Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 11225

PROJECT COMPLETION REPORT

PAKISTAN

AGRICULTURAL SECTOR ADJUSTMENT LOAN(LOAN 2986-PAK)

OCTOBER 5, 1992

Agriculture Operations DivisionCountry Department IIISouth Asia Regional Office

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EOUIVALENTS

Appraisal Year (1987) US$1 - Rs 17.4Average 1988-1990 US$1 - Rs 20.1Completion Year (1991) US$1 = Rs 23.8

ABBREVIATIONS AND ACRONYMS USED

ADP Annual Development ProgramAPCOM Agricultural Prices CommissionASAL Agricultural Sector Adjustment LoanCECP Cotton Export Corporation of PakistanCIP Core Investment ProgramDAP Di-ammonium Phosphate containing 18% N and 46% P205FGW Fresh Ground WaterFID Fertilizer Import DepartmentGOP Government of PakistanHYV High Yielding VarietylSRP Irrigation Systems Rehabilitation ProjectMFAC Ministry of Food, Agriculture and CooperativesMOP Muriate of Potash containing 60% K20MWP Ministry of Water and PowerNAP National Agricultural PolicyO&M Operation and MaintenancePFP Policy Framework PaperPID Provincial Irrigation DepartmentPSC Program Steering CommitteeFAP Revised Action Program for Irrigated AgricultureRFCP Rice Export Corporation of PakistanSAF Structural Adjustment FacilitySBA Stand-by ArrangementSCARP Salinity Control and Reclamation ProjectSOP Sulphate of Potash containing 50% K20TSP Triple Superphosphate containing 46% P205WAPDA Water and Power Development AuthorityWSIPS Water Sector Investment Planning Study

FISCAL YEAR(FY89 is 1988-89)

July 1 to June 30

FOR OFFICIAL USE ON'LYTHE WORLD BANK

Washington, D.C. 20433U.S.A.

Office of Director-GeneralOperations Evaluation

October 5, 1992

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on Pakistan - AgriculturalSector Adjustment Loan (Loan 2986-PAK)

Attached, for information, is a copy of a report entitled "ProjectCompletion Report on Pakistan - Agricultural Sector Adjustment Loan (Loan 2986-PAR)" prepared by the South Asia Regional Office with Part II of the reportcontributed by the Borrower. No audit of this project has been made by theOperations Evaluation Department at this time.

Attachment

This document has a restricted distribution and may be used by recipients only in the performance oftheir official dutias. Its contents may not otherwise be disclosed without World Bank authorization.

FOR OFFICIAL USE ONLYPROJECT COMPLETION REPORT

PAKISTAN

AGRICULTURAL SECTOR ADJUSTMENT LOAN(Loan 2986-PAK)

TABLE OF CONTENTS

Page No.

PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . .EVALUATION SUMMARY .i.i.i. . . . . . . . . . . . . . . . . . . . ..

PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE . . . . . . . . . .1. Project Identity .... . . . . . . . . . . . . . ... 12. Background ................ ..... 13. Program Objectives and Description . . . . . . . . . . . . 54. Implementation Performance.. 65. Project Results and Sustainability . . . . . . . . . . . . 96. Bank Performance . . . . . . . . . . . . . . . . . . . . . 117. Borrower Performance .. 118. Consulting Services and Procurement . . . . . . . . . . . . 129. Findings and Lessons Learned . . . . . . . . . . . . . . . 12

PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE . . . . . . . . 14

PART III. STATISTICAL INFORMATION ... . . . . . . . . . . . . . . . 16

A. Related Bank Loans and Credits . . . . . . . . . . . . . . 16B. Loan Data .. 16C. Timetable .. 16D. Loan Disbursement .. 17E. Use of Loan .17F. Use of Bank Resources .18

I. Staff Inputs .18II. Mission Data .18

G. Inputs -- Retail Prices of Fertilizer . . . . . . . . . . . 19H. Outputs -- Crop Support/Procurement Prices . . . . . . . . 20

Annex 1 Conditions of ASAL and Actions Taken . . . . . . . . . . . 21A. Before ASAL .... . . . . . . . . . . . . . . . . . . 21B. For Loan Effectivenesa ... . . . . . . . . . . . . . 22C. For Release of Second Tranche . . . . . . . . . . . . . 22D. Status of Legal Covenants . . . . . . . . . . . . . . . 23

Annex 2 Statement of Agricultural Sector Policies . . . . . . . . . 29

This document has a restricted distribution and may be used by recipients oily in the perfeorance oftheir official duties. Its contents may not otherwise be disclosed without World Bank aauthorizadon.

i

PROJECT COMPLETION REPORT

PAKISTAN

AGRICULTURAL SECTOR ADJUSTMENT LOAN(Loan 2986-PAK)

PREFACE

1. This is the Project Completion Report (PCR) for the AgriculturalSector Adjustment Loan (ASAL, Loan 2986-PAK) to the Islamic Republic ofPakistan in the amount of US$200 million equivalent, which was approved onAugust 2, 1988. The loan closing date was extended by six months to December31, 1990, and then a further month to January 31, 1991. The loan was fullydisbursed, with the last disbursement made on June 26, 1991.

2. The PCR was jointly prepared by the Agriculture Operations Division,Country Department III, South Asia Regional Office (Preface, EvaluationSummary, Parts I and III, Annexes) and the Borrower (Part II). The PolicyStatement on the Agriculture Sector (May 1988), which outlines the Borrower'sadjustment program as a basis for the loan, is given in Annex.2.

3. The Bank's final supervision mission initiated the preparation ofthis PCR in April 1990. The report is based, among other sources, on theInitiating Memorandum, President's Report, Loan Agreement, Economic Memorandum'Current Economic Situation and Prospects' (March 22, 1991), supervisionreports, correspondence between the Bank and the Borrower, and other internalBank documents.

iii

PROJECT COMPLETION REPORT

PAKISTAN

AGRICULTURAL SECTOR ADJUSTMENT LOAN(Loan 2986-PAK)

EVALUATION SUMMARY

A. Obiectives

1. The project aimed at promoting competitive agriculture and enhancingsustainable productivity and growth. To achieve this objective, theGovernment agreed to save domestic resources through cost and subsidyreductions; rationalize the investment program in the agriculture and watersectors; and strengthen institutions dealing with agricultural pricing, riceand cotton exports, and water sector investments. The specific measures thatthe Government of Pakistan (GOP) would take are detailed in Part I, para 3.01.

B. Implementation Experience

2. The US$200 million equivalent loan was signed on September 7, 1988,and became effective on November 4, 1988. It was to be released in twotranches of US$100 million equivalent each. The first tranche was releasedupon effectiveness. The second was withheld for eight months because ofsignificant shortfall in achieving the targets for fertilizer subsidyreduction, inadequate funding of the priority investment program, and delay intaking certain actions that were due by the tranche release date, October1989. The tranche was released in June 1990 once agreed actions had beentaken--fulfillment of the fertilizer subsidy reduction targets; enhancement ofthe Annual Development Program (ADP) for the agriculture and water sectors;and adoption of action plans based on the water charges study, and the studieson cotton and rice export operations. The loan closing date was extended atotal of seven months to January 31, 1991, to allow disbursement of the secondtranche to be completed.

C. Results

3. The fertilizer pricing policy objective of the program has not beenfully achieved. Still, when seen in the context of frequent politicalchanges, and resource constraints, the actual achievement is satisfactory. By1990, the fertilizer subsidy had been drastically reduced which, on the basisof the present quantity of phosphate (P) and potassium (K) fertilizer sold,would save about US$40 million per year in Government expenditure.Unfortunately, subsidy rates increased again in 1991. The subsidy on DAP andSOP was further reduced in March 1992 although it was still in excess of thetarget subsidy rates for DAP and SOP.

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4. The scope of the private sector in fertilizer marketing anddistribution has been increased to achieve economy and efficiency in theoperation (para 4.04).

5. More than 200 (of the target 216) public tubewells in freshgroundwater (FGW) areas of the SCARP Transition Pilot Project (Cr. 1693-PAK)were privatized. New public investment in tubewells in FGW areas of the Indusbasin was stopped. A Second SCARP Transition Project (Cr. 2257-PAK) toprivatize a further 1,346 public tubewells in Punjab and 380 in Sindh becameeffective on April 30, 1992 (para 4.05). The Governments of Sindh and Punjabare proceeding with further larger-scale privatization without foreignassistance.

6. Following a nationwide study for improving procedures and assessmentof water charges, a plan of action was agreed upon to move towards fullrecovery of O&M costs. However, the implementation of these measures has beenpartial and very slow (para 4.06-4.07)

7. Rationalization of investment in the agriculture and water sectorshas been approached through a three-year core investment program for FY89-91.Allocations for both sectors have been increased for priority projects, thoughresource availability has constrained full program implementation (para 4.08).The annual development program continues to be reviewed by the Bank annually.

8. Strengthening of institutions is progressing. Training and technicalassistance requirements of the Agricultural Prices Commission (APCOM) arebeing met through a program recommended in the studies that were carried out.Restrictions have been lifted on the private sector in order to permit itsparticipation in the rice and cotton export trade. The planning capacity ofthe agencies in the water sector has been increased by establishment offederal (WAPDA) and provincial planning cells. In Sindh, responsibility forassessment of water charges has been shifted from the Revenue Department tothe Irrigation Department, while similar actions in the other provinces isstill awaited (para 4.09).

9. Action plans based on the project studies have been agreed with theBank for further institutional strengthening in the areas of assessment andcollection of water charges, agricultural pricing, cotton and rice exports,and water sector planning (Annex 1, D). Measures have been developed by GOPto reduce the gap between O&M expenditure and cost recovery although, asmentioned above, their implementation by provincial authorities to date isslow.

D. Sustainability

10. The reform program supported by ASAL is a continuation of the processstarted under the Bank supported SAL (1983) and through project lending. TheGovernment has shown the will to recast investment priorities, mobilizeresources through cost and subsidy reduction, deploy non-price measures toimprove agricultural productivity, increase the role of the private sector inagriculture, and strengthen agricultural institutions. The Government hascontinued to implement the ASAL program as part of its adjustment program

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which the Bank supported through two additional sector adjustment loans -- forthe Financial Sector in March 1989, and the Second Energy Program in June1989. Support for the agricultural reforms is also being provided by theAsian Development Bank (ADB) under the ongoing Agricultural Program Loan.

E. Findings and Lessons Learned

11. The main findings and lessons learned from the implementation of theASAL program can be summarized as follows:

(i) The slow progress on the admittedly difficult cost recovery of O&M ofthe irrigation system highlights difficulties encountered byGovernment in ensuring compliance by provincial governments and theneed, if possible, for greater participation by provinces in projectformulation and finalization (para 9.02).

(ii) There is a need for thorough appraisal of the institutionsresponsible for implementation, especially those dealing withprograms that require difficult decisions as economic reform withwide political implications (para 9.03). The Ministry of Food,Agriculture and Cooperatives (MFAC) was made the Coordinator of theprogram. It deserves credit for delivering the program despite itsinstitutional weakness and frequent changes in senior staff.

(iii) The Bank should not underestimate the staff inputs required foreffective preparation and supervision of this kind of loan (para9.04).

(iv) ASAL demonstrated the need to focus the reform effort on a fewselected key issues rather than attempting to handle a broader rangeof agricultural issues (para 9.05).

(v) ASAL also demonstrated the importance of combining the reform programwith concurrent efforts in the same area. The program's success wasenhanced by the parallel Policy Framework Paper (PFP), theInternational Monetary Fund (IMF) program, and on-going irrigationprojects, all of which included ASAL objectives and reinforce theimportance of compliance (para 9.06).

(vi) Finally, private sector fertilizer importers found the Bank's ICBprocedures cumbersome, until US$80 million were earmarked for importsunder importers' own procedures. It may therefore be useful toadjust procurement procedures in future program loans (para 9.08).

PROJECT COMPLETION REPOkT

PAKISTAN

AGRICULTURAL SECTOR ADJUSTMENT LOAN(Loan 2986-PAK)

PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE

1. PROJECT IDENTITY

Project Name Agricultural Sector Adjustment LoanLoan Number 2986-PAKR V P Unit South Asia (SA3AG)Country PakistanSector Agriculture

2. BACKGROUND

Agriculture Sector and Macroeconomic Developments

2.01 Sectoral Context. The agriculture sector is the mainstay ofPakistan's economy. It contributes about one quarter of Gross DomesticProduct (GDP), 70% of foreign exchange earnings (including cotton basedmanufactures), and employs nearly 16 million people, which is over half of thetotal labor force.

2.02 Agricultural commodities, mostly cotton and rice, account for over25X of exports, while cotton textiles and other agro-based manufacturingexports account for an additional 40%. Agricultural imports, mainly wheat,edible oil, tea, fertilizers and agricultural machinery, absorb around 50X ofagricultural export earnings. Out of around 5,000 industrial establishments,about 60% are based on agricultural commodities. The value of their outputrepresents around three-fifths of the value of all industrial production.

2.03 Macroeconomic Developments. Pakistan's economy grew rapidly at over6Z during the 1980's with strong export performance and modest inflation.Despite this healthy performance, the underlying structure of the economycontained certain weaknesses. The savings rate was low; the fiscal budget washeavily dependant for revenues on trade taxes and inelastic demand taxes;current expenditures were largely absorbed by defense, interest expense,wages, subsidies on food and agricultural inputs; and development expenditureswere inadequate to build and maintain physical infrastructure.

2.04 Since July 1988, Pakistan has been implementing a comprehensivemacroeconomic adjustment and structural reform program designed to improve thecountry's growth performance while redressing the external and domestic

2

imbalances and rectifying the persistent structural weaknesses. The keyelements in this program are: (i) fiscal deficit reduction through revenuereform and expenditure restraint; (ii) correction of domestic price rigiditiesand distortions through adjustments to administered prices and deregulation;(iii) trade and exchange liberalization and tariff reform; (iv) enhancedprivate investment and investment deregulation and a privatization programand; (v) prudent exchange rate management to support firm demand managementand assist in preserving international competitiveness.

2.05 The Government's reform efforts have been supported by the IMFthrough disbursements under the Structural Adjustment Facility (SAF) and aStandby arrangement. The program has also been supported by the World Bankthrough projects and sectoral adjustment loans in energy and the financialsector as well as the project being reviewed in this report; and by the AsianDevelopment bank under various programs; and by other mulilateral andbilateral agencies.

2.06 in 1988/89, progress was made in implementation of policy measures intrade liberalization, domestic credit restraint and exchange rate management.Real GDP at market prices grew at 5.0% while inflation abated. The fiscal anddomestic pricing measures reduced the overall deficit by 1.0% of CDP to 7.6%and the Government's policies also contributed to the strengthening of privateinvestment.

2.07 In 1989/90, the overall performance was somewhat short of Governmentexpectations. In particular, gross domestic investment declined somewhat as ashare of GDP but the overall fiscal deficit declined by 1.0% to 6.6% of GDP,helping to improve domestic savings and contain the external current accountdeficit. However, the inflation rate declined to 6.4%. Further progress wasalso made in the area of structural reforms, new steps were taken in thefiscal area and the second stage of a medium term reform program to liberalizethe trade regime was implemented. In addition, as part of the comprehensivefinancial sector reform program, initial steps were taken to improve publicdebt management.

2.08 In addition to two changes of Government, the economy was adverselyaffected by the Middle East crisis in 1990/91. Overall, the economy achieveda rate of growth of 6.5% of GDP (at market prices). However, there wereadverse effects in other respects. The fiscal deficit reached 8.8% of GDP, thecurrent account deficit was 4.6% of GNP and the rate of inflation reached ahigh 12.7%. To correct these slippages, the Government is implementing inFY92, an ambitious stabilization and structural reform program with thesupport of the IMF. The Government is also currently discussing with the Banka proposed Public Sector Adjustment Loan.

2.09 Recent Agriculture Sector Performance. Overall growth of the sectorduring FY89-91 averaged more than the 3.8% achieved during the Sixth Planreaching the target of 4.7% set by the Seventh Plan, but fluctuated widelybetween years and among crops. Growth was satisfactory for cotton, but belowthe population growth rate for wheat. During the period, 4.2 million tons ofwheat had to be imported.

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2.10 The influence of ASAL measures on sectoral performance, thoughdifficult to demonstrate, appears to have been positive. The prices of P andK fertilizers were increased thrice during 1988-90 and input subsidies werereduced; investments were focused on high priority projects; O&M expenditureswere increased; relevant institutions were strengthened; and the privatesector was encouraged to participate in investment, marketing anddistribution.

2.11 Despite reduction in fertilizer subsidies as a part of the structuralreforms, total fertilizer use continued to increase between FY89 and FY91,except for P and K fertilizers for which consumption decreased by 3% and 12%,respectively. The reduction was partly due to the price increase and partlyto the supply situation and absence of promotional efforts. In FY90, it wascertainly influenced by delayed imports. During FY91, P and K fertilizer useincreased with timely availability but did not reach the FY88 level. GOPimported, under a Canadian aid project, about 5,000 tons of muriate of potash(MOP) at prices lower(US$108/ton) than sulphate of potash (SOP, US$198/ton).The program for water management, mainly through rehabilitation of the publicirrigation system and private investment chiefly in tubewells, has resulted inincreased availability of water by 2.48 HAF (from 117.14 MAF in 1989-90 to119.62 in 1990-91).

Actions Taken Before Preparation of ASAL

2.12 Changes in the agriculture sector started in 1980 as a part of WorldBank lending in support of the National Agricultural Policy (NAP). TheFertilizer Imports Credit (FY81) and Structural Adjustment Loan (SAL, FY83)and credits made for the water sector since 1982 addressed agricultural policyissues. Three interrelated agricultural pricing policy issues werehighlighted in the SAL and other lending operations. A brief description isgiven below.

(a) Fertilizer Price Subsidies. Fertilizer subsidies had increased fromUS$32 million in 1974/75 to about US$200 million in 1979/80,representing 33% and 64%, respectively, of GOP's total allocation forthe agricultural sector investment program. Since these subsidieswere a part of the capital budget, funds were being diverted fromother priority investments to cover the escalating fertilizer pricesfollowing the second "shock" of petroleum price increases in 1979.Also, by 1980 Pakistan had managed to sustain relatively high growthrates in agriculture for a number of years, assisted by high growthrates in fertilizer consumption (20% per year) and adoption of highyielding varieties. Fertilizer subsidy levels were determined byGOP's policy to expand the production capacity of domestic fertilizerplants, and as a result a relatively high proportion of the subsidywas being used to support high-cost plants. To lighten the fiscalburden, fertilizer prices were raised in 1980 by 50%, but thisreduced the growth rate of fertilizer use from 20% in earlier yearsto only 2% during the next two years. After the deregulation ofnitrogenous fertilizers in 1986, prices were carefully managedagainst possible decline in consumption. But the subsidy on P and Kfertilizers was US$80 million a year and public sector marketing and

4

distribution remained costly; ASAL aimed at alleviating this fiscalburden.

(b) Irrigation O&M Subsidies. The findings of the Revised Action Programfor Irrigated Agriculture (RAP) were confirmed in the NationalAgricultural Policy (NAP) statements in 1980. The NAP aimed at: (a)reorientation of public expenditure programs in the agriculture andwater sectors, with emphasis on use of existing facilities, notablyrehabilitation of the irrigation system, upgrading of on-farm watermanagement, and improving research and extension services; (b)adjustments in prices and subsidies to increase productivity andeliminate subsidies; (c) diversification of agriculture; and (d)encouragement of private sector participation in input and outputmarketing and distribution, processing of grains, and development offresh groundwater. It highlighted the need for channellingadditional financial resources to short-gestation projects andpostponing new large-scale, capital-intensive schemes. As a resultof this policy shift, the IDA-assisted Irrigation SystemsRehabilitation Project (Cr. 1239-PAX), cofinanced with USAID, hasimproved 25% of the canals with serious maintenance deficiencies. Anadditional 30% of the irrigation and drainage canal systems are beingrehabilitated under a follow-up project assisted by IDA, USAID, andthe Netherlands (Cr. 1888-PAK). Building on the experience of aUSAID assisted pilot project, a nationwide watercourse improvementprogram, under cost-sharing arrangements with Water User Associations(VWUAs) was launched in 1982 with IDA assistance. However, only 15%of the existing 107,000 watercourses had been renovated by FY90.Irrigation O&M expenditures and recoveries are the responsibility ofthe provincial governments which have not fully adjusted watercharges to O&M costs. Inadequate O&M funding resulted indeterioration olf the vast Indus irrigation system. Consequently, anestimated one half of the surface and groundwater was being lost.Resource constraints are attributable partly to highly subsidizedirrigation water charges, an issue which called for correctivemeasures such as those proposed under ASAL.

(c) Agricultural Pricing Policies. Up to 1980, GOP's process of settingprices of key inputs and outputs had been somewhat subjective and hadnot achieved its objectives of reducing the financial burden of foodand fertilizer subsidies, providing incentives to producers, andrealizing parity with border prices. Policy interventions requiredthe establishment of an institution to: (a) provide consistent andtimely recommendations on appropriate crop and input prices based oncontinuous and objective analysis; and (b) assess the effects of suchpolicies. The creation of the Agricultural Prices Commission (APCOM)in 1981 was intended to meet that need. The Rice and Cotton ExportCorporations, established in 1989, monopolized the export of thesecommodities. Problems of financial management and administrativeefficiency surfaced, however, for which a solution was to be soughtunder ASAL (paras 3.01 and 4.10).

5

ASAL and Parallel Developments

2.13 ASAL is a continuation of the adjustment process which was launchedduring the early 1980s. A preparation mission visited Pakistan in April 1985,and a first appraisal mission in November 1985. However, the appraisal teamcould not complete its work because GOP was not prepared to present timeschedules for removal of fertilizer and irrigation O&M subsidies. Following anew initiative by the Bank in November 1986, GOP revised its position on thesubsidy issue, and proposed a three-year schedule for elimination of thefertilizer subsidy. It also indicated its intent to privatize the SCARPtubewells (to narrow the cost recovery gap). The ASAL appraisal was completedin July 1987, and the loan approved in August 1988. Loan preparation tookplace in parallel with preparation of a macroeconomic and structuraladjustment program supported mainly by the Bank and the IMF as well as otherdonors. The balance of payments support (for agricultural imports) providedby ASAL and its sector specific conditions, which were also reflected in thePolicy Framework Paper (PFP), reinforced the macroeconomic reform program.

2.14 The Government's PFP was considered by the Bank's Executive Directorsin December 1988. At the same time, a 15-month Stand-by Arrangement (SBA), anda three-year (FY88-91) Structural Adjustment Facility (SAF), as well as thefirst annual SAF arrangement and loan thereunder, were approved by the Fund'sExecutive Directors. The medium-term adjustment and structural reform programsought to redress the growing macroeconomic imbalances; to improve the fiscalsituation through revenue generation and expenditure control; and to initiatereforms in the areas of domestic pricing, trade and industrial policies, andthe financial sector.

3. PROGRAM OBJECTIVES AND DESCRIPTION

3.01 ASAL supported the Government's policy of promoting competitiveagriculture and enhancing productivity and'growth through a reform programdesigned to: (i) mobilize domestic resources by cost recovery and subsidyreduction; (ii) rationalize the investment program in the agriculture andwater sectors; and (iii) continue institutional improvements. Specificmeasures the Government agreed to implement were:

(a) to phase out economic subsidies for phosphate (P) and potash (K)fertilizers based on an agreed schedule and formula for calculatingtheir economic price (paras 4.02 to 4.04);

(b) to reduce fertilizer distribution and marketing costs (para 4.04) by:(i) rationalizing the allocation of responsibility for marketing anddistribution between public and private sectors, i.e., increasingprivate distributors' share; and (ii) facilitating discharge of suchresponsibility by private distributors;

(c) to privatize public tubewells in fresh groundwater (FGW) areas, andnot to install new public tubevells in these areas, in order toreduce the public budgetary burden of O&M and improve the delivery ofirrigation supplies (para 4.05);

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(d) to move towards full recovery of irrigation (and drainage) operationand maintenance costs (para 4.06);

(e) to formulate and implement a three-year (FY89-91) Core InvestmentProgram (CIP) in the agriculture and water sectors (para 4.08);

(f) to strengthen institutions dealing with formulation of agriculturalsupport prices, rice and cotton exports, and water sector planning(para 4.09); and

(g) to undertake program-related studies on:

(i) improvement of water and drainage charge assessment andcollection procedures (para 4.07),

(ii) rice and cotton export operations (para 4.09), and

(iii) transfer of public tubewells in FGW areas in Punjab andSindh (para 4.05);

funding for these studies was provided in ASAL (US$1 million) but notused; the amount was reallocated for import of inputs, and thestudies were financed out of the Third Technical Assistance Credit(Cr. 1755-PAK) and Second Irrigation Systems Rehabilitation Project(Cr. 1888-PAK).

4. IMPLEMENTATION PERFORMANCE

4.01 Progress under ASAL was satisfactory with regard to the eliminationof fertilizer subsidies and the CIP, but less so with regard to irrigation O&Mcost recovery and implementation of the'recommendations of the studies.

4.02 Fertilizer Subsidy Reduction. The fertilizer subsidy, introduced inthe late 1950s to popularize fertilizer use, has achieved its purpose.Consumption increased from 31,000 tons of nutrients--nitrogen, phosphate andpotash (N, P and K)--in 1960-61 to 1.8 million tons in 1986-87, when thesubsidy on nitrogenous fertilizers (70% of the total) was eliminated.Fertilizer subsidies increased from 30% of the agricultural development budget.during the Second Plan (FY60-64) to 137% during the Fifth Plan (FY79-83). By1990-91, total fertilizer use had reached about 2 million tons, with the useof nitrogen fertilizer increasing. The use of P and K fertilizers, whichaccount for about one-fifth of total consumption, declined by 3% and 12%,respectively, between FY89 and FY91 which was contributed, at least in part,by the price increase following the phasing out of the subsidy. SOP accountsfor almost all consumption of potash while DAP accounts for about 90% ofphosphatic fertilizers. Both are imported and are the two major subsidizedfertilizers. Table 1 shows the subsidy on P and K fertilizers before thestart of ASAL (July 1988) and the reduction through March 1992.

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Table 1: PROPOSED (P) AND ACHIEVED (A) TARGETS OF PHASINGOUT THE FERTILIZER SUBSIDY1 /

Oct 88 Oct 89 Oct 90 Oct 91 Mar 92Fertilizer Pre-ASAL A P A P A P A A

----------------------Percent of Price--------------------------

DAP 35 25 17 22 9 8.5 0 19 8NP 48 45 33 - 20 - 0 - -SOP 76 60 52 68 44 44.72/ 36 53 38NPK 63 50 32 - 16 - 0 - -TSP 43 30 20 - 10 - 0 - -

4.03 In FY89, a pricing methodology based on nutrient content (N, P and K)was adopted which resulted in equivalent nutrient prices for differentfertilizer products. The prices of N, P and K were derived from urea, DAP andSOP, respectively. Since nitrogenous fertilizer prices were deregulated in1986, only DAP and SOP prices can be monitored to check progress in subsidyremoval. As shown in Table 1, GOP was in compliance with the agreed subsidyreduction schedule in 1990, but not in 1991. It has since taken steps tofurther reduce the remaining subsidies.

4.04 Fertilizer Marketing and Distribution. In FY90, GOP adopted an actionplan to rationalize and economize fertilizer marketing and distribution byincreasing the role of the private sector. Fertilizer distribution is handledby both public (federal and provincial) and private sector agencies. Each ofthese agencies operates in designated provinces, except the NationalFertilizer Marketing Ltd. (federal) and the Fauji Fertilizer Co. Ltd.(private), which cover the whole of Pakistan. Both public and private sectoragencies distribute their products (full domestic and respective share ofimported fertilizers) through dealers and outlets. The public sector's 7,000outlets are insufficient for efficient supply. To take advantage of the lowoverhead, transport and storage costs and the outlet network of the privatesector, GOP increased the private sector's share in fertilizer imports from50% to 60% in 1987, but by FY90 the private sector was not handling its fullshare while GOP was ready to increase it to 80%. The Government thereforeapproved the following: (a) the allocation of imported fertilizers was madecontingent upon marketing capabilities; (b) the private sector was toparticipate in the planning of fertilizer imports and their distribution; and(c) additional port facilities were to be made available to improve schedulingof deliveries.

4.05 Privatization of Public Tubewells. As part of the resource mobilizationeffort, privatization of SCARP tubewells in fresh groundwater (FGW) areas is

l/ The economic subsidy is defined as the difference between the domestic price and thethree-year average of the reference international price.

Z/ To be phased out by 1995 at the rate of 9% per year--President's Report, Annex V, page 2.

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being pursued with IDA assistance under the SCARP Transition Pilot and SecondSCARP Transition Projects (Cr. 1693-PAK, 2257-PAK) based on agreements reachedunder the Second Irrigation Systems Rehabilitation Project (Cr. 1888-PAK).The program calls for (a) replacement of large public tubewells by smallcapacity private tubewells, and/or transfer of public tubewells to privatefarmer groups; and (b) termination of public sector investment in new orreplacement tubewells in FGW areas. ASAL confirmed these project covenants.The objective is to complete the privatization program by 1998. GOP upheldthis policy of withdrawing from public replacement and investment in FGW areatubewells, and has encouraged the private sector to take its place. Already,213 tubewells have been phased out under the SCARP Transition Pilot Project inPunjab. The Second SCARP Transition Project covering 1346 public tubewells inPunjab and 380 in Sindh has started in FY92.

4.06 ASAL required completion of a study on Water Charges and adoption of itsrecommendations during the project period. The 'Nationwide Study for ImprovingProcedures for Assessment and Collection of Water Charges and Drainage Cess'was completed in March 1990, one year late. It proposed a plan of actionwhich was approved by GOP but implementation has been lagging. Sindh hasimplemented two of the recommended measures, shifting responsibility for watercharge assessment from the Revenue Department to the Irrigation Department,and streamlining the water rate structure (Annex 1, D7). However, overallprogress on this front was limited.

4.07 Recovery of Full O&M Costs. The Government was unable to provideadequate funding for O&M of the surface irrigation and subsurface drainagesystems and to raise recovery as agreed under ASAL and the Second IrrigationSystems Rehabilitation Project. Actual allocations have fallen short oftargets in all provinces except NWFP, with the greatest shortfall in Punjab.No water charge increases have been decided for years, and collections havestagnated around Rs 600 million, a level substantially below requirements.However, the ASAL covenants provided a great deal of flexibility regarding O&Mcost recovery. There were in effect "moving targets" on cost recovery, all tobe achieved by 1992 or later, up to 1997--after the closing of ASAL (see Annex1, D8). ASAL required only completion of a study and adoption of itsrecommendations during the project period.

4.08 Core Investment Program (FY89-91). The core investment program wasprepared in October 1988 and revised and agreed with the Bank in December1988. Actual funding for the two sectors concerned, agriculture and water,was about 80X of the targets during FY89 and FY90. The FY91 allocation,designed to offset the earlier shortfalls, was higher than envisaged in thecore program for the federal water sector. The allocation for the agriculturesector was 12% higher than in FY90. Shortfalls, on the whole, were morepronounced in the agriculture than the water sector. The Annual DevelopmentProgram (ADP) for 1991-92 which is a significant increase over the earlieryear,has been reviewed with the Bank and is broadly appropriate, althoughunder-budgeting for ongoing projects and O&M (especially in research,extension, and irrigation) remains a problem.

9

4.09 Strengthening of Institutions. ASAL envisaged the strengthening ofinstitutions dealing with agricultural pricing, rice and cotton exports, andwater sector planning. The implementation of this component, though slowerthan expected, was satisfactory. The training and technical assistancerequirements of the Agricultural Prices Commission (APCOM) have been met. Theproposed methodological improvements in pricing policy analysis have not yetbeen implemented pending further review. Recent developments indicate anincreasing gap between international prices and the lower domestic/procurementprices for cotton, basmati rice and wheat. Though commodity pricing policydid not form part of the ASAL program, this is disturbing. Action plans forimproving the cost structure of the Rice Export Corporation and Cotton ExportCorporation, and promoting the participation of the private sector in cottonand rice trade and export, were drawn up and agreed with the Bank. While theprivate sector is now participating in the rice and cotton export marketingoperations, its share of exports is small and closely regulated. Details arein Annex 1, D.

4.10 A Water Sector Investment Planning Study (WSIPS) was completed in late1990 with UNDP financing and the Bank as executing agency. The objectives ofthe study were to develop a medium-term (1990-2000) investment plan and toimprove the (federal and provincial) planning process. Its second objectivecorroborated ASAL's institutional objectives. The study recommendedstrengthening the planning cells established for its preparation andmaintaining the Technical Coordination Group at the federal level. It alsostrongly endorsed the recommendations of the ASAL study on assessment andcollection of water charges. A Consultative Meeting discussed therecommendations of the WISPS in March 1991, and consensus was reached on themajor issues in the water sector and the need for strengthening water sectorinstitutions.

5. PROJECT RESULTS AND SUSTAINABILITY

5.01 Emphasis on investment in high priority, low-cost and quick-maturingprojects has become part of the GOP strategy. However, financial constraintsprevented full implementation of the core investment program (CIP) formulatedunder ASAL. The agriculture sector received increased funding under CIP ineach succeeding year, and targets for the water sector were substantiallyachieved (80%). However, some key projects, such as LBOD (Left Bank OutfallDrain, Cr. 1532-PAK), received only 60% of their budgetary requirements inFY90, contributing to implementation delay. Still, GOP's efforts in 1991-92show substantial increase in funding which shows its commitment to the aboveinvestment strategy.

5.02 As stipulated by ASAL, fertilizer subsidies were drastically reducedfrom 35% in FY88 to 8.5% in FY91 on DAP, and from 76% in FY88 to 44.7% inFY91on SOP. The price adjustment for P and K fertilizers saves the Governmentaround US$40 million per year. The subsidy on nitrogenous fertilizer wasphased out in 1986. The role of the private sector in fertilizer distributionand marketing has been enhanced, which resulted in increased economy andefficiency. For 1991-92, the fertilizer subsidy on DAP is around 19% and forSOP around 53%, despite a decline in import prices. This compares with atarget subsidy of 0% for DAP and 36% for SOP. A further adjustment was made

10

in March 1992 to reduce the subsidy for DAP and SOP to 8% and 38%respectively.

5.03 GOP has agreed to increase recovery of O&M costs for surface irrigationand subsurface saline drainage. The actual increase has not yet materializedbecause of slow response of the provincial governments. However,conditionality under ASAL did not require this during the implemenationperiod. The program of reducing public expenditure through privatization oftubewells in FGW areas is progressing, and public investment in FCW tubewellshas ceased. In contrast, the ASAL covenants on O&M cost recovery appear to beless rigorous, possibly because of the realization that water charges are aprovincial (not a Federal) responsibility and which are politically sensitive.The delay in completion of the studies prevented a real opportunity for theBank to monitor implementation of their recommendations during the ASALperiod.

5.04 Agricultural institutions have been strengthened. Training andtechnical assistance were provided to APCOM. The Rice and Cotton ExportCorporations are being reorganized on the basis of the studies done under ASALto improve their efficiency. The private sector is now involved in rice andcotton trade and exports. Water sector planning institutions have beenprovided with planning cells. The effectiveness of institutions is beingimproved through increased numbers and quality of staff, and clearerdefinition of departmental responsibilities. However, since the studies weredelayed, not all their recommendations have yet been implemented.

5.05 Although implementation on some agreed actions was slower than expected,there is no indication that GOP would abandon any of the initiatives of theprogram. In fact GOP is still comitted to the ASAL objectives, but is of theview that more time is needed to achieve the goals and targets. This isevident in the case of the DAP subsidy where GOP has proposed a delay inachieving targets, and in the Irrigation O&M and water charges where GOPagreed to renewed targets under a recent Fordwah Eastern Sadiqia (South)Irrigation and Drainage Project. Chances of sustainability are reinforced bythe Asian Development Bank's Agricultural Program Loan (FY90).

5.06 Second Tranche Release. Release of the second tranche was delayed fromOctober 1989 to June 1990, when GOP substantially met the conditions forrelease, i.e., reduction of the fertilizer subsidy, adoption of plans forreducing fertilizer marketing costs, agreement to the action plan forimproving water charge assessment and collection, increasing the role of theprivate sector in rice and cotton exports, and formulation and implementationof the priority Investment Program.

5.07 When the Bank released the second tranche of the ASAL, the IMF had notbeen able to complete the second review of the Stand-by. This decision wastaken because: (i) ASAL conditions had been substantially met; (ii) there wasno specific provision linking the ASAL tranche release to the macroeconomicprogram. In addition, there was progress in most areas of the SBA/SAF program;and where there were deviations, Government had undertaken or had indicated itwill undertake corrective actions. In this regard it should be noted that theIMF had approved an extension of the SBA until November 1990 to allow time for

11

a fuller assessment of the FY90 outcome and the proposed program for FY91.

6. BANK PERFORMANCE

6.01 The ASAL concept emerged from a long dialogue between GOP and the Bank.This dialogue started in 1984, when SAL (Ln. 2166-PAK, Cr. 1255-PAK) wasimplemented. Substantial staff input was devoted to preparation and appraisal(Part III, E). ASAL was therefore rather costly in terms of staff time in theinitial stages.

6.02 The Bank's intervention was timely, relevant and helpful. Bank staffcoordination with IMF staff helped changing governments to make difficultdecisions. However, sufficiently strong mechanisms were not built into theprogram to ensure compliance with parts of it falling within provincialauthority. The last formal supervision mission was fielded in April 1990; itrecommended release of the second tranche in June 1990. Earlier supervisionmissions were effective in dealing with CIP and fertilizer price adjustments,and in expediting the studies. ASAL was also costly in terms of supervision,with the number of staff weeks in FY89 and FY90 well above Bank "norms".

7. BORROWER PERFORMANCE

7.01 Borrower performance on the whole was satisfactory. The fertilizersubsidy was drastically reduced; the scope of the private sector in fertilizermarketing and distribution was increased; public investment in tubewells inFGW areas was stopped; an action plan for recovery of of O&M irrigation costswas agreed upon; institutions were strengthened; and investment in agricultureand the water secors were rationalized. However, due to financial constraintsthere was inadequate funding in the earlier years of the core investmentprogram. Other problems included delays in the completion of studies,procurement, disbursements, and preparation of audit reports; incompleteprogress reports; and failure to introduce refined pricing policy analysiswith APCOM participation, and to implement agreed action plans expeditiously.Overall, response to the ASAL program by the provincial authorities waslimited. The conditions relating to the areas which were the responsibility ofthe Provinces ( e.g. water charges, irrigation O&M,) were outlined in theAgreement as agreed by the Federal Government on behalf of the Provinces, butimplementation by the provinces was slow or not forthcoming.

7.02 The Secretary to the Government of Pakistan, MFAC, was designated ascoordinator and chairman of the Program Steering Committee (PSC). Relevantagencies were represented on PSC and its membership was drawn from seniorofficials. Although PSC was well constituted, it did not forcefully follow upwhen certain agreed schedules were delayed. This was explained by the need toseek action from the many agencies responsible for the various programs, andthe lengthy decision making process.decided on their merits.

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8. CONSULTING SERVICES AND PROCUREMENT

8.01 Three studies were carried out by consultants under this program(financed under two other projects; see para 3.01):

(a) Rice and Cotton Export Operations studies under the auspices ofAPCOM;

(b) Water Charges Assessment and Collection Study under theresponsibility of the Ministry of Water and Power; and

(c) SCARP Transition Feasibility Studies in Punjab and Sindh.

8.02 All studies started late due to slow processing of consultants'proposals and award of contracts. The first two studies were delayed by abouteight months and one year, respectively. The SCARP Transition study wascompleted in May 1990 instead of June 1989.

8.03 The study on Rice and Cotton Export Operations was adequate.However, considerable input had to be provided by APCOM, in addition to afull-time coordinator, and Bank supervision missions. The Water Charges studywas carried out satisfactorily. Based on the SCARP Transition Study, aproject was appraised and an IDA credit (Cr. 2257-PAK) approved in June 1991.

8.04 Procurement. There were frequent delays in the preparation of biddocuments, evaluation of bills, and award of contracts, which considerablyslowed utilization of the loan proceeds. To facilitate private sector importsof pesticides, the Bank agreed to earmark US$80 million for procurement underimporters' own procedures rather than ICB procedures laid down in itsguidelines.

9. FINDINGS AND LESSONS LEARNED

9.01 The principal findings and lessons learned from implementation ofthis program are:

9.02 Action was more timely in the areas of federal governmentresponsibilities (e.g., fertilizer subsidy) than those of the provincialgovernments (e.g., O&M recovery).

9.03 The leading role in program coordination was given to the MFAC. Theministry needs to be strengthened. Its role in the sector, due to division ofresponsibility between federal and provincial governments, is limited. Inaddition, frequent changes in senior officials during the course of the ASALprogram caused problems as necessary continuity was not maintained. In thefinal analysis, however, MFAC deserves credit for delivering the program in afairly satisfactory form, some delays and shortfalls notwithstanding. Thelesson of this experience is the need for critical appraisal of implementingagencies, especially those dealing with programs that require difficultdecisions on economic reforms with wide political implications.

13

9.04 The project was staff-intensive for preparation and appraisal as wellas supervision (Part III, E). The lesson is that staff requirements forprogram loans should not be underestimated; supervision "norms" may not beapplicable for this type of operation.

9.05 The ASAL focussed on a few important issues rather than attempting todeal with a broader range. It attempted to address resource mobilizationthrough cost and subsidy reduction, privatization, and improvements in O&M andmarketing by upgrading a few key institutions, all designed to improveeconomic efficiency. However, ASAL set quantifiable targets only forfertilizer subsidy reduction and the CIP. All other elements required onlystudies to be carried out during the implementation period. Delays in studycompletion caused delays in adoption of their recommendations. This raises animportant issue on the timing of actions. While implementation before loanclosing could provide a greater chance for compliance with conditions, it alsoraises the issue of commitment of the Government to the actions proposed. Theevents after project closing (e.g water charges, action plans for rice andcotton export marketing) suggest a lack of commitment by the government to theagreed actions.

9.06 Although actions agreed on by the Federal Government were, inprinciple, binding on the provincial governments ( e.g vater charges,irrigation O&M) measures to be implemented by the provinces were somewhatdelayed. This raises the issue of whether there should be greaterparticipation of the provinces in project formulation and finalization inprograms of this type.

9.07 Another lesson is the importance of combining reform programs withconcurrent efforts in the same area. The success of ASAL was enhanced becauseit moved in parallel with ongoing projects, PFP, IMF and other aid agencies'programs that had similar or identical objectives.

9.08 Finally, private sector importers experienced difficulty using WorldBank procurement guidelines, which were subsequently relaxed. It may beuseful to adjust procurement procedures in program loans, depending on whetherthe importers are in the public or private sector.

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PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE

10.01 The Government of the Islamic Republic of Pakistan spelled out itsreform program for the agricultural sector in its statement of AgriculturePolicy in 1988 (Annex 2). That statement outlined the basis for a World Bankloan for the sector adjustment program. This program was a boost rather thana reason for adjustment which the Government of Pakistan had formulated.

10.02 The project aimed at promoting competitive agriculture and enhancingsustainable productivity and growth. The project objectives, as initiallyagreed, viz., improved mobilization of resources by reduction of costs andsubsidies, rationalizing investment program for agriculture and water sectors,and strengthening of institutions dealing with agricultural processing andtrade in major agricultural commodities, rice and cotton to be specific, werelargely implemented. Although some changes in the magnitude and timing oforiginally agreed action had to be negotiated with the World Bank duringimplementation, the program was delivered in a substantially wholesomecharacter. The examination and analysis of the program as contained in PartsI and III of this PCR provides proof of that claim. The impact of thesemeasures on productivity and production in the agriculture sector would needto be evaluated in due course.

10.03 The successful implementation of the program, besides politicallyhard decisions of the GOP, was greatly helped by the Bank's supervisionmissions which displayed professional understanding of the economic andpolitical environment in which the project was being implemented. Thecontinuous dialogue between GOP and World Bank staff was key to the success ofthis program.

10.04 The specific reforms introduced in the sector through this programcan be summarized as under:

(a) Subsidy on fertilizers was curtailed which resulted in annual savingsin the budget of US$40 million equivalent. Simultaneously, outputprices were substantially increased as natural corollary to subsidywithdrawal to achieve the adjustment balance. The same priceadjustment policy is being continued. The actual increase in pricesof major crops during the program was as tabulated below:

Price of Crops : Rs 40/KGWheat Rice (Basmati) Cotton Sugarcane

1988-89 85 135 196 12.61989-90 96 143.5 211 13.81990-91 112 150 245 15.3Increase over 88-89(%) 32 11 25 21

(b) Private sector was enabled to play a role in the rational andecononmic marketing and distribution of fertilizers.

15

(c) Investment program in the agriculture and water sectors was focussedon priority projects through a three-year (FY89-91) core program.

(d) Privatization of public tubewells in the fresh groundwater (FGW)areas was earnestly begun, and expansion of public tubewells ceasedin FGW areas which proved waiteful in the public sector.

(e) Measures were devised to move towards full recovery of O&M chargesincluding strengthening of the agencies responsible for water chargesassessment and collection.

(f) Technical assistance was provided for studies on Rice and CottonExport Corporations which were completed under this program tostrengthen the agencies dealing with the sector.

10.05 The adjustment program in all the above noted policy areas is beingcontinued even after the project completion. The noteworthy aspect is thatthis program has been continued despite three changes in the Government, andeach Government with a different political agenda. This shows wholesalecommitment to economic reforms in the agricultural sector.

16

PART III - STATISTICAL INFORMATION

A. RELATED BANK LOANS AND CREDITS

Title Approval Date Status

Third on Farm Water Management 5/21/91 ongoing(Cr. 2245/Ln.3327)

Second Scarp Transition 6/4/91 ongoing(Cr. 2257)

Private Tubewell 4/11/89 ongoing(Cr. 2257)

Second Irrigation Systems 3/29/88 ongoingRehabilitation (Cr. 1888)

B. LOAN DATA

(In USS Million equivalent)As of June 8, 1992

Original Disbursed Cancelled Repaid Oustandini

Loan 2986-PAK 200.00 200.00 -- -- 200.00

C. TIMETABLE

Original Loan Date(s) Actual

Initiating Memorandum August 30, 1985 October 5, 1985Negotiations March 7-11, 1988Letter of Development 'May 31, 1988Policy

Board Approval August 2, 1988Loan Signing 'September 7, 1988Effectiveness October 1, 1988 November 4, 1988Tranche Release2nd Tranche (USS100 M) June 15, 1990

Closing Date June 30, 1990 January 31, 1991Accounts Closed June, 1991

17

D. CUMUlATIVE LOAN DISBURSEMENT

(In US$ Million)FY89 FY90 FY91

(i) Estimated 100.00 180.30 200.00(ii) Actual 60.29 119.65 200.00(iil) (ii) as % of (i) 60.29 66.36 100.00

E. USF OF LOANI

FY89 YY90 FY91 TOTAL

Million DollarsPesticides & Implements 50.02_ 50.0Pesticides 13.0 13.0DAP 53.53/ 39.9 93.4SOP 5.1 5.1NPK _ 4.1 4.1Urea _ 11.4 23.0 34.4

TOTAL 50.0 83.0 67.0 200.0

Source: MFAC (Coordinating Section), M/Finance (External Finance Section),and mission estimates.

Notes: 1. The year of loan use refers to the year in which the purchasecontract was made.

2. Disbursements did not correspond to the years of contract.

l Figures have been rounded.

Retroactive financing for "Agricultural Imports".

3/ Including US$21.0 million to cover imports during the period of postponement of the second tranche release.

18

F. USE OF BANK RESOURCES

I. Staff Inmuts (Staff Weeks)

Y184 FY85 FY86 FY87 FY88 FY89 !Y90 1Y91 TOTAL

Preparation 1.3 58.1 11.9 - - - - - 71.3

Appraisal - - 10.6 20.7 43.4 - - - 74.7

Negotiations/ - - - - 13.0 1.8 - - 14.8Board Approval

Supervision - - - - 0.2 24.9 22.5 8.0 57.6

TOTAL 1.3 58.1 22.5 20.7 56.6 25.7 22.5 8.0 204.9

II. Mission Data

Time in No. of Specialization Staff Date ofDate Field Persons Weeks Report

Preparation FY 84-86 24.Owks 6 E, Eng 71.3 Onty documentAppraisal 7/87 4.0 wks _6 E. Eng 74.7 July 8, 1988Supervision I 12/88 18 dys 3 E, Eng 13.6 Jan. 2, 1989Supervision II 5/89 14 dys 3 E, Eng 11.3 June 4, 1989Supervision III 11/89 8 dys 2 E, Eng 11.2 Jan. 1, 1990Supervision IV 4/90 7 dys 3 E, Eng 8.8 May 25, 1990PCR 7/91 7 dys 1 E, Eng 9.0 June 1992

E = Economist, Eng = Engineer

19

G. INPUTS: RETAIL SALE PRICES OF FERTILIZERS

(Rs per bag of 50 kg/110 lbs)

Date Urea AN/CAN AS NP SSP DAP SOP NPK(46) (26) (21) (23:23) (18) (18:46) (50) (10:20:20)

01.01.79 63.0 36.5 29.0 46.5 -- 67.0 27.0 42.525.02.80 93.0 50.0 42.0 78.0 25.0 100.0 30.0 42.513.04.80 93.0 50.0 42.0 78.0 25.0 100.0 -- 63.027.10.81 93.0 50.0 42.0 78.0 25.0 100.0 30.0 63.016.03.82 103.0 55.0 47.0 84.0 25.0 105.0 30.0 65.006.10.82 118.0 58.0 54.0 97.0 29.0 121.0 35.0 75.0

11.06.83 128.0 60.0 59.0 110.0 40.0 133.0 40.0 82.020.05.86 * * * 110.0 40.0 146.0 50.0 98.018.09.87 * * * 119.0 46.0 161.0 60.0 105.0

10.10.88 * * * 137.0 53.0 185.0 72.0 115.031.08.89 * * * 149.0 58.0 203.0 85.0 128.026.03.90 * * * 150.0 68.0 217.0 107.0 143.029.10.90 * * * 173.0 93.0 249.0 150.0 176.0

Source: Federal Bureau of Statistics, and Food and Agricultural Division(Economic Wing), MFAC.

AN/CAN ammonium nitrate/calcium ammonium nitrateAS ammonium sulphateNP nitrophosSSP single super phosphateDAP diammonium phosphateSOP sulphate of potashNPK nitrogen phosphate and potash* not applicable after deregulation

Note: Figures in parentheses are main nutrients in percent.

20

H. OUTPUTS: SUPPORT PROCUREMENT PRICES OF CROPS EMBRACED BY PRICE SUPPORT

PROGRAM

Crops Support Prices - Rupees per 40 KR.1980-81 87-88 88-89 89-90 90-91 91-92

1. Sugarcane(Mill Gate)i) NWFP 9.38 11.52 12.32 13.50 15.25 16.75ii) Punjab 9.65 11.79 12.59 13.75 15.25 16.75iii) Sindh 9.81 11.95 12.86 14.00 15.75 17.00iv) Baluchistan - - - - - 17.00

2. Rice (Paddy) (a)i) Basmati 75.00 130.00 135.00 143.50 (d) 155.00ii) Irri-6 (FAQ) 38.58 55.00 60.00 66.00 73.00 78.00iii) Irri-6 (Superior) - 59.00 65.00 71.00 80.00 85.00iv) KS-282, DR-82 - 59.00 65.00 71.00 80.00 85.00

DR-83 (FAQ) - - - - - -v) KS-282, DR-82 - 63.00 70.00 76.00 84.00 -

DR-83 (Superior)

3. Seed Cotton (Phutti)i) Desi 156.00 173.50 176.50 191.50 220.00 255.00ii) AC-134-NT 160.00 185.00 188.00 203.00 235.00 270.00iii) B-557, 149-B 171.00 193.00 196.00 211.00 245.00 280.00

NAIB-78, SarmastQulandri, CIM-70Deltapine MS. 39/40MS-84

iv) K-68/69,93 182.00 207.00 210.00 225.00 260.00 290.00MNH 93/129

4. Wheat (a) 58.00 82.50 85.00 96.00 112.00 124.00

5. Gram (b) - 160.50 180.00 200.00 210.00 230.00

6. Oilseeds (c)i) Sunflower 117.89 170.00 177.00 205.00 225.00 250.00ii) Soyabean 107.17 160.00 165.00 185.00 200.00 230.00iii) Safflower 96.45 140.00 143.00 165.00 180.00 220.00

Source: Economic Survey of Pakistan 1989-90, and Agricultural Prices Commission.

(a) At purchasing centers (places designated)(b) At mandi level(c) At farm level(d) B/370 150.00

B 385 143.00Lateefy 100.00

21

Annex 1Page 1

CONDITIONS OF ASAL AND ACTIONS TAKEN

A. Actions Taken Before ASAL

Policy Areas Actions

1. Reallocation of public Mainly in compliance vith the Worldexpenditures from input Bank financed Structural Adjustmentsubsidies to priority water Loan (approved June 1982) substantialsector and agricultural reallocation of expenditures began inimprovement projects. 1982-83. Subsidy reduction on

fertilizers and pesticides alsocommenced and by July 1988 the onlyimportant fertilizers beingsubsidized vere DAP (35X), SOP (76X)and NPK (63X). This issue wasaddressed under ASAL.

2. Agricultural input and output Since FY77, GOP has constantlyprices to be aligned with the revieved and revised the prices oflong-term t re n d of major commodities. Subsidies oninternational prices, pesticides and nitrogenous

fertilizers vere eliminated. AnAgricultural Prices Commission vasset up in 1981 to continue the priceadjustment process. Furtherimprovement in these areas vasenvisaged under ASAL.

3. Diversification of agriculture An oil seed development planwith emphasis on high value providing incentive prices andcrops such as edible oils and support services to promote non-fruits. traditional oil seeds (sunflover,

safflover, soya beans) has been underexecution since the mid-1980s.However, it has met with mixedsuccess. New initiatives arenecessary for a breakthrough. Thehorticultural subsector is receivingconsiderable support from both thepublic and private sectors, but it isfacing market constraints.

22

Annex 1Page 2

B. Actions Taken to Meet Conditions of Effectiveness

1. A Program Steering Committee The PSC was established vith(PSC) vith suitable composition membership drawn, among others, fromand povers Vas to be the E in implementing agencies:established. NFAC, Planning Commission, APCOM, and

Ministries of Finance and Commerce.

2. A Program Coordinator was to be The Secretary, MFAC was appointeddesignated. Coordinator. His Joint Secretary

served as member and Secretary ofPSC.

3. Program Directors at different This was done for all provinces.locations were to bedesignated.

4. A Priority Investment Program This was done. But soon after, inwas to be formulated and agreed December 1988, the Program vaswith the Bank. revised and again agreed with the

Bank.

C. Actions Taken for Release of Second Tranche

1. Targets for subsidy reduction P and K prices were raised inon P and K fertilizers vere to September 1989 and again in Marchbe met. 1990. The first increase of lOX and

16X combined with the second, whichranged from 7X for DAP to 26X forSOP, fully met the agreed targets.

2. Measures were to be adopted to GOP prepared an action plan whichreduce the costs of fertilizer provided for (a) adoption of amarketing and distribution, formula for deciding on the share of

the private sector in thedistribution of fertilizers, (b)involvement of the private sector inplanning fertilizer imports and theirdistribution, and (c) increase ofport facilities to improve schedulingof deliveries to meet peak demand.

3. A plan based on the water The plan was approved by GOP andcharges assessment and passed on to the provinces forcollection study was to be action. It recommended separatingadopted. responsibilities for assessment and

collection, and increasing recoverieswhere the gap between O&M

23

Page 3

expenditures and recoveries wassigniflcant. Details are given inSection D.7 below.

4. The first-year prlority Fundlng level during FY89 fell shortinvestment program for vater of estimated requlrements of CIP inand agriculture sectors was to both the vater and agriculturebe implemented. sectors. The second tranche release

was postponed mainly for this reasonand due to slow action on some othercommitments.

5. Recommendations of the rlce and Due to late completion of the study,cotton export operations study review of its recommendations wasvere to be adopted. delayed from April to December 1989.

This, combined with other shortfalls,contributed to the postponement ofthe second tranche release.

D. Status of Legal Covenants

Strategies and Measures Implementation StAtus

1. GOP and the Bank to exchange Views were regularly exchanged.views from time to time on the Progress Reports and Memoranda ofprogress achieved in the Understandings (MOUs) were preparedLmplementation of the ASAL to focus attention on requiredProgram (Loan Agreement, actions.Section 3.01).

2. World Bank procedures for GOP followed World Bank procurementprocurement of goods and procedures. With the agreement ofservices to be followed the World Bank, private sector(Section 3.02). importers were alloved to use thelr

own procedures for US$80 milllonworth of imports.

3. GOP to follow World Bank This was done.guidelines in employingconsultants for a study onwater and drainage chargesassessment and collection(Sectlon 3.03).

4. GOP to have Project Accounts, The auditing requirements were met,including Special Account, but the audlt reports of YY89 andaudlted annually, and to FY90 were submitted late.furnish to the Bank a copy of

24

Annex 1Page 4

the audit report not later thansix months after the end ofeach fiscal year (Section3.04).

5. GOP to eliminate the economic Compliance with these requirementssubsidy for phosphate was partial. A fertilizer pricingfertilizers by October 1991 and formula was agreed with the Bank andpotash fertilizers by October the schedule for subsidy elimination1995 through annual price by agreed dates was maintained byadjustments on the basis of an increasing fertilizer prices inagreed formula (Section 3.05). 1989/90 (March 1990) between 7X and

26X (DAP and SOP respectively), andfurther by l5X and 40X during 1990/91(October 1990). With the latterprice increases, targets were fullymet. Hovever, by October 1991subsidies had risen again to 1989target levels.

6. GOP to lower the cost of GOP approved an action plan whichfertilizer marketing and increased the role of the privatedistribution by (a) sector in marketing and distribution.rationalizing the allocation of The private and public sector sharesresponsibility between public (60:40 in 1989) were to be revised onand private sectors, (b) the basis of their respectiveincreasing the role of the capacity.private sector and, (c)facilitating the private sectorto play its intended role(Section 3.06).

7. GOP to undertake a study on The study was completed with a one-improvement of water and year delay. The action plan wasdrainage charges assessment and prepared by the Ministry of Water andcollection by March 1989; to Power in collaboration with thereview its findings with the Provinces, and approved by GOP. ItBank and prepare an action plan mainly stipulated (a) assigning waterby May 1989; and to cause the charges assessment to one agency andProvinces to implement this collection to another, and (b)plan to improve their increasing charges more rapidly inassessment and collection those Provinces where currentprocedures (Section 3.07). recoveries were significantly below

O&M expenditures.

The Provinces were slow to implementthe Plan, and the expected increasesin O&M cost recoveries have not yetbeen realized. Following are the

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steps already taken:

(1) Baluchistan and Sind are totransfer assessment responsibilitiesfrom the Board of Revenue to theIrrigation and Pover Department.Only Sind has done so.

(2) The Plan calls for streamliningthe water rate structure by reducingthe number of assessment categoriesto five to eight. Sind has reducedthe number of categories to six whileother Provinces are contemplatingdoing the same.

B. The Provinces to adopt a Implementation is veak although GOP'stimetable to reach and maintain commitment regarding full recovery offull recovery of O&M costs of O&M costs from beneficiaries remainssurface irrigation and unchanged.subsurface saline drainagefacilities through water and/ordrainage charges (Section3.08).

(a) To that end, if by July 1,1992, Punjab and Sind shallhave been unable to achievefull O&M cost recovery despiteimprovements in their vater anddrainage charges assessment andcollection procedures, GOP tocause them:

(i) if the shortfall isexpected to be less than 25X,to adjust charges to make upthe shortfall and achieve fullrecovery by July 1, 1993;

(ii) lf the shortfall isexpected to be 25 or more butless than 40X, to adjustcharges, through periodicincreases satisfactory to theBank, to make up the shortfalland achieve recovery by July 1,1995; and

(iii) if the shortfall isexpected to be 40X or more, toadjust charges, through

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periodic increases, to make upthe shortfall and achieve fullrecovery by July 1, 1997.

(b) Thereafter, GOP to causePunjab and Sind to maintainfull O&M cost recovery and, tothat end, continue to adjusttheir vater and/or drainagecharges as necessary.

(c) GOP to cause NWFP andBaluchistan to adjust theirvater and/or drainage chargesto the levels to vhich Punjaband Sind shall have adjustedtheir charges under paragraph(a) and (b) above; provided,hovever, that such adjustmentsdo not result in charges atlevels below those assessed inFY88.

9. GOP to cause the Provinces to GOP has refrained from investment inphase out all public tubevells public tubevells in FGW areas. Inin FGW areas (except in South Punjab, 213 tubevells have beenRohri and Ghotki areas in Sind) privatized under the SCARP Transitionby (a) refraining from any Pilot Project. The Second SCARPfuture investment in nev or Transition Project covering 1346replacement tubevells in FGW public tubevells in Punjab and 380 inareas; and (b) Punjab and Sind Sind became effective in April 1992.privatizing tubevells in FGWareas as follovs: (i) under asecond SCALP transition projectin Punjab and pilot SCARMPtransition project in Sind byJune 1994 and, (ii) under otherSCARP projects, starting July1994, by June 1998.Feasibility studies for theSCARP transition projects inPunjab and Sind were to becompleted and furnished to theBank by June 1989, and for theother SCARP projects by March1993 (Section 3.09).

10. A Priority Investment Program The Priority Investment Programfor the agriculture and water (referred to as Core Investment

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sectors vas to be formulated Program, CIP), establishment of whichfor FY89-91 aimed at: (i) was a condition of loanimproving utilization of effectiveness, was prepared withinexisting assets, and raising the agreed time. However, ininput efficiency and crop December 1988, it was revised withyields; (ii) facilitating Bank approval in light of furtherprivate sector participation review of projects. This covenantin input distribution, served the useful purpose ofmarketing of agricultural providing funds for priority projectsproducts, groundwater during tight financial situations.exploitation, and agricultural There were shortfalls, nevertheless.advisory services; and (iii) Despite a reduction in program size,designing new irrigation funding fell short of estimatedprojects based on water requirements due to budgetavailability (Section 3.10). constraints. Federal ADP allocations

for the water and agriculture sectorsin FY89 were 98X and 83X ofprovisions made in the core programand actual expenditures werefractionally less. Provincialallocations for the water sectorexceeded the CIP provisions except inSind. However, for the agriculturalsector, provincial allocations vereless than 71X of provisions in allprovinces. In FY90, the federal ADPprovided 85X for agriculture and 72Xfor the water sector. However,during FY91, the federal allocationfor the water sector vas higher thanthe CIP target, and for agricultureit was 12X more than in FY90, whichwas adequate for the program.

On the whole, CIP funding, althoughshort of targets, was satisfactoryseen in relation to other programsand in the light of financialdifficulties.

11. The Agricultural Prices APCOM's involvement in determiningCommission (APCOM) was to be fertilizer prices has been valuable.actively involved in the APCOM staff received training in thedetermination of phosphate and Bank on pricing methodology, and apotash fertilizer prices, and professional dialogue between APCOhits methodology for formulating and Bank staff was initiated.price recommendations was to be APCOM's organization has beenreviewed ennually with the Bank strengthened and its influence has(Section 3.11). grown, but it has not yet assumed the

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full role foreseen in the program.

12. APCOM's work program vas to be This vas done.reviewed by the Bank annually(Section 3.12).

13. A rice and cotton export The study was completed in Decemberoperations *tudy was to be 1989, about eight months late. Itcarried out by GOP, and its was reviewed vith the Bank, and anfindings and a proposed action action plan for improving the costplan revieved vith the Bank by structure of the Rice and CottonApril 1989 (Section 3.13). Export Corporations vas agreed in

early 1990. Its main features were:(i) separation of export andprocurement functions; (ii) promotionof private sector involvement inexport of rice and cotton; and (iii)administrative and technicalimprovements.

The private sector is now active incotton exports and handles about halfof total exports. It has also becomeinvolved in rice exports.

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GOVERNMENT OF PAKISTAN

POLICY STATEMENT ON THE AGRICULTURE SECTOR

Recent Development Performance

1. Since the start of this decade, Pakistan's economy in general and theagricultural sector in particular have undergone major structural changesresulting in sustained high grovth rates in incomes and an improved standard ofliving. While population has been groving at the rate of about 3X per annum, percapita GDP has been increasing at about 4X per annum. Agriculture's contributionto the overall performance of the economy has been equally notable. Today, theagricultural sector supports 70X of the population, employs 52X of the laborforce, accounts for 55X of export earnings, and generates marketable surplusproduction to meet the nation's basic food and fiber requirements.

2. With the exception of the two successive crop failures in FY64 and FY85 dueto drought and pest attacks, the achievements hitherto of the agricultural sectorduring the Sixth Five-Year Plan (FY84-88) have been remarkable in terms ofproduction, investment and physical targets. Compared to 1982/83, the base yearfor the Sixth Plan, agricultural GDP in real terms increased by 24X by 1986/87.The total area under the major crops (wheat, cotton and rice) also increased by5.5% during the same period. As a result, the economy has attained self-sufficiency in wheat, and generated groving export surpluses of cotton and rice.These achievements were made possible by combination of appropriate productionincentives given to the farming community, a shift in public investmentpriorities tovard fast-gestating and low-cost schemes, increased participation ofthe private sector in input delivery and groundwater develogment, and improvedproject implementation capability of the public sector. During this period, GOPhas phased out input subsidies for pesticides, seed, tractor hire and nitrogenousfertilizer. To maintain adequate returns to the farmer, support prices foragricultural output have been adjusted upvard and reflect comparable world marketprices. The Government has also replaced the wheat rationing system by amodified system of releasing wheat at fixed prices to flour mills and traderswithout any quota or restrictions. This, apart from reducing subsidies, willalso ensure stable food prices throughout the year in all parts of the country.

3. Investments in the agricultural and vater sectors during the four years ofthe Sixth Five-Year Plan have resulted in increased water availability by 7X,irrigated area by 3.2 million acres, and fertilizer offtake by 30X, as comparedto the 1982/83 base year.

Sector Objectives

4. As stated in the Seventh Five-Year Plan, the objectives for theagricultural sector are to:

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(a) accelerate the modernization of the agricultural sector to achieve a grovthrate substantially higher than the population grovth rate so that thesector ! - -ste resources for sustained development of the economy vitha high deg.ee of self-reliance;

(b) increase agricultural productivity so as to realize future increases inagricultural production mainly from vertical expansion effectively over-riding the limitation on area expansion imposed by liaited irrigation vatersupplies;

(c) consolidate self-sufficiency in grains and make a determined effort toregain self-sufficiency in sugar production and reduce dependence on edibleoil imports;

(d) diversify agricultural production and rural employment opportunities bygiving more attention to high value products like fruits, vegetables,oilseeds, meat, milk and poultry, and increasing their share in theagricultural GDP;

(e) improve support price system and market mechanism in order to make thesystem more effective, especially for oilseeds, pulses and horticulturalcrops;

(f) bring about a major transformation in the productivity of the livestocksector to meet the groving demand for milk and meat and to contribute tothe vell-being of less developed areas;

(g) evolve an integrated program for developing barani, riverine andmountainous arAas as a part of a long-term program to arrest environmentaldegradation and conserve the country's physical resources of forests, landand water; and

(h) strengthen the institutional support and provide incentives for generatingexport surpluses by encouraging crop specialization in the areas/regionswhich have comparative cost advantages and resource endonment.

In order to meet these objectives, the Government plans to undertake a series ofpolicy and institutional reforms supported by a larger investment program on thelines recomended by the National Commission on Agriculture in its reportsubmitted to the Government in April 1988.

Investment in Agriculture

5. In the Sixth Five-Year Plan, Rs 39 billion vere allocated for theagricultural and vater sectors. Although this represented an increase of 76X innominal terms over the Fifth Plan, the agriculture/water sectors' share in the

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public sector development program was to remain roughly unchanged at lt8. Inagriculture, particularly large increases were allocated to extension andresearch, public grain storage, mechanization, livestock, forestry and fisheries.In the water sector, particular emphasis was given to investments to rehabilitatethe deteriorated irrigation systems, relieve vaterlogging and salinity problems,and increase the efficiency of vater use through on-farm and command vatermanagement programs. The unchanged share of the agriculture/water sectors calledfor in the Plan reflected the Government's policy to encourage greater privatesector participation as against public provision of inputs (e.g.. in improvedseeds, fertilizers and pesticides), and to rationalize expenditures to obtainoutput gains from existing infrastructure (irrigation systems rehabilitation andwater management projects), rather than undertaking major nev capitalinvestments.

6. During the first four years of the Sixth Plan, the rates ofimplementation in agriculture and water sectors were somewhat slower thanenvisaged in the Plan. In addition to overall resource constraints, thefavorable increase in private sector activities, shortfalls in the vheat cropreducing the need for storage, and the cost escalation/high interest chargesprolonging the completion of ongoing water projects, led to implementation lags.In response to the under-fulfillment of the initial investment plan targets, theGovernment undertook a major review of the investment program and identified acore program in both the agriculture and water sectors which called for increasedallocation in the final three years of the revised plan. The provisional planimplementation assessment in FY86-87 indicates a turn-around compared to previousyears and the allocation for FY87-88 would sustain the improved performance. Theestimated rate of implementation for the Sixth Plan is expected to reach 77X inagriculture and 86X in the water sector as against 90X for the Plan as a vhole.Under these circumstances, the thrust of Government policy towards increasedprivate sector participation and improved utilization of existing assets has beenmaintained. Implementation rates are expected to be relatively high in areaslike agriculture education (182X), extension (131X), research (128J), irrigation(104X), water management (117X), and relatively low in areas vhere the privatesector role has improved, viz., public storage (34X), improved seeds (59X), plantprotection (54X), and mechanization (77X). Only in drainage (82X) and floodcontrol (41X) has the performance been substantially lower than the Governmentwould like to have seen. Even so, in the past two years, performance in drainageproject implementation has improved significantly and ve would expect this trendto continue.

7. The shift in Government's investment priorities that hascharacterized the Sixth Plan will be continued during the Seventh Plan in thelight of recommendations of the National Commission on Agriculture (NCA). TheCommission has proposed a comprehensive but practical agricultural strategy forthe next 12 years, up to the year 2000, with specific recommendations for theSeventh Plan period (1988-1993). The main goals of the agricultural strategyrecommended by the Commission are to consolidate self-sufficiency ln grains, makea determined effort to regain self-sufficiency in sugar and pulses, reducedependence on edible oil imports and accelerate the modernization of the

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agricultural sector to achieve a grovth of 5% per annum--substantially higherthan the population grovth rate, so that the, sector can generate resources forthe sustained development of the economy vit~h a high degree of self-reliance.For achieving the desired increase in crop yields, the proposed strategy wouldextend the use of available technologies for crops like vheat, cotton and rice toa larger proportion of producers and to develop improved technology packages forsugarcane, maize, coarse grains, oilseeds, pulses, fruits and vegetables andextend the use of these packages to a significant number of farmers.

8. The Commission has laid special emphasis on achieving agriculturalgrovth vith social justice. A series of proposals have been made to secure thevhole-hearted cooperation of farmers in the process of development. Specialattention has been given to the problems of the small farmers and landless ruralhouseholds. The Commission has recommended several measures to improve livingconditions in rural areas.

9. A major thrust of the Commission's recommendations is the emphasis onconservation and development of soil and vater resources. For this purpose, theCommission has proposed improved arrangements to plan, coordinate and financeseveral inter-related activities in the fieids of vatershed management, rangemanagement and for the development of barani, arid and riverine areas.

10. The NCA has also recognized the crucial role of private investment inagriculture which is presently of the order of Rs 7 to 8 billion a year. It hasrecommended that this should be raised to about Rs 17 billion a year during theSeventh Plan. For this purpose, the credit availability thrust would beincreased substantially from about Rs 16 billion in 1986-87 to Rs 46 billion in1992-93. Of this amount, Rs 16 billion vould be needed for development purposes.

11. The investment priorities of the Seventh Plan will be based on theserecommendations and the proposed Water Sector Investment Planning Study. Afterthe approval of the Seventh Plan, a three-year priority investment program foragricultural and water sectors vill be formtlated and its funding for the firsttwo years will be revieved vith the Bank in October 1988 and October 1989.

Resource Mobiiization

12. During the past fev years, shortage of budgetary resources hasconstrained the expansion of public sector programs. The Government has beenattempting to mobilize greater resources through the expansion of tax revenues,improved cost recovery for goods and services provided through the budget orthrough public enterprises and encouraging the increased private sectorparticipation in a number of areas. The agriculture sector is expected tocontribute to these efforts through gradual reductions in the subsidy onfertilizers and the phasing out of public tubevells in fresh groundwater areas.

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Reduction of Fertilizer Subsidy

13. Until recently, it has been the Government's policy to encouragefertilizer use through price as well as non-price measures such as disseminationof knowledge and credit. This policy has been very successful in increasing theuse of fertilizer and spreading the knowledge of its benefits. The Governmentrecognizes that it is nov time to shift emphasis towards greater reliance on non-price measures. It is the Government's intention over the next four to eightyears to phase out the remaining economic subsidy on phosphatic and potassicfertilizers, i.e., the difference between the domestic selling price and theimport parity equivalent, suitably smoothed to remove the effect of short-termfluctuations. In 1986, the Government liberalized the market for nitrogenousfertilizers. Selling prices are no longer fixed and imports, hitherto limited toa public sector agency, have been opened up to the private sector. Together,these measures vill prevent the re-emergence of any subsidy on nitrogenousfertilizers except periodically on a temporary basis, if world prices rise abovetheir medium-term trends. As for the remaining non-nitrogenous fertilizers, theGovernment's policy is to remove subsidies through price increases and expandingprivate sector participation in marketing which vill reduce costs. Towards thisobjective of sustained annual reductions in the unit economic subsidy, theGovernment has recently reduced the unit economic subsidy rate for the follovingfertilizer products: DAP from 29X to 25X, TSP from 41X to 40X, and SOP from 77Xto 73X. The remaining unit economic subsidy for all phosphate and complexfertilizers will be phased out by the end of four years, and SOP by eight years,in equal annual percentage point reductions, provided that international pricesof fertilizers do not rise significantly above medium-term trends. Subsidyremoval will be effected through annual price increases, marketing and incidentalcost savings, and rationalizing the allocation of imported fertilizerdistribution between public and private sectors vith a viev to reducing costs ofmarketing and distribution. In addition, the Government will continue to reducesubsidies by finding cheaper and equally effective substitutes for SOP. Progresstovards elimination of economic subsidies would be monitored in annual reviews bythe Government and the Bank beginning in October 1988.

14. With fertilizer use now more videly accepted in Pakistan, informationregarding the amounts and mixes appropriate in different local and soilconditions has taken on added importance. Towards this objective, the Governmentwould continue to strengthen the soil fertility program in order to developappropriate recommendations for farmers.

O&M Cost Recovery of Irrigation Systems

15. Pakistan's most valuable productive asset is its water resources.The need to provide adequate funds to properly operate and maintain theirrigation systems is fully recognized at all levels of Government. Since 1983-84, the O&M budget, vhich absorbs 9X of the provincial non-development budgets,has been groving at an annual rate of about 22% per annum. Hovever, the revenue

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collected from irrigated agriculture beneficiaries has not been commensurate viththe expenditure levels. The GOP is fully convinced that the leading source ofthe irrigation O&am