Countries and Regions

	Table of Contents
p. 14 of 25 BACK | NEXT I. Country Performance Assessment II. Country Operational Strategy III. Sector Strategies A. Agriculture B. Infrastructure C. Social Infrastructure and Environment D. Governance Dimensions of ADB Operations E. Gender Dimensions of ADB Operations F. Province Level Interventions G. Private Sector Development IV. Regional Cooperation V. Donor Activities and Aid Coordination VI. Cofinancing and Catalyzing External Resources VII. ADB’s Operational Program VIII. Economic and Sector Work Program IX. Local Cost Financing

Country Assistance Plans - Pakistan : III. Sector Strategies

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B. Infrastructure

1. Energy

52. Pakistan's power sector is facing a crisis, which stems from weak governance, poor financial management, political interference, and long term disregard for prudent business practices. Weak governance has resulted in inefficient utility operations, power theft, illegal power supply, reduced billing and collection, and non-payment of arrears. A serious circular debt problem has also resulted between the power utilities, fuel suppliers and the engineering industry. These poor business practices have contributed to the build up of the financial crisis in the sector, which has significant repercussions on the country's economy. Due to its significance in the economy, the power sector is recognized in the COF as a primary area for policy initiative by the ADB. The absence of a prompt and adequate policy response in previous years posed a major threat to the power sector and also threatened future Pakistan's industrial development. The new Government has been prepared to commit itself to radical reforms and tough adjustment measures, including market-driven systems, to restore viability in the sector and to make it self-sustaining.

53. ADB support of the Government's initiatives for structural reforms in the power sector is considered essential, given the urgent need to introduce competition as the driving force for improvement and private sector participation as a vehicle for creating a competitive environment. Key areas of reforms include: (i) establishing a modern regulatory framework and supporting institutional capacity for autonomous power industry regulation; (ii) financial restructuring and privatization of the Karachi Electricity Supply Corporation (KESC); (iii) restructuring of the Water and Power Authority (WAPDA) and privatization of corporatized entities; (iv) creating an enabling environment for a competitive electricity market; and (v) fully resolving the ongoing issue of the contracts between WAPDA and several independent power producers (IPPs).

54. The longer term strategic objective in the sector is to develop an efficient and competitive power sector which would comprise a number of privately owned generation corporations operating under market competition; an independent and regulated transmission and dispatch corporation for an integrated operation of the system and for the wholesale market; private regulated corporations for electricity distribution; a privatized KESC supplying the Karachi area; and the transformation of the National Electric Power Regulatory Authority (NEPRA) into a fully autonomous and effectively functioning regulatory agency for the power sector. Under the proposed Energy Sector Restructuring Program Loan, for $350 million with the supporting TA loan ($5 million), to support the restructuring and privatization of KESC and to assist in financing the exceptional social and other costs attributable to such major restructuring and privatization under a first tranche. The second tranche of the loan is to be made to WAPDA to fill the residual financing gap after tariff adjustments and restructuring. IMF conditions under the SBA program concern overall strategic agreements on macroeconomic restructuring of the economy including public sector investments and restructuring which apply directly to issues in the power sector. To support expanded energy self-sufficiency and a reformed and sustainable institutional framework, two ADTAs were included in the 2000 program: (i) Institutional Strengthening of NEPRA²² to build the institutional capacity to independently examine and regulate prices and related power industry guiding principles and standards; and (ii) Support for the Privatization of KESC to assist in the preparation of financial models, the preliminary information memorandum and technical, social and labour due diligence, and to prepare KESC for sale. In addition, in 2001, an additional ADTA will be included for Capacity Building of the National Transmission and Dispatch Company (2001) to assist in developing the operating, investment and maintenance guidelines for the transmission grid code, a modern costing system and to build planning capacity. Taken together, this program will make a strong contribution to developing the institutional capacity to support the modernization of the power sector.

55. In addition to the power sector initiatives described above, a PPTA in 2002 will prepare an environmentally focussed project for loan financing for Industrial Efficiency and Environmental Management to implement market-based instruments for pollution control in highly polluted industrial subsectors, establish industrial waste treatment facilities, and reduce air and water pollution. The project will also provide a model for restructuring Government agencies in the environment sector through a comprehensive program of capacity building. Two PPTAs, Strengthening of Safety and Environmental Aspects in Petroleum Sector and Renewable Energy Development have been included in 2003 to further develop the future lending program

56. Efficient development of domestic natural gas will lead to long term improvements in the balance of payments due to substitution of imported fuel oil and reduced power generation costs. The ADB has recently advised the Government that there are four immediate needs: (i) appropriate regulations for the gas and liquid petroleum sector; (ii) an environment that is conducive to the privatization of the two existing public sector-owned gas corporations (Sui Southern and Sui Northern); (iii) public and private partnerships and investment in the infrastructure required to increase the utilization of domestic gas; and (iv) a white oils product pipeline to transport petroleum products to the north of the country. This will also lead to increased transportation efficiency and reduced environmental damage by road tankers. An ADTA has been programmed to assist the Government in Support for Regulatory Framework and Economic Modeling (2001) to focus on gas sector regulatory capacity, development of an economic gas pricing model and the form of the gas tariff structure, assist in economic decision making on fuel pricing, and market-based support for a regulatory framework for the liquid petroleum distribution subsector. Future loans to the sector may follow in the form of joint public-private partnerships.

2. Transport

57. The role of the ADB in the transport sector will be reviewed in the forthcoming ADB Transport Sector Strategy, which will complement the Transport Sector Development Initiative being developed in collaboration with the World Bank and stakeholders in Government, the private sector and civil society. Currently, principal focus of the ADB will be in the roads subsector.

58. Although the road network has become more extensive over the past two decades, investment in the sector has not matched the demands of greater mobility and trading opportunities. Resource constraints have led to inadequate road rehabilitation and maintenance resulting in rapidly deteriorating roads and a large and ever increasing maintenance backlog. There is also an urgent need to develop management and professional skills in the institutions that are tasked with managing the road network. The need for institutional strengthening and well designed road sector development plans are particularly apparent at the provincial level, where the greater portion of the network exists. Even those sections that have been improved recently with donor assistance will not achieve their intended lives unless network management is improved radically. While national and provincial roads are adequate in extent, though not in quality and service level, rural roads are inadequate in both extent and quality to serve the needs of rural areas, particularly with poverty reduction as a guiding parameter for ADB interventions. Key issues that need to be addressed through province-level interventions include: (i) institutional reform and capacity building; (ii) maintenance planning, funding, and operations; and (iii) traffic management and road safety. The overall strategic priority will focus on the development of the provincial road networks, including rural roads, to support economic development, rural development, and poverty reduction through improved access to basic services and employment opportunities for rural populations.

59. The first intervention under this strategy will be in Punjab province as an area of focus in the medium term. Punjab's share of the country's provincial road network is about 32,800 km, or about 54 percent. The network is characterized by deteriorated and inadequate pavements, in terms of physical capacity and strength; unregulated vehicle weights and axle loading; lack of timely, adequate and appropriate maintenance; and inadequate capital investment. Since Punjab is the most densely populated and economically active province, with high levels of industrial production and agricultural productivity, the poor condition of its road network has major economic impacts not only on the province, but also on the entire country.

60. The ADB's involvement in the road sector over the next few years will focus primarily on the provincial networks, the components of which range from heavily trafficked multi-lane highways to remote rural access roads, and in particular on improving the capabilities of the agencies that are responsible for the networks, both human capital and regulatory frameworks. Although the World Bank focuses on the national highway system, and is assisting in the establishment of a road fund, the ADB will complement those efforts by assisting in the establishment of a provincial road fund in Punjab, and selective interventions in the national highway system with a provincial emphasis. The strategy will seek to emphasize poverty reduction linkages; increase ownership; focus on sector revenues, and operation and maintenance expenditures; and complement ongoing ADB assistance (Provincial Highways Project) in further reform of provincial institutions and development of an effective transport policy framework. Although the viability of private sector involvement in development of arterial roads through BOT projects appears uncertain, the scope for private sector participation in construction and operation of rural roads, while limited, will be explored. The program currently includes a Punjab Road Sector (2002) loan of $150 million, and Road Sector Development (NWFP/Sindh) for $200 million in 2003, with an associated PPTAs in 2000 and 2001, respectively. A PPTA for Balochistan Rural Road Development, focused on farm to market roads and related investments, has been included for 2002.

61. The ADB also recognizes the critical role that the ports systems have in the national economy, with Port Qasim and Karachi Port as the principal trading gateways to Pakistan. There is considerable scope for efficiency improvements at the ports, both institutionally and operationally, and greater private sector participation in selected port operations. The ADB will assess the potential for support for ports development in the forthcoming Transport Strategy."

3. Finance and Industry

62. The performance of the trade and industrial sectors has been adversely affected by several factors, including inefficient and high cost of financial intermediation, distortions of the trade regime which encouraged uneconomic import substitution, inability of the export policy incentive framework to offset the anti-export bias in the trade regime, and large-scale nationalization of industrial and financial institutions. The ADB funded TEPI will promote exports, restructure institutional arrangements, liberalize trade and controls in the economy, simplify and streamline export procedures, and place greater reliance on market forces to promote efficiency and growth. Tariff reforms and rationalization of the trade regime (under TEPI) is in tandem with ESAF/EFF objectives and the successor PRGF, and will lead to a more efficient and competitive industrial structure that is able to successfully meet the rigors of international competition and is compliant with WTO stipulations. The ADB is supporting the achievement of these objectives under TEPI and its three associated TA loans. The Small and Medium Enterprise Trade Enhancement Facility (formerly called Foreign Currency Import Finance Facility) loan, which is related to TEPI, is included in the ADB's 2000 program in the amount of $150 million. It will support three components: (i) introduction of a Foreign Currency Import Facility to target SMEs excluded from current export schemes; (ii) a new US dollar and market interest based 3rd window in the Government's existing Export Financing Scheme (EFS) to also cover indirect exporters; and (iii) provision of ADB partial risk and partial credit guarantees. The ADB is also exploring financing of a Preshipment Export Financing Guarantee Agency (PEFG).

63. In conformity with the 1995 COS and the 1999 COF, the ADB is supporting the broadening and deepening of the financial markets and strengthening of their regulatory frameworks to improve financial intermediation, and the development of a conducive industrial and trade incentive framework to promote exports, product diversification, and private sector-led industrial growth. These are crucial elements for sustainable economic development. The ADB, under the ongoing Capital Market Development Program Loan (CMDPL)²³, is promoting development of a diversified and competitive capital market. A second phase, CMDPL II (2001) for $200 million, would focus on the development of an active domestic bond market. This will include development of a long-term yield curve by shifting the burden of the Government's non-bank financing from the National Savings Scheme (NSS) to a long-term bond market, and of the institutional investor base to invest in these instruments including insurance, pension and provident funds. Moreover, additional assistance will be required to develop further the secondary market infrastructure and the regulatory framework for capital markets and non-bank financial institutions. Increased emphasis will also be placed on corporate governance.

64. Three ongoing TAs from the 2000 program will have significant impact in lending and policy advice during the program period. These are (i) Development of Debt Markets and Institutional Investments to further the reform of the NSS²⁴, reform of the insurance industry, and reform of pension and provident funds, that has commenced following earlier TAs²⁵; (ii) Restructuring the State Life Insurance Corporation (SLIC), to support sequencing various reform components; and (iii) and ADTA for Debt and Risk Management in the Ministry of Finance (MOF) which will be crucial for more effective debt management within the MOF, and the preparation of a professional treasury group to manage the bond portfolio that will emerge as a result of the proposed reforms under CMDPL II²⁶. To follow up on the TEPI program, a PPTA has also been included for Small and Medium Scale Industries (2001), which will further support the need for a supportive policy and regulatory environment for diversified industrial growth, especially with an export orientation. A loan has been programmed for 2003.

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