from the British people

A n n u a l R e p o r t

Multi Donor Trust Fund forAccelerating Growth and Reforms

FEBRUARY 2015 -MarCH 2016

AGR

Copyright © 2016 The World Bank Group/Pakistan20-A Shahrah-e-Jamhuriat, G-5/1Islamabad 44000, Pakistan

All rights reservedwww.mdtfagr.org

Macroeconomic Context and World Bank Engagement

Debt Management Reforms

Energy Sector Reforms

State-Owned Enterprises and Private Sector Reforms

Tax and Trade Tariff Reforms

Resources

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Contents

Details of Activities under SOE Reforms and Privatization

Component Breakdown of Activities for FY2017

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AGR

ADB AsianDevelopmentBankAIT agriculturalincometaxBETF Bank-executedtrustfundCCP CompetitionCommissionofPakistanCGDPF CompetitivenessandGrowthDevelopmentPolicyFinancingCPEC China–PakistanEconomicCorridorCPI consumerpriceindexCPPA-GCentralPowerPurchasingAgency-GuaranteeCPS CountryPartnershipStrategyCRD CountryReadinessDiagnosticDFID DepartmentforInternationalDevelopmentDISCO distributioncompanyDMFASDebtManagementandFinancialAnalysisSystemDMR DebtManagementReformsDMU DebtManagementUnitDPC DevelopmentPolicyCreditDPCO DebtPolicyCoordinationOf�iceEAD EconomicAffairsDivisionEE&C energyef�iciencyandconservationEFF ExtendedFundFacilityFBR FederalBoardofRevenueFESCO FaisalabadElectricSupplyCompanyFSIG FiscallySustainableandInclusiveGrowthFY �iscalyearGCC GulfCooperationCouncilGDP grossdomesticproductGEPCOGujranwalaElectricPowerCompanyGOP GovernmentofPakistanGOS GovernmentofSindhHR humanresourcesICT informationandcommunicationstechnologyIERU ImplementationandEconomicReformsUnitIFC InternationalFinanceCorporationIMF InternationalMonetaryFundIT informationtechnologyJICA JapanInternationalCooperationAgencyJPCL JamshoroPowerCompanyLimitedKP KhyberPakhtunkhwaKPI keyperformanceindicatorMDTF-AGR Multi-DonorTrustFundforAcceleratingGrowthandReformsMIS managementinformationsystemMOF MinistryofFinanceMOU memorandumofunderstandingMPNR MinistryofPetroleumandNaturalResourcesMWP MinistryofWaterandPowerNEPRANationalElectricPowerRegulatoryAuthorityNLTA non-lendingtechnicalassistanceNPL non-performingloanNTDC NationalTransmissionandDespatchCompanyPC PrivatizationCommissionPEECA PunjabEnergyEf�iciencyandConservationAgencyPIA PakistanInternationalAirlines

Abbreviations and Acronyms

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PMT ProgramManagementTeamPPP public–privatepartnershipPSE publicsectorenterprisePSM PakistanSteelMillsRETF recipient-executedtrustfundROSC reportonobservanceofstandardsandcodesSECP SecuritiesandExchangeCommissionofPakistanSLIC StateLifeInsuranceCorporationSOE state-ownedenterpriseSRO statutoryregulatoryorderTF trustfundTOR termsofreferenceUAE UnitedArabEmiratesUNCTAD UnitedNationsConferenceonTradeandDevelopmentUSAID UnitedStatesAgencyforInternationalDevelopmentVAT value-addedtaxWBG WorldBankGroup

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Pakistan's economic conditions haveimprovedoverthepastyear.Theriskofabalance-of-paymentscrisishasreceded,withasigni�icantincreaseininternationalreservesresulting from strong remittance in�lows,foreigncapitalin�lowsandthewindfallfromloweroil prices.The current accountde�icithas remained manageable and the foreignexchange market has been stable. Headlinein�lation remains in single digits and �iscalconsolidationcontinues.

The gross domestic product (GDP)continuestogrow,butremainstimidat4.5percentasprojectedforthe�iscalyear(FY)2016; this is below the required level toaccelerate job creation and signi�icantlyimprove living standards. The growthoutlook for FY2016 remains modest, withgrowth expected to increase slightly to 4.5percent of GDP from 4.2 percent in theprevious year – driven by large-scalemanufacturinggrowthof4.0–4.5percentandservices growth of over 5 percent. Theagriculture sector, after suffering a poorcotton harvest, is expected to have sloweddown to between 2.0 and 2.5 percent inFY2016comparedwith2.9percentinFY2015.

Thenear-termoutlookwillbesupportedbythree major near-to-medium tailwinds: (i)risinginvestmentsundertheChina–PakistanEconomic Corridor (CPEC), (ii) persistentlylow international oil prices and (iii) theanticipatedreturnof theIslamicRepublicofIran to the international community. Theexpectedgrowthrate,however,remainswellbelowthe5.5percenttargetenvisagedunderPakistan's Annual Plan for FY2016 and thegrowthratesofitsSouthAsianpeers.Afurthergrowth revival remains contingent on thegovernment making further progress inaddressingstructuralchallengessuchaspoorelectricityavailability,narrow�iscalspaceandinadequateaccesstocredit.

Pakistanhasimproveditsexternalposition,strengtheningmacroeconomicstability.Alsocon t r ibu t ing to Pak i s t an' s improvedmacroeconomic stability was its improvedexternal position, with reserves reachingUS$15.9 billion by end-December 2015 – anincreaseofUS$2.2billioninthe�irstsixmonthsofFY2016tomorethanfourmonthsofimports.A lower current account de�icit and relativelyhealthy �inancial in�lows contributed to thesustainedbuild-upofforeignexchangereservesduringH1FY2016.

However,thisperformancemasksthestructuralweaknessesthatcontinuetomaketheexternalsector vulnerable. Exports shrank by 11.1percentinthe�irsthalfofthe�iscalyearasanuncertain global economy magni�ied existingdomestic bottlenecks. Similarly, importsdeclinedby9.1percentduringthesameperiod.The6.2percentgrowthinworkers'remittancescontinuedtocompensateforthenegativetradebalance inabsoluteterms.Higher in�lows intothecapitaland�inancialaccountsthis�iscalyearweresupportedbyreceiptsfromtheissuanceofUS$500millioninEurobonds.

Remittances have touched record-highlevels. In FY2015, these in�lows �inanced 45percent of the country's import bill and 109percent of the overall trade de�icit. Thisimpressiveperformancestemsfromtwomainfactors: (i) the consistent increase in thePakistani diaspora and (ii) the diversion ofremittances frominformal to formalchannels,as surveillance of global money launderingincreased.TheGulfCooperationCouncil(GCC)remainsthelargestsourceofremittances,withashare of 65 percent of total remittances. Thecountry-wise data shows that Saudi Arabia'sshareofoverallremittanceswasthelargest(31percent),withtheUnitedArabEmirates(UAE)(23percent), theUS (14percent) andUK (12percent) together contributing 80 percent tototalremittances.Moreover,almost67percentmore Pakistani migrants entered the UAE inFY2015comparedtothepreviousyear.Mostof

CHAPTER 1 Macroeconomic Context and World Bank Engagement

1RemittancesfromSaudiArabia,theUAE,USandUKgrewby19.1percent,35.3percent,4.93percentand4.92percent,respectively,inFY2015.

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2 Source:BureauofEmigrationandOverseasEmployment,GovernmentofPakistan.4

themwereengagedintheconstructionsectorwhere mega-infrastructure projects areunderway.

The growth in remittances continued inFY2016, albeit farmore slowly than before,with 6.1 percent growth in the �irst eightmonths compared to the previous year.Seasonal factorsexplainpartof thisdecline,butitalsore�lectsthefallinoilpricesandtheconsequent lower growth and � isca ltightening in the GCC countries. The steadyincrease in remittances will come underpressureifoilpricesremainlowandtheGCCcountriescutpublicexpenditure.

ThePakistanrupee(PKR)hasappreciatedinrealtermsinthelastyearandahalf.TherupeeremainedlargelystableagainsttheUSdollar as a result of the foreign exchangemarketreactingpositively to thebuild-upofreserves, with a small depreciation of 2.8percent in H1FY2016. In addition, theInternational Monetary Fund (IMF)'sExtended Fund Facility (EFF) program hascontinued successfully, improving sentimentintheforeignexchangemarket.

Witharelativelystablenominalexchangerateagainst the US dollar and in�lation that isstable in comparison to peer countries,Pakistan's real effective exchange rate hasappreciated recent ly ; th is may havecontributedtothedecliningcompetitivenessof its exports. This appreciation could beaffectingPakistan'scompetitiveness,therebyhurting exports and adding to the negativeimpact of structural constraints such as thepoor investment climate, energy shortagesandsecurityconcerns.

Pakistan's�iscalbalanceisimprovingdueto better discipline. Fiscal consolidationappearstobeontrackduringH1FY2016.The�iscalde�icitof theconsolidatedgovernmentinH1FY2016stoodat1.7percentofGDP–thesmallest half-year de�icit in the last threeyears.Totalexpenditureregisteredagrowthrateof8.1percent.Overall,taxcollectionhasimprovedfrom10.0percentofGDPinFY2013toaprojected11.8percentinFY2016.Muchofthis improvement is due to the �irst twophases of the withdrawal of concessionary

statutory regulatory orders (SROs) under athree-yearplan,togetheryieldinganadditional0.7–0.8 percent of GDP in revenues. Non-taxrevenueshavedeclinedasashareofGDPfrom3.4percentinFY2013toaprojected3.2percentin FY2016. This is partly a result of legalchallenges to the collection of the gasinfrastructure development cess, whichresultedinthecollectionofonly0.2percentofGDP against a target of 0.6 percent of GDP.

The federal government continued to holdrecurrent spending under tight rein: federalrecurrent spending grew by 3.7 percentcomparedto2.4percentinthesameperiodlastyear. Provincial recurrent spending registeredanincreaseoverthepreviousyearof25percent.Pakistan has been able to generate a primarysurplusof0.4percentofGDPduringH1FY2016.

Effortscontinuetocurbsubsidypaymentstothepowersector.Thegovernmentwasabletoreduce electricity subsidies to 0.8 percent ofGDPinFY2015from1.2percentinFY2014byintroducing signi�icant increases for all tariffclasses, following the mechanism in theNational Power Tariff and Subsidy PolicyGuidelines 2014 . Under this mechanism, theMinistry for Water and Power informed theregulator of the subsidies provided, ensuringthatthesubsidyamountwastakenintoaccountwhendeterminingconsumertariffsforthe�iscalyear.Theoriginaltargetwas0.7percentofGDPforFY2015,butdelaysintariffsettingresultedinanactualoutturnof0.8percent.

Thegovernmenthasimplementedamechanismbased on tariff surcharges and the TariffRationalization Fund to maintain nationaluniform tariffs in distribution companies(DISCOs)whileensuringcostrecovery.ThisnewmeasurewasintroducedinNovember2014andtaken in response to falling fuel costs, whichentailed a surcharge that equalized the tariffsacross seven of the ten DISCOs. The sevenDISCOsaffectedwerethosewhosetariffswouldhavefallenasaresultoftheperiodicfuelpriceadjustment,butwere,byvirtueofthesurcharge,maintained at their pre-November levels. Theremaining three DISCOs have continued toreceivethesubsidytobringtheirtariffsdowntotheuniformrate.

3ThelatestFundestimatespointtoanovervaluationofthePakistanirupeeof5–20percent.(Source:IMFCountryReportNo.16/2,PakistanSelectedIssuesPaper,January2016.)4 Cross-countryempiricalrelationshipsestimatedbyIMFeconomistssuggestthata10percentrealappreciationhasanegativeeffectonexportsofabout7percentandapositiveeffectonimports(i.e.,bydisplacingdomesticproduction)ofabout9percent,whichaccruesovertime.(Source:IMFCountryReportNo.16/2,PakistanSelectedIssuesPaper,January2016.)

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http://www.mowp.gov.pk/gop/index.php?q=aHR0cDovLzE5Mi4xNjguNzAuMTMwOjkwODAvbW93cC91c2VyZmlsZXMxL2ZpbGUvZmluYWwlMjAlMjBwb2xpY3klMjBGaW5hbCUyMDIwMTQwNDAxLnBkZg%3D%3D5

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Public debt sustainability is starting toimprove. The public debt-to-GDP ratiodecreased to a projected 64 percent inFY2016, but remains above the 60 percentlimit stipulated by the Fiscal ResponsibilityandDebtLimitationAct2005.Moreexpensivedomesticdebtdominatesat69percentofthetotaldebtcomposition.Thegovernmenthassucceeded in prolonging debt maturity anddiversifying its �inancing sources throughincreased access to international �inancialmarkets (including sukuks), of�icial lendingfrom multilaterals and greater access to�inancing from the domestic banking sector.This has also allowed the government toreduce its short-term borrowing from thecentralbank.

Current market volat i l i ty may affectgovernment efforts to continue accessinginternational �inancial markets. The policy-based guarantee proposed under thisoperation will support Pakistan's efforts tocontinuemeeting part of its gross �inancingneedsfrominternationalmarkets,despitethetighter�inancingconditions.

Priceshavestabilized,supportedbylowoilprices.For the thirdyear ina row,headlineconsumer price index (CPI) in�lation is insingledigits. Fallingoil priceshavenotonlycontributed directly through reductions inpetroleum product prices and electricitytariffs, but also indirectly through reducedserviceandmanufacturingcosts. InFY2016,in�lation has continued in single digits, butexpectations are shifting towards a gradualincrease. More notably, CPI in�lation (yearover year) has started to rise sinceOctober2015and,currently,standsat4.0percent inFebruary2016.

Financialsectordevelopmentsarepositiveandprivatesectorcreditisrecovering.Tofosterprivatesectorcredit,theStateBankofPakistancutitskeypolicyratebyacumulative350basispointsinFY2015,owingtofavorabletrends in oil prices and falling in�lation. Toanchor in�lation expectations and improveliquidity management, the central bankannounced a plan to set the policy ratebetween the �loor and ceiling rates of theinterest rate corridor in a forward-looking

fashion, thus maintaining real interest ratespositive and in line with future reservesaccumulationandastablein�lationpath.

Thebankingsectorhasmaintaineditsimprovedperformance and solvency. Year-over-yearbankingpro�itabilityimproved,growingby51percentuptoJune2015.Non-performingloans(NPLs)declinedto12.4percentof theoverallloan portfolio in June 2015 and by virtue ofadequate provisioning, net NPLs were 2.7percent.The improvement in credit quality isbroad-based: NPLs in small and mediumenterprisesdecreasedslightlylastyearto32.2percentandNPLsintheconsumersectoralsofellslightlyto10.6percent.

Private sector credit is recovering and hasgrownby9.7percentasof11March2016(year-over-year) .Muchof this increase stems fromthemanufacturing(particularlychemicalsandtextiles) and construction sectors. Anotherpositivedevelopment is the increase in creditforlong-terminvestmentpurposes,notablyintransport and electricity. To enhance thedomestic private sector's access to credit, themost recent Financial Sector AssessmentProgram mission to Pakistan recommendedthat the sourcesof governmentborrowingbediversi�ied, in particular by tapping externalmarkets and extending debt maturities. Theproposed policy-based guarantee supportseffortsinthisdirection.

Country risk perception is improving.Pakistan'sEmergingMarketsBond IndexPlusriskspreadhasdeclinedfromitspeakinMarch2013of1,011to517basispointsinApril2016.Moody's changed the outlook for its CAA1sovereigncreditratingfromstabletopositiveinMarch 2015. Later, in June 2015, it upgradedPakistan's foreign currencybond rating toB3and assigned a stable outlook. Standard &Poor's raised Pakistan's credit rating fromstabletopositiveinMay2015,butaf�irmeditsB–rating.Marketcon�idenceallowedPakistantoraiseUS$2billioninMay2014throughtwodollar-denominated Eurobonds with bulletmaturitiesandcouponsof �iveyearsand7.25percent and ten years and 8.25 percent. Thisimpliesaspreadofabout460–560basispointsoverUStreasuries.

6UnderSection3(4),theActallowsadeparturefromthethreshold,providedthe�inanceministerspeci�iesthereasonsandthemeasuresthegovernmentintendstotaketoreturnbelowthethresholdoveranestimatedperiodoftime.

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Privatesectorcreditcontractedby48percentcomparedtothesamedatelastMarch(year-over-year).7

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ThisisprimarilyduetolandtransportforconstructionandroadnetworksundertheCPEC.8

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The government issued a US$1 billion �ive-yearinternationalsukukinNovember2014at6.75 percent. More recently, in September2015, Pakistan tapped the internationalcapitalmarket once again and issued a ten-yearEurobondworthUS$500millionat8.25percent. Since international markets hadtightenedsigni�icantly, thepriceof thebondwas the same as the year before, despitesigni�icant improvements inmacroeconomicconditions. The proposed policy-basedguarantee will support Pakistan's access tointernationalmarketsatreasonablecosts.

World Bank Engagement

TheWorld Bank Group (WBG) has engagedwiththeGovernmentofPakistan(GOP)onastructural reformsagenda through itspolicydialog, supported by a series of budgetsupportoperations,andhasutilizedtheMulti-DonorTrustFundforAcceleratingGrowthandReforms (MDTF-AGR) to great effect. SinceFY2014, the WBG has undertaken threeDevelopment Policy Credits (DPCs): twooperations in the Fiscally Sustainable andInclusive Growth (FSIG) series (delivered inFY2014 and FY2015) and the standaloneCompetitiveness and Growth DevelopmentPolicyFinancing(CGDPF)program,deliveredinFY2016.

The FSIG operations, in close coordinationwiththeIMF'sEFF,havesupportedtheGOP'sreforms agenda in fostering private and�inancial sector development by privatizingstate-owned enterprises (SOEs), expandinga c ce s s to � i nance , improv ing t radecompetitiveness, enhancing the investmentclimate, mobilizing revenue by reducing taxexpenditures and enhancing enforcementthrough audits, and redirecting spending tomakeitmorepro-poor.

Similarly, energy is one of the pillars of theCountry Partnership Strategy (CPS) for2015–19and contributes to theWBG's twingoals of poverty reduction and sharedprosperity. The MDTF-AGR supports theenergy sector and complements the WBG'sPower Sector Reforms DPC series, which

supportsPakistanindevelopinganef�icientandconsumer-orientedelectricpowersystem(seeChapter3).

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Pakistan'seconomyhasbeencaughtinalow-investment,low-growthtrapcharacterizedby(i) an extremely weak external positionresultingfromthelossofcompetitivenessininternational markets and declining foreigncapital �lows; and (ii) a consistently weak�iscal position stemming frompoor revenuemobilization,theinabilityofthegovernmentto controlpower sector subsidies,highdebtservicingandthe�inanciallossesofSOEs.Recognizing the urgency of the economicsituation, the GOP embarked on a majorstructuralreformsprogramtoreducetheriskof a balance-of-payments crisis in the shortterm and to regain and sustain high andinclusive growth in the medium term. TheprogramissupportedbytheIMFthroughanEFF for US$6.6 billion, entered into inSeptember 2013. The Asian DevelopmentBank(ADB),theDepartmentforInternationalDevelopment(DFID)andtheWBGhavealsoprovided substantial assistance to supportthisreformsprogram.TheWBGhasapprovedtwo budget support operations designed todeepen reforms in the �iscal, private andenergysectors.Thereformsprogramhasnowbeen sustained through three successfulreviews.

Despiteearlygainsinstabilizingtheeconomyand implementing initial actions on thestructural reforms agenda, knowledge gaps,the government 's weak capaci ty forcompletingthedesignandimplementationofthe program, and dif�iculty in securing thebuy-in of all interested stakeholders posesdownsideriskstoeconomicreforms.

TheMDTF-AGR'smaindevelopmentobjectiveis to support the government's economicreformsprogramby �illing these knowledgegaps, strengthening the capacity of keyinstitutions (federal and provincial) tocomplete the design and implementation of

the reforms agenda, and building dialog andconsensus.Speci�ically, itwillhelpkey federalandprovincialministriesandagenciesexpandand sustain the �iscal space and revenuecollection, liberalize trade and economicactivities,facilitateprivateinvestment,improvethe qua l i ty o f expendi tures and debtmanagement , and tackle other bindingconstraintsfacingtheeconomy.

Background

Context

The Debt Management Reforms (DMR)componentoftheMDTF-AGRisalignedwiththeImproved Public Resource ManagementcomponentundertheservicedeliverypillaroftheWBG's Pakistan CPS 2015–19. It supportstheGOP'seconomicreformsagendaundertheIMF'sEFF,inwhichdebtmanagementisoneofthe agreed areas. Furthermore, DMR is beingsupportedbydebtmanagementpolicyactionsunder the �iscal management pillar of thecurrentCGDPFDPC.

Strategy

At the federal level, the DMR componentwillhelptheGOPformulateandimplementadebtmanagementstrategythatcontributesto�iscaland debt sustainability while minimizingfunding costs. Achieving this will requirebuildingcapacityintheentitiesresponsiblefordifferentdebtmanagementfunctions.

Debt management in Pakistan is distributedamong various institutions and entities, withlittlecoordinationamongthem.These includetheBudgetWingandExternalFinanceWingoftheMinistryofFinance(MOF),theStateBankofPakistan, Central Directorate of NationalSavings, Economic Affairs Division (EAD) andtheDebtPolicyCoordinationOf�ice(DPCO).

CHAPTER 2

Debt Management Reforms

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Thedesignofthefederalprogramisbasedonthe GOP's request to strengthen threeinstitutions: the DPCO (MOF), the ExternalFinance Wing (MOF) and the EAD asstandalone entities responsible for debtmanagement. Accordingly, the federalcomponent of DMR is designed to improvedebt management practices in Pakistan byhelpingtheauthoritiestostrengthenthreekeyfunctions: (i) the formulation of a debtmanagement strategy and riskmanagementattheDPCO,(ii)externaldebtrecordingandreporting at the EAD and (iii) funding inexternalmarketsattheExternalFinanceWing(MOF). These activities will be carried outthrough two standalone recipient-executedtrust funds (RETFs), one encompassing theDPCOandExternalFinanceWing(MOF)andtheotherfortheEAD.Pakistan's�iscalarchitecturehasundergoneafundamentalchangewiththeintroductionofthe18thConstitutionalAmendment.On1July2015,theNationalEconomicCouncildecidedto allow the provinces to borrow in thedomesticmarket.Thischangehasheightenedthe need to strengthen federal as well asprovincial debt management. The DMRprogramworks on Sindh and Punjab at thesubnationallevel.Thisaccountsforalmost75percentofPakistan'stotalsubnationaldebt.

TheaimoftheprograminSindhisthreefold:(i)tostrengthentheinternalorganizationofthe Debt Management Unit (DMU) andidentify its core responsibilities, (ii) toincrease transparency and accountability indebtmanagement and (iii) to improve debtmanagement operat ions and reduceoperational r isks by bui lding a debtmanagement system to support debtmanagemen t op e ra t i on s . T h e d eb tmanagementsupportprogramforPunjabhasyet to be contoured. The focus of thesubnationalsupportwillbecapacitybuildingthrough subnational activities and trainingprograms as well as limited internationaltraining.

Inanutshell,theobjectiveofthesubnationalprograms– implemented through theBank-executed trust fund (BETF)modality – is tobuild the capacity of the subnational

governments to undertake existing andadditionaldebtmanagementrolesinthemostef�icientandeffectivemanner.Oneofthemaintoolswillbecapacitybuildingthroughon-the-job training and workshops (e.g., in debtsustainability analysis, medium-term debtmanagementstrategiesanddebtmanagementperformanceassessment).

The achievements of the DMR componentinclude onsite missions, offsite support andcontinuedengagementwithclientagencies.

Atthefederallevel,achievementshaveincludedscopingactivities fortheDPCOunderthe�irstyearofBank-executedactivities aswell as fortherecipient-executedactivitiesenvisagedoverthenextthreeyears.Twokeysupportareashavebeenstaffcapacityandhumanresources(HR).The component has advised on institutionalreforms to reorganize the DPCO as a middleof�ice and helped it update theMedium-TermD e b t M a n a g em e n t S t r a t e g y. T h e s eachievementsare in linewiththeoutputsandoutcomesindicatedintheresultsframeworkofthischildtrustfund(TF)andareconducivetoachieving the wider objective of keeping thepublicdebt-to-GDPratioatasustainable levelby improving the public debt pro�ile anddevelopingacoherentvisionfortheanalyticalaspectsoftheportfolio.

Other areas of engagement have includedsupporttotheExternalFinanceWing(MOF)to�inalize activities under the RETF. Thecomponent has also helped the EAD �inalizeactivitiesunderthestandaloneRETFsetup.Theproposed activities include upgrading thecurrent version of the DebtManagement andFinancial Analysis System (DMFAS) andbuilding staff capacity. The United NationsConference on Trade and Development(UNCTAD),which is the proprietor ofDMFAS,was also engaged in the consultative process.This enhancementwill increase the ef�iciencyandutilityofthesystem,therebyimprovingitsabilitytosupportreportingandanalyticalneedsat the recording, monitoring and reporting

Overview of Achievements

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levels of the agencies involved in debtmanagementatthefederallevel.

At the subnational level, the componenthasundertakenscopingactivitiesforthe�irstyearunder the Sindh DebtManagement SupportProgram. A total of two knowledge-sharingevents(PhasesIandII)wereheldtosupportsubnational debt management in Sindh (26Augustto1September2015;21to27January2016). The missions delivered trainingsessions on subnational debt management,attendedbystafffromtheDMU,Governmentof Sindh (GOS), the Finance Department(Sindh), and Planning and DevelopmentDepartment (Sindh). A one-day trainingsession under Phase Iwas also attended byGovernmentofPunjabof�icialsand(selected)academics.

TheDMRhasalsosupportedtheDMUSindhinidentifyingrolesandresponsibilitiestypicalofa subnational debt management of�ice. TheExternal Debt Management Procedures andOperational Manual developed for the GOSclearlyspeci�iestherolesandresponsibilitiesof various institutions, entities and unitsinvolved in subnational debt management,thereby creating a systematic roadmap forsharing and consolidating information. Anidenti�icationmissionwasheldtodeterminepossible support activities under thesubnationalcomponentfortheGovernmentofPunjabaswell.

The component published its �irst quarterlynewsletterontheachievementsandactivitiesofDMRsupportatthesubnationallevel.Theprogram has also helped of�icials from allclient agencies to participate in specializedtraining,mostlyorganizedinternationally.

The Way Forward

At the federal level, this child TF is geared tosupport the client agencies in settingup theirrespective RETFs and, thereafter, supportingthem. The DPCO wi l l be supported inimplement ing the Medium-Term DebtManagement S t ra tegy 2016–19 . Th i scomponent aims to undertake technicalassistanceinthedomesticabsorptioncapacityof debt capitalmarkets and the government'snon-marketable funding sources, etc., incollaborationwiththeMOF.

ANationalDebtConferenceisbeingorganizedfor 2017 in partnership with the federalgovernment in addition to enabling clientagencies'stafftoparticipateininternationalandlocal specialized training (as and whenrequired).

Atthesubnationallevel,theTFwillsupporttheGOS and Punjab government in �inalizingactivities for the secondyearunder theSindhDebt Management Support Program and the�irstyearunder thePunjabDebtManagementSupportProgram,respectively.Thiscomponentwillalsoprovidepossiblesupporttowardstheinstitutional setup of debt management inKhyber Pakhtunkhwa (KP). The next yearenvisagescontinuingknowledge-sharingevents(for all provinces) and enabling subnationalgovernmentstafftoparticipateinlocalaswellasinternational debt management training andforums.

Institutional Arrangements

An advisory committee has been established,comprisingrepresentativesfromDFID,ADBandtheIMFaswellasfromtheWBGtechnicalteamsandtheWBGTreasury.Thiscommitteeprovidesstrategic advice and quality control at thefederal and subnational levels. On the clientside, the DPCO, the External Finance Wing(MOF)andtheEADareinvolvedatthefederallevel,while the �inancedepartmentsof Sindh,Punjab andKP (probable) are involved at thesubnationallevel.

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Inrecentyears,Pakistan'senergysectorhasfaced a crisis in terms of large and growingpowershortages,highcostsandinef�icienciesthathavepreventedthesectorfrom�inancingneededinvestmentsandcoveringthecostsofsupply.

Historically, the power sector has reliedheavily on government support throughsubsidies, which amounted to about 2.75percentofGDPin2012/13andwerebroughtdownto0.8percentofGDPin2014/15.Theelectricitysectorreliesalmostentirelyonthepublicsector.Government-ownedcompaniesdependonpublicfundingforalmosttheentireinvestmentprogram,whileprivate investorsin generation through independent powerprojectsalsorelyonsovereignguarantees.

Even thoughnaturalgashasprovidedabouthalf of Pakistan's primary energy, the pastdecade has seen deteriorating performanceacross the sector. Upstream, declininginvestment in existing and new productionhascontributedtoshortagesthatmightbe,bysomeestimates,asmuchagainastheexistingconsumption of 4 billion cubic feet per day.Theftandlossesfrompoorlymaintainedandoutdated equipment contribute to the poorperformance of the state-owned companiesthatoperatethetransmissionanddistributionsystem.

Sectorpoliciesandstructurehavenotresultedin good performance. Gas consumers in allcategories receive inadequate gas and areforced to use alternative fuels many timesmore expensive than domestic gas. Thegovernment has been making efforts toaddresstheshortageandmeetthecountry'sgrowing energy needs, incurring signi�icantcoststhatimposedabudgetarystrainuntiltherecentdeclineinpricesinglobalfuelmarkets.

Despitesigni�icanteffortsinrecentyears,the

Context performanceofPakistan'senergysectorisfarfromsatisfactoryandseveralproblemsremainunresolved. Poor performance in the energysector has hampered GDP growth. VariousestimatessuggestithasreducedGDPgrowthby2–3 percent per annum over the last severalyears.

Thegovernment'sgoal,assetout in the2013NationalPowerPolicy,istodevelopanef�icient,consumer-orientedelectricpowersystemthatmeetstheneedsofitspeopleandeconomyinasustainable and affordable way. The threeguiding principles of the policy are ef�iciency,competitionandsustainability.Inimplementingthisactionplan,thegovernmentissupportedbydevelopment partners to improve sectorperformance, enhance ef�iciency, lower costsand reduce subsidies, thereby contributing tothe�inancialsustainabilityofthesector.

FromtheperspectiveoftheWBG,energyisoneof the pillars of the CPS for 2015–19 andcontributestotheBank'stwingoalsofpovertyreduction and shared prosperity. The WBGsupportsthecountry'senergysectorthroughacombination of investment projects, technicalassistance and analytical activities, as well asdevelopmentpolicylending.Itsengagementinthe energy sector is intended to support thegovernment's effort to bring about structuraland cost transformations, which includereductions in load-shedding, subsidies andcostsasitsoutcomes.

TheMDTF-AGR-fundedprogramof support inthe energy sector complements the WorldBank'sPowerSectorReformDPCseries,whichsupports Pakistan's goal of developing anef�icient, consumer-oriented electric powersystemthatmeetspublicandeconomicneedsinasustainableandaffordableway.TheDPCseriesis structured around three objectives: (i)reducingsubsidiesand improvingtariffpolicyand regulations, ( i i) improving sectorperformanceandopeningthemarkettoprivateparticipation,and(iii)enhancingaccountabilityandtransparency.

CHAPTER 3

Energy Sector Reforms

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The First Power Sector ReformDPC (PowerDPC1), in the amount of US$600 million-equivalent,wasapprovedbytheWBG'sBoardofExecutiveDirectorson1May2014.PowerDPC1focusedonaddressingthemostpressingpolicychallengesandwasfollowedbyPowerDPC2 in the amount of US$500 million-equivalent, with policy actions focusing onlonger-term structural reform. Power DPC2was approved by the WBG's Board ofExecutiveDirectorson12November2015.

Todate,theGOPhasmadeprogressintakingaction in all these policy areas, includingbringingtariffsclosertocostrecoverylevels,limiting subsidies, publishing a plan for themanagement of circular debt, opening thesec tor to pr ivate part i c ipat ion , andintroducing greater transparency to thesector,whichincludesdisclosinginformationon the operation and performance of thesectorandkeyactors.

Strategy

The technical assistance and analyticalsupportprovidedtoPakistan'senergysectorcomplementstheGOP'sprogramtoenhancethe country's growth potential and seeks tocontributetothebroaderstructuralandcosttransformation that the government ispursuing in this sector. The program oftechnical and analytical support under theenergypillar,whichhasbeendevelopedwithaview to meeting the needs of key sectorstakeholders, is fully aligned with thecorrespondingCPSpillar.

WBG support under the energy pillar wasdesigned as a multiyear programmatictechnical assistance and advisory supportprogram. The program focuses on sharinginternat ional good pract ices , � i l l ingknowledge gaps, providing institutionalstrengtheningandcapacity-buildingsupportto key sector participants, and facilitatingoutreach and consultations on the energysectorreformsagenda.

TheMDTF-AGR-fundedEnergySectorReformSupportProgramisstructuredaroundthree

separa te , bu t complementary, a reas .Speci�ically,theseinclude:

The MDTF-AGR-funded Energy Sector ReformSupportProgramactivitiesineachreformareaweredevelopedbasedondiscussionswith,andrequests from, the key counterparts. Theprogramwas designedwith a view to ensurecontinued alignment with the energy sectorengagementandwiderprogramofsupportbythe WBG and the GOP's other developmentp a r t n e r s , i n c l u d i n g ADB , t h e J a p a n

Support for power sector reforms. Thisfocuses on support for sector reformimplementation and policy development;enhancing the sector's regulatory capacityand accountability; improving sectorperformance; facilitating private sectorp a r t i c i p a t i o n a n d t r a n s p a r e n c y,communicat ions and outreach; andprovidingarapidresponsetoissuesastheyariseduringdialogwithcounterparts.

Supportforoilandgassectorreforms.Thisisintended to help the GOP achieve itsobjectivesofextractingthemaximumvaluefromgasfortheeconomyandenablingthegas sector to functionmoreef�iciently.Thepillar includes technical assistance andanalytical support to enhance the gassector's policy and regulatory frameworkand to strengthen sector institutions'capacity for designing and implementingr e f o r m s , a n d f o r c a r r y i n g o u tcommunications and outreach. It alsoincludescontinuedsupporttocounterpartsinaddressingissuesastheyarise.

Suppor t fo r energy e f � i c i ency andconservation. This will start with Punjab,which consumes almost two thirds ofPakistan's electricity, hosts around 60percentofthecountry'sindustrialbaseandisresponsibleformorethanhalfitsGDP.ThispillarwillincludesupporttotheGovernmentofPunjab in thedevelopmentofanenergyef�iciencyprogramcoveringallsectorsoftheeconomy and a standards and labellingprogramforpilotingwithfan(motors)andboilermanufacturers.

1)

2)

3)

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InternationalCooperationAgency(JICA)andthe United States Agency for InternationalDevelopment(USAID).

Theactivities focusonareasnot coveredbyongoingandplannedengagements,andthosewheretheGOPhasrequestedfurthersupport.The support is also closely linked with thePowerDPC series,which ispartof a sharedapproachbringingtogetherthegovernment'smajordonorpartnersintheenergysector.Thedonorpartnersmeetregularlytodiscusstheirsupport for the sector and to review eachdonor's ongoing and planned technicalassistanceactivities.

Overview of Achievements

Thedirectionandnatureoftheenergysectorreforms supported by the MDTF-AGR havebroadlyremainedthesamesincethestartoftheIMFprogram,eventhoughinsomecasestherehasbeensomeopportunitytoadvancethereformsprocess.

Thesupportprovidedthroughtheseactivitiesranges fromstudiesandanalysestoaddressknowledgegapsontechnicaltopics,tospeci�icc a p a c i t y - bu i l d i n g effo r t s a imed a tstrengtheninginstitutionsinselectedareasofexpertise.Assuch,someactivitiesinvolveone-offstudiesorknowledgepieces,whileothersentail continuing reform implementationsupport.Thisincludesperiodicengagementsinvolvinginteractionbetweenthestaffofkeyentities and international advisors withhands-on experience of tackling suchchallengesinothercountries.

AsummaryofthekeyachievementsundertheMDTF-AGR-funded Energy Sector ReformSupport Program since its inception isprovidedbelow.

G u a r a n t e e L im i t e d ( C PPA -G ) a n dmodi�icationstothelicensefortheNationalTransmission and Despatch Company(NTDC). The issuance of themarket rules,CPPA-G separation and NTDC licensemodi�ication were completed in October2015.SupportwasalsoprovidedtotheMWPin assessing the impact of subsidy reformsand surcharges, which helped reducesubsidiesto0.8percentofGDPbytheendofFY2015.Theteamhassincecontinueddialogonthenextstepsinreform.

On the regulatory side, the WBG hasprovided implementation and capacity-building support to the National ElectricPower Regulatory Authority (NEPRA)through the engagement of internationaladvisors.This includesadvisorysupport toNEPRA's Tariff Department on amultiyeartariff methodology for regulating DISCOsbasedonperformanceandsupporttoboththe Tariff Department and TechnicalDepartmentonperformancestandards.

An international power sector reformsadvisor has been working with NEPRA'sMarketDepartmenttohelpanalyzeoptionsfordevelopingthenextstagesofcompetitionin the power sector. Addit ionally, acommunicationsexperthasadvisedNEPRAon communication and outreach activitiesand contributed to the newly draftedoutreach protocol. In response to NEPRA'srequest for support in reviewing a tariffpetitionforaproposedprivatesectorhigh-voltagedirectcurrenttransmissionproject,the WBG has recruited two internationaladvisorstoworkwithNEPRAonthisreview,which involves a technology that is beingdeployedinPakistanforthe�irsttime.

The Privatization Commission (PC) wassupported in the development of a powersector distribution privatization programthroughtheengagementoftwointernationalexperts, who advised the PC on programoptions and approaches that were alignedwith the sector's overarching needs,including multiyear tariffs and sectoralrestructuring. The advisors providedtechnical advice to PC in the form of eightjust-in-time notes produced on speci�ic

SupportforPowerSectorReforms

TheMinistryofWaterandPower (MWP)was supported in reviewingdraftmarketrules, arrangements for the separationofthe Central Power Purchasing Agency-

13

i s s u e s a n d c o n t i n u i n g p r o g r amdevelopment support toPCmanagementandstaffasandwhenneeded.

TheteamofexpertsaccompaniedthePCl eadersh ip and techn ica l s taff toroundtable meetings with investors and�inancialadvisorsaswellastrainingeventsin Washington, DC. A South–Southknowledgeexchangevisiton theTurkishelectricity privatization experience wasorganizedinAnkarainDecember2015foradelegationthatincludedthesecretaryforprivatization, advisors and consultants.Additionally,atwo-dayworkshopwasheldinIslamabadinJanuary2016,wherestafffrom the Turkish Competition AuthorityandEnergyMarketRegulatoryAuthoritydeliveredtrainingsessionsoncompetitionandelectricitymarkets.StafffromthePC,NEPRAandtheCompetitionCommissionofPakistan(CCP)attendedtheworkshop.

ThecomponenthasalsoprovidedsupporttotheNTDC.GivenitsrevisedroleundertheamendedGridCodefollowingthe2015reforms, an international consultantwasmobilized to review capacity-buildingneeds and the development of the workprogram.

In addition to continuing programmanagement, analysis and coordinationwith other development partners, ana s s e s s m e n t o f s e c t o r r e f o r mimplementation progress – includinginstitutional and stakeholder analyses ofreform implementation challenges –wasundertaken, for which two local expertswereengaged.

Several communication and outreachevents were organized, including blogposts, sector-speci�ic brie�ings andFacebook chats. Each of the eventsgarnered signi�icant attention, measuredby the number of times the event wasviewed,“liked”andsharedonline.

SupportforOilandGasSectorReforms

was supported in analyzing the mostimmediate challenges to securing newsupplies and determining a �inanciallysustainablewayforwardforthenaturalgassector. To this end, a teamof internationalconsultantswasengagedtoadvisetheMPNRongassectorreformsandrestructuring.Theoptions identi�ied for reforming the gasmarketandsectorstructurewerepresentedat a stakeholder consultation workshopchairedbytheMPNRinFebruary2016.Theworkshop endorsed the proposed reformoption for which an implementationapproach was developed in the form of aroadmap.Sectorparticipantswereconsultedon t he roadmap i n May 2016 andimplementationisunderway.

Two specialists were engaged to reviewdevelopmentsinthegastradingmarketandinlique�iednaturalgas.Theyalsoundertookananalysisof lique�iednatural gas storageand provided advice on the constitutionalaspectsoftheproposedsectorreforms.

SupportforEnergyEf�iciencyandConservation

TheInternationalFinanceCorporation(IFC)and theBank's Trade andCompetitivenessGlobalPracticeareprovidingsupporttotheGovernment of Punjab to adopt andimplement a regulatory and institutionalframework for responding effectively toopportunities to reduce energy use inPunjab's industrial sectors. Support wasprovided in drafting a �ive-year energyef�iciencyandconservation(EE&C)strategyfor Punjab; this was the �irst subnationalEE&Cstrategyproposedandhascontributedtotheapprovalofathree-yearEE&Cproject.

A team of international advisors wasengagedtosupportthePunjabgovernment'sEnergyDepartmentandthefederalagenciesconcerned in drafting boiler and fanef�iciency regulations and governmentstandards. This started with a marketana lys i s , f o l l owed by s t akeho lde rconsultations and program design, marketpreparedness and industry awareness-raising,andimplementationsupport.

In the natural gas sector, theMinistry ofPetroleumandNaturalResources(MPNR)

9Blogpostonnaturalgas:http://blogs.worldbank.org/endpovertyinsouthasia/increasing-domestic-gas-availability.Facebookchats·Load-shedding(March2015)https://www.facebook.com/events/347677685418059/

https://www.facebook.com/events/1027352560626447/·Circulardebt(April2015)https://www.facebook.com/events/111981345800572/·Naturalgas(May2015)

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OtherachievementsincludelaunchingthePunjab Standards and Labeling Programfor promoting energy ef�iciency inPunjab's industries to help achieve theobjectivesof the �ive-yearEE&Cstrategy,and consultations with governmentstakeholders, manufacturers of pumps,motors, boilers and fans, and privatesector�irms.

AllactivitiesintheearlystagesoftheenergysectorreformssupportwillbeexecutedbytheWBG.ActivitiesarebeingcarriedoutbyteamsofWBGstaff,withsupportfrominternationalandlocalconsultantsasneeded.Throughthecourseofprogramimplementation,continuedengagementwith,andregularoversightof,theactivities implemented by counterpartagencieswillensuretheyremainalignedwithgovernment priorities and needs. Newactivitieswillbeconsideredandevaluatedbythe Program Management Team (PMT) ifrequestedbythecounterpartagencies;thesewill be initiated after the PMT and clientcounterpartsagreeonthescopeoftheactivity.

The energy PMT comprises program teamleaders and task team leaders of individualactivitiesdrawnfromtheWorldBankandIFCasappropriate.Theprogramteamleadersarein charge of overall program oversight andcoordinationofthedifferentactivitiesandareaccountable for its results. Implementationoversight of individual activities will be theresponsibilityofthetaskteamleaders.

ThePMTperiodicallycoordinatesitsactivitiesw i th an adv i sory pane l compr i s ingrepresentatives from ADB, JICA, USAID andotherdevelopmentpartnersthroughregularmeet ings . Th i s invo lves exchang inginformation on the scope of ongoing andproposedactivities,avoidingoverlapand�ine-tuningactivityscopeasneedschange.

Going forward, technical assistance andcapacity-building support will be provided tokeysectorentitiesinimplementingthecurrentsectorreformsprogramanddesigningthenextstages of reform. A series of activities wereidenti�ied, building on �irst-year tasks andre�lecting current discussions with keycounterparts. The actual work program isexpected to evolve in line with the needs ofcounterparts.

Supportforpowersectorreforms.TheWBGwillcontinue regular interactionwith theMWP tojointly develop the next phase of technicalassistance for market development. Thisincludes support for developing a path tointroduce further competition in wholesalemarkets and addressing any shortcomings inthe currentpolicy and contractual frameworkfor competitive commercial transactions. Ananalysis–notfundedbytheMDTF–iscurrentlyunderwaythatlooksatpotentialwaysforwardinbetterallocatingsubsidiestothepoor.Onitscompletion, the WBG will discuss possiblereform options with the MWP. It will alsoremainreadytopreparejust-in-timeanalysesinresponsetotheMWP'srequests.

Since the support to NEPRAwas designed ascontinuing technical assistance and capacitybuilding to help the regulator implement andoperationalize the reforms program, it isexpected that, in the coming year, the keyadvisory tasks will continue. Accordingly, theinternational expert on regulatory reforms,multi-tariff advisors, the technical advisor onhigh-voltage direct current systems and thecommunications expertwill continue toworkwith the NEPRA departments concerned. Inaddition, the teamwillworkwith theNEPRAleadership to re�ine the support program,particularlywithrespecttoenhancingNEPRA'scapacity to support competitive marketdevelopmentandoverseeCPPA-Gactivities.TheWBGwillalsoexplore theoptionofprovidingNEPRA technical assistance in developingregulatorymechanismstosupportdistributedgenerat ion and wheel ing regulat ions .Dependingontheprogressingovernmentplanstoprivatizethepowersector,supporttothePC

Institutional Arrangements

The Way Forward

15

onspeci�ictechnicalissuesmaycontinue.

Supportforoilandsectorreforms.Followingthe completion of the gas sector reformsroadmap, support will be provided to theMPNRtomaketheplanoperational.Thiswillinc lude tackl ing the most immediateimplementation challenges, including theallocation of rights, responsibilities andbene�its related to natural gas among thefederal government and the provinces. Inaddition, capacity-building support to theDirectorate General Petroleum Concessions,theMPNR's policywing and theOil and GasRegulatoryAuthoritywillbeinitiated.

Supportforenergyef�iciencyandconservation.Over the course of the next year, a capacitybuilding and institutional strengtheningplanforthePunjabEnergyDepartment'sEE&Cunitwillbedevelopedandadvisorysupportwillbeprovided on implementing initial projectsunderthePunjabgovernment's�ive-yearEE&Cstrategy.Inaddition,itisexpectedthatatwo-yeardetailedworkprogramonstandardsandlabeling will be developed, along with pilotprogramsforef�icientfansandelectricmotors.The regulatory enforcement of labelling inPunjabwillalsobeassessed.

IFC-Supported Component

Thefollowingkeyactivitieswereundertakenduringthereportingperiod:

Developed a �ive-year EE&C strategy forPunjab.ThisisPakistan's�irstsubnationalEE&C strategy. The Punjab governmenthas approved PKR1.2 billion for threeyearstoimplementthestrategy.

Assisted the Punjab government inestablishingthePunjabEnergyEf�iciencyand Conservation Agency (PEECA) toimplementtheEE&Cstrategy.

In collaboration with the Korea EnergyAgency, delivered institutional capacity-buildingsupporttoPEECA.

Launched the Energy Ef�iciency StandardsandLabelingProgramforfansandmotorsinindustries.A communications strategyandawareness campaign for newly labelledenergy-ef�icientfansisbeingprepared.

Initiated procurement to undertake amappingandbenchmarkingstudyofelectricfansinPakistan.

At the provincial level, PEECA will play acritical role in the implementation of theNationalEnergyEf�iciencyandConservationAct2015,whichhasbeennoti�ied.

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Context

SOEsconstituteasizableportionofPakistan'seconomic landscape. More than 190 SOEsoperateinawiderangeofeconomicsectors,including infrastructure (power, transportand logistics), energy (oil and gas, mining),�inancialservices(banksandinsurance)andmanufacturing. SOEs contribute around 10percentofGDPandrepresentapproximatelyathird of the stock market capitalization.However,manyaremarredbyweakcorporategovernance, cost-ineffective service deliveryand considerable �inancial losses. The �iscalburdenofSOEsinFY2015wasPKR243billionin direct subsidies, while the guaranteesoutstanding to SOEs as of end-March 2015wereanotherPKR600billion.

The WBG recognizes that, for sustainedgrowth, it iscritical tohelpPakistanchangethe development landscape by facilitatingprivate sector development. One of the keywaysinwhichtheWBGhopestofosterprivatesectordevelopment is throughSOEreforms,including privatization. SOEs are a heavyburden on already strained �iscal resources,deliver poor services and create marketdistortions – all of which harm privateinvestment.

The Bank's CPS (2015–19) for Pakistan isstructured around four strategic themes orresu l t areas : energy, pr ivate sec tordevelopment, inclusionandservicedelivery.TheCPSexplicitlyrecognizesthecriticalroleof the private sector in responding to thecountry'sdevelopmentchallengesandthatoftheWBGincreatinganenablingenvironmentformoreeffectivedevelopmentsolutionsandusing its limitedresources to leverageotherdevelopment and private funding formaximumimpact.

Over the last several decades, the GOP hasfollowed various approaches to managingSOEs. An experts advisory cell was set up

undertheMinistryofIndustriestomonitorandsupport industrial SOEs in the 1980s. Asignaling system was put in place that wasreplicated inothercountriesbutdiscontinuedinPakistan.Intheearly1990s,aprivatizationprogramwaslaunchedwithaseriesofstrategicsales in the industry, energy and bankingsectors, including one power plant, two gasdistribution companies and one bank. In theearly2000s,thegovernmentconcludedaseriesof initial public offerings of SOE shares(including the Karachi Electric SupplyCompany), which helped mobilize domesticsavings and strengthen capital markets. Thepresent government had also set a veryaggressiveprivatizationagenda,whichhasbeenstalled by numerous political, labor andlegislativeissues.

Despiteanumberof initiatives, there is stillalack of strategic vision for a comprehensivereformsprogramaimedatde�iningthestate'sownership goals and improving the oversightand management of SOEs in Pakistan. Thecurrent framework is highly fragmented: lineministriesareinchargeofmanagingSOEs;theMOF deals with budgetary allocations and�inancial matters; the Implementation andEconomicReformsUnit(IERU)attheMOFactsasthesecretariat forthenowdefunctCabinetCommitteeforRestructuring;theSecuritiesandExchange Commission of Pakistan (SECP)regulates the capital market and corporatesector,andhasrecentlyissuedthePublicSectorCompanies(CorporateGovernance)Rules;thePC is responsible for privatization; and theMinistryofPlanning,DevelopmentandReformsisempoweredtodesignandoverseetheGOP'soverallreformsagenda.

In addition, there are several provincial SOEsthat are owned and managed by the linedepartmentsoftheprovincialgovernments.Assuch, there is no cohesive, coordinatedmomentumtomovetheSOEandprivatizationagenda forward in a strategic, sustainedmanner. With these multiple, and oftencontradictory, stakeholders, the GOP's SOE

CHAPTER 4 State-Owned Enterprises and Private Sector Reforms

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reformsandprivatizationagendaisstrugglingtogainmomentumandstakeholderbuy-in.

Previous WBG Work in Similar Areas

The WBG has been extensively involved infosteringprivatesectordevelopment;partofthis effort has focused on SOE reforms andprivatization. Pakistan's banking sectorprivatizations,whichcommenced in the late1990s , are touted as best examplesinternationally.TheWBGwasinvolvedinthisprivatizationprogramundertheBankSectorRestructuring and Privatization Project in2001,aninvestmentloanthathelpedtheGOPto operationally restructure nationalizedcommercial banks in preparation forprivatization(thesecondstage),improvethecorporate governance of partially privatizedbanks and strengthen the regulation of thebankingsystem.Thereformmeasuresinthisphase were supported by the Bank's 2004BankingSectorDevelopmentPolicyProgram.Withthesupportofthesetwoprograms,theGOP successfully sold its shareholding inMuslim Commercial Bank and reduced itsshareholding inAlliedBank to11.9percent.Hab ib Bank and Un i t ed Bank weresuccessfully privatized during the life of theproject,exceedingexpectations.

More recently, in March 2012, the Bankprepared a policy paper titled SOE Reform:TimeforSeriousCorporateGovernance,whichwasmotivatedbytheGOP's2011Frameworkfor Economic Growth. Another paper,Reforming SOEs, was prepared in 2013 andbecame part of the publication Pakistan: ATransformativePath,whichwascompiledbythe Bank to showcase potential areas ofassistancetotheincominggovernmentatthetime.Offthebackofthesepapers,theBank'sSOEreformsnon-lendingtechnicalassistance(NLTA)kickedoffin2013.ThisNLTAfellunderthe programmatic analytical and advisoryassistance titled 'Capacity Building of theRegulators',whichfedintotheDPCoperationon g rowth , i nves tment c l imate andc ompe t i t ivene s s . Unde r t h i s NLTA ,

knowledge-sharing events were organized toexposetherelevantgovernmentcounterpartstointernational experience of SOE reforms ingeneral and corporate governance reforms inparticular.

TargetedworkshopsandseminarswereheldforMOFandPCstafftoenhancetheircapacity toimplement the SOE reforms and privatizationagenda. Assistance was also provided to theSECP in drafting guidance notes under theCorporate Governance Rules for public sectorcompanies (2013). Along with ongoingadvocacyandpolicydialogonSOEs, theBankprovidedtwoin-houseconsultants–relatedtos t r a t e g y a n d t o i n f o r m a t i o n a n dcommunicationstechnology(ICT)–tothePCinthe latter half of 2014 to help enhance itscapacity to implement the government'sambitiousplans.

Strategy

TheMDTF-AGR has been critical in providingmuch-neededcapacitysupport togovernmentinstitutionsbyhelping them to �ill knowledgegaps,and instrengthening thecapacityofkeyinstitutionstodesignandimplementtheoverallSOE reforms agenda. The IMF reviews andWBG'sprioractionsforthethreeDPCs(budgetsupportprograms)servetocreateandfosteralegalandregulatoryenvironmentthatbolsterstheGOP'seconomicreformsagenda.

This TF is instrumental in providing the GOP(through technical assistance to the relevantimplementation agencies) with the expertiserequired tomeet the review points and prioractions that pertain to SOE reforms orprivatization.TechnicalexpertsfundedbythisTFhaverevieweddraftlegislation,policiesandstrategies and conducted training to createsubject matter expertise. These activitiescontributetosupporting,atamoremicro-level,theGOP'soverarchingreformsprogram.

The GOP recognizes that private sectordevelopment is critical for sustained growth.Theoverallgoalistoreducethegovernment'sdirect participation in product and factormarkets in selected sectors, while increasing

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private sector participation and fosteringcompetition.Thekeydevelopmentoutcomesaretwofold:(i)toreducethe�iscalstrainonthegovernment'sscarceresources,whichcant h e n b e r e d i r e c t e d t owa rd s o t h e rsocioeconomicdevelopmentgoals;and(ii)toincreaseprivatesectorparticipationtobringin professional management, investment,innovation, higher productivity and betterservicedeliveryforconsumers.

The World Bank's DPCs support thegovernment's concrete steps towards SOEreformsandrevivingPakistan'sprivatizationprogram,whichhadbeenstalledforovereightyears. The DPCs have been instrumental in

providing timely support to jumpstart SOEreformsandprivatizationtransactionsandhavecoincidedwithMDTF-AGR timing.Eachof thethree DPCs has had prior actions pertainingdirectly to the GOP's SOE reforms and/orprivatizationagenda.ThesearelistedinBox1below.

Box 1: Prior actions under DPCs in connection with SOE reforms and privatization

DPC 1: FSIG

ThePCistolaunchtheprivatizationprogram,whichincludes:

Taking to market one strategic sale of a public sector enterprise (PSE) and calling forexpressionsofinterestfromprospectiveinvestors.

Issuingrequestsforproposalsandcallingforexpressionsofinterestinconnectionwiththeprocurementof�inancialadvisorstoadviseon(i)anotherPSEstrategicsale,and(ii)offeringequityinthreePSEsindomesticandinternationalcapitalmarkets.

DPC 2: FSIG

Aspartoftheimplementationofitsprivatizationprogram,theGOPwillcompleteonePSEstrategicsaleandthreecapitalmarketPSEequitytransactions.

DPC 3: CGDPF

TheMOFhasimplementedanewdirectiverequiringtheannualcollectionandpublicationofkey �inancial information on all federal SOEs by publishing the �irst report on theMOFwebsite.

Toattractprivatesector investmentandremoveanybarriers inthe insurancesector, theNationalAssembly has passed the State Life InsuranceCorporation (Reorganization andConversion)Bill.

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ThedevelopmentgoalsofthischildTFhavebeen designed to feed into the broadereconomic reformobjectivesof theGOP . Inordertomeetthesegoalsandremainfocusedon the broader SOE reforms agenda, thiscomponent has been divided into �ivesubtasks.The strategy is to implementeachsubtask simultaneously with the relevantgovernment stakeholders, as each taskcomplements theothers tomeet theoverallgoalof theprogram.Thesubtasksare listedbelow:

Enhance awareness of , and supportmitigation steps to counter, the risks tocompe t i t i on posed by l a rge - s ca l eprivatization, and promote competitiveneutrality(maincounterpart:CCP).

Build theGOP's capacity tomonitor the�inancial performance of SOEs and helpimprove its performance managementsystem. This will enhance public sectoref�iciency in the longer term (mainc o un t e r p a r t s : I ERU (MOF ) a ndEstablishmentDivision).

Improve the regulatory framework forSOEcorporategovernancethroughbetterimplementationandmonitoringofPSEsunder the Corporate Governance Rules2013, which wi l l lead to greatertransparencyandaccountabilityofSOEsand the relevant l ine ministr ies .Undertake comprehensive analyticalworkandpreparereportsonobservanceof standards and codes (ROSC) foraudi t ing and account ing and forcorporategovernance(maincounterpart:SECP,MOF).DevelopanSOEownershippolicythatde�inestheobjectivesofstateownership and the respective roles andresponsibilities of the state as theshareholder,boardandmanagement.

Enhance the PC's capacity to effectivelyi m p l e m e n t t h e g o v e r n m e n t ' sp r i v a t i z a t i o n p r o g r a m ( m a i ncounterpart:PC).

Strengthen the regulatory and legalf r am ewo r k f o r p u b l i c – p r i v a t epartnerships (PPPs) at the federal andprovincial levels (main counterpart:Government of Balochistan). Thissupport will also entail building thecapacityofBalochistan'sPPPteam.

TheSOEreformsandprivatizationcomponentalsoincludesIFCsupporttothePCintheformoft ransact ion advisory serv ices for theprivatizationoftheGujranwalaElectricPowerCompany (GEPCO) and Jamshoro PowerCompany Limited (JPCL). The IFC not onlybringsinternationalexpertiseandcanaddgreatvalue to sell-side diagnostics, but also lendstransparency and credibility to the GOP'sprivatization program. The IFC is, therefore,playinga transformationalrolebyhelpingtheGOPcarryout a fair, credibleand transparenttransactionprocess.Itsengagementaddsvalueas itprovidesglobal lessonsand internationalbestpracticestothePCtransactionteams.

Technical Committee onSOE Reforms and Privatization

Many donors are currently working on SOEreformsandprivatizationasakeypriorityareafortheGOP.Inanefforttoensurethatthereisnoduplication and that all donors provideassistance to the GOP in a coordinated andconsistent manner, the World Bank has beenfacilitating a donor coordination forum sinceFebruary 2015 . Th i s fo rum inc ludesrepresentativesfromDFID,ADB,USAID,Crownagents,theIFCandtheWorldBank.Theforumisalso the main technical committee for thiscomponent.Eachdonorprovidesupdatesonitswork program to ensure that everyone has atimelyandholisticunderstandingoftheGOP'sc o l l a bo ra t i on w i t h dono r s . A dono rcoordinationmatrixwasproducedafterthe�irstdonorcoordinationmeetinginFebruary2015.ThismatrixisupdatedaftereachmeetingandsharedwiththeGOPsothatallstakeholdersareon the same page. To date, four donorcoordinationmeetingshavebeenheld.

1.

2.

3.

4.

5.

10TheWBGwillalsousetheprioractionsofanyfutureDPCstohelpachievetheaboveobjectiveswherepossible.

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Overview of Key Achievements

TheMDTF-AGRhasprovidedsupport to theGOP in SOE reforms . This has includedinstitutional and technical capacity buildingfor key stakeholders (thePC, SECP, CCPandIERU), enabling them to monitor SOEperformancemoreeffectivelyandtopromotegreatertransparencyandaccountabilityinthesector.

SOEsareacentralpartoftheeconomy,withimplications for the government's budget.Whileprivatizationisadeclaredpriorityofthegovernment, there is no publicly available,consolidated information on the �inancialperformanceofSOEs.FederalSOEsareactivein a wide range of economic sectors, mostnotablypowergenerationanddistribution,oiland gas, transport and manufacturing. Thestate's ownership and oversight functionswithregardtotheseSOEsaredecentralized,wherebylineministriesappointtheboardofdirectorsfortheSOEswithintheirremit.TheMOF is authorized to monitor the �inancialperformance of SOEs based on audited�inancial statements and other informationprovidedbythelineministriesandSOEs.

ClosingtheinformationgaponSOEs'�inancialperformance was important both for �iscaltransparency and business con�idence. Toachieve this objective, two consultantswerehiredundertheMDTF-AGRtoconsolidatekey�inancial and non-�inancial information onSOEs. WBG experts shared internationalexperience ofwhat constitutes key �inancialand non-�inancial information. The SOEPerformanceReviewReportforFY2014waspublishedinApril2016ontheMOFwebsite.ThereportincludesinformationonSOEs'legalstatus and areas of activity; the share ofgovernment ownership and that of othershareholders; turnover, pro�it and loss by�iscalyear;assetsandliabilities;outstandingdebt and debt covered by sovereignguarantees; budget subsidies received by�iscal year; loans from the government orotherstateinstitutionssuchastheStateBankof Pakistan; capital injections from thegovernment by �iscal year; and number of

employees.

In order to ensure the sustainability of thisreform,theMOFhasissuedadirectiverequiringthe report on SOEs to be updated at leastannually and specifying the information itshouldinclude.ThisconsolidatedreportwasaprioractionundertheCGDPFDPC.

TheWBGhasprovidedtechnicalassistancetothe SECP in implementing the Public SectorCompanies (Corporate Governance) Rules2013.DataisbeingcompiledbyconsultantsontheimplementationoftheRulestohighlightanyimplementation gaps and identify the leastcompliantsectorsandbottlenecks.Thedatawillb e u s ed t o p roduce a repo r t on t h eimplementationstatusoftheRules.Thelessonslearnedwillbeusedtoprovidetrainingsessionsto key SOEs, the relevant line ministries andSECPstaff.TheBankhasdevelopedatoolkitforSOE corporate governance that shares bestpractices in this area. The toolkit has beenshared with key stakeholders, includingthroughworkshopsledbytheWBG.

Under the MDTF-AGR, the PIA privatizationtransaction structure bene�itted greatly fromthe expertise of the Bank's lead air transportspecialist. The specialist shared internationalbestpracticesinaviationprivatizationsandsaidthatPIAshould,ideally,becorporatizedbeforeit is privatized. This corporatization was abenchmarksetbytheIMF.

Tostrengthentheinsurancesectorandensurealevel playing �ield, the corporatization ofPakistan's largest life insurance company, theState Life Insurance Corporation (SLIC), wascarriedoutundertheDPC.Goingforward,theMDTF-AGRwillsupportacorporategovernanceassessmentofstate insurancecompanies.TheInsurance Ordinance is also being revamped:under the proposed DPC, the Bank will helpidentifyanyanti-competitiveprovisionsintheOrdinance.Forinstance,thereisaprovisionthatpreventscompetitioninthenon-lifeinsurancemarket by extending exclusive rights to theNational Insurance Company Limited withrespecttoinsuranceofpublicproperty.

11TwogovernmentperformancemanagementworkshopswerealsoheldincollaborationwiththeEstablishmentDivisiontocreategreaterawarenessamonggovernmentof�icialsoftheneedforaresultsdevelopmentframework.WBGexpertssharedtheBank'sexperienceofimplementingsuchreforms.

11

http://�inance.gov.pk/publications/State_Owned_Entities_FY_2013_14.pdf12

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21

Box 2: Update on the privatization program

Theprivatizationofdistributionandgenerationcompaniesisundergoinga'rethink'atthehighestlevel.MuchoftheoppositionseemstobecomingfromtheMWP:itstandstoloserevenuefromwell-performingDISCOs(the�irsttobeprivatized),whichitusestocross-subsidize poor performers. Negotiations with the powerful Water and PowerDevelopmentAuthoritylaborunion,beinghandledbytheMWP,havealsoweakenedthePC'shand.

The privatization of the power sector was on track until December 2015. Financialadvisorsforall14entitieshadbeenappointed,themultiyeartariffsfortheFaisalabadElectricSupplyCompany(FESCO)wereapprovedbyNEPRAandthosefortheIslamabad

TherehavebeenmultiplesetbackstocorporatizingPIA.ThePIACorporation(Conversion)Ordinance2015waspromulgatedon4December2015,butwasstruckdownbytheSenateon31December2015.TheNationalAssemblyapprovedtheOrdinanceon21 January2016,buttheSenateonceagainstruckitdownon4March2016.Ina�inalefforttohavetheOrdinancepassed,itwaspresentedatajointsessionoftheSenateandNationalAssemblyon10March,2016.Itwas�inallypassedasabillinApril2016.

On1February2016,theJointActionCommitteeofPIAemployees–aconsortiumoftheeight labor unions under the PIA umbrella – called a nationwide strike against theprivatizationofPIA.TwoPIAstaffmemberswerekilledasaresultofclashesbetweenprotestorsandthepoliceatKarachi'sJinnahInternationalAirporton3February2016.ThisunfortunateturnofeventsledtoamediaandpublicoutcryandhasemboldenedtheoppositionwhileweakeningthehandofthePCandMOF.Thenationwidestrikecontinuedtill9February2016.

On21February2016,theMinistryofAviationregisteredanewcompany,PakistanAirwaysLimited. This company is registered under the Companies Ordinance 1984 and iscompletelyindependentofPIA.WeunderstandthePCwasnotconsultedinthedecisiontocreatethiscompanyand,atpresent,thereisnoclarityastotheroleandobjectiveofthisnewentity.ItsformationhascreatedfurtherambiguityaroundthePIAprivatization.

ThePCisencounteringpush-backfromagenciesofthefederalgovernmenttostallorrollbackthecurrentprivatizationeffort.Thereispoliticaloppositionfromseveralpartiesandlittle buy-in among themedia, unions, legislators, courts and the public. The priorityprivatizationsforthegovernmentwerethepowersectorentities(nineDISCOsand�ivegenerationcompanies),PIAandPSM.Atpresent,alltheseprivatizationshavebeenstalled.

Weunderstand that theMOFandPChave sought to substitute less controversial andpoliticallychargedtransactionstotheIMFinthetenthreviewofitsprograminJanuary2016.Thenewcandidatesareunlikelytobeonesthatsupporttheeconomicreformaimsofthegovernment.

TheGOPneedstorevitalizeitsprivatizationstrategybybeingmoretransparentabouthowit intends to proceed to regain lostmomentum.We need reassurance that it remainscommittedtothestructuralreformeffort,particularlyinthepowersector.

PIA

PowerSector

22

PSM

At present, IFC assistance to the twopowersectorprivatizationprojectsisstagnantastheGOP h a s p a u s e d a l l p owe r s e c t o rprivatizations for now. Nonetheless, the IFChascompleteditstechnical,legal,�inancialandaccounting due diligence and submitted thedue diligence reports to the PC. The PC'sTransactionCommitteeisexpectedtoapprovethe proposed transaction structure of bothSOEs, which will signal the end of Phase Ia c c o r d i n g t o t h e I F C ' s m a n d a t e .Notwithstandingthis,theIFCiscommittedtoensuring that these SOEs are privatizedsuccessfullyand iskeen tomove to thenextphase, which is the market sounding andcompletionofthetenderprocess.

IFC-Supported Component

The following activities have been plannedunder different subtasks from April 2016 toApril2017(adetailedbreakdownofactivitiesundereachsubtaskisgiveninAnnex1).

SOE Performance Monitoring Framework andCorporateGovernanceReforms

GiventhattheGOP'sprivatizationprogramhaslost momentum, there is even more need toensure that entities that remain in the publicsector operate ef�iciently and transparentlywithclearaccountability.Thecoreoftheworkprogram for this child TF will be to help theIERU,SECPandrelevantlineministriesmonitorSOE performance more effectively. The

The Way Forward

ThePCBoardapprovedthePSMtransactionstructureinAugust2015androadshowsforthecompanywereheldinChinaattheendofSeptember2015.Subsequently,threedistinctpotentialinvestorsfromChinavisitedPakistantodiscussthe�ineraspectsofthePSMdeal.

On2October2015,however,theCabinetCommitteeonPrivatizationdecidedthattheGOSshouldhavethe�irstrighttoacquirePSM.ThePChaswrittentotheGOSseveraltimessincethentoestablishifthereisseriousinterestinacquiringPSM.TheGOShasrespondedbyaskingforfurtherdetailsandmoretimetomakea�inaldecision.TilltheGOSmakesadecision,thePSMdealremainsstalled.

ElectricSupplyCompanyhadbeen�iledforapproval.AmarketconsultationonPakistan'spowersectorprivatizationwasheldinWashington,DC,inOctober2015tocreateglobalawarenessofthepipeline.Thismomentumwas,however,lostinDecember2015whentheGOPdecidedto'rethink'itsstrategy.

FESCOisthepilotprivatizationprojectforthepowersector.RoadshowsforFESCOwereheldinTurkeyandChinainNovember2015.Expressionsofinterestfrominvestorswereinvited on 2 November 2015; seven interested parties (both local and international)submittedtheirexpressionsofinterestbythedeadlineof31December2016.However,thistransactionhasnotmovedanyfurthersincethegovernment'sdecisiontorevisititsprivatizationstrategyforthesector.ThisstateoflimboclearlycreatesacredibilityriskfortheGOP.

Withouttheprivatizationofthepowersector,thebene�itsofimprovedservicedeliveryandlower�iscaloutlayswillbelost,aswillthekeyaimsofstructuralreformintheelectricitysector.

23

CorporateGovernanceRulesstillhavealongway to go in being properly understood,implementedandmonitored.Thissubtaskwillalso work to ensure more robust corporategovernanceinPSEs.

CapacityBuildingofthePC

While the privatization program has sloweddownsigni�icantly,theGOPstillhassomekeytransactions in the pipeline (including SMEBank,SLICandKotAdduPowerCompany).Itis essential, therefore, that the PC not onlyretainsand institutionalizes its learning,butalso builds knowledge as needed. We will,therefore,continueoursupporttothePCbyproviding subject matter expertise as andwhenneeded.

PPPDevelopment

ThePPPlandscapeinPakistanisdeveloping,particularly in thewakeof theCPECprojectpipeline. While some provinces are fairlyadvanced in their PPP development, with astrong legal frameworkanddynamicprojectportfolio(e.g.,Sindh),otherslagbehind.Thissubtask will focus on working with thoseprovincesthathaveweakerPPPenvironmentsto assist them in bridging the gap (KP andBalochistan). PPP development is alsoessentialtofosterprivatesectorparticipationinwhathavehistoricallybeenpublicarenas;thiswillpavethewayforeasierprivatizationtransactions,goingforward.

CapacityBuildingoftheCCP

Pakistan has oligarchic structures in manysectors and public monopolies remainprevalent. This distorts the market and thelarger SOEs that run on subsidies have adetrimentalimpactoncompetitiveneutrality.TheCCPneedscapacitybuildingtoeffectivelyimplement the competition law and willgreatly bene�it from international bestpract ices in order to ensure a morecompetitive environment in Pakistan.ThroughanRETFandothermodesoftechnicalassistance, this subtask hopes to build thecapacity of the CCP and foster competitiveneutrality in an economy that has over 190SOEs.

Knowledge Partnership with Senate StandingCommittee on Finance, Revenue, EconomicAffairs,StatisticsandPrivatization

Toshareinternationalexperienceandpeer-to-peerlearningonlegislatingandimplementing�inancialsectorbills,withafocusonthoselawsthathavebeenpushedundertheIMFprogramandtheWorldBankDPCs,theWBGhasinitiatedengagement with the Senate StandingCommittee on Finance, Revenue, EconomicAffairs, Statistics and Privatization. Thecommittee monitors government activity andp o l i c y, s c r u t i n i z e s b i l l s a n d make srecommendations to the Senate on �inance,revenue,economicaffairsandprivatization.

Thecomplexnatureofthereformsscrutinizedbythiscommitteeandtheextensivelegislativeagenda related to �inance, revenue andeconomicaffairsthattheSenateisrequiredtoconsiderhavepromptedthecommitteeandtheWorldBanktoexplorehowtheycancollaboratemoreclosely.Thisknowledgepartnershipaimsto (i) enhance the legislative scrutiny of billsreferredtothecommitteebytheSenateand(ii)strengthen the institutional capacity of thecommittee tomonitor government policy andactivity.The�irstknowledgeexchangeclinicontheCreditBureauActwasorganizedinAprilattheWorldBankof�ice;ascheduleofotherclinicsisbeingformulated.

24

Context

From a ve ry l ow base l ine , revenuemobilization increased substantially duringthe �irst year of program implementation,supported by strong commitment fromcountryauthorities.Relativetocountriesatasimilar level of development, Pakistan'srevenuemobilizationisamongthelowestinthe world. However, there are signs ofimprovement, with the tax-to-GDP ratiohaving risen steadily from the MDTF-AGR2013/14baselineof 10.5percent ofGDP to

12.3percentin2015/16–anincreaseof1.8percent .Attheprovinciallevel,revenuehasalsoincreasedfromaverylowbase,followingtheimplementationofthe18thconstitutionalamendment, which devolved additionaltaxation authorities to the provinces. Whilethis progress is encouraging, Pakistan's taxcapacity isestimatedat22.3percentofGDP,implying a tax revenue gapof 11percent ofGDP(seeFigures1and2).

Revenue increases have been supported by aconcerted program of IMF, World Bank andDFID technical assistance and performanceincentives. The US$6.6 billion IMF ExtendedArrangement (2013–16) includes risk-basedaudittargetsforlargetaxpayersanda�loorontax revenues as quantitative performancecriteria.TheUS$500millionWorldBankCGDPFDPC (2016/17) sets revenue targets andincludesprioractionstostreamlineonlinetaxpayments, reduce taxexemptionsandenforce

risk-based audits. Under the MDTF-AGR,signi�icant technical assistance has beenprovided to national and provincial taxauthorities to support rapid changes in taxpolicy and longer-term improvements in taxadministration.

To meet the near-term targets establishedunder these programs, the authorities haveimplemented 'quick-win' policy actions toincrease tax revenues. The elimination of taxexemptions and concessions has been animportant element of this effort. With WorldBank technical assistance, legislation waspassed to limit the SROs used previously toprovidetaxconcessions.Otheractionshavealso

CHAPTER 5

Tax and Trade Tariff Reforms

Source: Staff Calculations

Figure 1: Comparative tax-to-GDP ratio Figure 2: Provincial tax revenue (% of GDP)

Source: Staff Calculations

13IMF11thReviewundertheEFF,Table6b,taxrevenueasapercentageofGDP.Asigni�icantpartofthisrevenueincreasehasreliedontaxpolicymeasures.Furtherincreaseswillrequireimplementationoflonger-termtaxadministrationmeasures.IMF,PakistanSelectedIssuesPaper,2016.

14

13

14

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

16

14

12

10

8

6

4

Tax

to

GD

P r

atio

, %

World Pakistan India Nepal Sri Lanka Bangladesh

0 2 4 6 8 10 12 14 16

0.8

0.7

0.6

0.5

0.4

0.3

0.2

Pro

vinc

ial t

ax r

even

ue,

% o

gf n

atio

nal G

DP

25

beensupportive:morethan225,000noticesweresenttotaxpayerstoincreasecompliancerates, customs rates have been rationalizedand taxpayers' national tax numbers havebeen linked to their computerized nationalidentity cards. The IMF estimates thatremoving these exemptions has increasedrevenuesby0.9percentofGDPsince2014.

Tosustainthesegainsandfurtherclosethetaxgap , longer-term tax administrat ionimprovements are required to meet thegovernment's 14.5 percent tax-to-GDP ratiotargetby2020.Atpresent,Pakistanreliesonanexceptionallynarrowtaxbasetomobilizerevenues.Inacountryof182millionpeople,3.6 million are registered with the taxauthoritiesandonly982,525actively�iletaxreturns.

broader population. While direct taxes haverisen as a share of revenues since the 1990s,they currentlyaccount for justovera thirdofrevenues. Increasing revenues from incometaxes will require a broader tax base andincreased tax compliance. In short, this willrequire a more effective tax administration.Relevant tax administration reforms at thenational and provincial levels are discussedthroughoutthisreport.

LowprovincialrevenuemobilizationmustalsobeaddressedtoreducePakistan'staxgap.Theprovincesaccount forsubstantial componentsofthetaxbase–agriculturalincome,propertyandservices.Althoughtheprovinceshavealsobeen allocated increased service deliveryresponsibilities, total provincial governmentrevenuesaccountedforjust0.8percentofGDP

ArecentIMFreviewillustratesthisnarrowtaxbase(Figures3and4),comparingtaxpayersagainst thenumberof individuals employedandthenumberofcommercialandindustrialelectricityusers.Outof3.4millioncommercialand industrial electricity users, only 60,000areregisteredtaxpayersand25,551actively�ile returns. While not all individuals orcompaniesnecessarilyhaveataxliability,thisservesasapoignantillustrationofPakistan'sunrealizedtaxpotential.

Asaresultofthenarrowtaxbaseforincometaxes, Pakistan relies on regressive indirecttaxes such as sales tax, customs duty andexcise taxes to mobilize revenues from the

in 2015. Low administrative capacity andreliance on federal transfers has limitedprovincialrevenuegeneration.Support for taxpolicyandadministrationinPunjabandSindh,Pakistan's two most populous provinces, isincludedintheactivitiesoftheMDTF-AGR.

Strategy

Inadditiontosupportingfast-actingtaxpolicychanges,theMDTF-AGRaimstostrengthentheadministrativecapacitytoincreaseandsustainrevenue mobilization at the federal andprovincial levels over the longer term.

Source: IMF Selected Issues Paper 2016

Figure 3: Personal income tax payers (millions)

Figure 4: Corporate income tax payers (millions)

1996 1999 2002 2005 2008 2011 20141996 1999 2002 2005 2008 2011 2014

70

60

50

40

30

20

10

0

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Registered PIT payersNumber of employed Active PIT payers

Registered CIT payersNumber of commercialand industrial electricityusers

Active CIT payers

Source: IMF Selected Issues Paper 2016

26

Strengthening administrative capacity is thefoundationforfurtherequitable increases inrevenue mobilization. Implementing thisfollows the World Bank's principles in itsapproachtopolicyandadministrativereforms(Box3).

TheMDTF-AGRbuildsonlessonslearnedfromthe 2008–11 Tax Administrative Reform

Box 3: World Bank approach to tax policy and tax administration reforms in Pakistan

TheBankusesaholisticapproachtodomesticrevenuemobilization:

TheBankstrivestobuildthecapacityofthecountry'srevenuebodiesinorderto:

Inengagingwiththerevenueadministration,theBankfollowsthreeguidingprinciples:

Project, the successofwhichwas limitedbyinadequate technical assistance, a limitedlocal presence and low prioritization of taxreforms.Taxpolicyreformwasnotsequencedwithtaxadministrationandnoconsensuswasreached on the implementation of a newinformation technology (IT) system. Thepolicy environment was unsupportive, withlow prioritization of tax reforms and strong

internal resistance to change from taxauthorities.

Drawing on these lessons, the MDTF-AGRprovideson-demandtechnicalassistanceatthefederalandprovinciallevels.Asigni�icantlocalpresence and high availability of technicalassistance complement the results-basedlendinginstruments.Further,theMDTF-AGRis

providingtherelevantassistanceinthecontextofpolicydialogbetweentheIMF,WorldBank,DFID and country authorities.With increasedpolitical support for domestic revenuemobilization, productive high-level policydialogue and strong client ownership, theprojectisofftoastrongstartatboththefederalandprovinciallevels.

Taxpolicydesignandtaxadministrationmodernizationeffortsareaddressedtogether,takingintoaccounttherevenueandexpendituresidesofthe�iscalpolicyequation.Administrationreformsfocusonresultsthatincrease�iscalspacetofundqualitysocialexpenditure.

Improvetaxpolicydesigntoreducethecomplexityofthetaxsystemandbroadenthetaxbase.

Strengthen the tax administration's core business areas, including its legal function, toincrease�iscalspaceforgreatersocialexpenditureandinvestmentsinpublicservices.

Ownership: TheBank responds to clientdemand. It allowsadeepunderstandingof theclient'slong-termreformtrajectorytojointlydesignreformsthattruly'�it'theclient'smostpressingproblemsandneeds.

Sustainability:Thereareprospectsoflong-termsustainabilityforsectorreformsiftheyaredevelopedwithconsiderationoftheoverallpublicsectorenablingenvironment.

Continuity:ContinuousengagementenablestheclientandtheBanktobuildtrustandtoseize political windows of opportunity as and when they open. Continuous engagementallowsfortheprovisionofjust-in-timetechnicalassistance,muchofitnotcapturedwithinformalinstrumentsbutcrucialtosupportreformerswhenthetimeisripe.

27

Institutional Arrangements

An adv i sory commi t tee compr i s ingrepresentatives fromDFID, the IMF and theWorldBankwasestablishedat theoutsetoftheproject.Thiscommitteeprovidesstrategicadviceandqualitycontrolofimplementationreports. By involving expertise from theseinstitutions, allofwhichhavesigni�icant taxoperations in Pakistan, international goodp r a c t i c e s a r e r e i n f o r c e d i n t h eimplementation of the MDTF-AGR. Thecommittee meets virtually, reviewingelectronic copies of the implementationreport and related annexes. It also met inpersonduringthe�irstyearofimplementationontheoccasionofanIMFArticleIVmission.Extensive discussions were held on taxincentivesandvalue-addedtax(VAT).

Overview of Key Achievements

S t r o n g c l i e n t d em a n d d r o v e r a p i dimplementationinthe�irstyearofMDTF-AGRoperations,ledbyaseriesofdiagnosticreports.At the national level, a preliminary functionalreviewoftheFederalBoardofRevenue(FBR)fed into the work plan and strategy forsubsequentactivities.Followingthefunctionalreview,keyperformanceindicators(KPIs)weredraftedtomeasureongoingperformanceattheFBR.Termsofreference(TOR)weredraftedtoestablish the Tax Policy Analysis Unit andMarketMonitoringandInterventionUnit.Theseunitswillsupportimprovedtaxpolicyanalysiswhentheyareestablishedinthecomingyear.Acosted IT strategic plan was developed andproposed for FBR board approval, outlining a�ive-yearroadmapforautomation.AsummaryoftheseactivitiesispresentedinTable1below.

Table 1: Summary of FY2016 activities under tax reforms

Federal Board of Revenue

1.Taxpolicy.Buildinganalyticalcapacitytoimprovethequalityofthetaxsystemandinformthebudgetprocesswithrealisticrevenuetargets.

Supportingevidence-basedpolicy

WithsupportfromtheMDTF-AGR,signi�icantanalyticalworkwascompletedtoinformpolicymakers.Astudyoncapitalgainstaxrevealedthatsystematicundervaluationandexemptionsoncapitalgainsonpropertiesheldfortwoyearshadledtosigni�icanttaxlosses.Inresponse,theFBRintroducedanewvaluationmodelandextendedtheholdingtimerequiredforpropertytaxexemption.TheMDTF-AGRalsosupportedasigni�icantstudyonVATandsingle-stagesales tax,helping theauthoritiesgatherevidencetocommittochallengingadministrativereformstorealizethelonger-termbene�itsofVAT,inlinewithinternationalgoodpractice.

Buildinganalyticalcapacity

TheMDTF-AGRsupportedthedevelopmentofTORfortwonewunitsattheFBR:theTaxPolicyAnalysisUnit and the Market Monitoring and Intervention Unit. The TOR, which includes a proposedorganizationalstructureaswellasthefunctionsandresponsibilitiesoftheseunits,wassubmittedforapprovalbytheFBR.Thecreationoftheseunitswillbefundedbytherecipient-executedcomponentoftheMDTF-AGR'staxcomponent.Itisexpectedthattheseunitscanbeestablishedinthenextfewmonthsoncetherecipient-executedcomponentisapproved.

28

2.Taxadministration.Strengtheningcoretaxadministrationoperationstoimprovecontrolandfacilitatecompliance

DiagnosticoftheFBR

Apreliminary functional reviewof theFBRwas completed inApril 2015.The reviewoutlines thestrengthsandweaknessesof theFBR, identifyingareaswhere technicalassistance is requiredandestablishingabaseline andperformance indicators tomeasureprogress.The report covers all thefunctionalunitsoftheFBR:strategicplanning,revenuecollectionandmanagement,enforcement,taxarrears management, tax audit, taxpayer information and assistance, ICT, HR management,administration, taxpolicy, legalaffairs, internalauditand international taxation.Themain �indingsincludethefollowing:

KPIsandmanagementinformationsystem

Asacontinuationofthefunctionalreview,theWorldBankteamhasworkedwiththeFBRtodevelopaset of KPIs and a management information system (MIS) to monitor these. To identify strategicindicatorsmeasuringcriticalsuccessfactorsandhelpevaluateperformance,theteamworkedwiththeFBRmanagementtocreateapreliminarysetofKPIs.OrganizationsusuallycommittoKPIsoverthelongterm,creating thenecessarymanagementstructures,policiesandsystemstocollectdata for theseindicators.TheseKPIswerediscussedwithavarietyofFBRgroups.Themissionexplainedthestrategicmethodologyof theapproach todeveloping theKPIs.Thebaseline listdraftedhasbeencirculatedamongFBRmanagementforformalcomments.TheMISwillbedeliveredtotheFBRinAugust2016,coincidingwiththeITmissionscheduledforthismonth.

Taxaudit

ThetrainingprogramstartedinNovember2015.Fivetrainingworkshopshavebeencompleted,withtenmorescheduledfor2016/17.TheMDTF-AGRseekstoestablishapermanentstructurefortaxaudittrainingwithastrongfocusonforensicaudittechniques.Additionally,ithashelpedmentortaxauditorsonforensicauditandsupportedthereviewoftaxauditregulations,developmentofariskassessmentframeworkforthetaxauditwingandtheelaborationoftaxauditpolicies.

ThedocumentnotesthefragmentationofkeybusinessprocessesandtheorganizationalstructureasoneoftheprimaryweaknessesoftheFBR.

The FBR should integrate its core business processes and tailor them to meet the speci�iccharacteristicsofdifferenttaxpayersegmentstoaddressthetaxcollectiongap.

TheFBRneedstodeviseanITmasterplanandstrategytohelpredesignandsimplifytaxservicesandprocesses.Thisencompasseshardwareandsoftware,disasterrecoveryandabusinesscontinuityplan.

The FBR'sHRwing and its tax audit and enforcement functions should be strengthened and adedicatedtaxpolicyunitestablished.

3.ICTsystems.Automationtofacilitatecompliance,improveaccesstoinformation,supportef�icientprocessingoftaxpayer�ilingsandincreaseaccountability.

TheMDTF-AGRsupportedITworkinthreeareas:

29

DevelopmentofanITstrategicplan(includinganactionplan,changemanagementprogramandtrainingplan).

De�initionofabudgetestimatetoenhanceITinfrastructure.

CompletionofanupdatedauditreportonthecurrentstatusoftheITwing,basedonapreviousassessmentbyDeloitte.

ThissetofdocumentswasdeliveredinNovember2015andapresentationmadetotheFBRboard.Further presentations were made to the new FBR management in March/April 2016. The keyrecommendationisfortheFBRtostartimplementingthe�ive-yearstrategy,actionplanandchangemanagementprogram.Inordertokickoffthisprocess,thestrategyneedstobeapprovedbytheFBRboard.TheWorldBankteamiscurrentlyworkingonafunctionalreviewofIRIS,theintegratedrevenuesystemthatsupportsFBRbusinessprocesses.ThisfunctionalreviewwillbedeliveredontheoccasionofthenextmissionoftheITteam,scheduledforAugust2016.

Revenuemobilizationstrategy

AstrategywasdevelopedforPunjab.Thisseminalreportanalyzesthetaxpotentialofthemaintaxesoftheprovinceandoutlinesaroadmapforaddressingthekeyadministrativegaps.ItprovidesastrategicframeworkforthedifferentactivitiesplannedundertheMDTF-AGRinconcertwithotherstakeholdersandtechnicalassistanceproviders.Additionally,itisconceivedasakeyelementoffutureprojectsontaxadministrationreforms.

Analyticalcapacity

AtaxpolicyunitwasestablishedatthePunjabFinanceDepartmentandarevenueanalysisofrevenueforecastingandtaxexpenditurewasundertaken.

DiagnosticofPunjabRevenueAuthority,supporttoHRandtaxauditfunction

AfunctionalreviewofthePunjabRevenueAuthoritywasconductedandanHRmanualproduced.TheWorldBankteamisalsohelpingtostrengthenthetaxauditfunction.Atwo-dayworkshopontaxaudittechniqueswasheldinAugustanda�ive-daytaxauditcoursewasheldinSeptember.

Propertytax

A workshop on property tax took place in April/May 2016 in Lahore and will continue inAugust/Septemberintheareaofvaluationmethodsandcollectionenforcement.InthecaseoftheBoardofRevenue, theWorldBankwillsupportthedevelopmentofanMIStotrack judicialcasesandtaxappeals. Thiswill include a statistical analysis of the resolution of tax disputes. Awork planwassubmittedtotheBoardofRevenueandtheteamiswaitingforaresponsetostartdevelopingtheMIS.

Agriculturalincometax

TheMDTF-AGRpreparedanoteonproposalstostrengthentheadministrationofagriculturalincometax(AIT)andimprovecollectionusingavailabledata.Subsequently,anoteestimatingthepotentialrevenuethatcouldbeobtainedfromAITinPunjabwaspreparedandsharedwiththeprovincial�inanceministry.Thisnote ispartofa largerreportonthepolicyoptionsforAITinPunjabalongwiththeadministrativemechanismtoimplementit.

Punjab

30

Sindh

ICTstrategy

InSeptember2015,theWorldBankteammettheSindhRevenueBoardtodiscussconductinganITassessment.AsisthecasewithPunjab,itisnecessarytoadoptanintegrated,comprehensiveapproachtoanITstrategyfortaxadministration.ThisstrategywillaimtointegrateITsystemsandinformationdatabases.

Propertytax

AttheSindhRevenueBoard,theWorldBankisprovidingtechnicalassistanceonpropertytax,startingwithaworkshopthattookplaceinApril/May2016.InAugust2016,thisworkwillcontinuewithaspeci�ic focus on implementing modern valuation methods and strengthening property taxadministrationcapacity.

Excisetax–trackandtrace

Thisprojectwilltarget�ivesectors,startingwiththetobaccoindustry.TheTORforselectingwhichcompanywill implementthisprojectweresharedwiththeFBRmanagementinJune.TheselectionprocesswillstartinJuly2016.

AIT

TheMDTF-AGRbeganworkonestimatingtheAITpotentialinSindhandproposingimplementationreforms.TheteamdiscussedthescopeandpreliminaryresultsofAITworkinPunjabwithkeyof�icials.Further visits will be necessary to Hyderabad, Sindh, where the main departments dealing withagriculturestatisticsandcropreportingservicesarebased.

Inits�irstyearofimplementation,signi�icantprogresshasbeenachievedagainsttheresultsframework outcomes. Tax collection targetsare growing in line with the �inal outcomeobjective,althoughfurthergainsarelikelytorequire more dif� icult administrativeimprovements, going forward. The contextandassumptionsprovidedintheconceptnotefor this project remain valid and the designcontinues to be relevant to the challengesfacing the authorities. The progress madeagainst a l l intermediate outcomes issummarizedinTable2.

31

Table 2: Progress towards results framework indicators

Outcome level Target 2015/16 progress

Final Increasetaxcollectionbyleast2percentagepointsofGDP(from2013/14)andnolessthantheaverageannualin�lationrate

Ontrack

2013/14baselineof10.5percentofGDP.2015/16resultof12.3percentofGDP.

Intermediate EliminateSROsgrantingconcessionarytaxexemptions

Achieved

Legislationwaspassed,permanentlylimitingtheissuanceofSROs.

Reducetaxexpenditurebyatleast0.5percentofGDP

Achieved

Thegovernmenthaseliminatedtaxconcessionsandexemptionsamountingtoabout0.9percentofGDPsince2014.

Increasethenumberofactivetaxpayersbynolessthan5percentperannum

Notachieved

Atafederallevel,activetaxpayersfellfrom1.2millionin2014to1.03millionin2015.ThismayberelatedtoincreasingtheuseofwithholdingmechanismsandproblemsrelatedtotheITsystem.Furtheranalysisisrequired.

Annualballot-basedauditsupfrom0to15percent

Indicatoradjusted

TheMDTF-AGRissupportingtheshiftfromballot-basedauditstorisk-basedaudit–aninternationalgoodpractice.TheDPCtargetis40risk-basedauditsoflargetaxpayers.

IncreaseintegrationofFBRITsoftware Ontrack

Overthepastyear,theFBRhasmadesigni�icantprogressindevelopingtheICTstrategyandimplementationroadmap.

15IMF11thReviewundertheExtendedArrangement,Table6b.

15

The Way Forward

While the �irst year of implementationindicates encouraging progress, the projectcontinuestofacesubstantialimplementationrisks, particularly client staff turnover. Thefederal and provincial revenue boardscontinue to experience a high turnover rateamongseniormanagement.Thiscomplicatestheimplementationofworkplansagreedwithprevious leaders and requires additionaltechnical assistance engagements to reviewandadjustplansaccordingly.

Theprojectmitigates this risk throughdeepengagement with middle management,facilitated by team members based inIslamabad,LahoreandKarachi.Toaddressthecomplexvariables thatunderpin tax reform,the team is developing a political economyanalysisthatwillidentifywinnersandlosersof the planned tax reforms, drawing on apreliminarystakeholderanalysisundertakenin2012bytheWorldBank.

The progress achieved over the past year isencouraging, but sustaining this momentumcalls for timely investment of resources andcontinuedengagementwithtaxauthorities.ThestrategicplanningcompletedoverthelastyearoutlinescrucialmilestonessuchasFBRapprovalofthecomprehensiveITpackage,whichisvitaltoprojectimplementation.

Technicalassistancehasinherentlimitations.Itcan provide technical advice, deep analysis ofcore business areas and guidance based oninternational good practices, but successdependsontheownershipandcommitmentofauthorities to implementing reforms. Theincreases in revenue achieved through policyaction provide encouraging momentum. Tosustainthiseffort,considerationshouldbegivento exploring instruments to inform currentinvestment needs in terms of administrativecapacityinITandHR.

32

TheMDTF-AGRhas thus far received a totalcontributionofUS$10.6million,outofwhichUS$4.6millionwasmadeavailableinFY2015and US$6 .1 mi l l i on in FY2016 . ThecontributionswereallocatedamongthechildTFsaspresentedinFigure5.

ThetotalcontributiontoAGRcurrentlystandsat US$10.6 million. Thus far, US$5.6 million(53 percent) has been disbursed. However,commitments stand at US$3.3 million. ThecumulativeforecastfromApril2016toMarch2017isUS$11.3million.

AtthetimeAGRwasestablished,aspertheGBPto USD conversion rate, the GBP 30 millioncommitment amounted to US$50 millionapproximate ly. At the t ime TAGR wasestablished,aspertheGBPtoUSDconversionrate,theGBP30millioncommitmentamountedto US$50 million approximately. However,recent currency �luctuations seem likely todecreasetheoverallenvelope.DFIDiscurrentlythesolefunderofTAGR.

Disbursements, commitments and forecastsagainsteachTFarepresentedinFigure6.

CHAPTER 6 RESOURCES

Pakistan Debt Management Support Program

Tax Policy & Tax AdministrationReform

SOE & PPP

ProgramManagement

Energy SectorReform

IFC Activity under (SOE & PPP)

Allocation ofresources among

child TFs 37%

11%

13%

2%

14%

Figure 5

16%

7%IFC Energy

33

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Pakistan DebtManagementSupportProgram

Tax Policy& TaxAdministrationReform

ProgrammeManagement

EnergySectorReform

IFC Activtyunder(SOE & PPP)

IFC Energy

Grant (US$ in millions)1.13 3.86 1.35 0.19 1.45 1.70 0.80

Disbursements + Commitments0.39 3.85 0.92 0.19 1.30 1.67 0.61

Forecast April 2016 - March 20171.20 4.50 3.3 0.5 1.66 0.00 0.19

Figure 6: Disbursements, commitments and forecasts against each TF

34

Annex 1Details of Activities under SOE Reforms and Privatization Component

The PC was provided technical and sector-speci�ic support to assist its ongoingtransactions. It has successfully completedfourcapitalmarkettransactions(UnitedBankLimited, Pakistan Petroleum Limited, AlliedBank Limited and Habib Bank Limited) andone s t ra teg i c s a l e (Na t i ona l PowerConstruction Company). The GOP remainscommittedtoSOEreforms .However,givenstiffoppositionfromdifferentpoliticalpartiesand labor unions on privatization, it isconsidering other options such as initialpublicofferings.

ThepresentgovernmentcameintopowerinMay 2013 and embarked on an expeditedtimelineforprivatization.However,thePChadbeen dysfunctional since 2006 and wasencumbered with a signi�icant technicalcapacitygap.Thisgapwasaddressedwiththehelp of AGR. The support included: (i)updating thePCwebsite, an ICTassessmentand a detailed project plan for an in-housedocumentscanningsystem;(ii)theservicesofaprivatizationprocessexperttoascertainwhythe privatization of the Heavy ElectricalComplex had failed; (iii) theWBG's lead airtransportspecialistandseniorPPPspecialiste n ga g ed w i t h t h e PC a nd r e l e van tstakeholders to provide support on theaviation sector in general and on PIA inparticular;(iv)asenioradvisorwashiredtoassisttheseniormanagementofthePC;and(v) an asset valuation expert was hired toassistthePC'stransactionmanagers.

A market consultation conference on thepower sector was organized in the US inOctober 2015 . The ob ject ive was toreintroduce Pakistan's power sector toprospective investors and showcase thepotentia l power sector privat izat iontransactions to potential investors. To buildcapacityandpropagatebestpracticesamongkeymembersof thePC,a three-day trainingeventwasorganizedintheUS,precedingtheconference. The training session was titled'LessonsLearnedfromthePrivatizationof

Power,OilandGas,andAviationCompanies'.

TheIFCsignedtwomandateswiththePCinend-August 2015 to provide transaction advisoryservices for one DISCO (GEPCO) and onegenerationcompany(JPCL).TheduediligenceprocesswasstartedinSeptember2015;thetaskteamshave �inalized their reviewof technical,legalandaccountingduediligencereportsandareworkingona�inancialmodelencompassingalltheissuesraisedinthesereports.

Donor coordinationmeetings led by the Bankareheldat regular intervalsand thematrixofsupporttothePCisupdatedbyalldonors.

SupporttothePCwasoneofthesubtasksundertheSOEreformsandprivatizationcomponent.TheremainingfourincludeSOEmonitoring,SOEcorporategovernance,PPPsandsupporttotheCCP. Considerableprogresshasbeenmadeonthesesubtasksandabriefupdatebysubtaskisgivenbelow.

The AGR co-sponsored two governmentperformance management workshops incollaborationwith theEstablishmentDivision.These workshops created greater awarenessamong government of�icials of the need for aresults development framework, initiallybetweentheministerandlineministryof�icialsand later between the line ministries andrespectiveSOEs.

TwoWBGexpertssharedtheBank'sexperienceof implementing such reforms. TheWBG alsoengaged two experts from the Government ofIndia and the Government of Bangladesh tosha re imp l emen ta t i on expe r i ence o fgovernment performance reforms and SOEperformancemanagementframeworksintheirrespectivecountries.Theseexpertsmetseniorof�icialsattheMOFandtheMinistryofPlanning,DevelopmentandReforms,includingthefederalminister for planning, development andreforms, to ensure high-level polit icalownershipandunderstandingofkeyissues.

16 SLIC,thelargestlifeinsurerinPakistan,hasbeencorporatizedunderapresidentialordinanceandisnowwiththeSenateforapproval.

16

35

The accounting and auditing (ROSC)will becompleted this calendar year. The scopingwasdoneinDecember2015andthemissiontookplaceinMarch2016.TheaimofthisROSCis to: (i) assess the robustness of theinstitutional environment for corporate�inancialreportingandauditingbyevaluatinglocalaccountingandauditingstandardsandpractices against internationally recognizedbenchmarks;and(ii)toassistpolicymakersinexploring policy options to improve itsinstitutional environment as the quality ofaccounting and auditing practices dependsdirectlyonthis.

TheimplementationofpolicyrecommendationsthatemanatefromtheROSCwillbene�itprivateand �inancial sectorgrowthas follows.Theywill (i) strengthen the �inancial architectureandreducetheriskof�inancialmarketcrisesandtheirnegativeeconomicimpact;(ii)helpattract more foreign direct investment andportfolio investment and mobilize domesticsavings, which may grow due to additionalpension savings; (iii) help smaller-scalecorporate borrowers access credit from theformal �inancial sector by providing better�inancial information; (iv) allow investors inlarger-scale enterprises to better evaluatecorporate prospects and make informedinvestment and voting decisions, whichwillresult in a lower capital cost and betterallocationofcapitalandresources (�inancialreporting is also the bedrock of corporategovernance, allowing shareholders and thepublic to monitor the management'sperformance);and(v)underpinatransparentandfairprivatizationprocessforSOEs.

The Bank has developed a PPP CountryReadinessDiagnostic (CRD),whichprovidesbaseline information on the enablingenvironmentandcurrentstatusofPPPsinanyregionorcountry.ThisCRDiscurrentlybeingpiloted in Balochistan under AGR. The CRDwas launched in March 2016 together withtrainingforprovincialgovernmentof�icialsontheimplementationandroleofthisdiagnostic.The CRD outcomes include a detailed andt i m e - b o u n d a c t i o n p l a n f o r t h eimplementation of a PPP framework in theprovince.

The support is likely to be extended to thefederalPlanningCommissionandGovernmentofKPonceanof�icialrequestisreceivedfromthe GOP. The potential support to the KPgovernmentwill include drafting a provincialPPPlawtogetherwiththeCRDexercise.ForthePlanning Commission, the potential supportwill include developing a federal PPP law,particularlyinthewakeofthePPPimplicationsofCPEC.

TheWBGismakingconcertedeffortstocreategreater synergies between the CCP and PC.Taking a holistic view of the SOE reformsagenda,theroleoftheCCPisampli�iedwhetheror not the government moves towardsprivatization. It is important to encouragecompetitiveneutralitytoensurealevelplaying�ield.AscopingmissionwasconductedinMarch2016 to gain insights into sector-speci�iccompetitionissues,theroleandmandateoftheCCPandareasforstrongercooperation.

Furthermore,theCCPhashighlightedcapacitygapsinitsenforcementabilities.Tothisend,adetailedtrainingprogramforkeyCCPstaffwasorganized,whichincludedsessionsonverticalrestraints, vertical mergers, treatment ofexemptions under the competition law, andcompetitionadvocacywithafocusontheroleofthecompetitionauthoritiesintheprivatizationprocess. The trainers included a WBGcompetition expert and two internationalexperts (a former president of the PeruCompetitionAuthorityandTelecomAuthorityand a former head of the Merger Division ofCanada).

17 ThelastauditingandaccountingROSCwascompletedin2005.

17

36

Annex 2

Breakdown of Activities for FY2017

SOEPerformanceMonitoring FrameworkandCorporateGovernanceReforms

TechnicalcapacitywillbeprovidedtotheIERU to develop an online system formonitoringSOE�inancialperformance.

TheWBGwillensureannualreportingofSOE performance reviews (as per thedirective issued by theMOF). Support tothe IERU in developing an automatedsystem to capture all the informationrequired for these reviews will ensureconsistentandcentralizeddatacollection.

The IERU will be provided technicalassistance to develop (along with therelevant line ministries) performancecontracts with SOEs in order to create acultureoftransparencyandaccountability.

PSECorporateGovernanceReforms

A corporate governance assessment ofstate-owned insurance companies (SLIC,NICL,PRCL,PLI)willbeundertaken.Thesurvey formhasbeen rolledout to thesecompanies.

TrainingwillbeprovidedtotheSECP,lineministries and SOEs to create a betterunderstanding of the Public SectorCompanies(CorporateGovernance)Rules2 013 a nd t h e i r imp l emen t a t i o nrequirements.

AssistancewillbeprovidedtotheGOPind e v e l o p i n g a n S O E o w n e r s h i ppolicy/framework, which will de�ine theobjectivesofstateownershipandtherolesand responsibilities of the state asshareholder, board and management,bringinggreaterclarityandconsistencytoitsownershiprole.

A corporate governance ROSC will beundertaken, using as a starting point theself-assessment recently completed by theSECP against the OECD Principles ofCorporateGovernance.

CapacityBuildingofthePC

Ongoing technical assistance will beprovided to the PC to share internationalbest practices and sector experts under aBETF.

Thetransactionstructuringofbothadvisoryprojects ( JPCL and GEPCO) and thesubsequent privatization of the twocompanies,subjecttorelevantgovernmentapproval and regulatory reforms, isrequired.

PPPDevelopment

TheBalochistanPPPCRDwillbecompletedinApril/May2016.

PPPdevelopmenttrainingwillbeprovidedtogovernmentof�icialsfromtheprovinces.

Technical support will be provided to theGOSPPPcell througha �iscal commitmentandcontingentliabilityframework.

CapacityBuildingoftheCCP

AnRETFisbeingdevelopedfortheCCP(aroundUS$1.5 million) to help build its enforcementcapacity.ThisRETFwillbeusedtocomplementtheongoingworkundertheBETF.

A scoping mission was carried out in March2016, based on which the following areas ofsupportwereidenti�ied.

37

CompetitionAssessments

Thistaskwillprovidetechnicalassistanceandguidancetoidentifyandexaminecompetitionbot t lenecks assoc ia ted wi th marketconditions and the regulatory aspectsaffectingmarketcompetition inkeymarkets(atleastthree).Forexample,intheenergyandbankingsectors,itisimportanttoexaminetheoverlapbetweencompetitionandregulatorypolicy issues. In telecommunications, it isimportant to examine the overlap betweencompetitionandregulatorypolicyissuesthatlie behind the current use of infrastructureand the expansion of telecom services,especiallywhereconsumerrevenuesarelow(average revenue per user) and where theimplementationofregulatorymodelsand/orpolicies could affect the cost of capital andcompetitionconditions.

MemorandaofUnderstanding

Inlinewithitscompetitionadvocacymandate,the CCP is moving towards signing amemorandumofunderstanding (MOU)withseveral sectoral regulators, including thePC,thePublicProcurementRegulatoryAuthorityand Pakistan Telecom Authority; there ispotentialforstrengtheningcollaborationwiththeLawsandJusticeCommission.TheCCPandSECPhavealreadysignedanMOU.ThistaskwillensurewaystoenhancecollaborationoncompetitionissuesbetweentheCCPandthesectoralregulatorsmentionedabove.

AdvocacyWorkshops

At least three advocacy sessions (this mayinclude two workshops each) will beorganized for the CCP, sectoral regulators,ministriesandotherpublicof�ices.Thesewilldiscuss proposals for sector-speci� icmechanisms to tackle potential competitionbottlenecksintheselectedsectors.

Training(s)

This task will provide capacity-buildingsupporttoequiptheCCPwithstate-of-the-artskillsforassessingcompetitionrisksinlocalmarkets. The training program will identifytheskillsneededbytheCCPthroughatraining

needsassessment.Thistaskwillentailatleastthree training events on market analysis andtechniquesforcompetitionassessment.

38

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