Regions and Countries

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p. 7 of 11 BACK | NEXT Executive Summary I. Development Agenda II. Implementation of the Country Strategy and Program III. ADB's Strategy IV. Operational Approach V. Three-Year Assistance Program VI. Performance Monitoring and Evaluation

Country Strategy and Program 2002-2006: Pakistan

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II. ADB's Development Experience

A. Factual Summary of ADB's Assistance

39. ADB began lending to Pakistan in 1968. As of 31 December 2001, ADB had approved 183 loans to the country (excluding private sector lending) totaling $11.2 billion. Of these, 116 loans totaling $6.1 billion or 54 percent were from the Asian Development Fund (ADF) and $5.1 billion from ordinary capital resources. The two largest sectors of ADB assistance to Pakistan were energy (29.4 percent), and agriculture and natural resources (29.1 percent). During 1990s, ADB approved 47 projects for a cumulative value of $5.3 billion (Table 3).

40. ADB's lending to Pakistan during 1995-2000 was about $2.7 billion.⁸ In 2000, ADB lent $707 million; this increased to $957 million in 2001⁹ (an increase of about $325 million over the programmed lending level) in response to Pakistan's greatly increased needs as a result of the events following 11 September 2001. As of 31 December 2001, ADB had approved about $81 million for 243 technical assistance (TA) projects-130 were advisory TAs reflecting the importance of institutional strengthening, policy development, etc. to the Pakistan operations. The agriculture and natural resources sector received the largest number of TAs with 16 percent of the total TA funds approved, followed by social infrastructure with 10 percent.

B. Summary Evaluation of ADB Assistance

41. The last country operational strategy (COS) for Pakistan was prepared in 1995. Following the 1998 nuclear tests and the ensuing economic sanctions by the G-7 countries, ADB operations have been guided by an interim country operational framework (COF) prepared in 1999 to cover 1999 and 2000. Preparation of a full CSP was initiated in early 2001 and processed up to an advanced stage. However, the impact of the events following 11 September 2001 on the economy necessitated important changes in the CSP for which further work was needed. This work is now complete.

1. Relevance

42. Despite relatively high growth rates during the 1980s, Pakistan's human development indicators significantly lagged behind those of other countries at a comparable level of per capita income. Taking cognizance of this disparity, the 1995 COS identified human resource development as its primary objective with economic growth as a secondary objective. The 1999 COF took into account the changed economic and political conditions following the nuclear tests in 1998 and the ensuing economic sanctions imposed by the G7 countries. The COF focused on three areas: (i) improving economic efficiency and export promotion, (ii) human and social development, and (iii) governance and institutional strengthening.

2. Effectiveness and Efficiency

43. The new strategic emphasis under the 1995 COS was effective, and the increase¹⁰ in lending for human resource development was significant. While most of the projects flowing from this enhanced assistance to education, health, population welfare, and water supply and sanitation are still ongoing or only recently completed, implementation experience indicates that governance-related issues, such as relations between different levels of government, management and institutional capacity, and participation and ownership at the local level, resulted in a reduced development impact. However, there is strong Government commitment and broad consensus among the assistance agencies, as manifested at the recent Government-organized Human Development Forum (24-26 January 2002), that continued involvement in these sectors is necessary, albeit with improved governance.

44. Under the interim 1999 COF, ADB sought to address the following 1990s challenges: (i) weak governance, (ii) weak absorptive capacity, and (iii) high external debt resulting from fiscal mismanagement and a traditional reliance on external borrowing to cope with current account deficits. The results are mixed. Generally, the program loans such as those for trade and industry, energy sector restructuring, and export finance have performed satisfactorily; whereas the project and sector loans, performed less well (para. 43). Among the project and sector loans, umbrella-type projects, specifically those implemented by an apex institution at the federal level, were more prone to delays due to a disconnect between the different levels of government resulting in reduced development impact.

3. Major Sector Reviews

45. Agriculture and Rural Development and Water Resources. During the 1990s ADB had varied and extensive involvement in the agriculture sector. These interventions, (Table 3) comprising 18 projects and 27.5 percent of the lending, aimed at enhancing agricultural productivity, promoting market-oriented policy reforms, strengthening the institutional framework, and developing relatively resource-scarce areas of the country. Implementation experience suggests that generally across all projects, governance issues pertaining to limited capacity, centralized controls, dysfunctional systems and incentives of sector institutions, and weak ownership of the policy reform process at the provincial and local levels reduced the impact of ADB interventions. In the irrigation sector, impact was reduced due to the failure to increase the ownership and involvement of farmers and community organizations. ADB intervention in this vital subsector is on hold pending the completion of a major ongoing study on water sector strategy. These lessons have been incorporated in the recently approved area development projects, as well as the Microfinance Sector Development Program¹¹ and the Agriculture Sector Program Loan II.¹²

46. Energy Sector. During the 1990s, ADB provided seven loans and 29.4 percent of the lending to (i) augment generation, transmission, and the distribution network of the power subsector; and (ii) develop the existing oil and natural gas fields. Assistance for the development of the power subsector was coursed through the two main electric utilities, namely the Water and Power Development Authority and the Karachi Electric Supply Corporation. The key lesson learned from assistance to the power sector is that supporting capacity expansion without explicitly addressing issues of corporate governance only substitutes one set of problems with another. This deficiency was rectified under the Energy Sector Restructuring Program loan,¹³ which envisages the privatization of Karachi Electric Supply Corporation and unbundling of Water and Power Development Authority.

47. Finance, Industry, and Trade. During the 1990s, ADB approved four projects accounting for 15 percent of the lending. The earlier assistance provided foreign currency lines of credit to state-owned financial institutions. However, the issue of poor corporate governance of these institutions, as manifested by their large and growing portfolio of bad debts, was not explicitly addressed under these loans. Since 1997, assistance to this sector has focused on developing the capital market, and explicitly addressed such governance issues as transparency of transactions and elimination of insider trading. In addition, capacity building assistance was provided to strengthen the Securities and Exchange Commission of Pakistan, which has successfully developing a comprehensive regulatory framework for the functioning of the capital markets in the country. ADB also provided assistance for reform of the tariff regime and for capacity building of concerned government agencies.

48. Transport and Communications. During the 1990s, ADB approved four projects accounting for 9 percent of its lending. ADB's involvement in this sector pertained primarily to the telecommunications and road subsectors. Under the aegis of the ADB-financed Third Telecommunications Project,¹⁴ the public sector monopoly, namely, the Pakistan Telecommunication Corporation was successfully corporatized as a precursor to its privatization. ADB assistance to the road subsector, besides improving the rural population's access to markets, has contributed to the development of the domestic road construction industry. Lessons learned from past experience in this subsector include (i) decentralized province-specific operations foster greater ownership, (ii) emphasis on ensuring adequate availability of operation and maintenance funds must be increased, and (iii) capacity building of concerned executing agencies is needed. The lessons were incorporated in the recently approved Road Sector Development Project.¹⁵

49. Education. During the 1990s, ADB approved seven projects accounting for 11 percent of its lending. The major areas included primary education, teacher training, science training, textbook printing, and through the SAP projects I and II, basic education. ADB support for the SAP constituted a major portion of ADB assistance for the social sectors. Performance of the SAP I and II (some 60 percent of SAP resources were utilized in the education sector) has been mixed. The SAP experience has revealed that while lack of resources is a serious constraint to improve human development, mismanagement of available resources resulting in poor service delivery is a more pressing concern. The SAP highlights the need to have a strong system of governance, including improved financial controls, decentralized control of services to districts and communities, and improved incentives for service providers.

50. Health and Population. During the 1990s, ADB approved two health and one population welfare project, accounting for 2.5 percent of its lending. Of the two health sector projects, one specifically focuses on women's health. While ADB has assisted the Government in establishing sector priorities and developing human resources for the sector, issues such as centralized management, inadequate empowerment of local communities, and poor service delivery have adversely affected the sector. The recently approved Reproductive Health Project¹⁶ takes these issues into account.

51. Water Supply and Urban Development. During the 1990s, ADB approved three projects accounting for 4 percent of its assistance. The sector program focused on providing assistance to Punjab province for urban and rural water supply and sanitation, and for a sewerage project in Karachi. Lessons learned include the need for community and beneficiary participation, association of the private sector, and mechanisms to cover the operation and maintenance cost. Based on lessons learned from past experience, ADB has recently approved an urban development project for the NWFP that relies on community organization to identify and operate of urban development initiative.¹⁷

C. Portfolio Performance and Status

52. As of 31 December 2001, 45 loans were ongoing (including 5 program loans totaling $934 million) for 38 projects in ADB's loan portfolio for Pakistan. These comprised a total commitment (net of cancellations) of $3.6 billion. Two distinct features characterize ADB's portfolio performance in Pakistan. First, Pakistan's portfolio performance rates average among all developing member countries in terms of physical implementation progress as measured by the benchmarks of contract awards and disbursements. However, the 2001 disbursement ratio of 28.2 was higher than the ADB average of 20.5 percent. Second, portfolio performance until 1999 was characterized by such governance issues as poor management of the development process, overcentralization, weak accountability, inadequate community participation, and weak capacity of the executing agencies. A review of postevaluation findings, as reflected in the project performance audit reports circulated during 1996-2001 reveal that of the 19 projects reviewed, 3 were unsuccessful, and 16 were successful or partly successful (Appendix 3). Although the 3 unsuccessful projects were approved between 1976 and 1985, the overall results do suggest the need for improvements in the development management process, with special emphasis on governance-related factors.

53. Measures have been taken by the Government and ADB to ensure that portfolio performance improves. The Government has taken measures to strengthen financial controls by separating the offices of the auditor and accountant general. The National Accountability Bureau has prosecuted, among others, many who were involved in misappropriating public resources under the aegis of implementing development projects. The Government has also introduced measures to reform its business processes and has streamlined the execution of development projects.

54. For its part, ADB has intensified the frequency of its portfolio review process. Against the past practice of yearly project review meetings with the provincial governments, quarterly reviews are now being undertaken. In addition, the level of dialogue has been raised such that provincial finance and planning ministers now chair ADB portfolio review meetings. In addition to the provincial portfolio review meetings, ADB and the federal Government hold a biannual country portfolio review meeting to discuss and agree on specific cross-cutting issues that emerge from the provincial portfolio review meetings. ADB has actively engaged with all executing agencies to closely monitor, evaluate, and propose concrete plans to improve their implementation performance. The monitoring system is also being expanded to directly engage provincial governments. To improve the Government's capacity to undertake more intensive portfolio reviews, a TA proposal is included in the 2002 program to strengthen the institutional mechanism at the federal and local levels.

D. Conclusions and Lessons for the Country Strategy and Program

55. A key lesson from project implementation experience is that quality of governance is critical to the success or failure of a project. Project performance remained weak in cases where authority was highly centralized, institutional capacity was limited, projects required coordination between the provinces and federal authorities, incentives for better performance were missing, or the reform process or project was not owned by major stakeholders. Other key lessons include the need to (i) address corporate governance issues in state-owned enterprises upfront; (ii) increase the focus on efficiency and quality of public investment in social sectors; (iii) ensure flexibility in the design of policy reforms at the macro and sectoral levels, and incorporate ownership-strengthening components at the processing and implementation stages; (iv) invest in institutional development and capacity building to sustain the development momentum; and (v) institute a monitoring mechanism to track policy compliance.

56. These lessons have been incorporated into ADB's strategy, as outlined in the CSP. Improving governance has been made the central theme and the major focus of the strategy. The emphasis on policy-based lending will continue, but a more flexible approach will be adopted for institutional reform so that the process evolves in response to changing political and economic scenarios. Other key elements of the strategy include decentralization and emphasis on efficiency of service delivery, which imply a move away from federal government-based umbrella projects to more focused province-specific policy loans and sector development projects, that address sector institutional constraints that reduce development impact and are owned at the local level. To strengthen ownership of projects, ADB will also use advisory TAs to (i) promote public sector partnerships with civil society, nongovernment organizations (NGOs), and the private sector; and (ii) support monitoring and constituency building for reform programs and projects.

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