the cost of impact evaluation in 5-10percent of the project communities, preplanning site appraisals for each community (to be conducted eitherby CISP or a Service Provider), and the cost of purchasing water quality testing kits. Water quality testingwill be carried out by LGRDD with technical support from EPA and other line departments (PHED), asneeded. A study will be undertaken to review the current water quality monitoring mechanisms in ruralwater supply schemes and to recommend mechanism for pilot implementation which should promoteprivate sector capacity in water quality testing, and to identify practical approaches to necessary correctiveactions by the communities. On base line surveys and time KAP/time savings. In addition to base linesurvey of a representative group of sites, a short study will be carried out to assess whether significantnumbers of CI schemes are likely to meet the initial viability criteria set up for the Project.

The overall responsibility for ensuring that all project components are implemented according to agreedcriteria would rest with the Project Secretariat (PS) under the Secretary, LGRDD supported by a ProgramManagement and Coordination Committee (PMCC). The PS at the state Level will be set up from withinthe existing structure to manage and coordinate overall activities. It will be responsible to facilitatecommunity infrastructure and services delivery through the existing District/Urban local council offices.

The CISP through the district offices and municipal councils will have project arrangements and shareresponsibilities with the communities, which in turn will be supported by contracted individuals and/orother service providers. Consultant services or "service providers" (SPs) consist of NGOs, private firms,and training institutions which have sufficient capacity to help in capacity building and other supportactivities. They would be selected by the management/implementing authorities on the basis of transparentqualifications criteria. Since the proposed project is demand-led and community-based, the communitiesthemselves will be responsible for playing the major role in each of the three project phases (Preplanning,Planning and Implementation). Since many communities lack organizational and technical skills tocomplete schemes on their own they will be assisted by the District Offices/Municipal Councils and otherService Providers. The role of these service providers will be to assist CISP by facilitating adecision-making and planning process at the community level, and to provide technical support to ensurequality of construction. These SPs will also be used to build overall capacities, provide training, somemonitoring, auditing, as well as other specialized services and expertise. These SPs will consist ofapex/resource NGOs and firns, training organizations, and other private, professional associations orentities with the requisite qualifications.

Rural communities, with CISP support, will implement single schemes directly which then can move on toother rural plus community infrastructure. In the case of peri-urban schemes, which may require otherarrangements, an 8-12 month study and pilot activities will be conducted during the first year to finalize themost appropriate method of implementation for the CI schemes in the urban areas.

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Project Component 2 - US$1.93 million

(B) Community Development (with Special Attention to Women and Children (SWC) Activities (US $1.93 million). The main thrust of this component is to encourage users, particularly women, to participatein decision-making to increase ownership of the project for long term sustainability. This component willfund three activities:

(B-1) Community Mobilization and Capacity Building Activities (US$ 1.061). This willinclude awareness-raising, mobilization, and organization of communities. A series of smallworkshops, community meetings, information campaigns, and training in participatory communityaction planning (CAP) will be conducted to enable users to organize themselves into CommunityBased Organization or User Group/Committee, and to build their capacity for the planning andimplementation of community schemes. At least 30 percent of CBO membership should consist ofwomen and other minority groups. Community Education (economic literacy), for adult learnerswould be integrated with the CAP process and will focus on functional literacy, decision makingand problem solving.

(B-2) Health Environmental Sanitation Awareness (HESA) (US$ .302 million). HESAactivities will focus on improving personal, domestic, and community hygiene (e.g., in and aroundstand posts) and environmental sanitation. They will be conducted through women's groups, andtargeted at traditional birth attendants, community elders, and school teachers. Training will dealwith personal, domestic, and community hygiene, and other environmental sanitation-relatedactivities. Women would be involved in monitoring and evaluating improvements in hygienepractices, water use and management, etc. At least two women from each women'sgroup/community stand post will be trained. Project support will cover the cost of CD staff forcapacity building and of HESA training provided by the district/municipality and/or ServiceProviders.

(B-3) Support to Women and Children (SWC) Activities (US$ .564 million). SWC-relatedactivities will provide support to: (i) develop skills among women in community development andpromote the formation of women's groups for CD activities; (ii) improve access of women'sgroup(s) to the formal micro-credit system; (iii) promote women's role in planning, implementing,and monitoring community infrastructure; (iv) encourage their participation in resourcemobilization activities, such as collection of user charges, procurement of materials, etc. Thiscomponent will also promote other activities, such as community education (functional/economicliteracy), nutrition programs for children, etc.

Planning and Preparation Phases. The focus is on building/strengthening community cohesion,community needs assessment, problem solving, and deciding on community infrastructure (CI) andcommunity development (CD) scheme options as part of the community action planning (CAP)process to be supported at the implementation phase. During these project phases 15 percent of thebeneficiary population would be trained in participatory CAP and community monitoring, inaddition to training targeted at women. Gender issues will be dealt with at all stages of the projectcycle. The role of district/municipal offices and their SPs is to help build community capacity,facilitate the active participation of women, and confirm demand and willingness of communities tocontribute to project costs and be responsible for operation and maintenance. The CBO generallyconsists of 7-12 members, hence on average 100 percent of CBO members will be trained percommunity.

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The main facilitator will be the field team comprising of community organizer (one male onefemale), and a technical personnel from the District/markaz office and municipal office. They willbe supported as necessary by selecting with CBO a community activist which will serve as theliaison between the LGRDD and the CBO. Inputs from NGOs acting as SPs per community whichwill vary depending to the size and complexity of schemes, although the mix of skills required willbe similar for all. Project support will include the salaries of: (i) a Community Facilitator (CF)with a high school diploma and experience in community development work and hygiene andsanitation issues; and (ii) a Community Development Supervisor (CDS) with at least a graduatedegree in social sciences and a minimum of two years of experience in community development,and/or with community water supply, sanitation, or other community infrastructure.

Under the CD component the following basic courses/modules will be undertaken:

* The preparation of pre-feasibility studies during a three-day workshop, and projectproposal preparation during a four-day workshop. Both workshops will take placeduring the pre-planning phase. Training in participatory Community Action Planning(CAP) and monitoring during a 1 0-day workshop will also be held during the planningphase;

* Survey, design, and costing (10-15-day workshop), construction technologies (5-10day workshop), during the planning phase and construction monitoring (4-8 dayworkshop) during the implementation phase;

* Monitoring and Evaluation methods and tools. This training will take place during theplanning phase and will consist of a five-day workshop (for District/Municipal Staffand SPs). Other specialized training, as needed, will be conducted during the planningphase and implementation phase);

* District/Municipal and state workshops for periodic project review;* Training of Trainers for Women's Development: 5-10 days during the implementation

phase; training for community development supervisors in health education and otherdevelopment activities targeted at women (10 days) during the planning phase,

* CISP / District/Municipal level training and communications program. In addition tothe above training, costs associated with the production and dissemination of trainingmaterials; and

* CISP Staff training: This will include an initial 3-week intensive field-based immersionwith an SP in participatory methods for community infrastructure, in particular watersupply and sanitation. This training should be undertaken for districtoffices/municipalities and SPs before project launching activities.

Implementation Phase. In this phase responsibility for community organization and strengtheningis shared equally by the CBO and the field staff with NGO/SP staff. In order to enable the CBO tocarry out his/her functions effectively training will focus on those skills needed to implement andmanage community development activities complementary to the infrastructure being delivered,e.g., environmental sanitation/community hygiene programs as part of community water supplyand sanitation schemes.

Community-level training will focus on the implementing roles and responsibilities of CBOs,including scheme supervision, financial mariagement, monitoring, etc. At least two cormmunitymembers per community will receive training on simple book-/record-keeping. Women memberswould be encouraged to participate. District staff and partner SPs will assist in linking beneficiarycommunities, including women's groups, with other development programs in AJK (e.g., health and

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education, micro-credit programs, income-generating activities, etc.). Project staff support willcover payments to SPs providing training.

The community development component of the project will finance capacity building activities,including those to be provided by consultants and/or Service Providers, as well as communitydevelopment-related training and equipment.

Project Component 3 - US$ 18.96 million

(C) Community Infrastructure Upgrading and Services: (US $18.96 miHlion). This componentinvolves investments in infrastructure and services, with priorities to be established in consultation withCBOs. A menu of infrastructure to be provided under the project is presented below. These are essentialcommunity infrastructure, or mainly secondary and tertiary types of infrastructure. Trunk infrastructurerequired to ensure that basic infrastructure function efficiently would also be included. Other activities tobe financed under this component include capacity building (e.g., in scheme construction and supervision),technical services (e.g., for the design of facilities), civil works, training and related equipment.

This component would be demand driven, with the infrastructure to be provided according to the prioritiesof communities. Appropriate design and construction standards have been developed, taking cognizance oflocally available materials, ease of construction and maintenance, and affordability. The project will allowcommunities to choose from a range of altemative standards within cost ceilings. Communityinfrastructure schemes to be implemented should conformn with technical, financial, and other agreedcriteria.

Past experience with community infrastructure-related projects suggests that the top community prioritiestypically include water supply, drainage, access roads, and solid waste facilities, although further demandsurveys will be conducted under the Project. Possible further choices of infrastructure facilities, subject toprior community agreement to cost sharing arrangements (including for O&M) could include: provision ofcommunity facilities such as community halls, flood protection, foot bridges, basic access. The order ofpriority may differ from one community to another; in a few cases, other priorities such as flood protectionworks might take precedence.

The menu of community infrastructure schemes which can be considered for funding under the projectincludes:

(C-i) Water Supply (US $14.402 million). Water in rural areas is supplied by various meansincluding stand posts, hand-pumps, wells and through individual or shared house connections. Inlarger rural communities and in urban and/or peri-urban areas, tube-wells and reservoirs,constructed and operated by PHED, serve the distribution systems. In some cases water is supplieddirectly from rivers through gravity systems. In urban areas where a piped supply system exists thedistribution systems are often surface laid, routed along and across drainage channels and oftensubmerged in polluted water. These pipes are prone to damages and, with intermittent supplysystems, low pressures and faulty equipment, contamination of the water supply is a risk.Rehabilitation of distribution systems as well as augmentation, generally to serve houseconnections, can thus be funded under the project, which may also the necessary rehabilitation oftrunk facilities, such as tube-well and pump restoration/replacement where critical. Potability ofdrinking water, especially when supplied directly from river sources, would be checked andremedial measures taken as appropriate. The project will also finance the construction of newwater supply facilities or upgrading of existing water supply facilities.

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(C-2) Community/Public Latrines (US $0.337 million). Sanitation facilities in communities inAJK are generally poor, yet demand for such facilities (e.g., latrines) rarely figured in communitypriority surveys in the past. However, past meetings with women's organizations revealed thatsanitation issues require urgent intervention. A sanitation component has therefore been includedin the project. The major thrust of the project will be a two stage process: (a) generating greatercommunity awareness of the link between sanitation and health, and improving sanitation practices.The experience of the RWSS sanitation programs in AJK and other areas will be drawn upon,particularly in community education and awareness-raising; and (b) the promotion of publiclatrines through demonstration (including, if applicable on a pilot basis, pre-treatment ponds inurban or peri-urban communities where sewerage systems exist). Success in promoting thisscheme will depend on the effectiveness of the health education and sanitation awareness (BESA)campaign.

(C-3) Drainage (US $1.799 million). Drains invariably act as sewage carriers, conveying theircontents either to main watercourses, to open areas, or to fields for irrigation. Based on communitydemands, comprehensive open channel drainage systems (eg., storm water) will be constructed astrapezoidal or rectangular channels in either brick or concrete. System designs have allowed forthe fact that sludge will continue to be discharged to the drains in the foreseeable future.

(C4, 7, 9) Internal Pathways, Foot Bridges, Street Pavements, Street Lighting (US $4.674million). In rural areas, access is provided through a network of narrow, generally unpaved paths,little more than a car's width across, sometimes flanked on one or both sides by open ditches.Traffic involves animals, hand- or animal-drawn carts, and bicycles. The main access roads tourban settlements are more integrated with the town's road network and generally paved, althoughthey often lack maintenance. The network of roads and footpaths within urban settlements aresimilar to those in rural areas but with significantly more traffic.

Improvements to be considered under the Project wil be limited to paving of existing streets andfootpaths. Appropriate functional planning, design and construction standards will be used. Forroad and footpath construction priority would be given to the use of locally available constructionmaterial, such as bricks. Concrete will be used in steeply sloping sites and where storm waterflows are significant. Asphalt or double surface dressing will only be used for access roads andwider streets. There appear to be higher demand on the construction of simple foot bridges in manyrural plus and peri-urban sites with greater community participation. Many parents demand tolower the time and increase the safety involved for children to go to and from schools and save atleast between 30 minutes to more than an hour of walking.

(C-8) Solid Waste Disposal (US $0.135 million). Brick-built containers (collection points)primarily intended to reduce the spread of refuse by wind and animals will be constructed, andcoverage will be designed to appropriate planning standards. Purchase of land for sites ofcollection points is not likely to be necessary since communities generally agree to provide sites (ofapproxirnately 4 sq.m. each) and only those sites that are voluntarily offered by the community willbe selected. The primary collection will be linked to the overall trunk infrastructure of themunicipal/city as part of the community action plan and translated into a signed MOA. Localtransport vehicles (hand or animal drawn carts) in peri-urban areas will also be used as asnecessary.

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(C-10) Trunk Infrastructure & Community Facilities (US $.569 million). Trunk infrastructurewill include off-site infrastructure and larger infrastructure serving the community at large. It willinclude, for example:

(a) tubewells, bulk water transmission, storage and distribution;(b) flood protection, sewerage , pilot hydel, solar heating etc.and(c) rehabilitation of existing community facilities mainly to support women/children and

community group activities (e.g., functional/economic literacy, group/individual skilllearning, primary health care) will also be supported by the Project.

As in most public infrastructure in Pakistan, communities would not contribute directly to the costsof trunk infrastructure. These would be financed through general government revenues. Trunkinfrastructure required to allow secondary and tertiary infrastructure to function need to be in placeprior to implementing project-financed secondary/tertiary investments. The project will include acomponent for such infrastructure, subject to an assessment of their technical and economicfeasibility if costs exceed a threshold amount. Once a community has deternined a service to be apriority, the development of any required trunk infrastructure will also commence, and will beundertaken in parallel with the community and resource mobilization activities. The PlanningDesign and Construction standards have been included in the Operational Manual including O&Mresponsibilities.

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Annex 3: Estimated Project CostsPAKISTAN: AJK Community Infrastructure and Services Project

Table 1: CISP: Summary Cost Timetable

Nb C9 wWbOsMpb Tcm Cog Yowl Yew2 Ye83 Yeor4

R4 LI R U PR LS Rq LWB R{ LS

27.1C 0.4 54Z OM 54A 0B3 4517 Qff1 ain Rwftgad hpbrjAwn 18aee 27e

1a78 a0 3757 as 3757 09 3131 048

2 C m1TDfehxn3_ 1252__ 1S I _

184B6 28 3ss71 56 3%71 5a 30u 4.7

3 Iu1L4ksI ariSeYiO 1 17es6__

TcfgiBacod I M_ 2X74 32 4DI 7.10 481A 71MO 5M

Ft)WCa Y/odND3eA 61B oR 9241 1 184s aa 184 a 154C o2

Y__2_ ;Y3-A4=19Bxo 164CP a 30m OAE M% 0_ 749 1.1'

GTda 17648 27.1 79 _53 27 831 47496 731

R-X*V ~ TdS | 1 Ye8rl2 | Year3 |Yw4 RR 7 ,D FKR LuSDI FRs LE FM LIS RR LE R D7

A%sM3 1300.OC 2tlOO 1J; 3.O 3'M 600 .M 3250 500

GDffnrtdAJ< - - 14.17 OM 545 084 8aa7 12 8U 13

(lnTnrr MI;4 2! 3081 Q47, tb i 12 A t D7 1 t Q9T ubs 1764B4 27.10.4 3B 5 19 1 7a 5Q a31 474- 73

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Table 2: Decentralized Planning and Implementation

r-sximatea Cost rEsITmateaNo Component/ Activity |PKR |Cost USDA Technical Assistance

A.1 Community Development Specialist (6MM) International 4.875 0.075A.2 Procurement Specialist (12MM) National Firm 0.976 0.015A.3 Other Short Term Consultants (40MM) National Firm 3.250 0.050B Incremental Staff CostB1 State, District and Field Staff 66.1401 1.018C Different Items( Operational Cost)

C1 Vehicles,Motor Bikes,Equipment and Runninq Cost etc. | 72.440 1.114D Overseas Training 10.0001 0.154E Studies

El Water Quality Testing 3.000 0.046E2 Baseline Surveys 20.000 0.308

Total 180.681 2.780MM = Man Months

Total Cost Summary of Decentralized Planning and Implementation Showing Contingencies PKR in Million

Total Year 1 Year 2 Year 3 Year 4Base Cost 180.68 27.10 54.20 54.20 45.17

Price Contingency* 19.38 0.00 3.52 7.05 8.81

Total 200.06 27.10 57.72 61.25 53.98

* @ Y1 =0, Y2=6.5%, Y3=13% and Y4=19.5%

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Table 3: CISP: Comrmnwty Deveobprmt Cost

^. .1 .. . . e -- . DdedA >3_ --- - : 8- ' rOb.l.

B.1.1 ___ _ 8l T | 2 425 125 0.850 0.013B.12 CAPTaft 8 105 | 425 125 Z125 0.033

B.1.3 Treasure Trahir_ 2 1 425 125 0.106 0.002

.14 O _ A tdT ig 16 2 425 125 0.531 0.008

.165 odesint bido Wrs 5 2 425 525 0531 0.008B.1.6 DS 2m lEi AK) . 425 750 95 0.137

B.1.7 C_t_V__ 6u1.06 2 16 25 10000 3000 0046B.18 C Traig 15 2 425 15 15 94 0.025

B.19 Sk _~ 40 24 ek 425 _ 1000 17D0 0262B.1.10 CVR3 do ln (C4P nvbf 250 10 700 1 .50 0.027

B.1.11 TraW_ of CBOs 10 2 425 250 Z125 0.033

B.1.f2 T=*_ TOfdTEs 5 25 6 X1000 0.150 0.002

B.1.13 Fie1i#E_ FW_ ph3ss 100 4750 0300 0.005B.1.14 OrleSn Tmkig fr serior sbff _16 _ 2 1,000 0.032 0.000

BA.1.5 F n dpiepbirX i 0.03D 0.000B.1.16 __ _ S_Srvey design oa_1i Wd s eoog 40 Soo_ 5 1 600 0.025

B.1.17 _anin&C* ken _ _ 0.731 0.011

B.1.18 Uantl CIS CD ___ OM __F___) (36 __ _) 50 360000 182.2 1omB.1.19 H markn for Camu AMs 2 15 m"srf 425 750 95 B 0.147

Sub-e d T 68BS44 1.061

B2.1 HESA Trai*p 8 1 6 1 425 1 125 2 Z550 1 0.039822 HePJ he ba 1o 10 T 3 425 [ 125 1 1594 0.025 B23 O a M Traw1 5 5 425 75 0.797 3701232.4 HlAdx malabbt (kd) 10 425 150 0.638 0.010B2 5 HESA MablW K b 8 425 300 1 D20 OD163 Z6 Er= E=1lury Ad < _ 425 _ 35000 1Z750 0.196B2.7 RawSX desr, B 40 15 1 500 10300 0.005

9ub-Tdal 19648 0302

B3 SlW tDVomead ChklmnB.3.1 FurbEiror"i dirAion 40 6nmrnts 425 | 1075 187| 01_

332 ~~~~Dbepp Mico 0,ke SL*Me 20 425 160 1360 0.021

B.3.3 W@bren & a*ken hlbfes _ 40 24 ffntw 425 100D 17.000 0262

iTOtEd: 9ub-Toal 1 36.652 0S64

"WE Ttd a | YOW-1 IYEpr Yar 2Y 4 _ 223I 1a178 3757 375 31-3'1

=M .w i 1143I Z 48 6.111iTOW i i661 1&781 40D 4Z4Sk 37.421@ Y14O YZ:" Y3-13 Y*49Z%

- 50 -

coI

j o dX '} ii

cii

1~~~~10

Table 4: -Irnhustrum UpgratDng and Servces

-| TotaCost Year I Year 2 Year 3 Year4_M UDM FMM USM PKR usw LMM WDL RO USD

RARUA TUR LFGRADHG AND SERVCES1 Water Supply 808.9510 124454 121.342 1.8668 24Z6853 3.7336 242.6853 3.7336 202378 3.111

PRywical*Colingerxy5%. 40.4476 0.6223 6.0671 0.0933 121343 0.1867 1Z1343 0.1867 10.1119 0.155tP= Cont_nency 86.7600 1.3348 0.0000 0.0000 15.7745 02427 31.5491 0.4854 39.4364 0.606TOal 936.1585 143 127A098 1t9602 270.41 4.1630 284A4057 251.7860

CoXrfin. Total 1272075 1s9570 6.0671 0.0933 27.9088 0.4294 43.6834 06721 495482 0.76232 C Lun t .itne 18.9540 02916 2.8431 0.0437 5.662 0.0875 5.686 00875 4.7385 OD70

PhRysica Contrngency 5%. 0.9477 0.0146 0.14 0.0022 02843 0.0044 02843 0.0044 02369 0.Price Cntinecy' 20328 0.0313 0.0000 0.0000 0.3696 0.0057 0.7392 0.0114 0.9240 0.014:ToWal 21.9345 0.3375 29853 0.40 6.3401 0o975 6.7097 0L103 58994

Contin. Toa 29806 0.0459 0.14Z 0.002 0.6539 0.0101 1.0235 0.0157 1.1609 0.01793 Smnsaar Draiage 101.0880 1.552 15.1&3d 02333 30.3264 0.4666 30.3264 0.466 25272t 0388

Phys Catingency 5%. 5.0544 0.0778 0.7582 0.0117 1.5163 0.023 1.5163 0.0233 12636 0.019Proe Corningency 10.8417 0.1688 0.oooc 0.0000 1.9712 O.30 3.9424 0.0607 49280 0.07sToal 11i6.9841 1.7998 15.21 02449 33.8139 0520 35.7852 05 3A636 OAS41

Co,t. Total 15961 02446 0.7582 0.0117 3.4875 0.0637 5.4588 0.0840 6.1916 0.09534 Intefrda Patwvays 107.1000 1.6477 16.05 02472 32.1300 0.4943 32.130 0.4943 26.7750 0411

Ptysicel Cotgey 5%. 5.3550 0.0824 0.8033 0.0124 1.6065 0.0247 1.6065 0.0247 1.338 0.Pri Corniingency 11.4865 0.1767 0.OOt O.OOOO 2.85 0.0321 4.1769 0.0643 5221 0.Totad 123.9415 1q068 16 02595 35s2s O.512 37.913 05833 33334 051

Confin. Total 168415 02591 0.8033 0.0124 3.6950 0.058s 5.7834 0.0890 6.559 0.10095 Fot Bdges 101.0880 1 .555 15.1 02333 30.3264 0.4666 303264 0.4666 252720 0

Phl ceiCont n 5%. 5.0544 0.0778 0.7 0.0117 1.5163 0.0233 1.5163 0.0233 12636 0.01Prke Co,ndrneny 10.8417 0.1668 0.0000 ODO0 1.971 0.0303 3.9424 0.0607 4.9280 0.07Total 116.9841 1.7998 15.921 02449 33.8139 0.520 35785. 0oss 31A636 OA841

Contin. Total 15.8961 024461 0.758 0.0117 3.4875 0.0537 5.4588 0.0840 6.1916 0.09531

6 Suae Paveet 50.5440 o.m6 7.5816 0.1166 15.1632 0233 15.163 02333 126380 0.1_ vsirA Contnency 5%. 2 zsz 0.0389 0.3791 0.0056 0.7582 0.0117 0.7582 0.0117 0.6318 0.Pn_ c Contingency 5.4208 0.0634 0.0000 0.0000 0.9856 0.0152 1.9712 0303 Z4640 0.03Total 584920 0899 7.9607 0.1225 18.9070 02601 17.8926 02753 15.7318 0

Contn. Totl 7s0480 0.1223 0.3791 0.0058 1.74381 0.0268 Z7294 0.0420 3.0958 0.04767 Sbeet Lighturg 3.7908 0.0583 0.5686 0.0087 1.1372 0.0175 1.1372 0O175 0.9477 0.01

Physil Contrgercy 5%. 0.189 O.002 0.0284 0.04 0.0569 0.0009 0.0569 0.0009 0.0474 0.Pric Confteiry 0.4066 0.00631 0.O 0.0000 0.0739 0.0011 0.1478 0.0023 0.1848 0.Total 438S9 09675 0.5971 o0o09 1268 0.0195 1.3419 om02 1.1799 0.01

Confin. Totl 0.5961 0.00921 0.0284 0.0004 0.1308 0.0028 02047 0.0031 02322 0.oo8 Sold Wan ManagMent 7.5816 0.1166 1.1372 09175 22745 0! 30 22745 0.0903 1s954 0

Phsical Contercy 5%. 03791 0.0058 0.0569 0.0009 0.1137i 0.0017 0.1137 0.0017 0.0948 0.0011Pric Conb * 08131 0.0125 0.0 O.OOOX 0.1478 0.0023 2957 0.004, 0.3696 0.TTotal a738 0.1350 1.1941 0.0184 2.530 0.30 z6839 0.0413 2z3 o 036

Cortin. Toted 1.1922 0.0183 0.0569 o 00 02616 OD040 0.4094 o0063 0.464 0.0071

9 Taggng/ Numbett Sreets 12636 00194 0.1895 0.0028 0.3791 0o98 0.3791 00056 0.3159 0.aRwsicW Contanc5%. 0a0632 0.00101 0.0095 0.01 0.0190 0.0003 0.0190 0.03 09158 0.ooo

Price Coningncy* 0.1355 0.002 0.0000 0.0O 0.0246 0.0004 0.0493 o00 o01t .6 0.

Total 1A623 0.0225 0.1990 09031 OA227 o 0068 OA473 09 069 0.393 0906

Contin. Total 0.1987 0.0031 0.00X5 X ol 0.0436 o 0007 0.0682 0.0010 00774 0.0012

10 Tnmk nfrasl ur 32z0000 0.4923 4.8000 0.0738 9.6000 0.1477 9.6 0.1477 8.0toO 0.1231

Physica Coingercy 5%. 1.6000 0.0246 0240 0.0037 0.4800 0.0074 0.4800 0.0074 0.4000 0.ooe

Price Co*gncy' 3.4320 0.0528 0.0D0O 0.0000 0.6240 0.0096 12480 0.0192 15600 0.02

Totl 37.0320 0.569 5.0400 O97? 10.7040 0.1647 113280 0.1743 9-9600 0.1

Cotin. Total 59320 0.77 0.2400 0.0037 1.1040 00170 1.7280 0.0286 1.9600 0

Sub Total a: 42614 2140 1946 2986 4122248 63419 4362558 6.7116 385724 59011

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Summary AGoveS mentADP A 1 25121 346.78401 5.33511 367.00011 5.64621 322.6802 4.96431

Community Share 226.40161 3U31 30.81291 0.4740 65.44081 1.0068 69.2557 1.0655 60.8922 0.9368

Toral 1 1426.149 21.9408 194.0969 2.9861 412.22486 6.34191 436.2558 6.71161 383.5724 5.9011

Summary B

Base Cost 1232.3610 18.9594 184.8542 2.8439 369.7083 5.69.70839.7083 5.6878 308.0903 4.7399

Physical Contingency 5%. 61.6181 0.94801 9.2427 0.1422 18.4854 0.2844 18.4854 0.284 15.4045 0.2370

Price Contingency * 132.1707 2.0334 0.0000 0.0000 24.0310 0.3697 48.0621 0.739 60.0776 0.9243

Total 1426.14981 21.9408 194.0969 2.9861 412.2248 6.34191 436.258 6.7111 383.57241 S.

1 Price Contingency @ Y1=O,Y2=6.5,Y3=13,Y4=19.5°}'20% inclusive except Items nos. 2, 8 and 10

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Annex 4: Cost Effectiveness Analysis SummaryPAKISTAN: AJK Community Infrastructure and Services Project

Background. Proposed CISP will provide technical assistance and financial support to communities inAJK for various community infrastructure schemes, with the type of infrastructure to be selected bycommunities according to their priority needs and their affordability. The menu of options includes watersupply, latrines, drainage, solid waste management, intemal pathways and footbridges, street lightening,trunk infrastructure and other community facilities. Beneficiaries are expected to contribute a minimum oftwenty percent to the capital costs of these investments, hundred percent of the incremental capital costsfrom choosing a higher service level than the basic one, and will be fully accountable for the operation andmaintenance of the assets installed.

As the project is demand-based and communities make investment choices after project effectiveness, aneconomic cost-benefit analysis will not be feasible. For the first year, however, sub-projects involvinginvestments to improve access to and quality of current water supply sources have been pre-identifiedbased on need and demand.

A tentative allocation of investment costs among the different types of community infrastructure schemes isshown in Table 1. The distribution of cost is based on participatory assessments of local priorities andpreferences undertaken under the social assessment, and unit costs are based on LGRDD staff andconsultant estimates.

Table 1: Estimated Total Costs and Unit Costs by Investment Type

Type of investment Estimated Costs Percent of Estimated No. of Units(in million) Total Costs/Unit Served/Provided

Water supply $14.4 65.59% $187/hh 540,000Community latrines $0.34 1.55% $8/hh 36,666 hhRural $33/hh 50,000

$15.5/hh 25,000Storm water drainage $1.80 8.20% $7.25/m 248kmIntemal pathways $1.91 $8.70% 5385km 306kmFoot bridges $1.80. 8.2% $385/m 4.04kmStreet pavements $0.90 4.10% $11.4/m 17,000hhStreet lightening $0.07 0.32% $18.9//hh 25,000personsSolid waste management $0.14.00 .64% $2/hh 47,000 personsTrunk infrastructure (i.e. $0.57 2.60% $5,385/lam 401 kmaccess roads)Other community facilities $0.023 0.10%(including tagging and streetsignage)Total $21.953 100%Sources: Based on Government's Implementation Plan (PC-1) costings including physical and pricecontingencies and consultant engineer estimates of 1/only gravity and pumping schemes.

A per household ceiling of total investment costs has been defined at Rs.20,000 (or US$308), of which amaximum of Rs.5,000 could be spent on trunk infrastructure. Since no beneficiary contributions are

- 54 -

required for trunk infrastructure, the maximum subsidy any household could receive under the project isRs.17,000 (i.e. Rs.5,000 plus 80 percent of Rs.15,000).

Approach. Given the above mentioned constraints plus lack of suitable baseline data, the approachadopted for the economic analysis of the CISP is as follows: (a) assessment of the cost-effectiveness ofpre-identified water supply investments by comparing the estimated costs per person to those of recentlyimplemented schemes; and (b) identification of thresholds of investment cost per household to facilitatequick approval of water supply investments. Similar reviews for community infrastructure investmentsother than water could not be undertaken for lack of comparative data. The operational manual includes asection to guide such reviews for other type of investments and to advise the government on the use of suchcost thresholds in sub-project approval.

Analysis. The approach outlined above has been adopted for the pre-identified water supply schemes to beimplemented within the first year after project effectiveness. The estimated costs of these schemes(including labor, civil works, equipment and material) are US$1.7 million for spring-based gravity schemesand US$0.5 million for spring-based pumping schemes, serving a total population of about 115,000 people.Review of cost details for other type of water schemes using groundwater sources has not been feasible forlack of comparative data, and should be done within the first year.

(a) Spring-based Gravity Schemes

The per capita cost of both proposed and already implemented spring-based gravity schemes are plottedagainst capacity in Figure 1. Per capita cost variations with increasing capacity levels are negative butsmall, suggesting the existence of some yet negligible economies of scale.

Figure 1

9,000

_ 8,000 o

t: 7,000

s 6,000

o 5,000

X 4,000 o

3,000 00

1,000 - ° 00°0 ° A0

0 1,000 2,000 3,000 4,000

Number of Persons Served

Except for three schemes with excessive costs per person in this category, per capita costs for plannedschemes under the CISP are in line with the actual costs per person under the recently completed program,the government of AJK has financed on its own. It is recommended that the costs of these three watersupply schemes be examined in more detail, more cost-effective solutions be explored, or otherwise they bedropped from the CISP.

- 55 -

Of all sub-projects that meet the criteria for eligibility outlined elsewhere in the PAD, it seems reasonablethat about 20 percent of these sub-projects would be more thoroughly reviewed, while the remaining 80percent could be quickly approved if per capita or per household costs are below a certain threshold. Basedon the cost data of planned investments, gravity schemes that cost equal or more than Rs.12,000 perhousehold (equal to Rs. 1,714 or $26 per capita), would require a more detailed review of the costs and/orthe expected benefits.

In order to verify whether investment costs at Rs. 12,000 per household would produce a reasonable rate ofreturn, iterations of the ERR and the NPV (at 15 percent discount rate) have been reproduced in Table 2 indifferent scenarios.

The analysis is based on the following baseline assumptions:

ICR 2001 PAD 2002Average household size 10 7Discount rate (%) 10 15Exchange rate (Rs./$) 65Life of assets (years) 20 15Time savings (hours/hh/day) 3-9 3-5Women's wages (Rs./day) 11.2 (1989) 40 (2001)Time allocated for income generation (%) 10 10Value of leisure (%) 30 30O & M (Rs./hh/month) 30 30, 60Sources: ICR (2001), Social Assessment (2001), PK Poverty Assessment (2001).

Similar to the ICR (2001) of the former PK Rural Water Supply and Sanitation Project, only 10 percent oftime saved is assumed to translate into income generation, while the remaining 90 percent, valued at abouta third of the rural wage for unskilled labor, would be spent for leisure. The ICR economic analysis - basedon detailed surveys undertaken during appraisal - assumed time savings to be of a range between 3 to 9hours per household, while here a range from only 3 to 5 hours is assumed.

For investrnents at around Rs. 12,000 per household, the economic rate of return will be borderline at 11percent, if an average of 3 hours per household are being saved as a result of the investment. Hence, alsofrom the cost-benefit perspective, Rs.12,000 per household seems a reasonable cost threshold that - ifexceeded - will require the project implementation agency to review, whether a new water supply schemewill indeed translate into minimum time savings that would generate an adequate rate of return.

(b) Spring- and Groundwater-based Pumping Schemes

The per capita costs of both spring- and groundwater-based pumping schemes, already implemented andplanned, are illustrated in Figure 2. Although a clear trend of costs - probably due to limited observations -is not discemible, the slope of the fitted regression line (not shown in graph) is negative, suggesting somebut negligible economies of scale. One observation of actual investment costs had to be eliminated asoutlier.

- 56 -

Figure 2

3,500 -

3,000

X 2,500 - o oa. A oo) 2,000 - o o E

* ~~~~~Ar' 1,500 A 0 0 A

0~~~~~~~~~~~~

L 1,000 6 o 0

500 - 0 o

0 *

0 1,000 2,000 3,000 4,000

Number of Persons Served

If one were to adopt the same methodology for sub-project screening as outlined above, the threshold forinvestment costs per household could be defined at Rs.16,000 (equal to Rs.2,286 or $35 per capita), so that20 percent of the planned investments in pumping schemes during the first year would be reviewed in moredetail.

Considering the ERR or the NPV for a per household investment costs of Rs. 16,000 suggests lowering thethreshold, since neither is adequate or borderline. Even if the costs are lowered to Rs.12,000, the emergingERR at 7 percent is still inadequate, when assuming an average of 3 hours in daily time savings perhousehold.

Table 3 shows the expected ERR and NPV under different scenarios. With household investment costassessed for pumping schemes being similar to the one for gravity schemes, the only difference betweentable 2 and 3 are the costs for O&M, being higher for pumping than gravity schemes.

Summary of benefits and costs:

The benefits of the project remains strong. It is estimated that more than half of the physical investmentsin this project will be for rural water schemes. The economic analysis for the Implementation CompletionReport (ICR) of the recently completed Rural Water Supply and Sanitation Project (Cr.2228-PAK)provides an indication of likely results. The ICR's analysis demonstrated that the ERR of the AJKcomponent of that project lay in the range of 3 percent to 31 percent, with a median point of 13 percent,and with these results being sensitive to variations in the benefit streams flowing from the time saved bywomen from collecting water. The ICR indicated that only 10 percent of this time was considered to beapplied to income generating activities, an estimate considered to be low. In this operation, specificattention is paid to the economic needs of low income women by providing them with direct assistance andindirect linkages to help improve their income, so a greater proportion of time saved being applied toincome generating activities is a reasonable assumption. This would indicate that the ERR for the watersupply component should be towards the higher end of the range of the earlier project.

The impact of improved access to basic community infrastructure has both short-term and longer-term(generational) impacts in terms of improved health and labor productivity. The main economic benefits can

- 57 -

be summarized as follows:

* Improvement to local circulation, street lighting and signage is expected to reduce accidents and improvegeneral safety (particularly for women and children) and confidence for moving around the neighborhoodcommunity.

* Maintenance and rehabilitation of rural roads will increase access to markets and social services, such ashealth and education care. Better access to markets will generate economic benefits from markettransactions, whereas access to social services increases productivity, which in turn contributes toincreased income.

* Investment in safe drinking water and sanitation, by improving the health of rural population, as well as areduction of the time spent, especially by women, in transporting water, will contribute to povertyalleviation and increase the productive capacity of rural people, particularly women. The benefits ofimproved water supplies (quantity and quality) on health outcomes are well-documented. These healthbenefits in turn lead to labor productivity and income gains via a variety of direct and indirect pathways.

* Drainage, solid waste, water and sanitation and access improvements in peri-urban communities areexpected to provide higher property values, which reflect in some degree the economic and social benefitsenumerated here.

* CISP will also contribute to employment and income generation in rural and peri-urban areas, bothdirectly (through improvements of the infrastructure to give efficient access to the natural resource base,and involvement of local artisans and village workers in the construction of basic infrastructure fundedunder the project) and indirectly (through the new and/or additional economic opportunities generated bylocal road improvement, and improved capacity for economic activity due to better health and watersupply).

Main Assumptions:Table 2: Expected Economic Rate of Return and NPV for Gravity Schemes

Time Savings per Household per Day3 hours 4 hours 5 hours

ERR NPV ERR NPV ERR NPVInvestmeenit costs per householdRural wage: Rs.40/month, O&M: Rs.30/month, Discount Rate: 15%Rs. 8,000 19% 1,513 29% 4,947 37% 8,380

Rs.10,000 14% (226) 22% 3,208 30% 6,641

Rs.12,000 11% (1,965) 18% 1,468 24% 4,902

Rs.15,000 7% (4,574) 13% (1,140) 19% 2,293

Ruril wage of women per dayInvestment Costs: Rs.12,000, O&M: Rs.30/month, Discount Rate: 15%Rs.30 5% (4,730) 11% (2,155) 16% 420

Rs.40 11% (2,155) 17% 1,279 24% 4,712

Rs.50 16% 420 24% 4,712 31% 9,004

O&M per household per. monthInvestment Costs: Rs.12,000, Rural wage: Rs.40/month, Discount Rate: 15%Rs.30 11% (2,155) 17% 1,279 24% 4,712

Rs.60 7% (3,985) 14% (552) 20% 2,881

Rs.80 4% (5,206) 11% (1,772) 18% 1,661

Table 3: Expected Economic Rate of Return and NPV for Pumping Schemes

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Time Savings per Household per Day3 hours 4 hours 5 hours

ERR NPV ERR NPV ERR NPVInvestment costs per householdRural wage: Rs.40/month, O&M: Rs.60/month, Discount Rate: 15%

Rs.12,000 7% (3,795) 14% (362) 21% 3,071

Rs.14,000 5% (5,535) 11% (2,101) 17% 1,332

Rs.16,000 3% (7,274) 9% (3,840) 14% (407)

Rural wage of women per dayInvestment Costs: Rs.12,000, O&M: Rs.60/month, Discount Rate: 15%

Rs.30 0% (6,371) 7% (3,795) 13% (1,220)

Rs.40 7% (3,795) 14% (362) 21% 3,071

Rs.50 13% (1,220) 21% 3,071 28% 7,363

O&M per household per monthInvestment Costs: Rs.12,000, Rural wage: Rs.40/month, Discount Rate: 15%

Rs.40 10% (2,575) 17% 858 23% 4,292

Rs.60 7% (3,795) 14% (362) 21% 3,071

Rs.80 4% (5,016) 12% (1,582) 19% 1,851

Conclusion and Recommendations. Above analysis was done in order to establish a sound threshold forthe costs per household of gravity and pumping schemes to facilitate a quick approval process forsub-projects which costs fall below such threshold.

In the case of gravity schemes a threshold of Rs. 12,000 per household appears to be reasonable, ifcompared to the expected ERR from this investment and considering that this threshold is likely to require adetailed review of about 20 percent of sub-projects, being within the capacity of the implementing agency.

Since capital costs and recurrent costs per household are higher for pumping than gravity schemes, yet thebenefits remain the same, expected ERR or NPV would be, by definition, lower compared to gravityschemes. Given the small number of planned investments in this category (15 sub-projects), a reviewthreshold of Rs. 12,000 per household for pumping schemes is recommended during the first year, even ifthat will imply a more detailed review of costs and benefits in almost half of the pre-identified pumpingschemes. This threshold could be revised, once more information on actual costs or actual time savings inbeneficiary communities becomes available.

The assumptions adopted for calculating the ERR under the different scenarios have been conservative, andthe assessment of benefits has been limited to time savings, excluding other benefits, more difficult tomeasure, such as improved health or convenience.

More importantly, reported ERRs and NPVs are those for higher-end costs and not the average costs perhousehold. Therefore, the expected ERR for average cost of gravity schemes (about Rs.9,600 perhousehold) will be about 23 percent if a mid-point of 4 hours of time saved for collection water is assumed,or about 16 percent for pumping schemes (at a cost of about Rs.10,850 per household).

Cost-effectiveness indicators:A draft list of cost effectiveness indicators have been included in the Operational Manual.

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Annex 5: Financial SummaryPAKISTAN: AJK Community Infrastructure and Services Project

Years Ending

| IMPLEMENTATION PERIOD

Year 1 Year 2 Year 3 Year 4 Year 5 I Year 6 Year 7Total FinancingRequiredProject CostsInvestment Costs 3.3 7.1 7.4 6.3 0.0 0.0 0.0Recurrent Costs 0.3 0.8 0.9 1.0 0.0 0.0 0.0

Total Project Costs 3.6 7.9 8.3 7.3 0.0 0.0 0.0Total Financing 3.6 7.9 8.3 7.3 0.0 0.0 0.0

FinancingIBRD/IDA 3.0 6.0 6.0 5.0 0.0 0.0 0.0Government 0.3 0.7 1.0 1.8 0.0 0.0 0.0

Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0Provincial 0.3 0.7 1.0 1.8 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0User Fees/Beneflciaries 0.3 1.2 1.3 0.5 0.0 0.0 0.0Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Project Financing 3.6 7.9 8.3 7.3 0.0 0.0 0.0

Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Main assumptions:Project Costs- includes physical and price contingenciesRecurrent Costs- includes incremental costs and vehicle equipment running costsIDA credit is US$20 million (SDRs 16.1)

-60 -

Annex 6: Procurement and Disbursement ArrangementsPAKISTAN: AJK Community Infrastructure and Services Project

Procurement

Procurement Capacity6.01 An assessment of the Implementing Agency's procurement capacity was carried out by aProcurement Accredited Staff (PAS) during the pre-appraisal mission and was discussed with theimplementing agencies. The main findings are as follows:

Organization6.02 The existing procurement capacity of the implementing agencies, i.e. the Local Government andRural Development Department - LGRDD (the implementing agency responsible for the ruralsub-program), and its Local Government Board/Municipal Councils - LGB/MCs (the implementingagencies responsible for the urban sub-program), requires strengthening to be able to effectively carry outthe expected project procurement in accordance with agreed procedures. While these agencies haveadequate number of engineers/technical staff who are experienced in the govermment's own proceduralrequirements, most of the staff have little knowledge and experience of the Bank's procurementprocedures. Only two staff members of the LGRDD Central Office have been involved in handlingprimarily procurement of goods (pipes, fittings and pumps) under the previous Bank financed Rural WaterSupply and Sanitation Project (Cr.2228-Pak) and have also attended basic procurement training conductedby the Bank. While these two staff members are experienced and well versed in managing procurement ofgoods at the central level, the LGRDD staff at the district level (who will responsible for carrying out therural civil works procurement) and LGB/MC staff (who will responsible for canying out all procurementunder the urban sub-program), have had limited prior experience and training in the Bank's procurementprocedures.

6.03 The procurement capacities of the implementing agencies, LGRDD and LGB/MCs will bestrengthened through engagement of consultants and training to enable them to effectively carry outprocurement under their respective sub-programs. LGRDD and LGB will engage one qualified individualprocurement consultant each (i.e. one per agency - two in total for the project) for at least the first year ofthe project. The procurement consultants will initially serve as focal points for all procurement mattersunder their respective sub-programs, and will provide comprehensive procurement support includingprocurement planning and monitoring, preparation of bidding documents, evaluation of bids, and contracts,and overall guidance in complying with agreed procurement procedures. One Procurement Consultant hasalready been engaged under the PHRD Grant.

6.04 The Bank will assist in capacity building by conducting procurement training workshops for keyprocurement staff of the implementing agencies, before the start and during implementation of the project,in order to improve and update their knowledge of the Bank's procurement procedures. The dates for theseworkshops will be mutually agreed. All key procurement staff of the implementing agencies will beidentified and trained in the Bank's procurement procedures by December 31, 2002.

Procurement procedures6.05 The procurement procedures of the implementing agency were reviewed. Procurement procedureswere found to be broadly based on competitive methods of selection. There is also a system for intemalreview/clearances through established steering committees but there are no response time standards. It wasalso noted that there are some differences between the procurement procedures of the Implementing

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Agencies and the Bank, such as in the use of pre-qualification/post-qualification procedures, Bank's openeligibility requirements vs the implementing agency' practice of enlisting/pre-registering bidders, which theBank finds restrictive. Such differences will be removed through application of the Bank's ProcurementGuidelines which will govem all procurement of Goods and Works to be financed under the Project.Consultants' services will be procured in accordance with the Bank's Consultant Guidelines. The specificprocurement arrangements described below are designed to ensure conformity with the Bank's procurementprocedures. These are also intended to facilitate maximum community participation and empowerment inthe procurement process. It is expected that the CBOs themselves will carry out most of the civil worksunder the Project. They will also participate substantively in all stages of the procurement process whenprocurement is to be carried out by the Govenmment, provided the conflict of interest provisions of theBank's Procurement Guidelines are complied with.

Procurement Methods (Table A)6.06 Goods and Works to be financed under the project shall be procured in accordance with theGuidelines for Procurement under IBRD Loans and IDA Credits, January 1995, revised January 1999.Consultants Services financed under the project shall be procured in accordance with the Bank's Guidelinesfor Selection and Employment of Consultants by World Bank Borrowers, January 1997, revised January1999. In case of conflict between the Bank's procurement procedures and any national rules andregulations, the Bank's procurement procedures would take precedence.

6.07 The Bank's Standard Bidding Documents and bid evaluation forms for procurement underInternational Competitive Bidding (ICB), and sample bidding documents and bid evaluation forms forprocurement under National Competitive Bidding (NCB) which are already in use on other Bank financedprojects in Pakistan, will be used for procurement of Goods and Works. For works to be procured throughcommunity participation, a model contract document has been agreed with the Bank and incorporated in theOperational Manual. The Bank's Standard Request for Proposal document and evaluation form will beused in the selection of Consulting firms.

6.08 All expected procurement of goods, works and consultants' services will be listed in the project'sGeneral Procurement Notice (GPN) to be published in the United Nations Development Business (UNDB).A consolidated GPN for the whole project will be published in UNDB, and will be updated annually.

6.09 GoAJK has agreed to develop and notify response time standards for completion of the variousstages of the procurement process (e.g. bidding documents, advertising, evaluations and contract award)applicable to the project.

6.10 The draft bidding/contract documents for contracts expected to be awarded during the first year ofthe Project have been completed.

Civil Works ($11.86 million)

6.11 Civil works generally include:-- installation of water supply pipes- water tanks- tube wells-- community latrines-- storm water drains-- access roads/pathways-- foot bridges

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- street pavements-- installation of electric poles/conductors-- collection bins and filth depots- marking and installation of street signs-- trunk infrastructure (including if feasible) hydel/solar power pilots

6.12 It is expected that about 2,400 contracts for small and scattered civil works schemes, rangingbetween $200 and $200,000 each, will be procured during the life of the project. Due to the communitydriven nature of the project, specific contract packages, with the exception of the first year contracts,cannot be identified upfront and will be defined during the implementation phase. These contracts are notexpected to attract the interest of foreign contractors. However, if foreign firms wish to participate in thesecontracts, they will be permitted.

6.13 Civil works will be procured through National Competitive Bidding (NCB) procedures acceptableto the Bank, with post-qualification of bidders. Smaller works estimated to cost less than US$30,000 percontract up to an aggregate amount not to exceed US$7 million may be procured through communityparticipation. The community participation works will be carried out through a collaborative effort betweenthe CBOs, implementing agencies and technical assistance teams. For such works, the implementingagency will enter into a Memorandum of Agreement with CBOs that meet the eligibility criteria laid downin the Operational Manual. The CBOs will be responsible for carrying out the works themselves (withoutsub-letting the works to private contractors) by procuring (a) labor at market rates or as part of theirin-kind contribution towards the capital cost of the works, and (b) construction material through NationalShopping procedures. The CBOs will be reimbursed for the government's share of the costs. Theimplementing agencies and technical assistance teams will provide technical guidance and oversight. Theimplementing agencies will also carry out surveys every 12 months to determine the prevailing marketprices of construction materials required for CI schemes.

Goods ($10.62 million)

6.14 Goods under the Project would generally include:-- vehicles-- pipes and fittings-- pumps and motors-- office furniture-- office and survey equipment.

6.15 Intemational Competitive Bidding (ICB) procedures will be followed for each contract for goods,except pipes and fittings, estimated to cost more than US$ 200,000 equivalent. Domestic Preference will beallowed to local bidders on ICB contracts.

6.16 Taking into account the staggered time-frame linked to community mobilization, the small andscattered deliveries required at the community level, and the procurement capacity of the implementingagencies, contracts for pipes and fittings are expected to be procured by LGRDD's Central Office indistrict-wise packages (ranging between US$40,000 to US$225,000 each, and about US$10 million inaggregate over the life of the project) consolidated under 2-3 invitation for bids in each year. Thesecontracts are not expected to attract the interest of foreign suppliers.

6.17 Contracts for Pipes and fittings, irrespective of value, and all other goods estimated to cost betweenUS$30,000 equivalent and US$200,000 per contract up to an aggregate amount not to exceed US$500,000

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are expected to be procured through National Competitive Bidding (NCB) procedures acceptable to theBank. Small value off-the-shelf goods estimated to cost US$30,000 equivalent or less per contract and upto an aggregate ceiling not to exceed US$300,000 are expected to be procured following National Shoppingprocedures in accordance with the Procurement Guidelines.

Improvement of Bidding Procedures under National Competitive Bidding6.18 The following improvements in bidding procedures will apply to all procurement of Goods andWorks under National Competitive Bidding, in order to ensure economy, efficiency, transparency andbroad consistency with the provisions of Section I of the Guidelines:

-- Invitation to bid shall be advertised in at least one national newspaper with a wide circulation, atleast 30 days prior to the deadline for the submission of bids;

-- bid documents shall be made available, by mail or in person, to all who are willing to pay therequired fee;

-- foreign bidders shall not be precluded from bidding and no preference of any kind shall be given tonational bidders in the bidding process;

- bidding shall not be restricted to pre-registered firms;-- qualification criteria shall be stated in the bidding documents;-- bids shall be opened in public, immediately after the deadline for submission of bids;- bids shall not be rejected merely on the basis of a comparison with an official estimate without the

prior concurrence of the Association;- before rejecting all bids and soliciting new bids, the Association's prior concurrence shall be

obtained;-- bids shall be solicited and contracts shall be awarded on the basis of unit prices and not on the

basis of a composite schedule of rates;-- contracts shall not be awarded on the basis of nationally negotiated rates;-- contracts shall be awarded to the lowest evaluated and qualified bidder; and-- post-bidding negotiations shall not be allowed with the lowest evaluated or any other bidders.

Consultants' Services ($0.95 million) and Training ($1.63 million)

6.19 Contracts with consulting firms estimated to cost more than $100,000 per contract will beprocured in accordance with Quality and Cost Based Selection procedures. Contracts estimated to cost lessthan $100,000 per contract may be procured through the method of Selection Based on Consultants'Qualifications. Contracts with individual consultants will be procured in accordance with the provisions ofSection V of the Consultants Guidelines.

Incremental Operatinz Costs: (US$1.85 million)

6.20 Administrative and operating expenditures would be according to the govermnent procedures.

Procurement Planning6.21 Preliminary procurement plans for goods and works have been provided to the Bank and ouravailable in the Bank's files. Prior to issuing the first invitation for bids in the case of goods and works, andrequest for proposals in the case of consultants' services, each implementing agency will prepare andprovide for the Bank's review, updated annual procurement plans for Goods, Works and Consultants'Services. Procurement under the project will be carried out in accordance with the agreed procurementplan. Procurement plans will be closely monitored and updated on a quarterly basis, with the first updatedue on August 31, 2002.

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Review of Procurement by the Bank (Table B)6.22 Prior Review: The following contracts will be subject to the Bank's prior review:

-- The first ICB contract for Goods, irrespective of value, to be procured by each implementingagency;

-- The first NCB contract for Goods and works, irrespective of value, to be procured by eachimplementing agency;

-- Thereafter, each contract for Goods and works estimated to cost US$100,000 equivalent or more;-- The first Consultants' Services contract with consulting firms, irrespective of value, to be procured

by each implementing agency; the first consulting services contract with individual consultants,irrespective of value, to be procured by each implementing agency; and thereafter all contracts withfirms estimated to cost US$ 100,000 equivalent or more, and with individuals estimated to costUS$ 50,000 equivalent or more.

6.23 All other contracts will be subject to Post-Review by the Bank. The implementing agency willsend to the Bank on a quarterly basis, a list of all contracts subject to post-review.

Procurement Information and documentation6.24 Procurement information will be recorded and reported as follows:

(a) Complete procurement documentation for each contract, including bidding documents,advertisements, bids received, bid evaluations, letters of acceptance, contract agreements,securities, related correspondence etc., will be maintained by the implementing agency in anorderly manner so as to readily available for audit.

(b) Contract award information will be promptly recorded and contract rosters, in the Bank'ssample format, maintained by the implementing agency.

(c) Comprehensive quarterly reports by the implementing agency indicating:(i) revised cost estimates, where applicable, for each contract;(ii) status of on-going procurement, including a comparison of originally planned and

actual dates of the procurement actions, including preparation of bidding documents,advertising, bidding, evaluation, contract award and completion time for each contract;and

(iii) updated procurement plans, including revised dates, where applicable, for theprocurement actions.

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Procurement methods (Table A)

Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

T

Procurement MethodExpenditure Category ICB NCB Other N.B.F. Total Cost

1. Works 0.00 4.86 7.00 0.00 11.86

(0.00) (3.64) (5.25) (0.00) (8.89)2. Goods 0.28 10.04 0.30 0.00 10.62

(0.28) (7.38) (0.24) (0.00) (7.90)

3. Services 0.00 0.00 0.95 0.00 0.95Consultants (0.00) (0.00) (0.80) (0.00) (0.80)4. Training 0.00 0.00 1.63 0.00 1.63capacity building (0.00) (0.00) (1.38) (0.00) (1.38)5. Incremental Operating 0.00 0.00 1.85 0.00 1.85Costs (0.00) (0.00) (0.83) (0.00) (0.83)

6. Unallocated 0.00 0.00 0.24 0.00 0.24(0.00) (0.00) (0.20) (0.00) (0.20)

Total 0.28 14.90 11.97 0.00 27.15(0.28) (11.02) (8.70) (0.00) (20.00)

"Figures in parenthesis are the amounts to be financed by the IDA Credit. All costs include contingencies.2'Includes civil works , works with community participation, and goods to be procured through national

shopping, consulting services, services of contracted staff of the project managenment office, training,technical assistance services, and incremental operating costs related to (i) managing the project, and (ii)project funds to municipal - councils (including municipal corporations, town committees.

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Table Al: Consultant Selection Arrangements (optional)(US$ million equivalent)

Selection MethodConsultan't Services ,,:

Expenditure Category QCBS QBS SFB LCS CQ 'Other N.B.E. Total Cost'A. Firms 0.15 0.00 0.00 0.00 0.20 0.00 0.00 0.35

(0.12) (0.00) (0.00) (0.00) (0.17) (0.00) (0.00) (0.29)B. Individuals 0.00 0.00 0.00 0.00 0.00 0.60 0.00 0.60

(0.00) (0.00) (0.00) (0.00) (0.00) (0.51) (0.00) (0.51)Total 0.15 0.00 0.00 0.00 0.20 0.60 0.00 0.95

(0.12) (0.00) (0.00) (0.00) (0.17) (0.51) (0.00) (0.80)1\ Including contingencies

Note: QCBS = Quality- and Cost-Based SelectionQBS = Quality-based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsOther = selection of individual consultants (per Section V of Consultants Guidelines),Commercial Practices, etc.N.B.F. = Not Bank-financedFigures in parenthesis are the amounts to be financed by the Bank Credit.

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Prior review thresholds (Table B)

Table B: Thresholds for Procurement Methods and Prior Review'

Contract Value Contracts Subject toThreshold Procurement Prior Review

Expenditure Category (US$ thousands) Method (US$ millions)1. Works 1 million

> 100,000 NCB All

30,000-100,000 NCB First contract by each IA

< 30,000 Community First contract by each IAParticipation/NS

2. Goods 10 million

> 200,000 ICB All

100,000-200,000 NCB All

30,000-100,000 NCB First contract by each IA

< 30,000 NS None3. ServicesConsulting 0.5 millionServices Firms

> 100,000 QCBS All

< 100,000 SBCQ First contract by each IA

4. Individuals > 50,000 Section V - CG All

< 50,000 -do- First contract by each IA5. Miscellaneous6. Miscellaneous

Total value of contracts subject to prior review: US$ 11.5 million

Overall Procurement Risk Assessment

Average

Frequency of procurement supervision missions proposed: One every 6 months (includes specialprocurement supervision for post-review/audits)

6.25 There is a potential risk in having a large amount of contracting done at the community level;however, our experience with other projects including community infrastructure projects, has led us torequire monitoring mechanisms - mainly unwritten social audit by the CBOs themselves, and these haveconsiderably reduced the possibilities of things going wrong. To further reduce risks while enhancing thelevel of comfort in regard to the quantity and quality aspects of community contracting, the followingarrangements have been built into the project: (a) independent audit by the Auditor General of Pakistan

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which will also include physical verification; (b) ex-post procurement audit by individual procurementconsultants engaged by the Borrower; and (c) technical support and monitoring by consultants engaged bythe Borrower.

6.26 Because of the nature of this operation, a large number of contracts would be below prior reviewlimits. It is expected that the project will include about 2,600 contracts over a four year period. Out ofthese, about 1000 contracts are expected to cost less than US$5000 per contract, about 900 contractsranging from $5000 to $25,000, about 500 contracts ranging from $25,000 to $100,000, and about 200ranging from $100,000 to $500,000. The project itself provides for independent audit to be conducted bythe Office of the Auditor General of Pakistan for expenditures incurred, which under the new regulationswill also include physical verification. GoAJK has agreed to engage individual procurement consultants forprocurement capacity support, who as part of duties will also conduct post-award reviews at the projectlevel and furnish quarterly reports to the Bank. Furthermore, consultants' engaged by the GoAJK willprovide technical support and monitoring. The normal Bank requirement of ex-post review of I in 10contracts for an average risk project, cannot be achieved in this project due to resource constraints, sinceannual budget allocations only allow for a total of roughly 500 ex-post contract reviews for the entirePakistan Portfolio. Given the sheer numbers of contracts envisioned in this project, the Bank's resourceconstraints, the mitigating effect of the audits mentioned above, we would consider the "benchmark" reviewlevel of I in 10 contracts to be excessively large for this type of operation. The Bank would review as perregional guidelines, samples out of the audit reports called for in the project. In addition to a review of theaudit reports, Bank staff will conduct post award reviews during Supervision missions. These reviews willbe periodically supplemented by an appropriate allocation of random ex-post audits conducted byconsultants engaged by the Region for post award review coverage on the Pakistan portfolio as a whole.

'Thresholds generally differ by country and project. Consult OD 11.04 "Review of ProcurementDocumentation" and contact the Regional Procurement Adviser for guidance.

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Disbursement

Allocation of credit proceeds (Table C)6.3 The IDA credit of SDRs 16.100,000 million (US$ 20.00 million equivalent) would be disbursedover a period of four years. Disbursements from IDA credit would be made in the traditional system(replenishment and reimbursement with full documentation and against statement of expenditure). The finaldisbursement is anticipated to be made by December 31, 2006. Allocation of credit proceeds under theproposed project will be made as indicated in Table C.

Table C: Allocation of Credit Proceeds

Expenditure Category Amount in US$million Financing PercentageI.Civil Works 8.89 75%2.Goods (Equipment and Materials) 7.90 100% of foreign expenditures, 100% of

local expenditures (ex factory cost) and80% of local expenditures for other items

procured locally3. Consulting Services 0.80 85%

4. Services Training 1.38 85%

5. Incremental Operating Costs 0.83 80% FY03; 75% FY04; 50 FY05; 40%FY06.

Un-allocated 0.20 100%

Total Project Costs 20.00

Total 20.00

Use of statements of expenditures (SOEs):

6.3.1 Disbursement will be made on the basis of statement of expenditure for: (a) civil works forcontracts not exceeding US$100,000; (b) goods (equipment and materials) for contracts not exceedingUS$100,000; (c) consultants firms contracts not exceeding US$100,000 and individuals not exceedingUS$50,000; (d) training, workshops and study tours; and (e) incremental operating and maintenance costs.

Special account:6.3.2 A Special Account of US$ 1.5 million will be established at the National Bank of Pakistan to meetanticipated expenditures of about four months. Eligible payments greater than one fifth of the SpecialAccount amount may be paid by the Bank directly to suppliers at a specific request of LGRDD. Thespecial account will be replenished on the basis of reimbursed claims for eligible expenditures received byIDA on a monthly basis or whenever 20 percent of the account has been utilized.

6.3.3 Retroactive financing up to an amount of US$1 million (SDR's .804 million equivalent) wouldcover eligible expenditure for implementing activities after June 30, 2002. Retroactive financing wouldsupport mostly civil works and goods (e.g., pipes).

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6.4 Financial management

Country Issues6.4.1 The lack of accounting staff and capacity within the line departments is an issue common toBank-financed projects in Pakistan. Specific staffing arrangements have been agreed for the CISP so thatthere are adequate staff within LGRDD, including staff deputed from the AJK Accountant General.

The risk of funds not being released on a timely basis by GoAJK will apply to the Program, which mayeffect the Program implementation. Confirmation has been provided by the Finance Department regardingthe initial availability of funds ( to meet at least 20% of the annual requirements) in the "Revolving Fund"bank accounts.

Streneths and WeaknessesStrengths6.4.2 The Program will have following strengths in the area of financial management: (a) the officer whowill take care of program finance has worked on the RWSS Project and was trained in Bank's financialreporting requirements and disbursements procedures; (b) 100% payments are pre audited in addition tointernal audits performed by the Senior Auditors engaged at the State level; (c) effective control will bemaintained on the budget; and (d) preparation of Financial Monitoring Reports (FMRs). The FIS onceimplemented will provide the procedures and structure for internal control procedures and submission offinancial statements on timely basis.

Significant Weaknesses

Significant Weaknesses Resolution

Staffing: CISP staffing needs to be strengthened both at Appointment of suitable staff having accountingthe State and District levels; accounting staff are knowledge and training arrangementscurrently not in place.Delays in holding Departmental/Municipal Accounts Department meetings will be held on timely basis forCommittee (DAC) with the Government Auditors in resolving the audit issues reported by the auditors.resolving the issues raised by the auditors. Senior Auditors at the State level will assist the

Secretary LGRDD in preparing for the DAC meetings.Advances to the Project staff under the RWSS Project No staff advances will be given under CISP.were not settled in a timely manner.No periodic reconciliation of: bank statements; funds Bank statements will be reconciled on monthly basis anddisbursed by the GoAJK and the World Bank to the accounts between the State and GoAJK/IDA on quarterlyDepartment (RWSS Project - LGRDD). asis.The RWSS, accounting system is not suitable to provide A Financial Information System (FIS) has been.audit trail of SOEs to General Ledger. developed for the Project, which will focus on financial

reporting and monitoring.

Funds Flow6.4.3 The Project will be budgeted in the annual Public Sector Development Program (PSDP) of theGoAJK as an identifiable single head budget item each year showing both the local and foreign resources offunding in a lump sum manner.

Initially, the GoAJK-Finance Department will make the funds available in advance from GoAJK budgetresources (to meet at least 20% of the annual requirements) through the Accountant General (AG) in theshape of "Revolving Funds" to the spending units at the State, District and registered Communities Based

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Organizations (CBOs). This advance will be deposited in a bank account to be operated jointly by thedesignated officials at the State level: Secretary, LGRDD or his designated staff and Accounts Officer(AO); at District level: Assistant Director (AD), LGRDD and District Accounts Officer (DAO), and incase of Joint Scheme Bank Account of CBOs by it's President and Community Social Organizer (CSO) ofLGRDD.

It is envisaged that the funds initially provided by the GoAJK will be adjusted for their share on completionof respective scheme(s) or final completion of the Program at the State level, from the information providedby Districts/municipalites as noted below.

The conditions that trigger the initial release of funds are the (i) approved Annual Plan of Operation (APO)of the Program, (ii) copies of Administrative Approval of schemes by Secretary, LGRDD and (iii) in caseof CBOs, certified copies of evidence (for cash contribution: bank certificatelbank statement duly verifiedby the bank official) that CBOs have provided their share of contribution as per the terms and conditionslaid down in the Memorandum of Agreement (MOA) and the Community Finance Agreement (CFA). It isenvisaged that the CBOs will provide their share of contribution in tranches as contained in MOAs.

In respect of next phase of work (mainly civil works) by CBOs, the department accountant atDistrict/municipal level, will prepare a bill supported with full documentation of work done, which alsoincludes a copy of bank statement of 'Joint Scheme Bank Account' and a bank deposit slip/bank certificateduly certified by the bank's official confirming the deposit of the next tranche in the account by the CBOs.The accountant will also maintain the memorandum records identifying share allocation between IDA andGoAJK to be adjusted on completion of the scheme.

The documentation in support of bill prepared by the department accountant will be pre-audited by theSenior Auditor (GoAJK-AG staff on deputation) at the State and District levels in accordance with theexisting rules and regulations of the GoAJK. The bill will be approved by AD and DAO jointly at theDistrict level. However, at the State level the Project Coordinator/Director of the CISP will approve thebill.

On the basis of pre-audited paid bills, the department accountant at District level will prepare separatemonthly summarized statements of Uses of Funds by Components and Sub-components/Activities(expenditure statements) by District and CBOs. These statements will be verified by the Senior Auditor andjointly signed by AD and DAO and then submitted to the finance section of CISP Head Office by 5th of thenext month.

From the above statement of Uses of Funds received from the District level and the pre-audited statementof Uses of Funds by Components and Sub-components/Activities at the State level, a ConsolidatedStatement of Uses of Funds by Components and Sub-components/Activities will be prepared at the Statelevel on a monthly basis by Finance Officer and verified by AO. The monthly consolidated statement willbe completed by 15th of the following month.

The funds from the IDA Special Account would be utilized for reimbursement of expenditures incurred bythe spending units at the State, District levels and CBOs, on the basis of expenditure statement(s) dulycertified by the AO at the State level. The reimbursement from the IDA Special Account will be remitted tothe respective 'Revolving Fund' bank accounts including 'Joint Scheme' account of CBOs.

Direct payments from the IDA Special Account (for the IDA portion) would be made to thecontractors/suppliers against the provision of full documentation.

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An adjustment of initial funding by GoAJK in the 'Revolving Fund' and 'Joint Scheme' accounts will bemade on annual basis from the IDA Special Account to reimburse GoAJK for the IDA-financedexpenditures.

At the State level the Finance Officer, on the basis of certified consolidated statement of Uses of Funds byComponents and Sub-components/Activities, will link expenditures with the disbursement categories i.e.,Civil Works; Goods and Equipment; Consultant Services and Training; and Incremental Staff Costs. Thesystem of linking will be developed by the FMC. The SOEs will be certified by the AO.

The replenishments to IDA Special Account would be made against submission of monthly withdrawalapplication in accordance with the Bank's operational policies.

Staffing6.4.4 The accounting staff for the Program will be headed by a Deputy Director (Finance & Admin),who is already in place within the PS and has successfully managed the RWSS project and gainedexperience in financial reporting requirements, maintenance of Special Account and submission ofWithdrawal Applications. The staff and the Deputy Director (Finance & Admin.) are not trained inaccounting and do not have experience in computerized accounting system. They also need to be exposed tothe Financial Monitoring Reporting (FMRs) formats. The staffing need of the Program requires additionalappointments of: (i) one finance officer in the PS (MBA with major in accounts or equivalent qualificationwith five years practical experience in maintenance of entities' accounts); (ii) 9 seniors auditors (onsecondment from the Accountant General Office); seven will be posted at District levels and 2 at the PMC;and (iii) 7 accountants at the District offices (at least accounting graduates and three years practicallyexperience in maintaining the accounts of entities).

The final job descriptions of the accounting staff will be developed by the FMC as part of FIS. The twoSenior Auditors at the PS would perform pre-auditing in accordance with the guidelines issued by theGoAJK -AG and will also act as an internal auditors reporting directly to the Secretary, LGRDD and thePMCC. They will also guide and supervise the accountants in maintaining complete accounting records andbooks at the State and District/Municipal levels.

Training will be the most important requirement for the operation and implementation of the financialmanagement system. Accounting staff at the State level and District levels must be provided with thetraining on Bank's financial reporting and disbursement requirements before September 30, 2002 by theFinancial Management Consultant.

Since, the capacity of the accountants at the District levels to manage the accounts will not be adequate, thefinancial management consultant who prepares the FIS and Manual will provide induction training to theaccountants both at the State and District level on short term basis.

Accounting Policies and Procedures6.4.5 The FMC have been engaged to develop the manual Financial Inforrnation System (FIS) for CISP.The FIS will be operational from the effectiveness of the project.

A comprehensive FIS has been developed and documented in the shape of Financial Manual (FM). The FMwould cover: (i) flow of funds; (ii) financial and accounting policies; (iii) accounting system and internalcontrol mechanism including information flow; (iv) chart of accounts; (v) financial reporting (includingformats of financial monitoring reports); (vi) auditing arrangements; (vii) budgeting and financial

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forecasting; (viii) organization and staffing requirements for financial management function; (ix) terms ofreference for external auditors. The FM will be periodically updated and improved based onimplementation experience.

The Manual would also provide guidelines to serve as a reference document for all Project staff forfinancial reporting and accounting at the district levels and integrating it with the mainstream accountingand financial reporting system.

The CBOs will be required to maintain only cashbook for the Joint Scheme Bank Account. They willsubmit all original documents and bank statements (plus one set) to the Senior Auditor for pre-auditing theexpenditures to enable them to claim expenditure on the approved scheme. However, once a payment ismade, the original documents will be retained at the District level by the department accountant for postaudit purposes. The Senior Auditor after certifying copies of the documents will return them to CBOs fortheir record purposes. A bank account and records for the O&M expenditures will be maintained separatelyand retained by the CBOs.

As part of the development of the FIS, a chart of accounts will be developed to enable data be captured andclassified by Component and Sub-components/Activities and linked to the disbursement categories

Internal Audit6.4.6 The two Seniors Auditors at the State level will submit directly to the Secretary, LGRDD internalaudit reports on regular basis. They will also be responsible to under take physical stock count ofProgram's fixed assets and ensure complete maintenance of books of accounts, liaison with theGovernment Auditors and respond to the audit observations and organize Departmental AccountsCommittee (DAC) meetings.

External Audit6.4.7 The accounts and financial statements of the Progran for the fiscal years ending June 30 will beaudited by the Auditor General of Pakistan under the usual ToR acceptable to the Bank. The auditors shallcommence the audit by September 30, and submit the audited accounts and their report thereon byDecember 31 each year. The following audit reports will be monitored in Audit Reports ComplianceSystem (ARCS):

Implementing Entity Audit Report AuditorLGRDD Project financial statements/ SOE Auditor General of PakistanLGRDD Special Account Auditor General of Pakistan

Renortine & Monitorine6.4.8 The Financial Monitoring Reports (FMRs) in an acceptable format will be submitted by theProject on a quarterly basis, not later than 45 days after the full quarter/period after credit effectiveness.

Information System6.4.9 The FMC would be engaged to develop the manual Financial Information System (FIS) for CISP.The TOR has been finalized for approval; it will be developed before Board presentation. As anenhancement of the FIS, computerization of the system is expected to be completed by March 31, 2003.

Impact of Procurement Arrangements6.4.10 Due to the lack of procurement capacity at the District and CBO levels and economies of scale the

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project envisages that the procurement of pipes will be centralized at the State level. The CBOs will berepresented in the procurement evaluation committees.

The pipes will be supplied directly to the CBOs at the District/municipal level by the suppliers. Oncecertificates of quality assurance and quantities received duly signed by the AE and the CBO President arereceived at the District/municipal level a summary of such receipts will be prepared and forwarded by theDistrict to the State level for payments to the supplier. This summary will be verified by the AD and DAOand pre-audited by the Senior Auditor at the District level.

At the District/municipal level the Accountant will record the payment for procurement of pipes in thememorandum records of the respective CBOs.

Conversion to use of existine Financial Manaeement Systems of the Government6.4.11 During the life of the project GoAJK may convert to use the Financial Management Systems of theGovernment rather than the project-specific FIS. The GoAJK would need to agree the use of the existingFM systems of the Government with the Bank prior to implementation of this change.

Action PlanActions Required for Enhancement of Financial Management

Actions required for adequate financial Responsible Person/s Completion Datemanagementi- Appointment of Financial Management Secretary NegotiationsConsultant (Chartered Accountant). LGRDDii- Agreement with the Accountant General on the Secretary LGRDD and GoAJK-AG Negotiationsproposed Financial Management System noted in thisreport.iii- Appointment of Accounting Staff/Senior Auditor Secretary Negotiationsat the State and District levels (includes staff LGRDD and GoAJK-AGappointed by LGRDD and staff assigned by AG).Finance Officer at the State level to be appointed byfirst week of March, 2002.iv-Resolution of RWSS audit observations Secretary Negotiations

LGRDD and GoAJK-AGv- Confirmation of availability of funds(to meet at least Secretary Finance Department, Negotiations20% of the annual requirements) in the 'Revolving Fund' GoAJKbank accounts by GoAJK by July 15, 2002.Actions required for enhancement ofFinancial Managementvi- Completion of FIS (including FM Manual) by FMC by Secretary Board PresentationMay 15, 2002.Approval of FIS by the GoAJK-AG prior to LGRDD and GoAJK-AGBoard presentation..vii- Staff training on FIS. Secretary LGRDD & GoAJK-AG No later than September

I __ ___ ___ ___ ___ ___ _ _ __ 30, 2002viii- Computerization of Financial Information System Secretary LGRDD & GoAJK-AG March 31, 2003

Supervision Plan6.4.12 From a FM stand point, the Program will need intensive supervision. The focus during thesupervision will be on the capacity building activities at District levels and functioning of the FISaccounting and financial reporting activities (including FMRs) at these levels.

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Annex 7: Project Processing SchedulePAKISTAN: AJK Community Infrastructure and Services Project

Project Schedule Planned ActualTime taken to prepare the project (months) 18 12First Bank mission (identification) 10/30/2000 09/30/2000Appraisal mission departure 10/09/2001 11/12/2000Negotiations 03/25/2002 04/15/2002Planned Date of Effectiveness 07/15/2002

Prepared by:

Julie Viloria-Williams, Sr. Institutional Community-Development Specialist, Task Team Leader

Preparation assistance:

Lillian MacArthur, Anna Goodman

Bank staff who worked on the project included:

Name SpecialityViloria-Williams, Julie Sr. Institutional Community Devt. Specialist, Task Team LeaderRehan, Raja Sr. Implementation SpecialistLee, A. Graeme Sr. Municipal Finance SpecialistSaum, Robert Financial Management AdvisorYaqub, Arif Sr. Financial Management SpecialistBosch, Christophe Sr. Environmental SpecialistKhan, Hamnid Aktar Lead CounselAl Jalaly, Zia Social Development SpecialistZimmerman, Damnian ConsultantAlvarado, Oscar Sr. Implementation SpecialistAli, Ahsan Sr. Procurement SpecialistDurrani, Amer Technical specialistNavaid Quereshi Sr. Transport/Urban Specialist (Team Leader)Abedin, Esme Operations Analyst (detailed costings, implementation schedule)Allah Javaya Technical Specialist (water and sanitation, etc)Bhatti Anwar, Ali Disbursement specialistMacArthur, Lilian Program AssistantGoodman, Anna Program AssistantAnwar Syed Farrukh Program AssistantAhmad, Jenail Kemal Regional Manager, WSP, Peer ReviewerDongier, Philippe Lead Coordinator, Community Driven Development, Peer ReviewerKesides, Christine Lead Advisor, Urban Department,Peer ReviewerHommann, Kirsten EconomistElizabeth Mehta Consultant

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Annex 8: Documents in the Project File*

PAKISTAN: AJK Community Infrastructure and Services Project

A. Project Implementation Plan

GoAJK Implementation Plan (PC-1), February 19, 2002

B. Bank Staff Assessments

* Environmental Management Framework, August 2001 EMFMAINRPT.doc

* . Social Assessment Report, August 2001

C. Other

ManagemenUetter (scaned).pdf

AJK-CISP AldeMemoire-tinal.doc

*Including electronic files

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Annex 9: Statement of Loans and Credits

PAKISTAN: AJK Community Infrastructure and Services Project02-Apr-2002

Difference between expectedand actual

Original Amount In US$ Millions disbursementsProject ID FY Purpose IBRD IDA Cancel. Undisb. Orig Frm Revd

P055292 2002 8SRPP 0.00 300.00 0.00 207.57 -95.46 0.00P056213 2001 TRADE & TRANSPORT 0.00 3.00 0.00 1.88 0.16 0.00

P071092 2001 NWFP ON-FARM WATER MANAGEMENT PROJECT 0.00 21.35 0.00 20.23 -0.47 0.00

P049791 1999 POVERTY ALLEVIATION FUND 0.00 90.00 0.00 59.01 -7.08 0.00

P037834 1998 NORTHERN EDUCATION 0.00 22.80 0.09 14.56 15.61 0.00

P037835 1998 SOCIAL ACTION PRG 11 0.00 250.00 0.00 19.47 -4.74 0.00

P010500 1999 NATIONAL DRAINAGE PR 0.00 285.00 0.24 157.46 117.48 0.00

P036015 1997 IMPR FIN REP & AUDIT 0.00 28.80 0.0o 18.61 20.19 0.00

P039281 1996 GHAZI BAROTHA HYDROP 350.00 0.00 0.00 61.04 59.43 35.35

P010478 1996 NWFP COMMUNITY INFRA 0.00 21.50 0.00 8.37 11.94 1.29

P010482 1996 GALOCHISTAN COMMUNITY IRRIGATION & AGRI. 0.00 26.70 0.00 3.50 5.78 5.88

P034101 1996 PK-TELECOM REG & PRIVAT 35.00 0.00 13.15 4.93 18.08 8.08

P010470 1995 FIN SECTOR DEEPENING & INTERMEDIATION 216.00 0.00 188.03 13.07 200.91 12.91

Total: 601.00 1049.15 201.51 589.69 341.82 63.51

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PAKISTANSTATEMENT OF IFC's

Held and Disbursed PortfolioJan - 2002

In Millions US Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

1995 AES Lal Pir 30.82 9.50 0.00 0.00 30.82 9.50 0.00 0.001996 AES Pak Gen 16.22 9.50 0.00 29.52 16.22 9.50 0.00 29.521995 Abarmco Mgmt 0.00 0.29 0.00 0.00 0.00 0.29 0.00 0.001996 Atlas Inv Bank 2.81 0.00 0.00 0.00 2.81 0.00 0.00 0.001994 Atlas Lease 2.40 0.36 0.00 0.00 2.40 0.36 0.00 0.000 BRRIL 0.00 0.24 0.00 0.00 0.00 0.24 0.00 0.001991/94/95 BRRIM 0.00 0.00 5.00 0.00 0.00 0.00 5.00 0.001995 BSJS Fund 0.00 0.50 0.00 0.00 0.00 0.50 0.00 0.001993 CDCPL 0.00 0.16 0.00 0.00 0.00 0.16 0.00 0.001993/97/01 Crescent Greenwd 3.20 0.00 0.00 0.80 0.00 0.00 0.00 0.001996 Crescent IBank 6.75 0.00 0.00 0.00 6.75 0.00 0.00 0.000/94/95/96 D.G. Khan 0.00 0.51 0.00 0.00 0.00 0.51 0.00 0.001998 Engro Asahi 6.86 0.00 0.00 0.00 6.86 0.00 0.00 0.001991/95/97 Engro Chemical 5.14 0.00 0.00 3.75 5.14 0.00 0.00 3.751996 Engro Vopak 7.51 0.00 0.00 3.13 7.51 0.00 0.00 3.131990/91/96 FUB 1.54 0.00 0.00 0.00 1.54 0.00 0.00 0.001993 Fauji Cement 22.40 5.00 0.00 0.00 22.40 5.00 0.00 0.001995 First Crescent o.oo 0.00 5.00 0.00 0.00 0.00 5.00 0.001994/96 First Leasing 0.00 0.69 0.00 0.00 0.00 0.69 0.00 0.001995 First UDL 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.001996 Gul Ahmed 20.25 4.10 0.00 22.53 20.25 4.10 0.00 22.531988 Hala Spinning 3.25 0.00 0.00 0.00 3.25 0.00 0.00 0.001991/95 IHFL 0.00 0.40 0.00 0.00 0.00 0.40 0.00 0.001992/96 JSCL 0.00 0.27 0.00 0.00 0.00 0.27 0.00 0.001995 Kohinoor 17.50 6.30 0.00 20.33 17.50 6.30 0.00 20.331994/95/97 Maple Leaf 0.00 0.52 0.00 0.00 0.00 0.52 0.00 0.000/93 Muslim Comm Bank 1.41 0.00 0.00 0.00 1.41 0.00 0.00 0.001984/94 NDLC 2.81 1.25 0.00 0.00 2.81 1.25 0.00 0.001994 Orix Finance 0.00 0.58 0.00 0.00 0.00 0.58 0.00 0.001994 Orix Leasing 2.81 1.25 0.00 0.00 2.81 1.25 0.00 0.001994 PACRA 0.00 0.10 0.00 0.00 0.00 0.10 0.00 0.001994 PI&CL 1.25 0.00 0.00 0.00 1.25 0.00 0.00 0.001991/94/95 PILCO 0.00 0.54 0.00 0.00 0.00 0.54 0.00 0.001983/84/94 PPL 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001965/80/82/87/91/94/9 Packages 2.25 2.50 0.00 0.00 2.25 2.50 0.00 0.005 Pakistan Service 2.00 3.00 0.00 0.00 2.00 3.00 0.00 0.001993 Pakistan Unit Tr 0.00 1.48 0.00 0.00 0.00 1.48 0.00 0.001995 Prudential o.oo 0.40 0.00 0.00 0.00 0.40 0.00 0.001991 Regent Knitwear 5.90 0.00 0.00 2.80 5.90 0.00 0.00 2.801994 Rupafab 3.67 0.00 0.00 0.00 3.67 0.00 0.00 0.001995 Sarah Textiles o.oo o.00 0.00 0.00 0.00 0.00 0.00 0.000/93/96 Uch Power 38.05 0.00 0.00 71.24 33.09 0.00 0.00 56.201996

Total Portfolio: 206.80 49.44 20.00 154.10 198.64 49.44 20.00 138.26

Approvals Pending Commitment

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FY Approval Company Loan Equity Quasi Partic

2001 Lasmo Pakistan 10.00 0.00 0.00 0.002000 Maple Leaf Restr 15.00 0.00 0.00 0.002002 Microbank 0.00 0.00 1.64 0.00

Total Pending Commitment: 25.00 0.00 1.64 0.00

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Annex 10: Country at a GlancePAKISTAN: AJK Community Infrastructure and Services Project

POVERTY and SOCIAL South Low-Pakistan Asia Income Development diamond

1999Population, mid-year (millions) 134.8 1.329 2,417 Life expectancyGNP per capita (Atlas method, USS) 450 440 410GNP (Atlas method, US$ billions) 60.8 581 988

Average annual growth, 1993-99

Population (%) 2.4 1.9 1.9Labor force (%) 2.9 2.3 2.3 GNP Grioss

Most recent estimate (latest year available, 1993-99) capita / enrollment

Povertv (% of population below national povertV line)Urban Population (% of total population) 36 28 31Life expectancy at birth (years) 62 62 60Infent mortality (per 1,000 live births) 91 75 77Child malnutrition (% of children under 5) 38 51 43 Access to safe waterAccess to Improved water source (% of population) 60 77 64Illiteracy (% of population age 15+) 55 46 39Gross primary enrollment (% of school-age population) 74 100 96 Pakistan

Male 101 110 102 Low-income groupFemale 45 90 86

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1979 1989 1998 1999

GDP (US$ billions) 19.7 40.2 62.2 58.2Gross domestic Investment/GDP 17.9 18.9 17.7 15.0Exports of goods and serviceslGDP 10.7 13.9 16.1 15.2 TradeGross domestic savings/GDP 5.8 11.0 13.2 10.1Gross national savings/GDP 13.7 15.6 15.0 11.2

Current account balancelGDP -4.2 -3.4 -2.7 -3.8 Domestic /interest payments/GOP 1.1 1.1 1.3 1.8 InvestmentTotal debUGDP 45.3 45.7 51.8 53.6 Sa v gTotal debt servicelexports 18.5 24.2 23.6 27.4Present value of debVGDP .. .. 41.1 ..Present value of debt/exports .. .. 220.1

Indebtedness1979-89 1989-99 1998 1999 1999-03

(average annual growth)GDP 6.7 3.9 2.6 2.7 5.1 - PakistanGNP per capita 3.8 1.5 -1.4 0.3 2.9 Low-income groupExports of goods and services 9.2 2.9 -5.7 -2.4 6.9

STRUCTURE of the ECONOMY1979 1989 1998 1999 Growth of investment and GDP (%)

(% of GDP) 20Agriculture 30.4 26.9 27.3 27.2Industry 23.6 23.9 23.8 23.5 10

Manufacturing 15.4 16.6 15.8 15.6 o _Services 46.0 49.2 48.9 49.4 1 4 95 s

Private consumption 83.8 72.2 75.5 78.4 -20

General government consumption 10.4 16.8 11.3 11.5 GDI _ GDPImports of qoods and services 22.8 21.7 20.8 20.1

1979-89 1989-99 1998 1999 Growth of exports and Imports (S)(average annual growth)Agriculture 4.6 4.4 4.5 1.9 20

Industry 7.3 4.3 6.1 2.5Manufacturing 7.9 4.0 6.9 4.2 IC

Services 7.2 4.5 1.6 4.1

Private consumption 4.2 5.0 0.1 6.3 o 4General government consumption 10.5 0.4 6.8 -5.1Gross domestic Investment 6.5 2.2 9.6 -11.8 soImports of goods and services 1.7 3.4 -5.6 -6.2 Exports - lC ImpornsGross national Product 6.6 4.0 1.0 2.8

Note: 1999 data are preliminary estimates.

The diamonds show four key Indicators in the country (In bold) comPared with Its income-group average. If data are missing. the diamond willbe incomplete.

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Pakistan

PRICES and GOVERNMENT FINANCE

Domestic prices 1979 1989 1998 1999 Inflation (%)(% change) Consumer prices 7.8 .571OImplicit GOP deflator 6.6 8.6 7.5 6.0

Govemment finance s(% of GDP, includes current grants) o lCurrent revenue .. 18.1 16.3 16.3 94 95 99 97 98

Current budget balance .. -1.8 -4.2 -2.6 GDP defator e CPIOverall surplus/deficit .. -7.7 -7.7 -6.1

TRADE1979 1989 1998 1999 Export and Import levels (US$ mill.)

(US$ millions)Total exports (fob) .. 4,634 8,433 7,527 15 oo

Cotton .. 930 126 2Rice .. 304 562 533 12.000Manufactures .. 3,312 4,866 4,538 9.00

Total imports (cif) .. 7,851 10,456 10,888 o000Food .. .. 1,685 1,622Fuel and energy .. 1,006 1,750 1,458 3Capital goods .. .. 2,288 3,027 o

Export price index (1995=100) .. 51 94 90 93 94 95 ga 97 'Import price index (1995=100) .. 45 91 102 U Exports EImportsTerms of trade (1995=100) .. 112 104 88

BALANCE of PAYMENTS1979 1989 1998 1999 Current account balance to GDP (%)

(US$ millions)Exports of goods and services 2,107 5,577 10,017 8.838 0Imports of goods and services 4,485 8,736 12,819 11,688Resource balance -2,378 -3,159 -2,802 -2,850 2

Net Income -233 -875 -2,330 -1,808Net current transfers 1,790 2.687 3.430 2,471 4 i ii li i iCurrent account balance -820 -1,347 -1,702 -2,187

Financing Items (net) 515 1,347 1,554 3,441Changes in net reserves 305 0 148 -1,254 x.

Memo:Reserves including gold (US$ millions) 1.237 1.464 2,228Conversion rate (DEC, local/US$) 9.9 19.2 43.0 50.1

EXTERNAL DEBT and RESOURCE FLOWS1979 1989 1998 1999

(USS millions) Composition of 1999 debt (USS mill.)Total debt outstanding and disbursed 8,919 18,348 32,229 31,176

IBRD 339 1,428 3,262 3,175 G:1.390 A 3,175IDA 751 1,915 3,732 3,857 F: 3,028

Total debt service 658 1,841 2,743 2,743 B: 3,857

IDA 9 30 70 81

Composition of net resource flows C: 1,519Official grants 146 381 175 194Official creditors 561 931 891 1,642 E: 10,680 4 -Private creditors 23 -12 306 -316Foreign direct investment 58 210 500 428Portfolio equity .. .. .. 28 0:7,527

World Bank programCommitments 139 746 250 808 A -IBRD E -BilateralDisbursements 105 471 606 683 B -IDA 0- Other multilateral F -PrivatePrincipal repayments 27 82 243 264 C- IMF G * Short-termNet flows 79 389 363 419Interest payments 39 95 208 217Net transfers 39 294 155 202

Development Economics

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Additional Annex 11: Organizational ChartPAKISTAN: AJK Community Infrastructure and Services Project

STATE OFAJK

Local Government and RuralDepartment (LG&RD)

Secretariat

Attached Department of Local Government| ~~LG&RD Board (LGB)

pRURAL G s|| URAL s

LG&D RDisrc | a n own

Office |Cucl{ICr. t

l I ,1

Rral Deeoment/ Provision of > rovision of Urban communityRural Infrastructure Services Infrastructure Services

Beneflciaries / Community Based Organizations

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Additional Annex 12: Environmental Management Framework (EMF)Social Assessment

PAKISTAN: AJK Community Infrastructure and Services Project

ENVIRONMENTAL MANAGEMENT FRAMEWORKSummary

The Environmental Management Framework (EMF) for CISP was developed to ensure that projectdecision-making involving the design of community infrastructure plans and schemes is environmentallysound and sustainable, and is in compliance with environmental safeguards. The EMF was formulated onthe basis of the results of an environmental study conducted by the Environmental Protection Agency(EPA) of the Government of Azad Janrmu and Kashmir (GoAJK), and in consultation with differentstakeholders (CBOs and other community representatives, NGOs, etc.) held at a workshop organized inMuzaffarabad on July 24, 2001. More consultations on the EMF will be held with stakeholders at thedistrict level.

Current Legal and Institutional Framework

In Azad Jammu and Kashmir, the AJK Environmental Protection Act of 2000 provides the basis forenvironmental regulation and monitoring in the State, with the Environmental Protection Authority (EPA)as the regulatory agency responsible for enforcing the Act. With assistance from UNDP, the GoAJKdeveloped its "Policy Framework and Development Strategy" for Environmental Protection andSustainable Livelihood in 1997. In line with this strategy the EPA is conducting six studies in differentpriority areas, which include drinking water quality, solid waste management, and environmentalawareness, among others. The results of these studies will provide a good basis for designing thecommunity development and community infrastructure and services components of CISP.

In AJK, The Local Government and Rural Development Department (LGRDD) is responsible for ruraldevelopment while the development and management of urban areas fall under the jurisdiction ofmunicipalities (i.e., municipal corporations, municipal committees or town councils). A NationalDevolution Plan with the required legal and administrative framework is very recently introduced inPakistan and will be introduced in AJK later this year. Once enforced, the district offices of the LGRDDand the municipalities will be integrated into one entity at the district level. At present, among the majorresponsibilities of LGRDD and the municipalities are the provision and maintenance of such environmentalservices as water supply, sewerage and drainage, solid waste management, and sanitation in their respectivejurisdictions. However, both LGRDD and the municipalities in AJK lack the institutional and technicalcapacity to plan and manage these services. While functional linkages between the EPA and theLGRDD/municipalities have been established, they remain weak. Under CISP, these linkages will bestrengthened.

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The Environmental Management Plan (EMP)

Due to the nature of the proposed activities under CISP, a well thought-out EMP will not only preventand/or reduce the negative environmental impacts of different project initiatives but will also help enhancethe latter's environmental benefits. Its effective implementation requires significant institutionalstrengthening and capacity building, as well as functional links with other organizations. Some of theactions required to fulfill the EMP objectives of environmental protection and natural resource conservationat every stage of the Project are: (i) environmental awareness and training of the project staff and thecommunities; (ii) careful selection and planning of activities; (iii) inclusion of environmentalsafeguards/specifications in the design criteria of different schemes; (iv) inclusion of required provisions incontracts and agreements (Terms of Partnership) for environmental protection measures; (v) strictadherence to environmental criteria during scheme design/construction/operation; (vii) careful selection andapplication of mitigation measures; (viii) strengthening of the environment enhancement potential of the -

project; and, (ix) continuous and periodic environrmental monitoring by project staff and external agencies.

Environmental Screening, Review and Assessment. After identifying potential schemes for CISPfinancing, the field staff (district level staff) of LGRDD and MCs, in collaboration with the communities ortheir representative CBOs, will categorize these schemes using environmental screening and reviewchecklists as part of the scheme approval process. For those schemes requiring limited environmentalimpact assessment (EIA), the Assistant Director, Environment (ADE), or the Environmental Officer(ADE/EO) of LGRDD, with assistance from EPA and involvement of the field staff, shall conduct theassessment. Given their nature and sizes, CISP schemes are unlikely to require a full EIA. However, incase the latter is deemed necessary, the project authorities would either ask the EPA to do the assessment orwould contract it out.

Environmental Monitoring. Based on the identified environmental issues and impacts that need to beaddressed at different stages of scheme design and implementation, a list of environmental qualityindicators has been developed. All the periodic monitoring reports to be prepared by the project staff shallhave a built-in section on progress on these environmental indicators. At the time of the mid-term reviewthe Environmental Specialist (ES; see Technical Assistance below) shall prepare a report on theenvironmental status of the project. A three-level environmental monitoring plan is proposed: (i)continuous environmental monitoring by the district level staff of CISP; (ii) quarterly environmentalmonitoring by the Monitoring and Evaluation (M&E) unit of CISP; and (iii) six monthly environmentalmonitoring by EPA.

Implementation Arrangementfor EMP. The management of CISP at four different levels involves: (i)the Project Steering Committee (PSC) at the state level for policy formulation and project review; (ii) theProgram Management and Coordination Committee (PMCC), for monitoring, coordination, and support;assisted by a Project Secretariat at the Directorate level, LGRDD /Local Government Board, for overallmanagement, (iii) District Offices (DOs) and Municipal Councils (i.e., municipal corporations, municipalcommittees, town councils) at the district/municipal level for actual implementation; and, (iv) CBOs at thecommunity level for scheme execution and O&M. At these four levels, the proposed institutionalarrangements specifically for EMP implementation, to be further reinforced with external environmentalmonitoring and backstopping by EPA, are as follows:

1. Policy Level: To ensure that the EMF is fully integrated into the project implementationmechanism, the head of AJK-EPA would be made a member of the PMCC.

2. Management Level: The ADE, the municipal EOs, and the TA will assist the project managementauthorities in EMP implementation.3. Implementation Level: Comprehensive capacity building and professional training program has

been developed to enable the field staff and communities to implement the EMP. The required

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guidelines to be used by the field staff and communities for environmental assessment, monitoring,and mitigation have also been developed and provided as part of EMP. The ADE, EOs, and ESwill also be assisting the field staff in the implementation of EMP.

4. Community Level: Environmental education and capacity building of the community would be abuilt-in component of the community development activity.

5. External Monitoring and Backstopping: The EPA and/or a contracted agency shall carry outperiodic environmental monitoring (6-monthly), besides assisting in environmental assessment andcapacity building.

Institutional Strengthening. The Directorate of LGRDD will be provided with an Assistant DirectorEnvironment (ADE) to assist the project management team in dealing with environmental issues. He/shewill function as Coordinator for environmental matters in LGRDD and for environmental monitoring andcapacity building under CISP. He/She will be the lead person for the implementation of EMP in LGRDDand will be the Focal Point for EPA in LGRDD. Considering the current state of development andinstitutional capacity of the different municipalities of AJK, a phased program of institutional strengtheningis recommended. In the first phase the municipalities of Muzaffarabad, Mirpur, and Kotli (the three largestin AJK) shall each have an Environmental Officer. Based on the experience gained in the first phase, theremaining four comparatively smaller municipalities at the district headquarters level (Bagh, Rawalakot,Pallandri and Bhimber) shall be strengthened in the 2nd phase. The EO will also function as Coordinatorfor environmental matters in his/her municipality, including environmental monitoring and capacitybuilding for municipal staff. He/she will be the lead person for the implementation of EMP and willfunction as the focal point for EPA in the concerned municipality. The provision of EOs at the districtlevel under CISP is in keeping with the National Devolution Plan's recommendation for EOs to bedesignated at the district level.

Capacity Building. Capacity building of the district staff of LGRDD and the municipalities will involvestrengthening their ability to take into account environmental considerations into the planning, design, andimplementation of CISP schemes. It also requires training in, among others: (i) the use of theEnvironmental Guidelines and checklists developed for the Project; (ii) monitoring of compliance withenvironmental parameters; (iii) environmental reporting; and (iv) selecting and implementing mitigationmeasures. Some specialized short-term (one- to two-week) in-country training for professional staff to gainhands-on experience in addressing environmental issues is also proposed. The Training Coordinator ofLGRDD shall arrange and conduct these training activities, with assistance and/or inputs from theADE/EO, the Environment Specialist, and the EPA. A two-day training at the start of the project and aone-day follow-up training every year are proposed to be held in every district. At the community level,environmental awareness-raising shall be built into the community development activities of the Project.The Training Coordinator and the field staff entrusted with community development work will organizeenvironmental education campaigns and local training to assist communities in dealing with localenvironmental concerns, such as drinking water quality, water conservation, solid waste management,indoor air pollution, sanitation, and other related issues.

Technical Assistance. The services of a national Environmental Specialist (ES) are recommended as amember of the project team for seven person-months: four months at the start of the Project, two months inthe second year, and one month in the third year (at the time of the mid-term review). Among his/her tasksare to: (i) design and prepare training and capacity building materials; (ii) prepare an environment manualto be used by the project staff; (iii) develop detailed indicators for environmental monitoring and assist inthe preparation of environmental monitoring reports; (iv) provide training to project staff in environmentalmonitoring, in using the environmental guidelines and in the application of mitigation measures; (v) prepare

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environmental training materials and training programs for the communities; and (vi) prepare the report onthe environmental status of the project at the time of the mid-term review.

Financial Requirements. For EMP implementation, involving capacity building, technical assistance, andinstitutional strengthening, it is estimated that PR 4.570 million will be required.

SOCIAL ASSESSMENTExecutive Summary

Azad Jammu Kashmir (AJK) has a population of 2.92 million, the majority of which lives in rural areas.The state of AJK has seven districts, namely Muzaffarabad, Bagh, Poonch, Sudhnuti, Kotli, Mirpur andBhimber. Muzaffarabad is almost half of AJK in terms of land area and houses one quarter of thepopulation. The northern parts of AJK has high mountains and narrow valleys. As one moves south thevalley widens and productive use increases. The scattered settlement pattern over hilly terrain in AJKmakes development difficult and costly. In the rural areas, till the implementation of the Rural WaterSupply and Sanitation (RWSS) Project (1992-2000), water was fetched from streams by women on potsfor purpose of drinking, domestic use and to feed livestock. In the plains, people have dug wells and thoseliving by the riverside or near "kools" (water channel for agriculture) obtained water from these sources.The RWSS project covered a quarter of AJK's population through 1221 gravity schemes and 173 pumpingschemes. In each of these villages, the RWSS strengthened local organizations and made them developmentoriented.

Social organizations in AJK are molded around biradaris (clans), and one village may have up to four tofive Biradaris. Across AJK, one to two biradaris dominated almost half the villages surveyed, while the restwere homogenous with almost equal number of population. Political interests are not related to biradari,and political competition is equal within and between biradaris. The organization at the village levelcomprises of representatives (elders and influential persons) from different neighborhoods within thevillage, who meet on occasions or when needs arise. The organization resolves family and property disputesand discusses and directs welfare activities. In the past, many of the self help activities related toconstruction of Mosques, schools, link roads and bridges have been carried out using this platform. In themore recent past, community based Government projects and NGO activities have strengthened theseorganizations by making them development oriented, motivating participation by youth and women and byintroducing to them contemporary system of management and leadership development.

Land fragmentation and increasing population has over burdened subsistence agriculture, forcing people tomove out of AJK to Pakistan and abroad in search of employment. The 1992 social survey of AJK,estimated off farm income to be 29.7 percent of which 44 percent was share of remittances. Economicallyactive rural population in AJK is 18 percent. Unemployment rate is about 37.5 percent and the larger partof unemployed population is domestic workers - mostly women. Average per capita income reported isUS$ 184-205 and field survey shows rural household monthly income to be in the range of Rs.5000 -6000. People place poverty line in the range of Rs. 2,500-3,000/hh given the increasing price of grains andthe decreasing yield due to land fragmentation, construction and environmental change. This figure iscomparable to the poverty line worked out for NWFP and Pakistan. In the rest of AJK, especially in thenorthem part of Neelum valley and in the border areas, and the area near the Jhelum River in district Baghand Sudhnuti, access to cash income and development is very limited. A good part of these areas lack roadaccess and people have to travel long distances on foot and pay carriage for transportation of goods.

According to the Social Assessment, NGOs/CBOs are a recent phenomenon in AJK where most of themhave been registered under the Companies Act of 1860, (about 503 organizations) and with the

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(Muhikma-e-Sanat-o-Hirfat) Department of Industry. Majority of the organizations are either welfareoriented, or religious schools, or organizations of artists and professionals. The Social Welfare Departmentis responsible for the registration of these organizations through the Jammu Kashmir Council Secretariat,Islamabad. The Department has short-listed 18 NGOs that are considered development-oriented, genuineand functional (these have submitted audited accounts and have done some work on the ground). Out ofthese, three are from outside AJK, and only 15 functional and registered organizations (under this Council)in the region.

In AJK registered, formal and functional CBOs/NGOs are few in number. According to the SA somecommunity based organizations visible during the study included the following: i) Mian Mohd WelfareTrust-Pothi Balyala/ Bunkhurma (Mirpur), ii) Muslim Welfare Organization - Nakar Bazar (Sudhnoti) iii)Khidma-e-Khalq Trust - Seher Mandi/ Jhanda Khas (Kotli) etc. Most of these are involved in welfareactivities (distribution of school books, arranging dowry for girls, etc). Involvement of CBOs indevelopment is not obvious except for Khidmat-e-Khalq Trust, which has laid a water line from thesource to a local Mosque in Seher Mandi. Activities of CBOs are generally financed by communitycontributions. Mernbership base ranges from 22-70 persons. The presence of these organizations withinthe sample is indicative of existence of spontaneous community organization that have potential for beingengaged in future infrastructure development projects.

Community mobilization has been undertaken by apex NGOs like the National Rural Support Programme(NRSP), along with community based govemment projects like the Neelum Valley - Jhelum Valley(NVJV) project, and the Northern Resource Management Project (NRMP) that have contributed towardsstrengthening community organisations. With provision of capacity building activities, local CBOs nowfocus on development activities, and also encourage women and youth to actively participate in thedevelopment. Women's Welfare Organization (WWOP) based in Rawalakot/ Sarracha (Poonch), is thelargest women's organization.

Other examples of NGOs with a development focus are Youth Academy of Pakistan (YAP) -Muzaffarabad, Abdul Aziz Memorial Welfare Society - Bagh, Kashmir Institute of National Development(KIND), Institute for Planning and Development (IPD), and Society for Advancement of Women (SAW).The RWSS partnered with these 4 above mentioned NGOs in its program. According to the RWSSevaluation report (April 2000), their capacity and performance was found to be satisfactory.

NGOs and private groups aim to strengthen community organizations through provision of services. Thereconstruction of village organizations into Committees/CBOs is apparent only to the extent of acquiringbenefits from extemal organizations. In terms of decision-making, responsibility sharing and contributions,the traditional relationship still holds. The CISP can greatly benefit and build on the work carried out bycommunity based projects and development NGOs. The strengthened community organization at thegrassroots level is an asset in the consultation process, especially the water committees formed through theRWSS project. This would lead to a more integrated service delivery in the region.

Of the poor, women are most disadvantaged. About 20 percent of rural households are female headed andgenerally all community and social organizations are male lead. Government projects generally do notconsult women, and in the many meetings held, women either did not attend or where they did attend, theyremained silent. In "women only" meetings, women were more forthcoming and showed a strong inclinationto participate and had many concerns. They viewed water supply as a health related development activityand felt that it needed to be related to childcare and medical facilities. The women felt that increasinghousehold income and improving quality of education is important for reducing vulnerability to povertyconditions. They showed willingness for improving family based income generation activities and showedinterest in micro credit and savings scheme.

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Focused groups discussions with community members in 55 rural communities and 5 urban communitiesshow that:

* Water supply, roads, Primary School upgrading (especially for girls) and improvement in healthfacilities is the main need.

* There is a strong willingness to participate by the communities and people are willing to contributeup-front. Larger percentage of community members prefer to provide labor instead of cashcontributions as most are poor and survive on subsistence.

* Almost all the communities visited have a tradition of self-help for development, and the leadership andorganization will require little strengthening and capacity building. There is also a tradition ofvoluntary land donation for public benefit.

* People are aware of the changing environmental conditions and many have related it to the growingpopulation. There is a growing concem about quality of water, disposal of human and domestic waste,overgrazing and deforestation. Last three years dry period has made them realize the need for waterconservation and in many of the sites where RWSS schemes are complete, water-rationing practice wasvisible.

* A large number of people survive on subsistence and in all of the cases the households have 1-2member working in Pakistan or abroad. The poor viewed infrastructure development, especially watersupply and roads as contributing to poverty alleviation, provided income generation activities werelinked to it and supported. Improvement of health facilities, especially preventive practice were seen ascost saving.

* Main participation issues emerged as: (i) scattered pattem of settlement that restrict outreach; (ii)conflict between groups due to political and social competition; (iii) consultation and participationframework being complicated and time consuming; (iv) people being left out due to poverty reasons i.e.too poor to contribute and therefore not selected; (v) willingness to contribute; and (vi) elite capture.

* No indigenous communities were found and almost all of the local communities are in the process ofmodemizing.

From the study of RWSS and other community development projects, lessons leamt are sumnmarized below:

* Demand driven community based projects require additional time initially.* Information dissemination should be done as a package.* Within a community a variety of needs exist and these should be prioritized through community

consultation.* Involvement of community at all stages of project cycle increases community ownership, decreases cost

and motivates community in upfront cost sharing.* Sharing of cost based on division of responsibility causes understanding and makes sharing possible.

Percentage sharing model is generally viewed with suspicion while component sharing increasesflexibility.

* Community development is a key component to infrastructure development and staff involved incommunity development needs to be encouraged and their capacity enhanced.

* Involvement of NGOs as trainers and facilitators in community development institutionally strengthensGoveurnent departments. The NGOs can play a catalyst role in facilitating partnership developmentbetween Govermment and community organizations.

The following monitoring indicators were identified with the stakeholders at appraisal:

* Enhanced access to community sub project organized around social and community assets:

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(i) number of communities applying and selected(ii) percent of the community represented in the intervention and benefiting from it

* Confirmed changes in local government attitude to working in partnership withcommunities/CBOsINGOs:(i) Number of visits of LGRDD staff and outcome through signing MOAs and partnership with

communities/CBOs/NGOs.(ii) Percent of registered social disputes resolved

(a) number of disputes identified by communities(b) number resolved through facilitation by department

(iii) Number of linkages between communities and NGOs/private sector facilitated by LGRDD

* Sound Operation and maintenance of sub projects neighborhood and community assets:(i) Intervention functioning as planned with optimal performance(ii) Amount of funds collected for O&M (regular basis and percent of members contributing)(iii) Effective mechanism in place to address O&M issues

* Increase in new development activities initiated by CBOs members:(i) Scale of development activities initiated by CBOs through linkage with other stakeholders

(besides LGRDD), NGOs. Private sector etc.

* Increased womens'participation in sub project planning, implementation, O&M with particularemphasis on community development programs (skill training, linkages, micro credit, communityeducation etc):(i) Number of women participating in O&M(ii) Women participating (as a percent of men) in planning, implementation and O&M(iii) Number of women's groups (or number of women in the CBO) and their participation in the

project cycle(a) number of meetings held with women during planning (as a percent of total meeting heldwith the community)(b) number of women trained and participating in book keeping, accounts, O&M, etc.

* Women's participation in CD activities:HESA(i) Number of women trained in HESA and practicing outreach activities

* Community Education.(i) Number attending (by age groups)(ii) Number graduating from the course

* Linkagesfor micro credit, skill development and management(i) Number of loans taken by women, and amount repaid(ii) Number of women identified for skill, enterprise and management training and number trained(iii) Number practicing/utilizing skill(iv) Impact ( of contribution) on household income(v) Overall impact of skill development and income generation on women

* Village cross visits will be utilized to build transparency, and experience sharing by viUlagecommittees /CBOs. Problems and solutions will be identified using local knowledge.

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