ASIAN DEVELOPMENT BANK RRP: PAK 33173

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

BOARD OF DIRECTORS

ON

PROPOSED LOANS

TO THE

ISLAMIC REPUBLIC OF PAKISTAN

FOR THE

AGRICULTURE SECTOR PROGRAM II

November 2001

CURRENCY EQUIVALENTS(as of 12 November 2001)

Currency Units – Pakistan Rupee/s (PRe/PRs)– Japanese Yen (JPY)

PRe1.00 = $0.0164$1.00 = PRs61.100JPY1.00 = $0.0082$1.00 = JPY122.060

Since September 2000, the Pakistan rupee has been on a system of freefloat. For the purpose of calculations in this Report, the rate of $1.00 =PRs64.00 has been used.

ABBREVIATIONS

ADA – Agriculture Development AgencyADB – Asian Development BankADBP – Agricultural Development Bank of PakistanADF – Asian Development FundALMA – Agriculture and Livestock Products Marketing and Grading

DepartmentAPCOM – Agricultural Prices CommissionFAO – Food and Agriculture OrganizationFID – Fertilizer Import DepartmentGDP – gross domestic productHRD – human resource developmentIMF – International Monetary FundJBIC – Japan Bank for International CooperationMINFAL – Ministry of Food, Agriculture, and LivestockMOC – Ministry of CommerceMOF – Ministry of FinanceNARC – National Agricultural Research CouncilNFC – National Fertilizer CorporationNFDC – National Fertilizer Development CentreNFML – National Fertilizer Marketing LimitedNGO – nongovernment organizationNWFP – North-West Frontier ProvinceOCR – ordinary capital resourcesPADSC – Punjab Agricultural Development and Supplies CorporationPARC – Pakistan Agricultural Research CouncilPASSCO – Pakistan Agricultural Storage and Services CorporationPG – provincial governmentPIU – program implementation unitPPAR – program performance audit reportPRGF – Poverty Reduction and Growth FacilityPSC – Punjab Seed CorporationPSMA – Pakistan Sugar Mills AssociationREAP – Rice Exporters Association of PakistanSASO – Sindh Agricultural Supplies OrganizationSOE – state-owned enterpriseSSC – Sindh Seed CorporationT&V - training and visit

ii

TA – technical assistanceTCP – Trading Corporation of Pakistan

NOTES

(i) The fiscal year (FY) of the Government of Pakistan ends on 30 June. FYbefore a calendar year denotes the year in which the fiscal year ends. Forexample, FY2001 begins on 1 July 2000 and ends on 30 June 2001.

(ii) In this Report, "$" refers to US dollars.

CONTENTSPage

LOAN AND PROJECT SUMMARY iii

I. THE PROPOSAL 1

II. INTRODUCTION 1

III. THE MACROECONOMIC CONTEXT 1

A. The Economy 1B. Policy and Development Issues 3C. Poverty Reduction 4

IV. THE SECTOR 5

A. Background and Recent Performance 5B. Sector Institutions 6C. Constraints and Issues 8D. Government Objectives, Strategies, and Plans 15E. External Assistance to the Sector 16F. ADB's Sector Strategy 18G. Lessons Learned 19

V. THE PROGRAM 20

A. Rationale 20B. Objectives and Scope 22C. Policy Framework and Actions 22D. Social and Environmental Issues 27

VI. THE PROPOSED LOANS 28

A. Amount of Loans and Source of Funds 28B. Implementation Arrangements 29C. Procurement and Disbursement 29D. Use of Loan Proceeds 29E. Tranching and Monitoring 30

VII. THE TECHNICAL ASSISTANCE LOAN 30

A. Program Coordination 30B. Improving the Efficiency of Commodity Markets 30C. Small Farmer Extension, Research, and Safety Nets 31D. Reorganization and Restructuring of SOEs 31

VIII. PROGRAM BENEFITS AND RISKS 31

A. Impacts 31B. Justification 35C. Risks 35

IX. ASSURANCES 37

X. RECOMMENDATION 37

APPENDIXES 38

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LOAN AND PROGRAM SUMMARY

Borrower Islamic Republic of Pakistan

The Proposal Pakistan’s agriculture sector is undergoing fundamentalstructural changes. These changes form a part of the overalleconomic policy reform to move to a market-based system,with an expanded role for the private sector, in order toincrease growth and reduce debt. The Program has beendesigned to assist the Government in addressing keyconstraints in the agriculture sector regarding productivity andprofitability with an emphasis on small and marginal farmersand on private sector investors and exporters. It is expectedthat the Program will increase agricultural growth, investment,exports, and rural employment, and reduce rural poverty.Beneficiaries will be provided with opportunities to increasetheir crop yields, productivity, incomes, and employment andto improve their quality of life through the promotion of efficientcommodity markets and support services. The Program willcomplement the Government's macroeconomic reforms,which are supported by the World Bank and the InternationalMonetary Fund.

The Program Rationale Despite the progress made in liberalizing agricultural marketsand prices in recent years, direct intervention by theGovernment in agricultural markets remains excessive. Thishas led to low producer prices and low farm profitability. Theproductivity of most crops is low, and research and extensionsystems and institutions are outdated and weak. These haveaffected both the upstream linkages for farm inputs such asseeds, fertilizers, and machinery and the downstreamlinkages to agro-processing and related industries. Thesehave also adversely affected the well-being of the vastmajority of small farmers and the rural poor, and haverestrained overall economic growth. Government subsidies inthe agriculture sector are expensive to maintain and do nottypically benefit the target beneficiaries—the small andmarginal farmers.

Pakistan is in the midst of an International Monetary Fund-ledstructural adjustment program with poverty reduction as thekey goal, and revitalization of the agriculture sector as a keycomponent in the export-led strategy. The Governmentintends to redefine its role in the agriculture sector to ensurethe smooth functioning of markets, promote private sectoractivities, and reshape public expenditures in agriculture onpublic goods and market failures.

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The Program will promote reforms to expand the role of theprivate sector through deregulation, liberalization, andprivatization, affecting many public input supply and outputmarketing enterprises that now operate in the agriculturesector. The agricultural subsidy regime that has compoundedfiscal difficulties and skewed the benefits of growth andinvestment away from the needy will be gradually dismantledto correspondingly increase social sector investments. TheGovernment has demonstrated its commitment to theProgram by initiating actions in several key areas. TheProgram is consistent with ADB’s country assistance plan forPakistan and is well anchored with the overall goals of thestructural adjustment.

Objectives and Scope The primary objective of the Program will be to improveagricultural productivity and profitability. It includes specificreform measures to (i) promote efficient markets for the majorcommodities, including wheat, cotton, rice, sugar, fertilizer,and seeds; and (ii) strengthen support services in smallfarmer extension and training, research, and regulation toimprove quality control.

Classification Thematic: Economic Growth

EnvironmentalAssessment

Category BEnvironmental implications of the proposed policy andinstitutional reforms were reviewed, and environmentalinterventions have been incorporated as required.

The ADB Loan Amountand Terms The Asian Development Bank (ADB) will provide three loans

totaling the equivalent of $350 million, including (i) a loan inan amount of SDR96,238,000 ($123 million equivalent) fromADB’s Special Funds resources (subject to the availability ofAsian Development Fund [ADF] resources), with a term of 24years maturity, including a grace period of 8 years, with aninterest rate of 1 percent per annum during the grace period,and 1.5 percent per annum during the amortization period; (ii)a loan in an amount of Y27,463,500,000 ($225 millionequivalent at the exchange rate of $1.00=JPY122.060 as of12 November 2001) from ADB’s ordinary capital resources(OCR), with a term of 15 years, including a grace period of 3years, and interest charge to be determined in accordancewith ADB's London interbank offered rate-based loan facility;and (iii) a technical assistance (TA) loan in an amount ofSDR1,565,000 ($2 million equivalent) from ADB's SpecialFunds resources, with a term of 32 years maturity, including agrace period of 8 years, with an interest rate of 1 percent perannum during the grace period and 1.5 percent per annumduring the amortization period.

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Program Period andTranching

The Program period will be five years from December 2001.The proposed ADB loans will be released in three tranches.The first tranche of $125 million equivalent (SDR39,121,000ADF and Y9,154,500,000 OCR) will be released upon loaneffectiveness, based upon its fulfillment of all first trancheconditions. A second tranche of $100 million equivalent(SDR39,121,000 ADF and Y6,103,000,000 OCR) is expectedto be released within 18 months of loan effectiveness orearlier, subject to fulfilling the relevant conditions, but is nottime-bound. The third tranche of $123 million equivalent(SDR17,996,000 ADF and Y12,206,000,000 OCR) isexpected to be released within 60 months of loaneffectiveness or earlier upon fulfillment of the relevantconditions.

Procurement The proceeds of the loan will be utilized to finance the fullforeign exchange costs (excluding local taxes and duties) ofgoods and services produced in and procured from ADBmember countries (other than those items specified in thenegative list and imports financed by other bilateral andmultilateral sources). Procurement of eligible items will be onthe basis of normal commercial practices for procurement bythe private sector or standard Government procurementpractices acceptable to ADB for procurement by theGovernment or its representatives.

Utilization of the Loan The loans will be disbursed until 31 December 2006. Loanproceeds from the first tranche can be used to finance eligibleexpenditures incurred up to 180 days prior to the date of loaneffectiveness.

Executing Agency The Ministry of Finance (MOF) will coordinate and monitor theimplementation of the Program and administer the utilizationof the loan proceeds. MOF will be supported by the Ministryof Food, Agriculture, and Livestock; the Ministry ofCommerce; and the provincial governments.

Counterpart Funds The use of the local currency proceeds of the loan will beconsistent with the overall fiscal framework defined in theStandby Agreement between the Government and theInternational Monetary Fund. Subject to this agreement, localcurrency proceeds of the loan will be used by theGovernment to support the agriculture sector in general aswell as the reforms to be initiated under the Program inparticular.

Technical Assistance A TA loan will be provided to assist the Government in (i)policy advice and program coordination, including legal,monitoring, and environmental services; (ii) improving theefficiency of commodity markets; (iii) small farmer extension,

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research, and safety nets; and (iv) reorganization andrestructuring of state-owned enterprises. All procurementunder the TA loan will be in accordance with ADB'sGuidelines for Procurement. The selection and engagementof consultants will be in accordance with ADB's Guidelines onthe Use of Consultants and other arrangements satisfactoryto ADB on the engagement of domestic consultants. TheGovernment has requested that ADB recruit the consultantson behalf of the Government and assist the Government innegotiating the contract with the consultants. TheGovernment and the consultant will sign the contract.

Risks and Safeguards The Government has expressed its strong ownership of andcommitment to implement the Program. The relevantministries agree that the goals and objectives of the Programare in line with the national agricultural development andpoverty reduction strategies. Given the wide acceptability andurgency of the reforms, the agreed upon timeframe forimplementation is considered realistic. The positive responsefrom the stakeholders, including policy makers, traders,processors, nongovernment organizations, farmers’associations, and small farmers, helps assure thesustainability of program reforms, and minimizes the risk ofpolicy reversal. There are also risks of full provincialownership and slow implementation of the reforms,particularly regarding the phaseout of the wheat subsidy andthe reduction in government procurement and managementof wheat stocks.

The Program envisages the development and implementationof a small farmers plan, which would include social safetynets and linkages with ongoing safety net mechanisms, suchas the Food Support Program, to minimize social risks in theunlikely event of any exogenous shocks or fluctuations ininternational prices that may adversely affect the incomelevels of poor farmers. The small farmer orientation of thesupport services will increase stakeholder participation inresearch and extension, facilitate technological improvement,and lead to a gradual change in cropping patterns that willresult in increased incomes. The Program is of sufficientduration (up to five years) with three undated tranches toprovide the Government and provincial governmentsadequate time to implement the reforms, including wheatprice, subsidy, and procurement measures.

I. THE PROPOSAL

1. I submit for your approval the following Report and Recommendation on proposed loansto the Islamic Republic of Pakistan for the Agriculture Sector Program II.

II. INTRODUCTION

2. During the Country Programming Mission in May 1999, the Government requested theAsian Development Bank (ADB) to provide a program loan for reforms in the agriculture sector.Project preparatory technical assistance (TA) was approved in July 1999,1 and individualconsultants were fielded in Pakistan during 2000 and 2001 to assist in preparing feasibility studiesfor the proposed program loan. The TA was implemented in a participatory way, and numerousstakeholders representing the Government, farmers, farmer groups, nongovernmentorganizations (NGOs), academia, private sector agribusiness, and external aid agencies wereconsulted in workshops and meetings. A draft sector Program was confirmed by the AppraisalMission2 in June 2001. This report is based on the findings of several ADB missions anddiscussions with stakeholders. A Program framework is in Appendix 1.

III. THE MACROECONOMIC CONTEXT

A. The Economy

3. Pakistan is faced with severe macroeconomic imbalances, declining economic growth,rising poverty, and underdeveloped human capital. During the 1990s the fiscal deficit and thecurrent account deficit as a proportion of the gross domestic product (GDP) averaged 6.9percent and 4.5 percent, respectively. The average economic growth rate decelerated from 6.5percent in the 1980s to 5.4 percent in the first half of the 1990s, and to 3.6 percent during thelast five years. The incidence of poverty increased from less than 20 percent in the late 1980s toover 30 percent today.3 In addition, the savings and investment rates, at less than 15 percent ofGDP in 2001, remain low. The agriculture sector and textile industry continue to dominate theeconomy. The agriculture sector contributes about 26 percent to GDP and employs about 50percent of the work force. The textile sector, which is based on the cotton produced by theagriculture sector, is the largest source of employment for the industrial labor force (38 percent)and the largest source of foreign exchange earnings (60 percent).

4. Crises in the management of public finances and external balances dominated theeconomic policy agenda in Pakistan during the 1990s. However, despite all efforts, and threeInternational Monetary Fund (IMF) programs between 1988 and 1999, little progress was madein addressing macroeconomic imbalances. Efforts of successive governments to implementstructural reforms during this period were often interrupted, due in part to frequent changes ofgovernments. The result was a decade of stop-go stabilization policies, with the attendantnegative impact on growth, but without the desired benefits in the form of improvedmacroeconomic fundamentals. The imposition of economic sanctions following the nuclear testsof May 1998 further exposed the vulnerabilities of Pakistan’s economy.

1 TA 3229-PAK: Agriculture Sector Program, for $350,000, approved on 20 July 1999, and completed on 31 May

2001.2 Comprising R. Renfro, Senior Project Economist/Mission Leader, R. O'Sullivan, Counsel, and R. Faruqee, Staff

Consultant and Lead Economist, World Bank. N. Hamid, Senior Economist, Pakistan Resident Mission, assistedthe Mission.

3 "Economic Survey, 2000-2001", Economic Advisor's Wing, Finance Division, Government of Pakistan, 2001.

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5. Chronic fiscal and external deficits have resulted in the accumulation of large domesticand external debt. Public debt (both domestic and external) equaled 92 percent of GDP in 2000,and interest payments on public debt accounted for over 40 percent of the total currentexpenditure of the Government. Within Pakistan’s debt problems, the external debt is the morecritical issue for short- to medium-term economic management. In 1998, debt servicingexceeded 50 percent of foreign exchange earnings, and even after debt rescheduling, theexternal debt service ratio in 2001 was over 35 percent. As of 30 June 2001, Pakistan’s totalexternal debt was about $34.7 billion, and the ratio of external debt to foreign exchangeearnings stood at over 240 percent.

6. The military Government that came to power in October 1999 has initiated a number ofreform programs to address governance problems and long-standing structural challenges, andsince November 2000 Pakistan has been implementing a far-reaching macroeconomicstabilization and restructuring program under an IMF Standby Arrangement.4 Drought, high oilprices, and deterioration in the terms of trade have aggravated the situation in Pakistan. GDPgrowth in 2000 declined to 3.9 percent from 4.2 percent in 1999. The slowdown occurreddespite a bountiful harvest, which propelled real agricultural value-added growth from about 2percent in 1999 to 6 percent in 2000. In 2001, because of severe drought that resulted in a 40percent reduction in the irrigation water supply, agricultural production fell by 2.5 percent, whichresulted in a further slowing down of the GDP growth rate to 2.6 percent. However, there aresome positive signs, as large-scale manufacturing output expanded by over 7 percent in 2001compared with less than 2 percent in 2000. Strong expansion in the volume of exports was animportant factor in the revival of growth in the manufacturing sector.

7. Exports, which had been stagnating since the mid-1990s, have expanded by 10 percentand 7 percent in 2000 and 2001, respectively. However, export growth in 2001 is expected to bewell below the target of 11.3 percent. This was largely because of the slowdown in the worldeconomy and the resulting decline in unit values of Pakistan’s principal export items, as exportsin volume terms increased by 14.8 percent in 2001. While the failure to meet the export targethas resulted in pressure on the current account, strong expansion in export volumes isencouraging, as it shows that the restructuring policies are beginning to take effect. WhilePakistan’s non-oil imports declined in 2001 due to depressed domestic demand, higher oilprices resulted in an increase of about 6 percent in total imports. The trade deficit declined forthe second year in a row, and the current account deficit also declined. Pakistan’s externalreserves were also higher, with the State Bank of Pakistan’s foreign exchange reservesincreasing to over $1.6 billion by 30 June 2001.5

8. To reduce the large, unsustainable, and chronic fiscal deficit is a major challenge thatthe Government has started to address effectively. In 2001, because of weak domesticeconomic conditions, total revenues as a share of GDP declined to 16.2 percent from 16.9percent in 2000. However, the Government managed to reduce total expenditures in 2001 to21.8 percent of GDP from 23.4 percent in 2000. This decline in expenditures was achieved by

4 On 29 November 2000, IMF approved a standby credit for Pakistan until 30 September 2001 in an amount of

$596 million. Pakistan’s performance under the IMF Standby Arrangement has been very good, and the thirdtranche, based on the 31 March 2001 review by IMF, was released on schedule in July 2001.

5 Since 1999, the State Bank of Pakistan has been forced to purchase dollars in the open market to finance a partof the current account deficit and meet its external reserves target. Such purchases increased to over $2 billion in2001 from $1.6 billion in 2000.

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reducing both current and development spending.6 Overall, the consolidated budget deficitdeclined to 5.6 percent of GDP in 2001 from 6.5 percent in 2000. In the 2002 Budget, theGovernment is committed to reducing the fiscal deficit to below 5 percent of GDP.

9. The medium- and long-term outlook depends on the pace of structural reforms andprivatization, as well as the political will necessary for undertaking reorganization of the CentralBoard of Revenue, which is essential for improving revenue collection and sustaining fiscaldiscipline. Success in reviving investor confidence is critical for improving economicperformance in the short to medium term, and for that, successful completion of negotiationswith IMF for the Poverty Reduction and Growth Facility (PRGF) in 2001 will be critical. RealGDP growth is forecast to remain below 5 percent per annum over the next two years.Manufacturing is likely to sustain the robust growth witnessed in 2001. Agricultural growth in2002 will probably be adversely affected to some extent by the carryover effects of the drought,but it should return to a rate of 4-5 percent by 2003.

B. Policy and Development Issues

10. The primary economic policy issue for Pakistan is the reduction of the fiscal deficit to asustainable level. The Government has been able to increase tax revenues in the last twoyears, but as a proportion of GDP they are well below the average ratio for the 1990s. Theburden of adjustment in the 1990s has been largely borne by the development expenditure,which as a proportion of the GDP is now at the lowest level ever. Given Pakistan’s high andrising levels of poverty, and the low level of human development, there is a need to increasedevelopment spending. Therefore, the Government needs to focus more on reforms to improverevenue collection by broadening the tax base and strengthening tax administration. In addition,it must improve public expenditure management; eliminate untargeted subsidies; and mostimportantly, stop the massive hemorrhaging of public resources by loss-incurring state-ownedenterprises (SOEs). The Government has announced an ambitious privatization program, and ifimplemented it would help to reduce the fiscal burden of the loss-incurring SOEs, and alsogenerate resources for both debt retirement and poverty reduction. However, thus far theGovernment has been concentrating on measures to create equal conditions and an enablingenvironment for privatization, and now it needs to focus on completing some of the majorprivatizations planned for the next year to demonstrate its seriousness and commitment.

11. Another important economic policy issue is economic restructuring to enhance theefficiency and outward orientation of the agriculture and manufacturing sectors. This isnecessary for Pakistan to improve its external balance, service its huge external debt, and meetthe challenges of globalization. The Government has been implementing a program of tradeliberalization since the 1990s. The maximum tariff rate, which stood at 90 percent in 1991, wasreduced to 45 percent in 1997 and to 30 percent in 2001. As a result, the effective tariff rate(i.e., tax revenues from international trade as a proportion of total imports) declined from 30percent in 1991 to 12 percent in 2000. However, the trade liberalization policies have not hadthe desired impact because of the balance of payments crisis, slow economic growth, and thelow level of private investment since the mid-1990s. But the export performance of the last twoyears gives some hope that the restructuring process is beginning to have an effect.

12. The key development issue is the need to address the governance failure underlying theeconomic problems confronting Pakistan today. The Government has initiated a number of civil

6 In 2001, development expenditure was reduced to an all-time low of 2.8 percent of GDP. Such low levels of

development spending are likely to have serious implications for poverty reduction and physical infrastructure.

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service and administrative reforms, including an anticorruption drive and merit-based and moretransparent recruitment and promotion systems. However, devolution is the centerpiece ofPakistan’s governance reform program. The objective is to enhance public accountability andtransform the society in the medium term into a more democratic and equitable one. The LocalGovernment 2000 Plan, announced in March 2000, envisages a three-tiered local-levelgovernment system. The basic underlying principles are "people-centered, rights- andresponsibility-based, and service-oriented" government structures. Elected local governmentstook power on 14 August 2001. Since delivery of almost all public services will be devolved tothe local governments, successful implementation of the plan will have far-reaching implicationsfor accelerating poverty reduction and human development in the country. The implementationwill need to be closely monitored because of the fiscal devolution component, which couldadversely affect the fiscal position of the country as a whole and thus put at risk the ongoingstabilization program of the Government.

C. Poverty Reduction

13. After falling in the 1980s, the incidence of poverty has been rising in Pakistan since the1990s. At the end of the 1980s, one of five Pakistanis was poor; today it is one of three.Although Pakistan has no official poverty line and estimates vary, there is agreement that theincidence of poverty currently ranges between 30 and 35 percent. Despite the Social ActionProgram, primary and middle school enrolment rates have declined since the 1990s. Whileinfant and maternal mortality rates and the total fertility rate declined during the 1990s, theycontinue to be among the highest in the region. Significant gender gaps also remain in keyindicators of human development. Poverty in rural areas, where two out of five persons arepoor, is much higher than the national average. Among the rural areas, the incidence of povertyis highest in southern Punjab, large parts of Sindh, and almost all of Balochistan. There is also awidening gap in education between the rural and urban areas, and the primary schoolenrollment rate in the rural areas is only two thirds of the urban rate.

14. Slow economic growth was the immediate cause of the increase in poverty in Pakistan inthe 1990s. The underlying cause, however, was poor governance, which includes socialexclusion of the poor; failure to control ethnic and sectarian violence; poor fiscal management;failure to address accountability and performance issues within the public service; andovercentralization, resulting in continuing tensions between the federal and provincial levels ofgovernment. The slowdown in economic growth and expanding debt burden also resulted in ashrinking public sector development program and declining employment opportunities, whichcompounded the problem of poverty in the 1990s. ADB’s poverty analysis also identified thelack of nonfarm employment opportunities, which are largely determined by the extent ofrural-urban linkages, as the key explanatory variable in the regional differences in the incidenceof poverty in rural areas.

15. In February 2001, the Government released its Three-Year Poverty ReductionProgramme 2001-2004. The five pillars of the program are (i) macroeconomic reforms topromote growth, (ii) physical asset creation for the poor, (iii) social asset creation for the poor,(iv) provision of social safety nets to protect the most vulnerable groups, and (v) goodgovernance. The Government's strategy to achieve higher growth and build a more self-relianteconomy includes (i) transforming the agriculture sector into a dynamic, high-yielding, market-based sector; (ii) creating a broad-based manufacturing structure oriented towards exports, withparticular attention to small and medium enterprise development; (iii) encouraging oil and gasexploration and development; and (iv) developing information technology and the softwareindustry. However, structural adjustment under the IMF program involves reducing marketdistortions, fiscal and monetary compression, and structural reforms such as increases in public

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utility tariffs and indirect taxes, which could lead to further pressure on the poor. Therefore, therole of good governance, targeted interventions, and improvements in access to basic serviceswill be crucial in mitigating the adverse impacts of macroeconomic stabilization and structuraladjustment on the poor.

IV. THE SECTOR

A. Background and Recent Performance

16. Pakistan was a leading world exporter of raw cotton and rice through the 1990s. In 2000,the agriculture sector was the major source of exports (about 70 percent), including raw andprocessed cotton, rice, leather, textiles, and carpets. Over 90 percent of the total farm outputcomes from irrigated land. Major crops are wheat, cotton, rice, sugarcane, and fodder; and cropsaccounted for about 60 percent of agricultural GDP in 1999 and 26 percent of total GDP. Pakistanattained self-sufficiency in wheat production (the staple food) for most of the 1980s but wasunable to sustain a high growth rate. Wheat surpluses were again attained in 2000 and 2001,largely due to the Government's price supports and improvements in extension deliveries, notablyin Punjab. However, there are major concerns about agricultural productivity and profitability.Between 1990 and 1999, the agriculture sector grew at about 3 percent per year. GivenPakistan's rapid population growth rate of about 2.5 percent per year, per capita agriculturalgrowth is even more discouraging in comparison with other countries in the region, such asPeople's Republic of China, Thailand, and Indonesia.

17. Under a World Bank- and IMF-funded structural adjustment program during the 1980s,the Government committed itself to bringing input and output prices closer to world levels,reducing public expenditure, and enhancing the role of the private sector. As a consequence, anumber of policy decisions became inevitable. For example, subsidies on pesticides, seeds, andmechanization were withdrawn in one step in the early 1980s. In addition, a phased removal ofthe fertilizer subsidy was instituted in cooperation with ADB, which has since resulted in periodicincreases in fertilizer prices and an expanded role for the private sector in fertilizer production,distribution, and import. However, the agriculture sector still remains distorted. Severalmacroeconomic policy changes are currently being implemented in agreement with IMF and theWorld Bank as discussed above.

18. Like price distortions, government intervention in agricultural markets has been quitecommon in order to make price controls more effective. For example, since the 1950s, theGovernment has continued to procure, store, trade, and distribute major agricultural inputs andcommodities to varying degrees. Even after the World Bank and IMF structural adjustmentprograms during the 1980s, SOEs or parastatal organizations continued to operate along withthe newly emerging private sector. The public sector has a major market share in wheat (about67 percent of the marketed surplus), fertilizer (40 percent), and seed (50 percent), and SOEsregularly intervene in cotton and rice markets.

19. Local, provincial, and federal governments levy taxes on agriculture in one form oranother. These taxes included direct, indirect, and implicit taxes. The historic land revenue andits cesses, octroi7 (until its abolition in 2000), income tax, wealth tax, and export duties fall in thecategory of direct taxes. There are also indirect taxes (including customs and excise duties, andsales taxes) and implicit taxes (such as procurement prices for the major commodities less thaninternational prices). The sum of direct, indirect, and implicit taxes is very high in agriculture—

7 Octroi means a tax on the internal movement of goods.

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estimated at 32 percent of total agriculture income in 1999.8 Even the net tax after subtraction ofsubsidies and government expenditure on agriculture and irrigation is high, estimated at 29percent in 1999. Pakistan has a long history of taxing agriculture through the land revenuesystem. The replacement of the system with an agricultural income tax has been widelyproposed to meet the financial needs of the growing national economy. Under pressure fromADB (through the completed Agriculture Program Loan),9 the World Bank, and IMF, Pakistanintroduced various types of agricultural income tax, in part in 1993 and in full during 1996, butimplementation problems remain. Implicit taxes generally arise as a result of governmentintervention in the agricultural commodity, input, and foreign exchange markets. It is thisinterventionist price policy that has implicitly taxed the agriculture sector from time to time.Taking into account such implicit taxation, agriculture's total tax burden has been estimated tobe roughly double that of the nonagricultural sectors.

B. Sector Institutions

20. The institutions that provide services and regulatory functions both in the public (federaland provincial level) and the private (multinational and national) sectors are numerous. A reviewof the major institutions impacting on the Program is provided with their responsibilities,performance, and suggested institutional reforms. Details are in Appendix 2.

1. Ministry of Food, Agriculture, and Livestock

21. The Ministry of Food, Agriculture, and Livestock (MINFAL) is responsible for economiccoordination and policy planning of agriculture, food security, livestock, and fisheries activities.MINFAL is staffed with about 100 officers (technical and administrative) and about 400 supportstaff. MINFAL has several wings namely (i) the Food and Agriculture Wing (primarilyresponsible for general administration, finance, and budget), (ii) the Food Wing (primarilyresponsible for supervision of the Directorate General of Food, the Pakistan Agricultural Storageand Services Corporation [PASSCO], the Agriculture and Livestock Products Marketing andGrading Department [ALMA], and the Agricultural Prices Commission [APCOM]), (iii) thePlanning Wing (primarily responsible for preparation of development programs and annualplans), (iv) the Agriculture Development Wing (primarily responsible for supervision of severalautonomous institutions, including the Fertilizer Import Department [FID], the Soil Survey ofPakistan, the Federal Seed Certification and Registration Department, the Pakistan CentralCotton Committee, the Pakistan Cotton Standards Institute, the Pakistan Agricultural ResearchCouncil [PARC], the Pakistan Oilseeds Development Board, and the Korangi Fish Harbor), (v)the Water Management Cell (primarily responsible for coordination of the on-farm watermanagement activities of the provinces), and (vi) the Economic Wing (primarily responsible forcollecting and disseminating agricultural statistics, formulation of agricultural policy, andpreparation of import and export trade policies, World Trade Organization-related policies, andbriefs).

22. Agriculture and livestock are mainly provincial matters, and MINFAL needs to bereorganized to rationalize the roles and responsibilities of the secretariat. FID, the DirectorateGeneral of Food, and PASSCO are responsible for the import, procurement, storage of fertilizer,and food distribution at the federal level. These institutions are overstaffed; heavily dependenton budgetary support; and wasteful due to poor governance, financial indiscipline, and

8 Chaudhry, M.G., R.M. Ashiq, and M.I. Ahmad, Pakistan's Agricultural Tax System: Current Policies and Needed

Reforms, Agricultural Prices Commission, Islamabad, 2000.9 Loan 1062-PAK(SF), for $200 million, approved on 11 December 1990, and completed on 30 June 1994.

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leakages. With the Government's planned liberalization of trade and expansion of the privatesector in import, export, and domestic trade and storage activities, these institutions will beredundant and should be closed and divested.

23. Some of the institutions, such as PARC, are overstaffed and generally duplicate thefunctions being carried out at the provincial level. The federal institutions can continue to workas clearing and coordinating agencies, and can conduct other functions that cannot bedecentralized. Some of the institutions such as APCOM and ALMA can be made more effectiveby merging them with MINFAL's Planning Wing.

2. Other Federal Institutions

24. The Trading Corporation of Pakistan (TCP) is a public sector organization under theMinistry of Commerce, responsible for the marketing of surplus agricultural commodities. TCPhas incorporated the former parastatals, the Cotton Export Corporation, and the Rice ExportCorporation of Pakistan, along with their liabilities. The staffs of the two organizations werereleased, and a limited number have been absorbed in TCP for winding-up activities. TCPreceives budgetary support from the Government for the losses incurred in trading ofagricultural commodities. The National Fertilizer Development Centre (NFDC) under thePlanning Commission is also a candidate for closure, and National Fertilizer Marketing Limited(NFML) under the Ministry of Production is being privatized.

3. Provincial Institutions

25. Although the Federal Government is largely responsible for policy matters, the provincialgovernments are mainly responsible for implementing policy, and agriculture and the socialsectors are considered provincial subjects. The provincial agriculture departments oversee themanagement of research, extension, maintenance and regulation of commodity markets, theprovincial seed corporations, and provincial input supply organizations. The departmentssupervise the agricultural extension departments, agricultural research institutes,10 theagricultural machinery and engineering departments, the soil conservation departments, and theon-farm water management departments. They also supervise the provincial seed and fertilizerstorage and marketing institutions, such as the Punjab Seed Corporation (PSC), the Sindh SeedCorporation (SSC), the Sindh Agricultural Supplies Organization (SASO), and the AgricultureDevelopment Agency (ADA) in North-West Frontier Province (NWFP). The research activitiesare very weak due to high establishment costs and inadequate funding for operational activities.Moreover, the linkage among research, extension, and farmers is very weak. The researchpursued in the institutes generally does not address farmers' problems. The research institutes,to make them responsive to farmers' needs, should be given autonomy, with the majority of themembers of the supervising board drawn from the farming community, processors, and traders.The extension department’s performance is also very poor. The present activities are not farmerresponsive. The knowledge and extension methods of field staff are outdated and outmoded.Livestock extension also is overstaffed, and the delivery efficiency of services is very poor.

4. Private Institutions

26. Numerous multinational and national private sector fertilizer, pesticide, and seedcompanies and machinery suppliers are active and provide input supply services along with

10 In North-West Frontier Province, the research and outreach functions have been put under the Agricultural

University, while the Agriculture Department continues to supervise the agricultural extension and agriculturalmachinery functions.

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extension services. Private seed companies have to compete with public sector companies thathave the advantage of budgetary support from the Government. Several NGOs (particularly theRural Support Programs throughout the country) have shown interest in the extension activities,but they lack the resources. They can provide these services to farmers in a cost-effectivemanner by linking farming communities with the relevant research and extension staff.

C. Constraints and Issues

27. A number of key issues and constraints affect the sector. A detailed cause and effect orproblem tree analysis was conducted during preparation of the Program that proved effective infocusing the proposed Program on a few selected areas. Based on this analysis and substantialdiscussion with major stakeholders, a program framework was developed (Appendix 1). The coreproblems in Pakistan’s agriculture are low productivity and profitability. The major causes of lowproductivity and profitability include (i) low quality inputs, (ii) imperfect commodity markets (withrelated pricing, subsidy, storage, and trade issues), (iii) poor quality support services (researchand extension services especially for small farmers), (iv) inefficient water resource management,(v) poor delivery and sustainability of agricultural finance, (vi) inadequate rural infrastructure, (vii)deteriorating natural resources, and (viii) insecure land tenure. There are problems of land tenure,insecure property rights, and labor markets, particularly in the southern areas of Sindh Province,and a separate project is currently being prepared to address these issues.11 ADB and the WorldBank are actively assisting Pakistan in the areas of water resource management, agriculturalfinance, rural infrastructure, and natural resources. However, there are major gaps in assistancefor market development (for both commodity outputs and inputs) and support and regulatoryservices. The major effects of these problems are low agricultural growth, rising unemployment,and increasing rural poverty. Crop production has remained stagnant or has declined in somecases due to poor market development, inadequate price incentives, poor seed, low fertilizer use,disease problems, poor water management, and increasing costs of production.

28. In terms of output per hectare, productivity for wheat and rice has risen slowly in recentyears, while productivity growth has remained stagnant for cotton and sugarcane. Growth ratesin yield during 1990-2000 have averaged 2.0 percent for wheat, 3.1 percent for rice, -0.9percent for cotton, and 1.8 percent for sugarcane. Other indicators of productivity are (i) yieldgaps, or the difference between average and best farmers' yields; and (ii) total factorproductivity, an index of all outputs and inputs. The yield gap is as high as 30 percent for wheatand 50 percent for rice, and total factor productivity has either stagnated or declined since themid-1970s.12 Major obstacles to yield increases include resource constraints and policydistortions.

29. Key resource constraints include a problem-plagued irrigation system, inadequate humanresources, poor infrastructure, and resource degradation. By examining various croppingsystems over a time series from the introduction of the Green Revolution (1966-1974), throughthe period of intensification (1975-1984), and including the Post Green Revolution (1984-1994),Ali and Byerlee13 demonstrate that while there is continuous and widespread resource

11 TA 3132-PAK: Sindh Rural Development Project, for $800,000, approved on 22 December 1998, and completed

on 1 November 2000; and TA 3725-PAK: Additional Preparatory Work on the Sindh Rural Development Project,for $150,000, approved on 24 September 2001.

12 Byerlee, D. and A. Siddiq, "Has the Green Revolution Been Sustained? The Quantitative Impact of the Seed-Fertilizer Revolution in Pakistan Revisited," World Development, 22:9, 1994.

13 Ali, M. and D. Byerlee, Productivity Growth and Resource Degradation in Pakistan's Punjab: A DecompositionAnalysis, the World Bank, Washington, November 2000.

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degradation, the health of the agrosystem is also related to poorly introduced moderntechnologies, monocropping, and mismanagement of water resources. Increasing populationgrowth, decreasing farm size, degrading soil and water resources, and lack of diversifiedproduction systems suggest that Pakistan is reaching a point where agricultural sustainability isproblematic. With past sources of growth weakening, future growth will have to come primarilyfrom productivity gains, which can be achieved by (i) allocating resources to crops thatdemonstrate comparative advantage, (ii) improving the technical efficiency of inputs and farmmanagement, and (iii) increasing cropping intensity.

30. In addition to resource constraints, Pakistan's agriculture faces numerous policyconstraints. Government intervention in agricultural markets remains excessive, and, particularlyin the cases of wheat, sugarcane, and seeds, has discouraged sustainable and efficientproduction and marketing. This intervention, coupled with powerful private marketing associationsin cotton and quality problems in rice, has led to low farmer prices, low profitability for farmers, andfew incentives for growth in productivity. Government spending has been dominated by subsidiesthat typically do not help farmers, either because of inefficiencies or because the subsidy (onwheat in particular) is designed to help consumers at the expense of producers. Producers willrespond to credible price reforms that will introduce market-based incentives. Public marketingenterprises and subsidies currently crowd out private sector involvement. Restricting membershipin trading and marketing associations limits competition. Research and extension are particularlyweak and ineffective, and do not contribute substantially to productivity gains by small farmers.The proper role of the Government should be to encourage the development of smoothlyfunctioning markets through institutional and regulatory reforms that facilitate private sector andsmall farmer activities. As a result of current government interventions and policies, productivityincentives are weak, particularly for small farms (less than 5 hectares), which constitute 80-90percent of all farms and include marginal farms (less than 2 hectares).

31. The problems and constraints in the markets for the major commodities (wheat, cotton,rice, and sugar), key inputs (fertilizer and seeds), and support services to farmers (extension andresearch) are discussed in detail in the following subsections. Wheat is the major winter or rabicrop, cotton and rice are major summer (monsoon) or kharif crops, and sugarcane is a 9-12month crop.

1. Wheat

32. The production of Pakistan’s major food crop has averaged about 18 million tons perannum over the last five years, ranging from about 17 million tons in 1996 and 1997 to 21 milliontons in 2000. After a hiatus of about 10 years since the 1980s, Pakistan again achieved self-sufficiency in wheat in 2000, and the estimated production in 2001 is 19-20 million tons.Historically, about 65-70 percent of the total production is consumed on the farm or traded withinthe local area, with a marketable surplus of about 5-6 million tons. The Government regularlyprocures about 4 million tons for the Strategic Reserve and buffer stock. The remaining quantitiesare sold in open markets. However, the Government reserves the right to procure more wheat,and in 2000, it procured a total of 8.6 million tons, practically the entire marketed surplus. Punjabis the only wheat surplus province, and Pakistan has traditionally imported wheat (about 2 milliontons annually), entirely through MINFAL’s Directorate of Food and the US Embassy inWashington. Wheat is procured by the Government through PASSCO, and by provincialgovernments through their food departments, at the support price announced by MINFAL(prepared by APCOM). PASSCO purchases wheat from Punjab, supplies the provincial food

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departments, and stores wheat for the national Strategic Reserve.14 The total wheat storagecapacity in the public sector is about 5.2 million tons, including 1.3 million tons with PASSCOand 3.9 million tons with the provinces.15 Restrictions on wheat movement, particularly inPunjab, during harvest time force farmers to sell to the public sector, and as a result, farmersreceive lower prices than they would otherwise.

33. Later, government agencies sell the wheat to flour mills at a subsidized issue (sales)price. The subsidy is equivalent to the procurement price plus incidental costs (storage, debtservicing, bags, salaries, and transportation) less the issue price.16 In addition, imported wheatmay be subsidized so that the landed price of imports equals the support price. For many years,the support price was below the world price, but in 2000, due to an increase in the procurementprice, the procurement price was more or less equivalent to the world price (about $118-125 perton). In 2001, the procurement price (about $117 per ton) was less than the export parity price(about $126 per ton). The Government, through TCP, exported about 200,000 tons of wheat in2001 to Iraq at an average price of about $108 per ton. There were no imports in 2000, but thetotal wheat subsidy on domestic procurement was about PRs13 billion ($213 million) paid fromthe provincial budget funds. In 1999, the wheat subsidy was about PRs9 billion, and in 1998 itwas about PRs13 billion. These subsidy amounts are underestimated, because not all the costsof handling and storage are included. About two thirds of the subsidy cost is borne by theprovincial governments, mainly Punjab. The major part of the subsidy goes to mill owners, and aminor part goes to food consumers. The price supports benefit mainly larger farmers and notsmall and marginal farmers. The Government also finances the losses of PASSCO and the fooddepartments.

34. The public food procurement, storage, and sales program is expensive to operate andwasteful of wheat supplies (due to high storage losses), and it does not target the poor (since itbenefits all flour consumers) or farmers unless they are net consumers of wheat. When thesupport price is below the world price, farmers lose out. When the support price is greater thanthe world price, the consumer subsidizes wheat farmers. Also, the Punjab Government has untilrecently restricted the free movement of wheat out of the province and between districts in orderto guarantee that it can procure all the wheat it wishes at the support price. Punjab’s wheatfarmers would benefit from a policy that would encourage a higher farmgate price through freemovement of wheat and no subsidies to mill owners. Incentives to investment in private storageand to long-term trading have been thwarted through both price policy and restricting freemovement of wheat. Conscious of these problems, the Punjab Government constituted in 2001a Task Force on the Procurement and Marketing of Wheat. This task force is proposing toincrease private sector participation in wheat marketing, storage, and export, as well asexamining the proper role of government in the wheat trade. Wheat imports and exports shouldalso be liberalized to improve food security. Poor consumers of wheat would be bettersupported through direct and targeted programs, and the Government is proposing food supportand zakat (mandated Islamic cash transfer) programs in this regard.

14 In addition to PASSCO's share of the total annual procurement at about 30 percent, the average provincial shares

are Punjab, 60 percent; Sindh, 10 percent; and NWFP and Balochistan, less than 1 percent each.15 Including 2,483,000 tons with Punjab, 709,000 tons with Sindh, 365,000 tons with NWFP, 218,000 tons with

Balochistan, 44,000 tons with Azad Kashmir, 20,000 tons with the Northern Areas, and 54,000 tons with themilitary. PASSCO’s storage capacity includes 0.45 million tons covered and 0.85 million tons open using raisedplatforms and tarps.

16 Currently, the procurement price is PRs300/40 kg or PRs7,500 per ton, and the issue price is PRs8,000 per ton inPunjab and PRs8,500 per ton in other provinces. Incidental costs are about PRs1,800 per ton with PASSCO, andthe rate of subsidy is about PRs1,300 per ton, not including all the costs of the provincial food departments.

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2. Cotton

35. The production of Pakistan’s major cash or export crop has averaged about 10 millionbales per annum over the last five years, ranging from about 9.4 million bales in 1996 to 11.2million bales in 2000. The estimated production in 2001 is 10.7 million bales. By 1995 cotton hadbecome almost as important as wheat in terms of value added, accounting for about 3 percent ofthe total GDP in 1999, more or less equivalent to the share of wheat. Expansion of cottonproduction, due in large part to the introduction of insect- and disease-resistant varieties and afree trade policy that was introduced in FY1996 removing import and export duties, caused acorresponding decline in the relative importance of sugar and rice. There are over 1,100 ginningfactories that buy from farmers and marketing agents and separate the seed from the lint. Theginners are organized through the Pakistan Cotton Ginners Association. There are about 500textile mills, but there is concern that they are oligopolistic, since they are owned by only 30-40extended families and are organized in the powerful All Pakistan Textile Mills Association. TheKarachi Cotton Association largely dominates exports of raw cotton, lint, and yarn. There is aneed for more competition in exports, imports, and processing by encouraging other smallertraders and ginners in order to raise farmgate prices to producers.

36. In 2000, cotton production reached a record 11.2 million bales, the market price crashed,and the domestic price was much below the world price. In an effort to support producers, theGovernment, through TCP, procured about 10,000 bales for export in 2000 and about 500,000bales in 1999. These actions by the Government encouraged additional exports of cotton lint andyarn by the private sector, and the domestic price gradually rose. Unfortunately, TCP's actionscrowded out the private sector. There may eventually be a need for a futures market to stabilizeprices, especially for ginning factories. There is also a need for enhanced quality controlmeasures to ensure the private sector supply of quality products for international and domesticmarkets.

3. Rice

37. The production of milled rice has averaged about 4.5 million tons per annum over the lastfive years, ranging from 4.0 million tons in 1996 to 5.2 million tons in 2000. The estimatedproduction in 2001 is 4.8 million tons. Long grain basmati rice production was about 1.8 milliontons of total production in 2000. Punjab leads the provinces in rice production. Pakistan’s privatesector exported 1.9 million tons of rice in 2000, and is expected to export about 1.5 million tons in2001. Rice has accounted for an average of 6 percent of total export earnings over the last fiveyears. The mixing and export of basmati and short grain rice in 2000 by some in the private sectoradversely affected the reputation of Pakistani basmati rice, pointing to a need for self-regulationand some oversight by the public sector for improved quality control. Due to the high production in2000 and the resulting drop in the domestic price soon after harvest, many growers advocatedgovernment procurement at a support price higher than the open market price. In late September2000, the Government announced an increase in the support prices for the various varieties ofrice, and directed PASSCO to procure up to PRs1 billion ($20 million). Large rice exporting firmsare organized into the Rice Exporters Association of Pakistan (REAP), but they restrictmembership, and new and smaller exporting firms do not have representation or an equal voicewith government licensing and regulatory authorities. New entrants in the market and newassociations are needed to increase competition with REAP, expand exports, and ensure higherprices to producers.

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4. Sugar

38. The production of sugarcane has averaged about 48 million tons per annum over the lastfive years. Production in 2000 was about 46 million tons and is estimated to be 43.7 million tons in2001. About 25 percent of the annual crop is used to process brown sugar (gur). Molasses is abyproduct. In 2000, about 29 million tons of sugarcane was processed into about 2.4 million tonsof white sugar. The remainder was processed into brown sugar and molasses. The domesticdemand for sugar is 3.1-3.2 million tons annually, and imports average about 0.8-0.9 million tons.Although Pakistan is the world’s fifth largest producer of sugar, there are major problems. There isabout 45 percent overcapacity in the sugar mills, and the average sugar content of sugarcane is8.25 percent, below the world average of about 10.0 percent. As measured by the domesticresource cost, Pakistani sugarcane appears to be noncompetitive, with a domestic resource costof about 2.17 By comparison, cotton, wheat, basmati rice, oilseeds, and pulses had measures lessthan one illustrating comparative advantage. The sugar industry has been highly protected inrecent years, and the domestic ex-mill sugar price has been about 40 percent higher than thelanded world price. Imports were taxed so that the import price plus the tariff would more or lessequal the domestic price. However in 2000, the duty on imports was reduced from 45 percent to20 percent. The import duty was further lowered to 10 percent in June 2001. Relations are alsostrained between the growers and the 77 mill owners, organized into the powerful Pakistan SugarMills Association (PSMA). The sugar industry has been overprotected, monopsonistic, highlyindebted to banks, and inefficient, and was kept competitive with active government support at theexpense of the taxpayers and sugar consumers. Under the old zoning system, farmers wererequired to sell sugarcane to the mills in their area. This was abolished in 2000, and growers cannow sell sugarcane to any mill. Farmers have also been restricted from producing brown sugarand molasses, a restriction that is being abolished. Brown sugar and molasses are in highdemand, in both rural areas and in Afghanistan, and the removal of the restriction would helpfarmers. Payments are commonly delayed to farmers from sugar mill owners. PSMA is continuallypressuring the Government to reintroduce zoning restrictions and raise import tariffs to protectdomestic production and processing.

5. Fertilizer

39. The consumption of fertilizer has averaged about 5 million tons per annum over the lastfive years (5.4 million tons in 1999 and an estimated 6.5 million tons in 2000), at a growth rate ofabout 5 percent per year, with production of about 4.5 million tons on average and imports ofabout 0.5 million tons. Urea fertilizer accounts for about 70 percent of total consumption, followedby diammonium phosphate (19 percent) and sulphate of potash and compound fertilizers (11percent). In terms of nutrients, the ratios of nitrogen to phosphate to potassium use are similar tonutrient uses in the region, but below the recommended uses of phosphate and potassium. About40 percent of domestic production, largely urea, is in the public sector with the National FertilizerCorporation. The remainder is with three large private fertilizer companies. Imports are currentlymade entirely by the private sector, and the Government has agreed to close and divest FID.Imports of urea are very limited. Traditionally, all the diammonium phosphate requirements wereimported, but Fauji Fertilizer started producing about 700,000 tons annually in 2000. About540,000 tons of this fertilizer were imported in 2000, and about 700,000 tons will be imported in2001. The National Fertilizer Corporation markets its fertilizer through its subsidiary, NFML, a

17 The domestic resource cost is the ratio of domestic (nontraded) inputs to the value of foreign exchange earned per

unit of the crop, and a measure of comparative advantage. A value of less than 1 indicates a comparative advantage,and a value greater than 1 indicates relatively inefficient production. The data was from 1992: Longmire, J. and P.Deboard, Agricultural Pricing and Comparative Advantage in Pakistan, World Bank, Washington, 1993.

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commercial but loss-incurring institution. The five factories of the National Fertilizer Corporationare being privatized, starting with the Paksaudi plant in 2001, and NFML will be reorganized anddownsized as factories are privatized.

40. Three provincial government enterprises have until recently been distributing importedfertilizer (from FID) and other items such as public sector seed, pesticide, and machinery,including the Punjab Agricultural Development and Supplies Corporation, SASO, and ADA inNWFP. These are all loss-incurring enterprises that have defaulted on government loans, andhave limited functions, given the private sector domination of the fertilizer import and marketingoperations. The Government and the provincial governments have decided to close or divest allthese institutions.

41. Fertilizer subsidies have been eliminated (direct subsidies from the Government wereeliminated in 1996 in large part due to the completed Agriculture Program Loan), but natural gassubsidies continue. The Government is finalizing its new fertilizer policy in consultation with privateproducers, and is considering terminating gas subsidies for all new fertilizer factories andcontracts. Active government support to public sector fertilizer import, production, and marketingagencies acts as a major disincentive to private sector open market operations. The Governmentdirected FID to stop fertilizer imports in 1999 and 2000, and only the private sector has beenimporting diammonium phosphate, urea, and other fertilizers in the last two years. Private firmsvoluntarily charge uniform prices throughout the country to stay competitive. In addition, NFDCunder the Planning Commission is not serving any useful purpose, since data on fertilizersubsector is readily available throughout the country. The Government is therefore considering itsclosure or divestiture. Provincial governments are continuously monitoring and regulating fertilizerimports and retail markets for quality control, and there are no major quality problems. However,there is no existing legislation dealing with the import, certification, and use of chemical fertilizer.MINFAL is preparing a Fertilizer Control Ordinance to address regulatory needs in (i) monitoringthe quality of imported fertilizer, (ii) registering importers, (iii) compiling data on imports and use,and (iv) forecasting demand for imports.

6. Seeds

42. About 74,000-80,000 tons of certified seed are marketed annually, with wheat seedaccounting for about 91 percent and cotton seed about 6 percent. Most seed is passed on fromfarmer to farmer, and the use of retained seed after harvest is very high. There is an urgent needto increase the market for high quality seed to meet farmers' unmet demands. The private sectoraccounts for about half of the seed market, partly attributed to the Agriculture Program. There areabout 300 private seed companies, including 4 multinationals. However, most of the certified seeddistributed by the private sector is imported seed, and the restricted access to research institutionvarieties and low demand have not encouraged the establishment of seed farms. The two publicsector seed agencies, PSC and SSC, are largely loss-incurring operations,18 and also discourageprivate sector investment in domestic seed farms. They are good candidates for privatization orreorganization along commercial lines to effectively compete on equal terms with the privatesector. The public research institutes are required by the Government to provide breeder seed fornew varieties to PSC and SSC, and as a result, private seed companies do not have easy accessto this seed. This amounts to a virtual monopoly of the public seed companies on the supply ofbreeder seed. The Federal Seed Certification and Registration Department and the National Seed

18 PSC’s performance has been mixed since its establishment in 1976, but SSC has never been able to generate a

profit and is highly subsidized by the Sindh Government. SSC depends on PSC for its seed. Details are in Ahmed,M. J., Performance Evaluations of PSC and SSC, World Bank, Islamabad, November 1998.

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Council under MINFAL are responsible for ensuring high quality seed and genetic material, butthey have poor implementation capacity and lack a clear mandate to assist in ensuring andregulating quality seed. The private sector should finance its own certifications of high quality seedaccording to national guidelines.

7. Extension

43. There are more than 5,000 extension workers throughout the country, who basically followthe top-down and supply-driven training and visit (T&V) extension system introduced in the 1980slargely with World Bank assistance. This system’s centralized and hierarchical approach targetsassistance to powerful landlords and larger farmers. Small farmers and women are often ignored.In addition, provincial extension workers, both field workers and agriculture officers at the unioncouncil level, suffer from lack of funds and mobility and poor linkage with research workers andavailable technologies. Extension is not coordinated, and each line department at the district leveland below conducts its own separate extension services. Field workers and agriculture officershave no expertise in organizing small farmers into groups and adopting participatory, bottom-upplanning procedures. The World Bank’s Implementation Completion Report for the AgriculturalResearch II Project (December 1998) found little overall improvement in extension and researchlinkages. However, the Punjab Government is experimenting with several new initiatives thatshow considerable promise. Among them is the Model Union Council Project, which works withthe leading NGOs in Punjab, the Punjab Rural Support Program, and the National Rural SupportProgram. The Model Union Council Project has been implemented for one year.

44. Another alternative to the T&V system that has been successfully replicated throughoutSoutheast Asia (notably in Indonesia, Philippines, and Viet Nam) is the farmer field schoolapproach to problem solving with groups of farmers. This approach has been implemented in 10villages of Vehari District of Punjab since 1997, and is based on group training mechanisms.Hand-picked agriculture officers are trained by experienced agriculture officers from SoutheastAsia in management and key agriculture skills to work with groups of farmers in problem solving.An interesting feature of this approach is that farmers typically choose to use lower levels of inputs(pesticides, herbicides, and chemical fertilizers) in the first year, with an immediate benefit in yieldincrease. They also save money on input use. In the second year, more emphasis is placed oncareful crop management and use of inputs to increase the productivity of crops and livestock. InSoutheast Asia, some extension services are being privatized as the skills and value of theagriculture officers increase, and they voluntarily leave government service to commercially selltheir services to groups of farmers. This program has also been replicated on a modest scale inPunjab and Sindh since 2000 in connection with an integrated pest management program underMINFAL with financing from ADB.19

45. The Food and Agriculture Organization (FAO) Pilot Food Security Program also uses thefarmer field school and group-based extension approach, but is focused on using existing wateruser associations. These associations are usually dormant after watercourse improvements undergovernment programs, and the objective is to make them operational again for crop and livestockproductivity improvements.

19 TA 3383-PAK: Integrated Pest Management, for $500,000, approved on 28 December 1999, and expected to be

completed on 31 March 2003.

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8. Research

46. Pakistan has a sizable network of national and provincial research institutions. Theresearch and extension system was originally unified in the agricultural universities patterned afterthe United States land grant model. But in 1961, research, extension, and education weredelinked and given to the provincial governments. PARC under MINFAL coordinates nationalresearch. PARC provides funding and supervision monitoring to its affiliate, the NationalAgricultural Research Council (NARC), in the areas of crops, machinery, natural resources,animal sciences, and social sciences, and to four other research institutes. MINFAL supports notonly PARC but also research institutes in cotton, marketing, forestry, soils, and zoology. ThePakistan Atomic Energy Commission also conducts research in the major crops. There are alsonumerous research institutes at the provincial level in the areas of crops, soils, insects, diseases,livestock, fisheries, forestry, irrigation, and economics: 41 in Punjab, 10 in Sindh, 10 inBalochistan, and 6 in NWFP. In addition, the major agricultural universities in Punjab, Sindh, andNWFP are conducting agricultural research. The private sector is also conducting research butlacks funding. There is little sharing or coordinating of research findings. Funding for research is aproblem with all institutions, and most spend 70-90 percent of their available funds on salaries andexpenses. Funding for public sector research has fallen from PRs600 million in 1995, to PRs355million in 1999. Trained staff and infrastructure exist, but the priorities and linkages betweenresearch and extension are very weak. There is little focus on integrating available informationand technologies into packages for small farmers. Research institutes are not allowed to sell theirgenetic materials to private seed companies despite the high demand, particularly for newvarieties; nor are they allowed to retain part of the royalties to help meet the funding gaps.

D. Government Objectives, Strategies, and Plans

47. The Government is cognizant that agricultural development is vital in reviving theeconomy and reducing poverty. The Government aims to achieve robust and sustainablegrowth through efficient import substitution, export orientation, and enhanced productivity. Withthese key objectives, the main element is to accelerate growth by enhancing per hectareproductivity through price incentives, support services, and market reforms. In this way, theGovernment hopes to increase profitability for small farmers. Attention will be focused onincreasing the production of wheat, cotton, and rice through remunerative market-based prices;evolving new technologies through research; help improving marketing and storage facilities,both in the public and the private sectors; and providing access to optimum technologies to thefarmers, especially to small and marginal farmers.

48. The Economic Advisory Board of the Ministry of Finance (MOF) has prepared anEconomic Revival Program (February 2001). It was recognized that increasing growth in theagriculture sector would assure significant poverty reduction in rural areas. In addition, MINFALprepared “Agricultural Strategies for the First Decade of New Millennium” (June 2000), whichwas approved by the Government in March 2001. TA 3229-PAK (footnote 1) contributed to thisdocument. This strategy recognizes that agricultural production has stagnated and is no longerkeeping pace with population growth. In response, the strategy sets goals at achieving anannual rate of production increase averaging 5 percent and achieving food security and self-reliance by 2010. The document also highlights the failures in extension and research servicesand the resulting poor yields especially on small farms.

49. The Government is moving towards market-based agricultural output. It has decided tophase out price supports and subsidies. To help safeguard the interest of farmers againstdeclines in prices during post-harvest periods, the Government is promoting increased exports,private competition, and joint farmer storage and marketing activities. The primary constraints

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being addressed are inadequate farm-to-market roads; fragmented markets; lack of properstorage, transportation, and processing facilities; and inadequate market information. To supportexports and investment, the Government is providing PRs99 billion in 2001-2002 exclusively forthe private sector in five priority areas, including agriculture. Priority areas in agriculture havebeen identified as exports, storage, processing, and marketing. In addition, the State Bank ofPakistan lowered the margin or collateral requirement in 2001 from 75 percent to 10 percent forflour mills and processors, and to 15 percent for growers.

50. To safeguard poor consumers of foodgrains, the Government is developing targeted,direct subsidy programs such as (i) the Khushhal Pakistan Program (small public works) forPRs30 billion budgeted for 2002, (ii) the Food Support Program for PRs2.5 billion in 2001 andPRs2.9 billion in 2002, and (iii) the Zakat Fund for PRs3.5 billion in 2001.

51. Water management constitutes a significant plank of the Government’s strategy,heightened by the drought in many parts of the country. Desilting of canals, lining of irrigationcanals and watercourses, and renovation of watercourses are immediate priorities. For rainfedareas, schemes of water harvesting, utilization of small dams, and rejuvenation of farmers’minidam schemes are already being implemented. For livestock and fisheries, the emphasis ison enhancing quality and productivity through genetic improvement, ensuring availability ofimproved feed and fodder, and comprehensive disease and pollution control. Privatization hasbeen identified as key to better services. Value addition in agriculture will be consciouslypromoted through proactive measures to promote rural enterprises through advisory servicesand access to finance.

52. Regarding economic reforms, under the Three-Year Poverty Reduction Program, 2001-2004, a substantial increase in private sector development and participation is called for, includingin the agriculture sector. The agriculture sector should be revitalized through increased emphasisand reforms in pricing policy, marketing, research, extension, water management, and drainage.The strategy also encourages self-sufficiency in wheat, sugar, edible oils, and pulses, so thatimports of agricultural commodities can be eliminated. Regarding physical asset creation for thepoor, the strategy encourages increased allocation of available state land to the landless poor,and the promotion of microfinance through ongoing programs including the Microfinance orKhushali Bank20 and support to NGOs through the Pakistan Poverty Alleviation Fund (withassistance from the World Bank).

E. External Assistance to the Sector

53. To assist the Government’s reform efforts and to provide balance of payments support,IMF approved a standby arrangement amounting to $596 million in November 2000.Discussions are ongoing for a comprehensive multiyear package under the PRGF, and IMFboard consideration is scheduled for the third week of November 2001. ADB is coordinating withIMF and the World Bank to ensure that the policy reforms supported by the Program are anintegral component of the policy framework paper supported by the PRGF.

54. For several years, the Government has been undertaking policy reforms in the agriculturesector. Many of the significant reforms were carried out under ADB-funded loans, such as the

20 Being assisted through Loans 1805-PAK(SF) and 1806-PAK(SF): Microfinance Sector Development Program, for

$150 million, approved on 13 December 2000.

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Agriculture Inputs Program21 and the Agriculture Program.22 The focus of these policy reforms hasbeen to eliminate producer and consumption subsidies, progressively eliminate subsidized credit,streamline and improve the collection of agricultural taxation, and improve crop productivitythrough increased and timely availability of agricultural inputs, including water. Under the NationalDrainage (Sector) Project,23 ADB is supporting policy reforms in the drainage and irrigation sector.ADB also assists the agriculture sector through area and rural development projects that includecomponents of agriculture, livestock, on-farm water management, rural electrification, rural watersupply, forestry, rural roads, and microfinance services using NGOs.24 Details are in Appendix 3.

55. ADB provided three lines of credit to the Agricultural Development Bank of Pakistan(ADBP) to enhance the supply of agricultural credit.25 ADB is supporting the Microfinance orKhushali Bank through the Microfinance Sector Development Program.26 Nearly 50 percent of thecredit facilities from the Khushali Bank will be for crop production, and the balance is likely to bedivided among livestock and farm-related income-generating activities. The program is alsofinancing an external audit of ADBP aimed at reforming ADBP. In the other sectors related toagriculture, the ADB-funded Capital Market Development Program,27 Trade Export Promotionand Industry Program,28 and Small and Medium Trade Enhancement Finance Project29 aim toassist Pakistan attain higher and sustainable private sector and export-led growth throughcomprehensive policies and innovative financing. These are expected to facilitate exports,including agriculture and processed goods, that comprise the major exports of Pakistan, andhelp integrate the country with the global economy.

56. In addition to jointly financing the National Drainage Project and the Agricultural CreditProject, the World Bank has provided assistance to ADBP since 1965 through six credit lines. TheFinancial Sector Adjustment Loan for $150 million, approved in 1989, strengthened thecompetitiveness of the banking system by recapitalizing and restructuring commercial banks. ThePublic Sector Structural Adjustment Loan of $350 million aims to improve public sectorgovernance in the key areas of banking, tax administration, public utilities, and public expenditure.The Financial Sector Deepening and Intermediation Project is providing TA for institutionalbuilding. In addition, the Banking Sector Adjustment Loan for $250 million, currently beingdiscussed with the Government, is being designed to support ongoing banking reforms. TheWorld Bank is assisting the Pakistan Poverty Alleviation Fund and its financial support to selectedNGOs through the Poverty Alleviation Fund Project for $90 million. The On-farm WaterManagement Project of the World Bank has been approved for NWFP. Similar on-farm projectsare under preparation for other provinces. Since 1978, the World Bank has funded six agriculturalextension and research projects to sustain increases in agricultural production and strengthen the

21 Loans 825-PAK(SF) and 826-PAK, for $150 million, approved on 18 December 1986.22 Loan 1062-PAK(SF), for $200 million, approved on 11 December 1990, and completed on 30 June 1994.23 Loan 1413-PAK(SF), for $140 million, approved on 21 November 1995.24 Including Loan 1467-PAK(SF): Bahawalpur Rural Development Project, for $38 million, approved on 26

September 1996; Loan 1531-PAK(SF): Dera Ghazi Khan Rural Development Project, for $36 million, approved on4 September 1997; Loan 1672-PAK(SF): Malakand Rural Development Project, for $41 million, approved on 18March 1999; and Loan 1787-PAK(SF): NWFP Barani Area Development Project, for $52 million, approved on 28November 2000.

25 Loan 617-PAK(SF): Agricultural Development Bank of Pakistan Project, for $50 million, approved on 23December 1982; Loans 810-PAK(SF) and 811-PAK: Second Agricultural Development Bank of Pakistan Project,for $50 million, approved on 4 December 1986; and Loan 1044-PAK(SF): Agricultural Credit Project, for $150million, approved on 14 December 1990.

26 Loan 1805-PAK(SF) and 1806-PAK(SF), for $150 million, approved on 13 December 2000.27 Loan 1576-PAK, for $250 million, approved on 6 November 1997.28 Loan 1680-PAK, for $300 million, approved on 31 March 1999.29 Loan 1796-PAK, for $150 million, approved on 7 December 2000.

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T&V system, both nationwide and separately for Punjab, Sindh, and Balochistan.

57. FAO has been mainly providing TA in the development of agriculture through varioussmall-scale projects to improve food security, including improvements to farm productivity andfarm-level technological innovations. The Japan Bank for International Cooperation (JBIC) hasfunded the Punjab Province Agricultural Land Development Project (1978), and the AgricultureCredit Program (1992). It has also funded four projects to improve irrigation and drainagefacilities, including the National Drainage Program (1995). In the area of rural development,JBIC’s assistance includes rural electrification and rural roads. The United Nations DevelopmentProgramme, the Department for International Development of the United Kingdom, and theNetherlands Development Assistance have also financed area development projects supportingimproved farming practices, community development, and linking communities with sources ofassistance.

F. ADB's Sector Strategy

58. The country operational framework for Pakistan links poverty reduction to socialservices, agriculture and rural development, microfinance, development of social infrastructure,reforms in finance and industry sectors, and good governance. Consistent with theGovernment’s assessment, ADB considers agriculture as the most important sector foremployment generation. Reforms to achieve a sustainable production and marketing system,modernization and diversification to improve competitiveness and higher value addition, and asupportive policy and institutional environment for private investment are considered keyelements to realize the employment generation potential. In the longer term, constraints thatneed to be removed include imperfections in land markets and land distribution, irrigationinefficiencies and increasing deterioration in land quality, an inadequate rural transport network,inefficiencies in public sector marketing of agricultural inputs and outputs, poor quality ofresearch and extension, and restricted access to credit by small farmers.

59. Agriculture is also important in the context of rural development and poverty reduction.Community-based and multisector area development projects focusing on farm and nonfarmincome-generating opportunities have proven be successful in poverty reduction. A number ofrural development programs have been included in the pipeline to leverage the reformssupported by this Program. However, success also depends upon effective targeting andcommunity-based participatory approaches.

60. ADB's strategy is supportive of the Government's strategy and program for povertyreduction. While the Government has initiated a number of positive structural reforms since1999, Pakistan remains in crisis, with modest growth, high levels of debt, low foreign exchangereserves, a slowdown in exports, and severe pressures on the fiscal deficit. On a positive notethe Government has been spurred to consider actions and embrace agendas that only a fewyears ago would not have been considered. To support pro-poor growth, ADB's focus will be on(i) promoting private sector development, (ii) encouraging growth in employment-generatingsectors such as agriculture and small and medium enterprises, and (iii) building infrastructure.For social development the focus will be on (i) the development of human capital by increasingthe quality of primary education and basic reproductive health care, and (ii) gender developmentto reduce gaps in key social indicators by improving female access to education and healthcare, among others. For good governance the focus will be on (i) support for fiscaldecentralization and management, (ii) reorientation of public expenditures to the poor, (iii)reform of civil service, (iv) restructuring of loss-incurring SOEs, and (v) development of efficientcapital markets and good corporate governance.

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G. Lessons Learned

61. The program performance audit reports (PPAR) of the previous Agriculture Programidentified important lessons, which have been incorporated in the design of the proposedProgram. These lessons may be grouped as (i) program prioritization and design, (ii)implementation and timing of politically sensitive reforms, and (iii) program linkages. In addition,lessons from other agencies' experiences in the provision of farmer support services have beendrawn upon extensively.

1. Program Prioritization and Design

62. The PPAR noted that the first Agriculture Program was based on insufficient sectoranalysis, contained too many reform measures, and covered too many agriculture subsectors,treating each too broadly to bring about meaningful changes. Thus, that program showedinadequate focus, a lack of specificity and prioritization in the reform measures, and a failure toset clear targets and performance indicators. In response, the proposed Program has beenbased on detailed diagnostic analyses of critical sector constraints that began during the projectpreparatory TA and continued through loan processing. Based on the earlier lessons, theProgram has intentionally avoided areas of reform which, while important for long-run growth ofthe sector, will be more effectively addressed over a longer timeframe and through alternativelending modalities.30 The design of the Program reflects a much tighter focus on the criticalareas of market liberalization for key crops and inputs, reduction of budgetary costs for stateinterventions in these markets, and sharper targeting of support services for small farmers. TheProgram also entails (i) a clear set of targets and performance indicators, including the size ofthe Strategic Reserve of wheat; (ii) downsizing of existing public procurement and storageprograms; (iii) crop prices, production, and distribution; and (iv) budgetary allocations for staffretrenchment and small farmer and rural support programs. Close monitoring of the Program’simplementation and impacts will be undertaken jointly by the Government, ADB, andindependent research agencies (paras. 93 and 98).

2. Implementation and Timing of Politically Sensitive Reforms

63. The PPAR also recommended that a phased, step-by-step approach to program designand implementation is required in a traditional society like Pakistan, where there remain manypolitically well-connected interest groups and limited governance capacity. The proposedProgram has addressed this concern in four ways. First, detailed preparation was undertakenwith a comprehensive TA. During the TA and subsequent loan processing, extensive provincialconsultations were undertaken with government and nongovernment stakeholders in order toencourage understanding and ownership of the Program (para. 88). Second, in light of theseconsultations, a five-year period of implementation is planned, with three loan tranches to becarefully sequenced in accordance with Federal and provincial government commitments to fullyimplement the Program. About three years will be required for implementation of the core policyagenda, and an additional two years will be required to allow flexibility and ensure adequate

30 Two important examples include agricultural taxation and the water resource subsector. Enhanced and more

equitable taxation of agriculture will require strong political commitment and considerable strengthening of localinstitutional capacity for tax assessment and collection. Agricultural taxes will be comprehensively addressedunder the IMF's proposed multiyear PRGF (para. 53). Similarly, issues related to integrated water resourcemanagement in Pakistan require a longer term approach, combining policy dialogue with physical investment,institutional development, and capacity building for more sustainable management of irrigation and drainageinfrastructure. These needs are being comprehensively addressed through a variety of ongoing projects financedby ADB and other agencies, such as the National Drainage (Sector) Project (para. 54).

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monitoring. Third, a proposed TA loan will assist the Federal and local stakeholders toeffectively implement, sequence, and monitor the reforms (paras. 99-104). Fourth, local politicalcommitment to the reforms has been strengthened by targeted allocation of counterpart funds tothe provinces for the purpose of absorbing many adjustment costs of the reform program. Acluster loan approach was considered during the design of the Program, but the Governmentindicated a preference for retaining this package of reforms under a single program that wouldbe implemented in phases over a longer period than the previous agriculture program.

3. Program Linkages

64. The PPAR noted that program reforms should be prioritized based on sector needs andADB’s strategic objectives, and that the linkage between reforms must be clearly identified. Asnoted above, the Program has been designed based on detailed analysis of sector constraints,preparation of a detailed problem and objective tree analysis, identification of reform priorities,and analysis of the complementarities with ongoing operations in the sector financed by ADBand other agencies. The proposed Program is also complementary with the Government’sThree-Year Poverty Reduction Programme 2001-2004 (para. 15), and with ADB’s broadercountry operational framework, which promotes sustainable growth and poverty reductionthrough improvement of economic efficiency and export competitiveness, human and socialdevelopment, good governance, and institutional strengthening. Linkage between reforms hasbeen carefully assessed to enhance their combined impacts (e.g., by linking the expected priceand supply effects of market liberalization to the redesign of programs for small farmer researchand extension).

4. Lessons from Other Aid Agencies' Experiences

65. To ensure that agricultural support services are more effective in meeting the needs ofsmall farmers, the lessons learned from earlier and ongoing externally supported programshave also been considered. These include the World Bank-supported T&V Program forextension, the United States Agency for International Development-supported farming systemresearch approach, and ongoing and completed externally supported activities including theFAO-funded Farmer Field Schools and Pilot Food Security Program. Most of these models andapproaches are either ineffective or unsustainable. Some of their major shortcomings include (i)intensive capital and human resources at the top, (ii) weak governance structures, (iii) lack of ademand-driven approach, (iv) inadequate training and incentives for middle level and fieldextension staff, (v) weak interface between research and farmers, and (vi) lack of a replicableand cost-effective strategy. The TA will assist the Government in (i) conducting studies andaction plans for institutional reforms to improve governance and autonomy for the researchsystem, accountability to the stakeholders, responsiveness to end-users' needs, andaccessibility to small and poor farmers; and (ii) assessing the feasibility of integratingagricultural research, education, and extension such that it is cost effective, responsive toimproving productivity and efficiency, and financially sustainable.

V. THE PROGRAM

A. Rationale

66. Sustainable growth of the agriculture sector is a prerequisite for economic growth andpoverty reduction in Pakistan. The agriculture sector employs about 50 percent of the laborforce and generates 70 percent of export revenues. Two thirds of the population and about 75percent of the poor live in rural areas. Although agricultural income accounts for just half of thetotal rural income, dependence of the poor on agriculture is much greater because of the stronglinkages between the farm and nonfarm sectors. The increase in the number of poor during the

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last decade is partly a result of declining productivity, decreasing rural employment, andstagnating household income.

67. Pakistan has made progress in liberalizing agricultural markets and prices in recentyears. However, further progress is still needed to enhance the real growth of the agriculturesector as the productivity of most crops is low. This has affected both the upstream linkages forfarm inputs, such as seeds, fertilizers, and machinery, and the downstream linkages to agro-processing and related industries. Despite the moves towards market liberalization during the1990s, direct intervention by the Government in agricultural markets remains excessive. Thishas adversely affected sustainable increases in production and crowded out private sectorinvolvement. Government pricing and marketing interventions on the one hand and privatesector cartels and market failures on the other hand have led to low producer prices, low farmprofitability, and dampened productivity growth. Government subsidies are expensive tomaintain and do not typically benefit the target beneficiaries, the small and marginal farmers.The research and extension systems and institutions are outdated and weak. These distortionsinfluence the productivity and profitability of the major agricultural commodities, including wheat,cotton, rice, and sugar; adversely impact on the well-being of the vast majority of small farmersand the rural poor; and restrain overall economic growth.

68. Pakistan is in the midst of a structural adjustment program, with poverty reduction as thekey goal and revitalization of the agriculture sector as a key component in the export-ledstrategy. The Government intends to redefine its role in the agriculture sector to ensure thesmooth functioning of markets, promote private sector activities, and adjust public expendituresin agriculture more on public goods and market failures and less on agricultural production andmarketing activities. Consistent with the overall goals of adjustment, these reforms aim toexpand the role of the private sector through deregulation, liberalization, and privatization,affecting many public input supply and output marketing enterprises that now operate in theagriculture sector. The envisaged adjustment will phase out Government control of activities inagricultural production and marketing that the private sector is better equipped to handle. Theagricultural subsidy regime that has compounded fiscal difficulties and skewed the benefits ofgrowth and investment away from the needy will be dismantled to correspondingly increasesocial sector investments.

69. The Government’s acknowledgement of the seriousness with which the sector’sstructural issues need to be addressed is reflected in the intense dialogue with IMF, the WorldBank, and ADB; public participation; and involvement of other external agencies in designingthe Program to set the stage for sustainable growth in the long run. The Government hasdemonstrated its firm commitment to the Program by initiating action in several key areasincluding (i) reducing the public sector procurement and marketing of wheat, (ii) expanding therole of the private sector in wheat and seeds, (iii) phasing out the costly wheat subsidy program,(iv) ensuring free movement of wheat and other commodities, (v) allowing unrestricted importand export of major commodities, and (vi) allowing free access to breeder seed from researchinstitutions.

70. To be firmly placed on a sustainable growth path in order to reduce poverty, Pakistanrequires wide and deep reforms in all the major economic sectors. The major challenge,however, is to implement the reforms in major economic sectors and reduce fiscal deficits.Reforms in the agriculture sector are critically needed to ensure the success of all reforms, aswell as to enhance the sector's ability to provide sustainable means of livelihood toapproximately half of the country’s labor force. The costs of implementing these reforms,however, are substantial and so would be the benefits when the reforms are effectivelyimplemented. With the limited fiscal maneuverability of the Government, it will be difficult to

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meet the short-term adjustment costs (paras. 91 and 92) of the reform agenda withoutsignificant external assistance. The Government has, therefore, requested ADB support toundertake the reforms, which are well anchored in and integral to the ongoing structuralchanges in the macroeconomy, and to implement the Program. The implementation period isfive years, given the Government's commitment to these difficult reforms and increased privatesector involvement, coupled with the need to replace ineffective wheat subsidies to consumerswith better and targeted programs for small farmers and the poor. The Development PolicyLetter describing the Government’s reform measures is in Appendix 4 along with the detailedpolicy matrix.

B. Objectives and Scope

71. The Program has been designed to assist the Government in addressing key constraintsin the agriculture sector regarding productivity and profitability with an emphasis on small andmarginal farmers. As a result of increased productivity and profitability, it is expected that theProgram will increase agricultural growth and rural employment and reduce rural poverty.Beneficiaries will be provided with opportunities to increase their crop yields, productivity,incomes, and employment and improve their quality of life through the promotion of efficientcommodity markets and support services. A Program Framework is in Appendix 1, based on adetailed problem and cause-effect analysis of the sector.

72. The primary objective of the Program will be to improve agricultural productivity andprofitability. The Program includes specific reform measures to (i) promote efficient markets forthe major commodities, including wheat, cotton, rice, and sugarcane, in order to promotemarket-based incentives for farms, especially smallholders; (ii) liberalize markets for fertilizerand seed; and (iii) strengthen support services in small farmer extension and training, research,and regulation to improve quality control. These reforms will include (i) increased private sectorinvolvement in the wheat market, with a planned phase-out of support prices and subsidies, andremoval of restrictions on internal movement, imports, and exports; (ii) increased private sectorcompetition in cotton and rice marketing and export to overcome market imperfections; (iii)increased competition in sugar production and marketing with imports; (iv) increased privatesector competition in fertilizer imports; (v) removal of the public sector monopoly in access tobreeder seeds and increased private sector participation; (vi) rationalization, increasedautonomy, and financial self-reliance of research institutions; and (vii) increased small farmerfocus of extension services. Several SOEs will be restructured and/or closed down and divestedas a result of the rationalization and private-sector orientation of the Program.

C. Policy Framework and Actions

1. Improve Efficiency of Commodity Markets

a. Remove Market Restrictions

73. Under the proposed reforms, all restrictions on free movement of wheat and otheragricultural commodities will be removed. As first tranche conditions, MINFAL, the Ministry ofCommerce (MOC), and the provincial governments will (i) permanently remove all restrictions,except those related to antismuggling activities along the borders,31 on the internal movement ofwheat and other agricultural commodities; (ii) permit free movement throughout each province of

31 To minimize the smuggling of agricultural commodities to and from Afghanistan, Pakistan closely monitors the

movement of goods within 20 miles of the border.

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seed certified for a particular ecological zone by the provincial governments' seed councils; and(iii) ensure that no new public sector seed corporation will be established in the country. Atpresent, there is a restriction on the free movement of cotton seed in order to safeguard againstthe spread of diseases that could devastate the crop. Also as first tranche conditions, MOC willissue a policy announcement that (i) allows unrestricted private sector (which includes bothdomestic and international firms) imports and exports, subject to tariffs and antidumping rules;and (ii) ensures that there are no nontariff barriers to private sector imports and exports ofwheat, sugar, fertilizer, seed, cotton, and rice.

74. A major reform program is under way in sugar marketing and processing. Farmers in thesugar mill zones are no longer required to sell sugarcane to the mills in their area. Farmers arealso not restricted from producing brown sugar and molasses. The tariff for imported sugar wasreduced on 18 June 2001 from 15 percent to 10 percent. Under the Program, imports of sugar bythe private sector will be encouraged. As a first tranche condition, the Government will allowunrestricted imports of sugar. Also, the Government will remove all restrictions on theproduction, marketing, and export of brown sugar and molasses. As a second tranche condition,MINFAL and MOC will issue a policy announcement for (i) the permanent removal of the zoningof sugarcane areas and the forced sale to the nearest sugar mill, and (ii) allowing sugar mills tomerge and relocate. Regulations of unfair and monopsonistic practices of sugar millers andimporters will be improved and enforced by the Government. These measures will improve theefficiency of the sugar mills and ensure consumers with plentiful sugar at competitive prices. It isexpected that domestic production of sugar will decline over time, and farmers in the lesscompetitive production and processing regions will replace sugarcane with more profitable cropssuch as wheat, cotton, and rice, and with horticulture.

75. A free trade policy in cotton was introduced in FY1996 that removed import and exportduties. There is a need for more competition in exports, imports, ginning, and processing. As asecond tranche condition, MOC will submit draft legislation to the competent authoritiesconcerning the grading and standardization of cotton. This legislation and implementingregulations will be adopted as a third tranche condition. This is expected to improve the qualityand international competitiveness of Pakistan’s cotton exports. Also, as a second tranchecondition, MINFAL and the provincial governments will permit unrestricted access to and sale ofbreeder seed from research institutes and PSC for the production of certified seed to privateseed companies.

b. Improve Public Management of Strategic Reserves of Wheat

76. The objectives of maintaining a strategic reserve of wheat are to ensure price stability toboth producers and consumers and to provide food security in the event of shortages oremergency needs. The strategic reserve or buffer stock will provide for domestic consumptionand help offset any shortages in the market. The public food system will procure and sell adeclining amount until reaching a minimum of 1.0 million tons32 or about 12.5 percent of themarketed surplus, and the private sector will market the balance of wheat. As a first tranchecondition, MINFAL and MOC will issue policy announcements that (i) the Government willprocure and manage a minimum of 1.0 million tons of wheat strategic reserve (the actualrequirements of the strategic reserve will be determined by the Government in March and Aprilof each year); (ii) PASSCO and the provincial food departments will only manage the strategicreserve of wheat and on a commercial and cost-effective basis; and (iii) the directorates of food

32 This level may be adjusted below 1.0 million tons, as agreed between ADB and the Government.

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in the provincial food departments of Sindh, NWFP, and Balochistan will be closed over a five-year period.33 PASSCO will mainly procure, store, and distribute strategic reserves of wheat, butother agriculture commodities may be marketed on a commercial and case-by-case basis, andonly when special circumstances warrant. All other agricultural commodities and the remainingquantities of wheat will be freely traded in open domestic markets. PASSCO will be allowed toexport wheat with TCP. The provincial governments will have representation on the board ofPASSCO. These measures and the permanent removal of restrictions on the internal movementof wheat will ensure a higher price to the farmer and improved availability throughout thecountry.

77. For wheat and the other marketing components (including cotton, rice, sugar, fertilizer, andseeds), TA will be provided under the Program to assist the Government in (i) implementing thepolicy reforms, (ii) establishing a market-based information system, (iii) instituting systems ofinternationally accepted standards and grades for the exported commodities, (iv) managing thestrategic reserve and reducing costs, and (v) providing capacity building and training to promotemarket reforms and quality standards for exports. The TA will also assist the private sector with (i)exports and market performance, (ii) quality control, (iii) storage, and (iv) a possible revival of thewheat and cotton futures markets. Details are provided in Chapter VII.

c. Phase Out Commodity Price Supports and Subsidies

78. APCOM under MINFAL will continue to recommend support prices to the Government.Regarding support prices for wheat, and as a first tranche condition, MINFAL and MOC willissue a policy announcement that (i) the issue price for sale of wheat to flour mills will not beuniform throughout the year, but will be allowed to increase seasonally to reflect storage costs;and (ii) the issue price will be phased out and replaced by a sales price that reflects theprocurement price plus the full costs of storage, distribution, and management. Regardingsubsidies on wheat, MINFAL and MOC will issue a policy announcement that the basis for theprocurement price will be the international reference price (export or import parity price),34 withmarginal adjustments allowed to reflect changes in the cost of production. As third trancheconditions, the Government will eliminate (i) the consumer subsidy for wheat by moving to amarket-based sales price; and (ii) the producer subsidy for wheat by moving from a supportprice to a market-based procurement price (export or import parity price), unless otherwiseagreed upon between ADB and the Government, except for the losses that may accrue due tothe minimum strategic reserve for wheat. These price measures will enable a gradual phasingout of the wheat consumer and producer subsidies, while also protecting wheat producers tosome extent from rapid and sustained price declines in the competitive market.

33 The provincial food departments perform two major functions: (i) procurement, storage, and sale (at prices fixed

by the Federal Government) of wheat and limited other commodities through the directorates of food (whichcontain more than 90 percent of their total staff and assets); and (ii) regulatory services including (a) food qualityinspection through food inspectors, and (b) price determination of essential commodities through food controllers.Under the Program, the provincial food departments will be restructured, involving reorganization and possibledownsizing. The directorates of food in three of the food departments (Sindh, NWFP, and Balochistan) will berestructured for eventual closure and divestiture over a five-year period, whereas their regulatory functions willcontinue operations. PASSCO and the Punjab Food Department will be restructured and will continue operationand management of the strategic reserve. The Punjab Food Department is needed because of the major role thatwheat plays in the Punjab economy.

34 This price will then be adjusted for wholesale market-to-port marketing margins, as has traditionally been done forcotton.

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79. A first tranche policy announcement will also confirm that (i) for cotton, the Governmentwill continue to use the export parity price as the basis for the procurement price; (ii) forsugarcane, the Government will only announce an indicative price to be used for procurementby the private sugar mills, and the Government will not procure sugarcane; (iii) for rice and allother agricultural commodities, public procurement will be at market prices; and (iv) no newsubsidies will be introduced on wheat imports, public seed production and marketing, or fertilizerimport and marketing. The Government and the provincial governments will provide incentivesto promote private sector and joint or cooperative farmer storage of the major commodities. As asecond tranche condition, the Government will prepare and submit to ADB a plan to replaceuntargeted wheat subsidies with targeted programs for small farmers (the small farmers plan).As a third tranche condition, the Government will commence implementation of the approvedsmall farmers plan.

d. Accelerate Divestiture and Restructuring of SOEs

80. The Program will assist the federal and provincial governments in closing and divestingseveral SOEs in the agriculture sector that are no longer needed. Some SOEs will remain but willundergo considerable restructuring in order to perform more effectively in the market. As firsttranche conditions, SASO and ADA will be closed, and the process of divestiture will be startedby the provincial governments of Sindh and NWFP. As stated above, no new public sector seedcorporation will be established in the country. Private seed companies will continue to certifytheir seed as required by the Federal Seed Certification and Registration Department.

81. The Cotton Export Corporation and the Rice Export Corporation of Pakistan havealready been closed, and in January 2001 they were merged with TCP. Also, as a first tranchecondition, MOC will end all budgetary support, subsidies, and preferential credit at subsidizedinterest rates for TCP, and ensure that TCP competes on equal terms with private companies.Support prices announced by APCOM will act only as market reference prices and not as publicprocurement prices. If TCP procures wheat, cotton, and rice, it will be primarily for export and atopen market or export parity prices. These measures will expand exports at internationalstandards and help ensure higher prices to farmers. If TCP procures wheat, cotton, and rice, itwill be at open market or international preference prices.

82. As a second tranche condition, MINFAL and the provincial governments will submit plansto ADB to reorganize and downsize PASSCO and the provincial food departments to operate onmarket-oriented lines and compete on equal terms with the private sector (the PASSCO andProvincial Food Department Restructuring Plans), and begin implementation (includingupgrading and leasing storage facilities). Also as second tranche conditions, (i) MINFAL willclose FID, responsible in the past for fertilizer imports, and the Directorate of Food, responsiblefor wheat imports, and begin the process of divestiture; and (ii) the Sindh Government willannounce a plan and a timetable to close SSC. Divestiture will entail leasing or selling assets tothe private sector (i.e., sale of stocks and lease of storage facilities), settlement of alloutstanding claims and debt, and assigning staff to the provincial surplus pool.35 It has beenagreed that the proceeds of the Loan under the Program will be made available by the FederalGovernment to the provinces on the same terms and conditions to assist in closing these andother SOEs under the Program. Also as a second tranche condition, the Government and the

35 In lieu of assigning staff to the surplus pool, the provinces may elect to offer staff a voluntary retirement scheme,

depending on the availability of funds and a firm policy on retrenchment. A proposal being considered at theFederal level is a payment of 3-5 years of salary and benefits on a monthly basis, instead of a lump sum, withpermission granted to the staff to work in the private sector during the period of monthly payments.

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provincial governments will issue policy announcements that all staff affected under thisProgram (both public servants and public corporation staff) will either be placed in the surpluspool or provided with a severance package consistent with the Government's guidelines. Asanother second tranche condition, MOC will ensure that TCP is operating on a commercialbasis without any budgetary support, subsidies, or exclusive preferential credit in wheat, cotton,and rice exports. These measures will increase the market share of the private sector in wheat,cotton, and rice marketing.

83. As third tranche conditions, the Government will cause the Provincial governments to (i)complete the implementation of the agreed upon PASSCO and provincial food departmentreorganization plans, including provision of severance packages consistent with theGovernment's guidelines; (ii) close the provincial food departments of Sindh, NWFP, andBalochistan and SSC, and begin the process of divesting them; and (iii) end all budgetarysupport, subsidies, and preferential credit for PASSCO, except for the costs of managing theminimum wheat strategic reserve.

2. Strengthen Support Services

a. Accelerate the Provision of Agricultural Support Services

84. As a first tranche condition, MOF and MINFAL will issue a statement that the proceeds ofthe Loan under this Program will be made available for onlending to the provincial governmentson the same terms and conditions as those of the Program Loan, with the Federal Governmentbearing the entire foreign exchange risk, for the purpose of upgrading storage facilities andfinancing any staff severance programs, and for programs focusing on small farmers, includingresearch and extension programs. As second tranche conditions (i) MOC and the provincialgovernments will make a determination (the financing determination) regarding financing,through the provincial trust funds, joint NGO activities, and extension agent programs with afocus on small farmers; and (ii) the Sindh Government will finance, through the provincial trustfunds, a Sindh Rural Support Program, similar to those programs in the other provinces.Provincial governments will also promote group-based small farmer storage and marketingefforts in order to reduce the dependence on middlemen during the harvest and to obtain higherprices. This will increase the scope for private sector competition in agricultural markets. As athird tranche condition, the provincial governments will finance new initiatives agriculturalresearch, extension, and higher education by using some of the local currency funds in theprovincial trust funds. These funds are additional to annual budgetary funds received by theprovinces.

b. Accelerate the Strengthening and Coordination of AgriculturalSupport Services

85. Major reforms are planned in agricultural research. As a second tranche condition,research institutes will be allowed to sell breeder seed to private companies. In addition tofinancing innovate extension and small farmer training activities, another potential use of theProgram Loan proceeds is innovative research programs to support small farmer development.Also as second tranche conditions (i) the provincial governments will study the feasibility andprepare plans (the research institutes plans) to make provincial research institutes autonomousand allow them to retain the royalties earned from the sale of seed; (ii) MINFAL and theprovincial governments will study the feasibility of reorganizing and strengthening the deliveryand coordination of agricultural research, extension, and higher education services (theagricultural support service plans); and (iii) MINFAL will prepare and submit for cabinet approvala plan to substantially reorganize and right-size PARC and NARC (the research councils plan)

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to focus on research coordination with the provinces and special national topics dealing withupstream research such as biotechnology. As third tranche conditions, the Government and theprovincial governments will, subject to the results of the relevant study and their jointagreement, commence implementation of (i) the research institute plans, (ii) the agriculturalsupport service plans, and (iii) the research councils plan.

c. Quality Control and Regulation Measures

86. As first tranche conditions, MINFAL will prepare (i) an ordinance on fertilizer regulation,and (ii) draft legislation for the regulation and control of agricultural chemicals (including revisionof the Environmental Protection Act of 1997) to establish legal responsibilities for the handling,transport, storage, and disposal of agricultural chemicals for Government and ADB review. Assecond tranche conditions, the Government and the provincial governments will ensure that (i)suppliers of imported fertilizer certify the nutrient contents at the point of origin, and (ii) privatethird-party laboratories, certified by the Government, are allowed to certify quality at the retaillevel for fertilizer and seed, subject to existing Government regulations. Also, MINFAL willsubmit (i) the ordinance on fertilizer regulation for promulgation to the cabinet, and (ii) the draftlegislation on agricultural chemical regulation to the national assembly.

D. Social and Environmental Issues

87. The Program will address policy issues that are presently impeding the performance ofthe agriculture sector and have significant socioeconomic, poverty-related, and environmental-adverse impacts. These issues include (i) inadequate role of the private sector in commoditytrade, overshadowed by an inefficient and overstaffed public sector, and in the procurement,marketing, and distribution of agricultural inputs and food grains; (ii) inadequate and ineffectiveregulatory mechanisms, and ill-defined standards and specifications for inputs and farm produceto ensure quality; (iii) ineffective research and extension services that are top down andinaccessible to small and poor farmers; (iv) unsatisfactory performance, overstaffing, andoverlapping functions and mandates of Federal level research and marketing institutions; (v)inadequate funding to target the poor and marginalized households; and (vi) absence ofmonitoring mechanisms and plans to mitigate possible adverse socioeconomic, physical, andbiological impacts from increased use of agrochemicals and other increased agroprocessingactivities.

88. To encourage the role of the private sector, the inefficient public sector trading andmarketing organizations will be divested, and, where necessary, their roles and budgetarysupport will be reduced. Moreover, credit facilities will be allocated to the private sector to investin expanding marketing linkages. Similarly, monitoring mechanisms to regulate major marketsand prices will be instituted to ensure the quality of inputs and outputs, and to mitigate anyadverse environmental impacts. To ensure improved and effective support services, institutionalrestructuring will be carried out to make research and extension agencies demand driven andcost effective. Similarly, research institutions will be restructured to avoid any overlappingfunctions and wasteful expenditure. Support will be provided to enhance the implementationcapacity of the institutions to provide support for marginalized and poor consumers. The majorimpacts of the Program are provided in Chapter VIII. Details of the major impacts and publicconsultations are in Appendix 5.

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VI. THE PROPOSED LOANS

A. Amount of Loans and Source of Funds

89. Three loans totaling $350 million equivalent are required: (i) a loan in an amount ofSDR96,238,000 ($123 million equivalent) from ADB’s Special Funds resources36 to the IslamicRepublic of Pakistan, with a term of 24 years maturity, including a grace period of 8 years, with aninterest rate of 1 percent per annum during the grace period and 1.5 percent per annum duringthe amortization period; (ii) a loan in an amount of Y27,643,500,000 ($225 million equivalent) fromADB’s ordinary capital resources to the Islamic Republic of Pakistan, with a term of 15 yearsmaturity, including a grace period of 3 years, and with interest to be determined in accordancewith ADB’s London interbank offered rate-based loan facility; and (iii) a TA loan in an amount ofSDR1,565,000 ($2 million equivalent) from ADB’s Special Fund resources (footnote 36) to theIslamic Republic of Pakistan, with a term of 32 years maturity, including a grace period of 8 years,with an interest rate of 1 percent per annum during the grace period and 1.5 percent per annumduring the amortization period.

90. Use of low-cost funds from ADB’s Special Funds resources is justified in support of policyreforms that address complex and long-standing issues and socially significant measures to (i)enhance benefits to small and marginal farmers and the rural poor; (ii) free government resourcescurrently used in misdirected and nontargeted subsidies, and (iii) improve the terms of trade foragriculture on which the livelihood of the majority of the households, especially the poor,depend. In addition, the adjustment costs to implement the program are substantial.

91. An estimated net adjustment cost of about $500 million is required to catalyze thechanges to enhance productivity and profitability in the agriculture sector through the proposedreform measures. About 80 percent of the expected savings of $180 million from phasing outuntargeted subsidies and reducing the wheat stock to the level of the wheat strategic reserve ismeant for targeted small farmer programs including contingency for safety nets for poorhouseholds against fluctuations in the wheat price. As a result, a net savings of $30 million isexpected. Restructuring and divestiture of SOEs, including provision for staff affected byreforms and upgrading storage facilities for leasing or sale, are likely to cost about $340 millionover the five-year program period. An adjustment cost of about $180 million is expected forreorienting the agricultural extension, research, and education services to address small farmerneeds. These include community-based services, agricultural productivity enhancementprograms, and private-public associations in the delivery of agricultural services. The cost forimproving quality control and regulation measures is estimated at $10 million.

92. The proposed measures have been phased to factor in resource availability duringimplementation. The reforms will be facilitated by measures that generate savings, such asremoval of subsides. The budgetary implication of the proposed reform measures is expected tobe positive, and nonquantifiable benefits and savings are expected to be substantial. These wouldaccrue through (i) lower expenses on controlling the movement, marketing, import, and export ofagricultural commodities; (ii) efficiency gains in sugar production, increased price for cotton,increased producer and private sector benefits, and increased tax revenues to the Government;(iii) higher efficiency and market orientation of restructured SOEs that will reduce the need forbudgetary support; and (iv) divestiture that will lead to recurring savings and reduced personneland administration costs. The rental and sale of upgraded storage facilities could potentiallygenerate significant revenues.

36 Subject to the availability of Asian Development Fund resources.

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B. Implementation Arrangements

93. MOF will be the Executing Agency and will (i) coordinate with MINFAL, MOC, and theprovincial governments on the policy reforms; (ii) oversee compliance of tranche conditions; (iii)administer the use of loan proceeds; and (iv) request ADB for tranche releases. MINFAL will beresponsible for day-to-day implementation, including monitoring the implementation of theProgram and use of counterpart funds and evaluating the impact of the reforms on stakeholders.To facilitate implementation, MINFAL will establish, prior to loan negotiations (i) a steeringcommittee composed of senior staff from MINFAL, MOC, MOF, and the provincial planning anddevelopment departments (to meet at least quarterly); and (ii) a program implementation unit(PIU) in Islamabad, under the direction of the secretary, MINFAL. The steering committee willensure that the reforms are undertaken in line with the agreed upon timetable. The PIU will haveat least three full-time staff to oversee the progress and issues relating to policy implementation.In addition, the PIU will collect baseline data and continually assess program impact. Appendix 6presents (i) policy compliance measures for tranche releases and (ii) program monitoringindicators.

C. Procurement and Disbursement

94. The loan proceeds will be used to finance the foreign exchange costs of items producedand procured in ADB member countries, excluding ineligible items (Appendix 7). The Governmentwill certify that (i) if the loan proceeds will finance goods already imported, the value of eligibleimports in the period concerned will exceed the amount of the requested withdrawal; or (ii) if theloan proceeds finance items to be imported, the value of eligible imports in the immediatelypreceding one-year period will be equal to or greater than the amount of the requested withdrawalplus all other amounts expected to be withdrawn during the succeeding one-year period. Allprocurement will be in accordance with ADB's Guidelines for Procurement. An audit of the use ofthe loan proceeds will be undertaken only upon ADB’s request, provided that ADB retains the rightto (i) audit any account, and (ii) verify the validity of the certification issued by the Government foreach withdrawal application. Prior to withdrawal, the Government will open an account with theState Bank of Pakistan in which all withdrawals will be deposited. The account will be managed,operated, and liquidated in accordance with terms satisfactory to ADB.

D. Use of Loan Proceeds

95. The use of the local currency proceeds of the loan (counterpart funds) needs to beconsistent with the overall fiscal framework defined in the Government's agreement with IMF.Subject to this, local currency proceeds of the loan will be used by the Government to supportthe reforms to be initiated or implemented under the Program in particular, and to redirect thesavings from subsidies towards social sector expenditures, which is a government commitmentto IMF. Considering that agriculture is largely a provincial matter and the cost of the reformmeasures will have to be borne by the provinces, the Federal Government has agreed toprovide part of the counterpart funds for the provinces on the same terms and conditions as theADB loans, with the Federal Government bearing the entire foreign exchange risk.

96. Allocation of part of the loan proceeds to the provinces is the first such arrangementunder a policy loan modality. This has been specifically introduced since the Government isalready implementing a time-bound administrative and financial devolution plan. The provincialgovernments and the Federal Government will also discuss the cost sharing for closing andrationalizing the SOEs. Furthermore, funds allocated to the provinces have been dedicated tocommunity-based research, extension, and innovations to enhance productivity. Counterpartfunds will therefore directly support ADB’s strategic development objective for poverty reduction

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and also will supplement the policy reforms with measures to enhance the productivity of smalland poor farm households.

E. Tranching and Monitoring

97. The proposed ADB loans will be released in three tranches. The first tranche of $125million equivalent (SDR39,121,000 from the Asian Development Fund [ADF] andY9,154,500,000 from ordinary capital resources [OCR]) will be released upon loaneffectiveness, based upon fulfillment of all first tranche conditions. The second tranche of $100million equivalent (SDR39,121,000 from ADF and Y6,103,000,000 OCR) is expected to bereleased within 18 months of loan effectiveness or earlier, subject to fulfilling the relevantconditions, but is not time-bound. The third tranche of $123 million equivalent (SDR17,996,000from ADF and Y12,206,000,000 from OCR) is expected to be released within 60 months of loaneffectiveness or earlier upon fulfillment of the relevant conditions.

98. MINFAL, through the PIU and its Economic Wing, will collect benchmark or baselinedata at the start of the Program. Regular and close monitoring of the implementation of theProgram will be undertaken by both the Government and ADB. Specific program performanceindicators have been developed to assist with monitoring (Appendix 6). Program impact will beassessed particularly from the perspective of productivity gains for small and marginal farmersand consumption patterns of the urban and rural poor due to shifts in market prices of staplefood items. Mechanisms to monitor these will be assigned to independent research agencies, tobe appointed by MINFAL at the start of the Program.

VII. THE TECHNICAL ASSISTANCE LOAN

99. The Government has determined that additional support will be required to effectivelyimplement, sequence, and monitor policy reform actions, and has requested ADB TA for (i)program coordination; (ii) improving the efficiency of commodity markets; (iii) small farmerextension, research, and safety nets; and (iv) reorganization and restructuring of SOEs. Otherfunding agencies have also indicated that these are the areas where assistance is urgentlyneeded and where ADB assistance would be best targeted.

A. Program Coordination

100. To facilitate the design of the elements of the reform, and to sequence them to meet thetranche release conditions, assistance will be provided to MINFAL and its provincial counterparts to(i) maintain consistency of outputs with the Program objectives of enhancing the profitability ofagricultural production; (ii) advise the Government on price and subsidy reform measures; (iii)review all policy, legal, and institutional aspects for consistency in promoting efficient markets; (iv)ensure that the terms of participation of small farmers in commodity markets improve; (v)enhance private sector participation in agricultural research, education, and extension; and (vi)ensure that SOEs are reorganized with adequate emphasis on good governance andsustainability.

B. Improving the Efficiency of Commodity Markets

101. With the deregulation of trade in inputs, foodgrains, cash crops, and intermediate goodsas part of the Program, the Government has sought assistance to establish an appropriatelegislative framework and guidelines for major crops (sugarcane and cotton) and for inputs(fertilizer, agricultural chemicals, and seed) to meet the Program's objectives. The TA will alsoprovide support for establishing quality benchmarks and their control mechanisms in the privatesector that would supplement the limited Government regulatory mechanisms.

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C. Small Farmer Extension, Research, and Safety Nets

102. The TA will assess the most effective alternative means for agricultural extension,including through NGOs, from among the current pilot projects in Pakistan, and build plans (theagriculture support services plans) to reorient its own extension system accordingly. MINFALwill be assisted in (i) preparing plans (the research institutes plans and the research councilsplan) to reorganize the research establishments and develop a seamless delivery mechanismfor education, research, and extension; (ii) developing a plan that will enhance the participationand benefits for small farmers (the small farmers plan) and provide safety nets; and (iii)structuring the counterpart funds allotted to the provinces into trust funds with defined smallfarmer focus.

D. Reorganization and Restructuring of SOEs

103. The Government will need to direct, manage, and sequence the reorganization andrestructuring of SOEs in a manner that increases the opportunities for participation of the privatesector. The TA will assist the Government in the reorganization of the provincial and nationalresearch institutions, and more specifically, in enabling PASSCO to manage the strategicreserve. In addition, the TA will assist in the preparation of a corporate governance frameworkand performance standards for the reorganized SOEs, and will develop eligibility criteria foraccess to public resources.

104. The total cost of the TA is estimated to be $2.8 million equivalent, comprising $1.1million in foreign exchange cost and $1.7 million in local currency cost. ADB will provide $2million to cover the entire foreign exchange cost and $900,000 to partly meet the local currencycost. International and domestic consultants will be engaged from a consulting firm to implementthe TA. The consultants will be selected in accordance with ADB’s Guidelines on the Use ofConsultants and other arrangements satisfactory to ADB for the engagement of domesticconsultants. The Government has requested that ADB recruit the consultants on behalf of theGovernment and assist the Government in negotiating the contract with the consultants. TheGovernment and the consultants will sign the contract. The Government has requested advanceprocurement action. An estimated 138 person-months of consulting services will be required,including 36 person-months of international consultants and 102 persons-months of domesticconsulting services. TA components are expected to begin in February 2002 and will beimplemented over a 2-3 year period. Outline terms of reference and cost estimates are inAppendix 8.

VIII. PROGRAM BENEFITS AND RISKS

A. Impacts

105. The Program will have significant social, financial, and economic impacts at both thenational and provincial levels on stakeholders including farmers (especially small and poorfarmers and landless farm laborers), rural and urban consumers, private sector agribusinessenterprises, and employees of the public sector. The impact analysis is based primarily on apartial equilibrium methodology37 through changes in one commodity at a time, and thenanalyzing the combined effect. Changes in prices, yields, cropped area, and cropping intensities

37 Khan, M.E., Report on the Financial, Economic, and Poverty Impacts of the Proposed Policy Reforms, under TA

3229-PAK, Islamabad, June 2001.

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are modeled.38

1. Impact on Prices

106. The Program is expected to rationalize agricultural input and output prices through policyreforms, including removal of subsidies, discontinuation of wheat price support policy, and tradeand market liberalization. In the past, government support prices have been generally below therelevant import and export parity prices, except in the case of sugarcane, where the support pricehas been higher than the import parity price. With the Program, it is expected that in the mediumterm (2001–2005), the farmgate prices in real dollar terms of wheat, basmati paddy, short grainpaddy, and seed cotton will increase by 11, 24, 8, and 7 percent, respectively; and in the long run(by 2010) by 17, 37,19, and 23 percent, respectively. The increase in prices would be realizedmainly due to two factors: (i) liberalization of trade that would bridge the gap between the exportparity price and the support prices (and the consequent wholesale market price), and (ii)increases in world commodity prices.39 In the case of sugarcane, however, as the current andprojected import parity prices are significantly lower than the support price, the farmgate price ofsugarcane would fall by 27 percent in the short run with the unrestricted import of sugar but wouldincrease by 6 percent by 2010. This recovery is expected to be realized from the returns oninvestment in extension and research and from increases in world sugar prices. Demand andsupply elasticities average -0.9 for sugarcane and 0.5 for wheat, demonstrating that demand andsupply are inelastic. Sensitivity analysis on these price changes, assuming a 10 percent change ofannual growth rate in both directions, demonstrates some sensitivity of wheat and paddy prices,ranging from 5.3 to 5.7 percent compared with the base average annual growth rate by 2005 of5.5 percent.

107. The first 2-3 years after the commencement of the Program will be an adjustment ortransition period. During this period, the private sector market institutions and functionaries willgradually replace the role of the public sector market and institutions, make increasedinvestment, and establish domestic and international marketing linkages. It is likely that duringthis transition period, prices of major crops except sugarcane may fall slightly. Later, the priceswill recover and stabilize with the full active role of private sector institutions. During thetransition period, the prices for consumers may temporarily decrease. Sugar prices, however,will decrease significantly, due to lower import parity prices. With the elimination of the subsidyon wheat, the price of wheat flour may increase by about PRs1.25-1.50 per kilogram. Thiswould require an additional expenditure of $1.3-$1.6 (PRs87-100) per household per month,meaning an addition of about 1.0 percent for food expenditures of low-income householdsearning less than $47 (PRs3,000) per month.

2. Impact on Farm Production

108. With the policy and price reforms, there will be a shift in cropping patterns, reflectingcomparative advantage and the relative profitability of crops. By 2005, it is estimated that yields ofwheat, paddy, and seed cotton will increase by 5, 2, and 5 percent, respectively. Average croppedarea and cropping intensities will also increase by about 2 percent and 3 percent, respectively. Asa result, total production of these crops should increase to 23.5, 10.3, and 6.4 million tons,respectively, representing increases of about 12 percent, 19 percent, and 11 percent,

38 Based mainly on Ahmad, Bashir, Crop and Farm Budget Analysis, prepared under TA 3229-PAK, Faisalabad,

June 2001.39 Commodity Market Report, World Bank, March 2001.

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respectively, over the production levels in 2000. The supply and adoption of improved andcertified seed have been a major limiting factor in productivity gains. Also, the supportingagricultural services of research and extension have been inefficiently managed due to theirinappropriate administrative structures and lack of adequate funding. With the removal of seedmarketing barriers and increase in private seed company marketing of certified seed, coupled withthe restructuring of the service delivery institutions, by 2010 the estimated production will increaseto 24.7, 10.9, and 6.9 million tons, respectively, for wheat, paddy, and seed cotton. In percentageterms, the increases will be 17 percent, 25 percent, and 20 percent for the three crops. Sugarproduction, however, is anticipated to decrease to 20.5 million tons from 46.3 million tons by 2005.However, with improved seed and research and extension services, sugar production is estimatedto reach 23.0 million tons by 2010. Sensitivity analysis on yields, assuming 10 percent changes inboth directions, indicates some sensitivity of wheat and paddy yields, similar to the results forprice sensitivities.

3. Impact on Agriculture Sector Growth

109. It is anticipated that by 2005, the sector will be able to realize an annual growth rate ofabout 4 percent with the marketing reforms alone. When complemented with the increased useof certified seed and the restructuring of support services, by 2010 it may increase to a 5percent annual growth rate.

4. Impact on Farm Household Income, Farm Labor, and Poverty Incidence

110. The Program will have a significant impact on farm household incomes. It is expected thatwith the Program, by 2005 the annual income of an average farm household will increase from$580 to $730 (27 percent). This increase in income should be realized through (i) changes in theprices of inputs and commodities, and (ii) shifts in cropping patterns based on the relativeprofitability of crops. By 2010, it is estimated that the average farm income will increase by 67percent from the base year due to (i) increased availability of improved seed, and (ii) improvedsupport to farmers from agricultural research and extension services. The loss of income due tothe anticipated decrease in sugarcane prices will be compensated by increases in income fromsubstituting crops. It is also expected that, with the policy and price reforms alone, the demand forfarm laborers in 2005 will increase by about 15 million person-days, or about 2.4 percent. Withincreased productivity gains from improved seeds and institutional reforms, the labor requirementin 2010 will increase by about 37 million person-days or about 6 percent. This will increase thehousehold incomes of landless laborers. Moreover, with the increase in the prices of commodities,the wages of landless laborers will also increase. With the Program, the incidence of poverty inthe rural areas will be lowered from the existing 35 percent to about 33 percent. For consumers,the anticipated slight increases in the price of foodgrains will be offset by the decrease in the priceof sugar. The rise in commodity prices will increase household expenditures on food items of theurban and rural nonagricultural households, but by only $7.50 and $10 per year, respectively,which is an increase of less than 1 percent over present expenditure on food by an averagehousehold. In addition, the Government is preparing plans for targeted poverty reductionprograms in both rural and urban areas, and the Program will assist it in setting up thesesupport programs to target poor households. The annual budgetary requirement, in constantterms, to mitigate the additional burden on households that are below the poverty line isestimated at $27 million.

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5. Impacts on Investment and Employment

111. By providing appropriate incentives to private sector marketing and investment, theproduction, import, and marketing of seed and fertilizer will significantly improve, ensuringgreater efficiencies through competitive pricing and timely provision of these inputs. With theProgram, the private sector will be encouraged to replace public sector marketing and tradingactivities, particularly regarding wheat and seeds. It is estimated that by the year 2005, 12-15million tons of marketable surplus wheat will be available for marketing institutions to handle. Thisincludes 3.5 million tons of wheat for export, after meeting the domestic requirements. Similarly,about 3.3 million tons of rice and about 0.2 ton of cotton will be surplus for export. This will requirea sizeable investment and will generate employment opportunities in the private sector. However,flour and sugar mills, generally operating below the installed capacity and with suboptimal millingefficiencies, will lose the advantage of subsidized wheat and overvalued sugar prices, and mayclose down unless they invest in modernization. This may cause some unemployment, but it isexpected that the surplus employees will be absorbed in alternate employment in the expandingagroprocessing industries. Similarly, the divestment of public sector institutions will render some ofthe staff surplus. Initially, they will be absorbed in the surplus pool. Nonetheless, if they arereleased with severance pay and some training, they should be able to find employment in theprivate sector.

6. Impact on Public Sector Expenditure and Balance of Payments

112. A large part of the subsidy, especially for wheat, has benefited the traders and thebetter-off urban consumers. Reducing and eventually eliminating the wheat subsidy will result inlarge fiscal savings for the Government that can be better spent on the ongoing targeted povertyreduction programs. The average annual expenditure on the wheat subsidy (Federal andprovincial combined) over the last five years was about $145 million. This does not include thesubstantial costs of staff and other fixed costs, which will also be a saving to the Government.

113. With PASSCO commercializing its strategic reserve operations in wheat, the net savingto the provinces will be $135-$140 million.40 Similarly, by closing various SOEs,41 there will bean additional annual saving of $15-20 million. This saving could then be diverted to public sectorexpenditures on other social and infrastructure development programs. In addition, the provincialgovernments will be able to lease out or privatize the existing wheat storage facilities. Similarly,providing increased autonomy to research organizations will encourage them to generate theirown funds and be increasingly self-financing, and reorganization and decentralization of theseinstitutions will reduce expenditures on overlapping functions. This saving will be available forincreased funding for the research institutions.

114. With the policy reforms and liberalization of trade, the private sector will be able to exportsurplus wheat, rice, and cotton. After adjusting for the value of sugar imports, the estimated valueof incremental exports in 2005 will be about $1.9 billion. It is anticipated that, with the increase infarm productivity achieved through seed improvements and restructuring of research andextension services, and adjusting for population increases, the total value of incremental exportsin 2010 will be around $2.0 billion. This will contribute to improving the balance of payments

40 The annual operating loss reported by PASSCO in 2000 was about $23 million for the management of about 1.25

million tons. Under the Program, with commercialization of operations and induction of provincial representativeson the board of governors, there may be some cost savings through improved management and economies ofscale.

41 These organizations include FID, SSC, SASO, ADA, and the provincial food departments.

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situation of the country.

B. Justification

115. The Government is committed to further liberalizing agricultural trade, divesting SOEs,discontinuing its price support policy, withdrawing subsidies in general and in wheat inparticular, restructuring and strengthening research and extension departments, and realigningexisting relevant institutions. These reforms will require substantial financial resources to (i)bridge the revenue gap in the short run, (ii) implement a staff retrenchment and retrainingprogram, (iii) establish endowment funds for supporting innovative research and extensionapproaches, (iv) provide incentives and credit to private sector investment, and (v) supporttargeted poverty reduction programs. The Program will assist the Government in implementingthis reform agenda by providing the requisite financial resources.

116. The overall goals of the Program are consistent with ADB’s country strategy, which aimsat (i) reducing poverty, (ii) increasing the efficiency of public sector organizations and improvinggovernance, (iii) expanding the role of the private sector, and (iv) rationalizing the role of publicinstitutions. The Federal Government has also ensured fair compensation to the provincialgovernments to absorb the adjustment costs and to implement the targeted poverty reductionprograms.

C. Risks

117. The main risk associated with program loans often relates to the Government’ssustained support throughout the implementation period. The current Government is fullycommitted to the policy and institutional reforms contained in the Program. It is clear that theimplementation period of this Program will extend beyond the tenure of this administration, viz.,October 2002. However, there is a reason to believe that the Program will be equally supportedby any future administration, as the major benefits of many of its components will start yieldingresults within the first year and many others relate to irreversible structural changes that willhave taken root by then. There is also a risk of unsustained provincial government support forthe Program, particularly with regard to the planned phaseout of the wheat subsidy andreduction in provincial government procurement, management, and marketing of wheat. The 5-year implementation period of the Program with three undated tranches will provide adequatetime to implement the reforms. Contraction of the government activities in wheat will follow theprice and subsidy reforms, coupled with the planned expansion in private sector marketingactivities.

118. Other than political risks, programs sometimes also face social and financial risks.Although the proposed reform agenda is ambitious, it is prioritized, sequenced, and interlinked,and was prepared in consultation with all relevant stakeholders in private and public sectorinstitutes and organizations. Therefore, it is expected to gain wide acceptance among theconcerned interest groups and institutions, minimizing the social risk. Many elements of theinstitutional reforms of the Program were initiated by the agencies of the Federal and provincialgovernments themselves. Therefore, the risk of slow implementation progress is also minimal. Agreat majority of the target group of this Program are farmers. They are the main beneficiariesof these reforms, in terms of fair prices for farm output and support from public sector researchand extension services for increasing farm productivity. Consultations with many farmer groupsat the village level as well as with their representative organizations were held during thepreparation of the Program. The feedback has demonstrated their positive response. The mainsocial risk is associated with the well being of the most vulnerable groups both in rural andurban areas, who would be worse off due to increased food prices. Targeted poverty reduction

36

programs are included to ensure that the poor benefit through food subsidies and increasedemployment opportunities.

119. The price stability of agricultural produce, especially food crops, and fair prices toproducers and consumers are among the important objectives of this Program. In case of asudden drop in world commodity prices and/or lack of demand from importing countries, domesticprices will also fall. Under the Program, a floor price mechanism will be introduced for wheat asexists now for cotton and rice, whereby the Government will intervene in the market and support aprice that provides adequate production incentive and return on farmers investment. In such ascenario, the Government would continue buying wheat and supporting the floor price until theprice increases, indicating shortages and increased market demand, at which time theGovernment will stop buying. Similarly, in the case of a sudden increase in consumer prices,government intervention may be inevitable to provide the necessary safeguards for poor andvulnerable groups. Periodic farm income studies by independent research institutes accompaniedby wide dissemination of findings will help monitor the real impact on farm incomes and assess ifthe total profit is still higher after slight decreases in prices, compared with the base year.

120. The monitoring mechanisms for improved management of the wheat strategic reserves byPASSCO and the provincial food departments spell out clearly the threshold levels andmechanisms for entry and intervention as corrective mechanisms, and an exit strategy, withoutcompromising the objectives of the Program. In addition, during the transition stage, due topossible collusion of market functionaries, market failure, or lack of adequate investment capacityof the private sector, farmers may not receive satisfactory prices at harvest time. Similarly, tradersmay hoard the produce to create artificial shortages. In such eventualities, various farmer groups,especially those representing large farmers with political clout, and consumers may pressure theGovernment for a reversal of reforms. The monitoring mechanisms will help ensure theimplementation of regulatory mechanisms and measures to prevent hoarding and collusion, aswell as provision of adequate finances for both working capital and investment.

121. The existing research system is bureaucratically managed, underfunded, andnonresponsive to farmers or industry. Given the existing rigid administrative rules of business andprocedures, the present system does not offer adequate incentives to research staff, in terms ofcompensation and returns for high quality research, but provides safeguards to job security withminimal accountability. With the increasing autonomy given to research institutes, theperformance of the research staff will be periodically reviewed by the stakeholders managed bytheir boards. The pace of the proposed restructuring and transition may be politically resisted byinefficient staff who will be vulnerable under the new system. The institutional restructuring aimedat providing autonomy to the research system will therefore take into account the needs,perceptions, and concerns of all stakeholders, including research staff, farmers, commoditytraders, agroprocessors, and consumers. There will be a cost to the economy of delaying thepolicy reforms. The TA consultants will help ensure a practical time frame to design andimplement the transition of research management.

122. Similarly, the existing agriculture extension system is ineffective due to inadequatelinkages and interface among research, extension, and farmers. The reorganization of theextension systems to adopt approaches that are farmer responsive and accessible to smallfarmers, with active coordination with rural support programs, NGOs, and input marketingfunctionaries, could be constrained by various factors. There is a need for improved training andrefresher courses for extension staff, and increased budget support and mobility. To ensureeffective and sustainable delivery of services, the performance needs to be monitored and madeaccountable. Under the new decentralization and devolution plan of the Government,strengthened local government institutions will monitor and supervise the activities and

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performance of the extension services at the village level.

IX. ASSURANCES

123. The Government and the provincial governments have given the following assurances, inaddition to the standard assurances, which are incorporated in the Loan Agreement:

(i) the policies and actions included in the Program and specified in the developmentpolicy letter and the policy matrix will be adopted in a timely manner, and suchpolicies and actions will continue to be in effect during the Program period andsubsequently; and

(ii) adequate and timely counterpart funds to implement the Program will be provided.

X. RECOMMENDATION

124. I am satisfied that the proposed loans would comply with the Articles of Agreement ofADB, and acting in the absence of the President, under the provisions of Article 35.1 of theArticles of Agreement of ADB, I recommend that the Board approve:

(i) the loan in various currencies equivalent to Special Drawing Rights 96,238,000 tothe Islamic Republic of Pakistan for the Agriculture Sector Program II, with a termof 24 years, including a grace period of 8 years, with an interest rate of 1 percentper annum during the grace period and 1.5 percent per annum during theamortization period, and such other terms and conditions as are substantially inaccordance with those set forth in the draft Loan Agreement presented to theBoard;

(ii) the loan of Y27,463,500,000 to the Islamic Republic of Pakistan for the AgricultureSector Program II, from ADB’s ordinary capital resources with a term of 15 years,including a grace period of 3 years, and with interest to be determined inaccordance with ADB's LIBOR-based loan facility, and such other terms andconditions as are substantially in accordance with those set forth in the draft LoanAgreement presented to the Board; and

(iii) the technical assistance loan in various currencies equivalent to Special DrawingRights 1,565,000 to the Islamic Republic of Pakistan for the Agriculture SectorProgram II, with a term of 32 years, including a grace period of 8 years, with aninterest rate of 1 percent per annum during the grace period and 1.5 percent perannum during the amortization period, and such other terms and conditions as aresubstantially in accordance with those set forth in the draft TA Loan Agreementpresented to the Board.

MYOUNG-HO SHINVice-President

22 November 2001

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APPENDIXES

Number Title Page Cited on

(page, para.)

1 Program Framework 39 1,2

2 Major Agriculture Sector Institutions 46 6,20

3 External Assistance to the Sector 51 17,54

4 Development Policy Letter and Policy Matrix 54 22,70

5 Poverty and Social Impact Assessment and PublicConsultation

64 27,88

6 Compliance Measures for Trance Releases and MonitoringIndicators

71 29,93

7 Ineligible Items 80 29,94

8 Outline Terms of Reference for Consulting Services 81 31,104

SUPPLEMENTARY APPENDIXES(available on request)

A Financial, Economic, and Poverty Impacts of the ProposedPolicy Reforms

B Environmental Assessment of the Program

C Problem and Objective Tree Analyses

PROGRAM FRAMEWORK

Design Summary Performance Targets Monitoring Mechanism Assumptions and RisksGoals/Sector Impacts1. Reduced rural poverty

2. Increased agricultural growth

3. Increased exports of agricultural commodities

• Reduction in rural poverty from 35 to 33percent.

• Rural unemployment decreases by 2percent, and wages increase by 5 percent.

• Agricultural growth rate of about 4 percent by2005, and about 5 percent by 2010.

• The net incremental value of agriculturalexport surpluses reaches $1.9 by 2005, and$2.4 billion by 2010.

• Program monitoring systemat Ministry of Food,Agriculture, and Livestock(MINFAL)

• Asian Development Bank(ADB) review missions

• ADB sector reviews• Stakeholder workshops

Purposes/Objectives1. Improve agricultural productivity andprofitability

• Production of wheat, paddy, and seed cottonincreases by 12, 19, and 11 percent by 2005,respectively, and by 17, 25, and 20 percent,respectively by 2010.

• 45-50 percent of 2000 sugarcane area issubstituted by wheat, rice, and cotton.

• The farm income of an average farmhousehold increases by 27 percent ($580 to$739) in 2005, and by 67 percent ($580 to$968) in 2010.

• Program monitoring systemat MINFAL

• Government progressreports

• ADB review missions• Stakeholder workshops

• Effectiveimplementation ofpolicy and institutionalreforms undercomplementaryprograms and projects

• Improved access toinputs, irrigation water,and agriculturalfinance

Output/ComponentsA. Improve The Efficiency Of Commodity Markets1. Remove Market RestrictionsA1.1 Ministry of Food, Agriculture and Livestock(MINFAL), Ministry of Commerce (MOC), and theprovincial governments (PGs) will issue instructions,with immediate effect, to (i) remove all restrictions onthe internal movement (interprovincial andinterdistrict) of agricultural commodities, includingwheat, except those relating to antismugglingactivities along the borders; (ii) permit free movementof seed certified for a particular ecological zone bythe PGs' councils, throughout each province; and (iii)ensure that no new public sector seed corporationwill be established in the country.

A1.2 MOC will issue a policy announcement that (i)allows the private sector (which includes bothdomestic and international firms) to import and exportagricultural products, subject to the tariffs andantidumping rules under International Monetary Fundand World Trade Organization agreements; and

• Farmers receive prices close to import orexport parity prices.

• Commodities are freely traded in the countrywithout restrictions on inter-district or inter-provincial movement.

• Certified seed is freely traded withoutrestrictions.

• Private sector share of agricultural importsand exports increases to 90 percent.

• All nontariff barriers on import and export ofcommodities removed.

• Program monitoring systemat MINFAL

• Government progressreports

• ADB review missions• Stakeholder workshops• Review of public

expenditures in agriculture• Export figures from

Customs Department andMOC

• Periodic reports from seedcompanies

• No major crop failures• Active participation

takes place from theprivate sector,farmers, and otherstakeholders.

• Improved tradelinkages with foreignmarkets.

• Effective removal ofrestrictions on tradeand movement, andno nontariff barriersimposed.

• Government is able toresist pressures to theentry of new entrantsin markets.

Appendix 1, page 1

39

Design Summary Performance Targets Monitoring Mechanism Assumptions and Risks(ii) verifies that there are no nontariff barriers toprivate sector imports and exports of wheat, sugar,fertilizer, seeds, cotton, and rice.

A1.3 MINFAL and MOC will remove all restrictionson the production, marketing, and export of brownsugar (gur) and molasses.

A1.4 MOC will submit draft legislation to thecompetent authorities concerning the grading andstandardization of cotton.

A1.5 MINFAL and MOC will (i) permanently removethe zoning of sugarcane areas and the forced sale tothe nearest sugar mill, and (ii) allow sugar mills tomerge and relocate.

A1.6 MINFAL and PGs will issue instructions topermit private seed companies to gain unrestrictedaccess to, and research institutes to sell to bothprivate seed companies and the Punjab SeedCorporation (PSC), breeder seed for the productionof certified seed.

A1.7 The Government, through MOC, will adoptlegislation, and the PGs will adopt implementingregulations, concerning the grading andstandardization of cotton.

• Brown sugar and molasses are beingproduced, marketed, imported, and exportedwithout restrictions.

• Draft legislation prepared in consultation withthe private sector for Government approval.

• Farmers are able to sell sugarcane to anysugar mill.

• Sugar mills operating more efficiently andprofitably, and uneconomic mills closed.

• Breeder seed is available toprivate seed companies at competitive prices.

• Certified seed is freely marketed by privateseed companies without restrictions.

• Quality of raw and processed cottonimproves, and quality discounts minimized.

• Price for higher quality cotton increasesrelative to price for regular cotton.

• Government is able towithstand pressurefrom All PakistanSugar MillsAssociation regardingsugar import andbrown sugar andmolasses export.

2. Improve Public Management of Strategic Reserves of WheatA2.1 MINFAL and MOC will issue a policyannouncement that (i) the Government of Pakistanwill procure and manage a minimum of 1 million tonsof wheat strategic reserve on or before 31 December2001, for the purposes of food security and farmerwell-being; the actual requirements of the strategicreserve will be determined by the Government inMarch and April of each year; (ii) PakistanAgricultural Storage and Services Corporation(PASSCO) and the provincial food departments willmanage the strategic reserve of wheat on acommercial and cost-efficient basis; and (iii) thedirectorates of food in the provincial fooddepartments of Sindh, NWFP, and Balochistan will beclosed over a 5-year period.

• Reduction in public sector share of wheatmarket and increase in private sector shareof market.

• Provincial food departments of Sindh, NWFP,and Balochistan closed by third trancherelease.

• Storage facilities are leased out to the privatesector.

• Private sector storage and marketingincrease.

• Program monitoring systemat MINFAL and provincesGovernment progressreports

• ADB review missions• Review of public

expenditures in agriculture• Periodic reports from

PASSCO and provincialfood departments on use ofwheat reserves

• Strategic reserve ismaintained for thepurpose was set up.

• Private sectorinvestment is notconstrained by creditavailability forinvestment andworking capital.

Appendix 1, page 2

40

Design Summary Performance Targets Monitoring Mechanism Assumptions and RisksA2.2 PASSCO will (i) mainly procure, store, anddistribute strategic reserves of wheat, but otheragriculture commodities may be marketed on acommercial and case-by-case basis, and only whenspecial circumstances warrant; (ii) be allowed toexport wheat; and (iii) extend its board representationto all the PGs.

• PASSCO’s board expanded by induction ofprovincial representatives.

• PASSCO discontinues procurement of allcommodities except wheat.

• Restrictions on PASSCO to export wheatremoved.

• Government reimburses PASSCO andPunjab Food Department for the cost ofdeficit of managing the strategic reserves.

3. Phase Out Commodity Price Supports and Subsidies A3.1 MINFAL and MOC will issue policyannouncements that:

(i) (a) for wheat with immediate effect, the issueprice will not be uniform throughout the year, butwill be allowed to rise seasonally to reflect storagecosts; and (b) the issue price will be phased out,and will be replaced by a sales price that reflectsthe procurement price plus the full costs of storage,distribution, and management;(ii) (a) for wheat, the basis for the procurementprice will be the international reference price(export or import parity price), with marginaladjustments allowed to reflect changes in cost ofproduction; (b) for cotton, the Government willcontinue to use the export parity price as the basisfor the procurement price; (c) for sugarcane, theGovernment will only announce an indicative priceto be used for procurement by the private sugarmills and the Government will not make anyprocurement; (d) for rice and all other agriculturalcommodities, public procurement will be at marketprices; and(iii) no new subsidies will be introduced on wheatimports, public seed production and marketing, orfertilizer production imports and marketing.

A3.2 The Government will prepare and submit toADB a study (the small farmers plan) of the feasibilityto replace untargeted commodity subsidies withtargeted programs for small farmers.

A3.3 The Government will eliminate the consumersubsidy for wheat by moving to a market-based salesprice.

• Subsidy on wheat imports eliminated.• Subsidy on seed production and marketing

eliminated.• Subsidy on fertilizer imports and domestic

production eliminated.• Subsidy on wheat issue price eliminated by

third tranche release.• PASSCO and Punjab Food Department

procurement and disposal is based on openmarket prices by third tranche release.

• Small farmers' plan prepared in consultationwith PGs, ADB, and NGOs.

• Issue price replaced by market-based pricefor the sale of public wheat stocks; and publicfood management losses decrease.

• Program monitoring systemat MINFAL and provinces

• Government progressreports

• ADB review missions• Stakeholder workshops• Review of public

expenditures in agriculture• Export figures from

Customs Department andMOC

• Annual reports fromPASSCO and provincialfood departments

• Consultant’s reports

• Sudden fall in pricesdoes not encouragepublic sectorintervention.

• The targeted poorsupport programs areeffective.

Appendix 1, page 3

41

Design Summary Performance Targets Monitoring Mechanism Assumptions and RisksA3.4 The Government will eliminate the producersubsidy for wheat by moving from a support price to amarket-based price for procurement (export or importparity price), unless otherwise agreed upon betweenADB and the Government, except for the losses thatmay accrue due to the minimum strategic reserve ofwheat.

A3.5 The Government will commence implementationof the agreed small farmers plan.

• Procurement price for wheat revised in linewith prevailing international prices.

• Farmers getting higher price for wheat.• Reduction in public sector spending on

subsidies.

• Small farmers' plan approved to replaceuntargeted subsidies.

4. Accelerate Divestiture and Restructuring of State-owned EnterprisesA4.1. (i) The Sindh Government will close theSindh Agricultural Supplies Organization andbegin the process of its divestiture, and (ii) theNWFP Government will close the AgricultureDevelopment Authority and begin the process ofits divestiture.

A4.2 PASSCO’s procurement and storage costs willbe borne by the provinces on a prorata basis, andany losses from exports will be borne by theGovernment.

A4.3 MOC will end all budgetary support, subsidies,and preferential credit for the Trading Corporation ofPakistan (TCP), except for financing any year-endlosses in TCP’s wheat, cotton, rice, edible oil, andseed operations.

A4.4 (i) Fertilizer Import Department and Directorateof Food will be closed and the process of divestiturecommenced by MINFAL; and (ii) Sindh Governmentwill announce a plan and a timetable to close SindhSeed Corporation.

A4.5 MINFAL in consultation with the PGs will submitplans, acceptable to ADB, to restructure PASSCOand the provincial food departments to operate onmarket-oriented lines and compete on equal termswith the private sector (the PASSCO and provincialfood departments restructuring plans), and beginimplementation (including upgrading and leasingstorage facilities).

• Reduction in public expenditure on SOEs• By 31 December 2001, Sindh Agriculture

Supplies Organization, and AgricultureDevelopment Authority are closed.

• PGs are financing on a prorata basis thecosts of the strategic reserve.

• Private sector share in wheat marketincreases

• Budgetary support to TCP is withdrawn,except for financing year-end losses in cottonand rice operations.

• By second tranche, Fertilizer ImportDepartment and Directorate of Food areclosed.

• Plan prepared for close of Sindh SeedCorporation.

• By second tranche, downsizing andreorganization plans for PASSCO andprovincial food departments will besubmitted.

• Program monitoring systemat MINFAL

• Government progressreports

• ADB review missions• Stakeholder workshops• Review of public

expenditures in agriculture• Export figures from

Customs Department andMOC

• Periodic reports from seedcompanies

• Annual reports of PSC,PASSCO, and provincialfood departments

• Public sectorinvestment increasesin proportion todecrease inGovernmentexpenditure.

• Government is able tolease or sell surplusstorage and otherassets.

• PGs implement theclosure of fooddepartments, asagreed.

Appendix 1, page 4

42

Design Summary Performance Targets Monitoring Mechanism Assumptions and RisksA4.6 The Government and the PGs will issue policyannouncements that all staff affected under thisProgram (both public servants and public corporationstaff) will either be placed in the surplus pool orprovided a severance package consistent with theGovernment’s guidelines.

A4.7 MOC will ensure that TCP is operatingwithout budgetary support, subsidies, or exclusivepreferential credit in wheat, cotton, and rice exports.

A4.8 The Government will cause the PGs to (a)complete implementation of the agreed PASSCO andProvincial Food Departments Restructuring Plans; (b)close the Directorates of Food in the provincial FoodDepartments of Sindh, NWFP, and Balochistan andthe Sindh Seed Corporation, and commence theprocess of divestiture; and (c) end budgetary support,subsidies, and preferential credit for PASSCO exceptfor the costs of managing the wheat strategic reserve.

• Surplus SOE workers will either be placed insurplus pools of the Government or provideda severance package.

• TCP is operating on a commercial basis andcompeting equally with private firms.

• By third tranche, PASSCO and provincialfood departments will be reorganized anddownsized to operate on commercial lines.

• Food departments in Sindh, NWFP, andBalochistan and Sindh Seed Corporation areclosed and divestiture started.

B. Strengthen Support Services1. Accelerate the Provision of Agricultural Support ServicesB1.1 The Ministry of Finance and MINFAL will issuea statement that the proceeds of the Loan under thisProgram will be made available for onlending to thePGs on the same terms and conditions as those ofthe Program Loan, with the Federal Governmentbearing the entire foreign exchange risk, for thepurposes of upgrading storage facilities and financingany staff severance programs as well as relatedpolicy measures (the reform programs).

B1.2 MOC and PGs will determine and inform theGovernment and ADB regarding financingrequirements for (i) the reform programs; (ii) theprovincial trust funds, which will be used for the jointnongovernment organization (NGO) and extensionagent programs which focus on small farmers (thefinancing determination); and (iii) the privateassociations' endowment funds for export promotionand quality enhancement.

B1.3 The Sindh Government will finance, through theprovincial trust funds, a Sindh rural support program

• Funding is available to innovative research,extension, and higher education endeavors,as well as to help finance the reformprograms.

• Support services accessible to small farmers,and farm productivity increased.

• Sindh rural support program established forsupport to small farmers and rural poor.

• Program monitoring systemat MINFAL

• Government progressreports

• ADB review missions• Stakeholder workshops• Review of public

expenditures in agriculture

• Consultant’s reports• Review of reports of trust

funds

• Trust funds areadequate andeffective.

• Government is able tosustain the fundingrequirement.Government is able toeffectively allocatefunds among variousresearch andextension agencies.

• Provincial agriculturedepartment is able toreward good qualityresearch.Effectivecoordination betweenPakistan AgriculturalResearch Council/National AgriculturalResearch Council(PARC/NARC), andprovincial research

Appendix 1, page 5

43

Design Summary Performance Targets Monitoring Mechanism Assumptions and Riskssimilar to those programs in the other provinces.

B1.4. The PGs will each commence implementationof their financing determination, including financingnew initiatives in agricultural research, extension, andhigher education, through using some of the localcurrency funds in the provincial trust funds.

• Joint NGO-extension services programsfocusing on small farmers established.

• Private association endowment funds forexport promotion in rice and possibly cottonestablished.

and extensionagencies anduniversities.

2. Accelerate the Strengthening and Coordination of Agricultural Support ServicesB2.1. PGs will undertake a study, acceptable toADB, of the feasibility of allowing greateradministrative and financial autonomy to provincialresearch institutes (the research institute plans).

B2.2. MINFAL and PGs will undertake studies,acceptable to ADB, of the feasibility of

(i) reorganizing and strengthening the deliveryand coordination of agricultural research,extension, and higher education services(the agricultural support service plans); and

(ii) substantially reorganizing and right-sizingPakistan and National Agricultural ResearchCouncils (PARC and NARC) (the researchcouncils plan) to focus on researchcoordination with the provinces and specialnational topics, such as biotechnology.

B2.3. The Government and PGs will commenceimplementation of the research institute plans,depending on the results of the study and if agreed,(i) the agreed upon agricultural support service plans,and (ii) the agreed upon research councils plan.

• Research institute plans prepared in eachprovince.

• Agricultural supports services and researchcouncil plans prepared.

• Agriculture support services plans beingimplemented.

• Research, extension, and higher educationservices reorganized.

• Research councils’ plan approved.• PARC and NARC reorganized.

• Program monitoring systemat MINFAL

• Government progressreports

• ADB review missionsStakeholder workshops

• Review of publicexpenditures in agriculture

• Consultant’s reports• Review of reports of trust

funds

• PGs will agree toresearch institute andagricultural supportservice plans.

• Reorganization anddownsizing of PARCand NARC willimprove the delivery ofresearch services inthe provinces andsome governmentresources.

3. Quality Control and Regulation MeasuresB3.1. MINFAL will prepare draft legislation oramendments for Government and ADB review for (i)fertilizer regulation; and (ii) regulation and control ofagricultural chemicals, including revision of theEnvironmental Protection Act of 1997, to establishlegal responsibilities for the handling, transport,storage, and disposal of agricultural chemicals.

• Draft regulations and revisions to existingacts prepared

• Program monitoring systemat MINFAL

• ADB review missions• ADB sector reviews• Stakeholder workshops

• New legislationeffective.

• Farmers get betterquality inputs.

• Processors andtraders get betterquality products.

Appendix 1, page 6

44

Design Summary Performance Targets Monitoring Mechanism Assumptions and RisksB3.2. The Government and PGs will ensure that (i)suppliers of imported fertilizer certify the nutrientcontents at the point of origin; and (ii) private third-party laboratories, certified by the Government, willalso be allowed to certify quality at the retail level forfertilizer and seed, subject to existing Governmentregulations.

B3.3. MINFAL will submit to Cabinet for promulgationthe draft legislation or amendment on (i) fertilizerregulation, and (ii) regulation and control ofagricultural chemicals.

• Imported fertilizer certified on nutrientcontents from port of origin.

• Private sector laboratories established tocertify quality at retail level.

• Better quality agrochemicals available, andimproved disposal of chemicals.

Inputs/Activities1. StaffEstablishment of program management unit officesat MINFAL• Appointment of program manager at MINFAL• Assignment of staff for management,

coordination, and monitoring• Establishment of interministerial and

interprovincial steering committee

• Total Loan amount:$348 million• Total TA Loan amount: $2 million• Total Government contribution: $150 million

• Program monitoring system• Government progress

reports• ADB review missions• Stakeholder workshops

• Timely provision ofgood quality programmanagement staff.

• Excellent qualityconsultants andtraining provided.

• Counterpart andallocations from loanproceeds are availableon a timely basis.

2. Finances• Establishment of separate accounts for loan

proceeds and counterpart funds• Allocation of counterpart funds

Appendix 1, page 7

45

MAJOR AGRICULTURE SECTOR INSTITUTIONS

Institutions Functions Problems andPerformance

ProposedCorrectivemeasures

A. Institutions under the Ministry of Food, Agriculture, and Livestock (MINFAL)Fertilizer ImportDepartment (FID)

Planning and assessment of fertilizer requirements, monitoring of importsand off-take, procurement of fertilizers from overseas, budgeting andfinancial administration of imports, and distribution to public and privatesector companies

• Large budgetarysupport

• Sustained losses• Overstaffed• Monopolistic

controls• Inhibits private

sector

• Close and divest

DirectorateGeneral of Food

Responsible for the import and handling of foodgrains, and distribution anddisposal of damaged foodgrains

• Same as above • Same as above

Federal SeedCertificationDepartment

Responsible for carrying out pest control trials on breeder seed, samplingand analysis of seed procured by provincial seed corporations, certificationand quality control of seed for sale to farmers, and conducting trainingcourses

• Underfunded• Limited capacity

• Budgetarysupport forequipment

• Human ResourceDevelopment(HRD) andtraining

Directorate ofAccounts (Food)

Responsible for compilation, appropriation, and pre-auditing of cashaccounts, maintenance of stock accounts for wheat and packing materials,and checking of warehouse accounts

• Will be largelyredundant after fullprivatization of foodmarketing

• Reorganize anddownsize

Plant ProtectionDepartment

Responsible for implementing the Plant Quarantine Act of 1976, locustcontrol, checking of phytosanitary conditions of plant and plant products atentry and exit points, aerial pest control, and implementation and regulationof Pesticide Ordinance of 1971

• Underfunded• Limited capacity

• Budgetarysupport forequipment

• HRD and training

B. MINFAL’s Autonomous InstitutionsPakistanAgriculturalResearch Council

Responsible to (i) undertake, facilitate, provide support to provincialagriculture, livestock, fisheries, forestry, and water management researchsystem; (ii) fill in the gap of research activities at the national level; (iii)

• Underfunded• Overstaffed• Low output

• Focus on nationalcoordination

• Transfer of

Appendix 2, page 1

46

Institutions Functions Problems andPerformance

ProposedCorrectivemeasures

(PARC) coordinate agricultural research at the national level; (iv) disseminateresearch findings; and (v) arrange higher level training in agriculture,livestock, fisheries, and water management. PARC also manages andoverseas various research centers and institutes, namely (i) NationalAgricultural Research Center in Islamabad, (ii) Arid Zone Research Institutein Quetta, (iii) Tropical Agricultural Research Institute in Karachi, (iv)Research Institute Juglot in the Northern Areas, (v) Himalayan AgricultureResearch Station in Kaghan, (vi) Plant Introduction Center in Karachi, and(vii) Southern Zone Agriculture Research Station in Sujawal.

• Duplication ofresearch

physical andhuman resourcesto provinces

Pakistan CentralCotton Committee

Funded through a cess fund imposed on ginned cotton, responsible toconduct and develop cotton cultivars and varieties, conduct agronomicresearch, coordinate with provincial research systems, disseminate higherproduction packages to extension, collect and disseminate market- andprice-related information, and provide training. It manages two main cottonresearch institutes and satellite research stations and substations.

• Overstaffed• Low output• Duplication of

research

• Transfer ofphysical andhuman resourcesto provinces

Pakistan CottonStandards Institute

Responsible for standardization and enforcement of quality control of rawcotton. It is also mandated to provide training to the private sector. TheInstitute, initially funded by public sector budgetary support, is expected toearn its revenues from cotton exporters and textile mills when fullyoperational.

• Underfunded• Limited capacity

• Budgetarysupport forequipment

• HRD and training

Agricultural PricesCommission

Responsible to advise policy makers regarding price policy of wheat, rice,maize, cotton, sugarcane, oilseeds, potatoes, onion, and other commoditiesas requested. It is also required to provide advice on the issue prices offertilizers, pesticides, quality seeds, and other farm inputs.

• Ineffective • Merge withEconomic PolicySection ofMINFAL’sPlanning Unit

PakistanAgriculturalStorage andServicesCorporation(PASSCO)

Established in 1973 as a public limited company with shares from theFederal Government and six public sector banks, PASSCO is responsible toundertake price stabilization measures through price support to farmers forwheat, paddy, gram, potatoes, onions, etc. under the direction of MINFAL. Itis also responsible to ensure food security by maintaining strategic reservesfor wheat and distribution to deficit districts. It receives budgetary support tomanage the losses when required to intervene for price stabilization.PASSCO maintains it own and leased warehouses to minimize the storagelosses. The major activity of PASSCO is procurement of wheat at the supportprice fixed by the Government and its disposal mainly to provincial food

• Overstaffed• Poor services• Inadequate

operationalfinancial resources

• With budgetarysupport

• Role restricted tomanagement ofstrategic reserves

Appendix 2, page 2

47

Institutions Functions Problems andPerformance

ProposedCorrectivemeasures

departments. The sale prices allows for prefixed handling markup. All othercrops procured by PASSCO are disposed through open competitive bidding,and the losses are absorbed through budgetary support.

C. Other Federal InstitutionsTradingCorporation ofPakistan (TCP)

A public sector organization under the Ministry of Commerce, responsible forthe marketing of surplus agricultural commodities. TCP has incorporated theformer Cotton Export Corporation and Rice Export Corporation along withtheir liabilities. Skeleton staff from those enterprise has been absorbed inTCP. TCP receives budgetary support from the Government for the lossesincurred in trading of agricultural commodities.

• Overstaffed• Monopolistic

control

• Withdrawbudgetarysupport

• Retrenchment ofsurplus staff

National FertilizerDevelopmentCenter

A semiautonomous research organization under the Planning Commission topromote the use of balanced fertilizers

• Duplicatesfunctionsperformed byMINFAL

• Close and divest

National FertilizerCorporation (NFC)

Under the Ministry of Production, NFC is a state-owned holding company forseven independent enterprises.1 NFC is registered as a private limitedcompany, but the Government holds all the shares. NFC controls about 50percent of the domestically produced nitrogen and 80 percent of thephosphate fertilizers.

• With greaterreliance on theprivate sector,continuedgovernmentownership is notnecessary.

• Privatize fertilizerfactories

National FertilizerMarketing Ltd.

A subsidiary of NFC, it markets NFC’s products through a network of about3,000 distributors. It does not receive any budgetary support and is a self-financing organization.

• With greaterreliance on theprivate sector,continuedgovernmentownership is notnecessary.

• Close and divestonce factoriesare privatized

1 Hazara Phosphate Fertilizer Ltd., Paksaudi Fertilizer Ltd., Pakarab Fertilizer Ltd., Layallpur Fertilizers and Chemicals Ltd., Pakchina Fertilizers Ltd.,National Fertilizer Marketing Ltd., the Fertilizer Research and Development Institute, and the NFC Technical Training Center. In 1992, PakchinaFertilizer Ltd was divested.

Appendix 2, page 3

48

Institutions Functions Problems andPerformance

ProposedCorrectivemeasures

Atomic EnergyAgriculturalResearch Centers

The centers are managed by the Pakistan Atomic Energy Commission indifferent parts of country. They are responsible for development of newvarieties and cultivars, and are supposed to coordinate with provincialagricultural research institutes in sharing information.

• Limitedcoordination withother researchinstitutes

• Improvedcoordination withother institutes

D. Provincial InstitutionsAgricultureextensiondepartments

Responsible for disseminating and communicating research findings tofarmers, providing support to farmers in plant protection measures,supervising and regulating agricultural markets, collecting and collatingagricultural statistics and price data, and monitoring and regulating variousacts and ordinances related to agricultural commodities. They have networksof extension staff at the division, district, subdistrict, and union council levels,including plant protection officers, subject matter specialists, and agricultureofficers at the district level. They also manage agricultural field assistanttraining institutes and offer three-year nondegree courses in agriculture.

• Overstaffed• Obsolete

knowledge• Outmoded

extensionapproaches

• Top-downextension

• Frequentrefresher course

• Make extensionfarmer-responsive

• Work closely withNGOs

Agriculturalresearch institutes

Responsible for carrying out basic research covering plant breeding,agronomy, soil management, entomology, plant pathology, and plantphysiology, for all field, fodder, fruit, and vegetable crops. The Institutes havesatellite research stations and substations in the respective provinces.

• Overstaffed• Inadequate funding• Top-down research• Poor linkage with

extensiondepartment andfarmers

• Autonomy toresearchinstitutes

• Managementthrough boardsconstituted withfarmer membersin majority

Punjab SeedCorporation (PSC)and Sindh SeedCorporation

Semiautonomous organizations under the supervision of the Punjab andSindh agriculture departments. The basic seed is obtained from the researchinstitutions in the respective provinces. Both the corporations process seedafter multiplication on seed farms owned by them and on the farms ofregistered growers.

• Duplicates andinhibits privateseed companies

• Close and divestSindh Seed Corp.

• Reorganize anddownsize PunjabSeed Corp.

Seed and fertilizersupply institutions

Punjab Agriculture Development and Supplies Corporation, SindhAgricultural Supplies Organization, and Agriculture Development Authoritywere responsible until recently, for the marketing of fertilizer (allocated fromFID) and seed procured from the seed corporations through their dealernetworks in the respective provinces. These organizations have beenrecently closed.

• Overstaffed• Poor services• Running losses

• Divest assets andretire and lay offworkers

Appendix 2, page 4

49

Institutions Functions Problems andPerformance

ProposedCorrectivemeasures

Provincial livestockdepartments

Responsible for (i) developing improved breeds of livestock and poultry; (ii)providing veterinary and animal husbandry support services to the farmers;(iii) providing improved breeds and artificial insemination services to farmers;and (iv) disseminating improved preventive and curative disease preventionmethods, and improved livestock and animal feeding and managementpackages to farmers. The departments also maintain the Poultry ResearchInstitute, and provide training to farmers and entrepreneurs.

• Overstaffed• Running losses• Poor services

• Downsize andreorganizeservices

Provincial fooddepartments

Responsible for the procurement, storage, and disposal of foodgrains,especially wheat in the provinces. They also monitor and regulate thesupplies to flour mills.

• Overstaffed• Running losses• Poor services

• Close and divest

Agriculturaluniversities

In each province, the agricultural universities are responsible forundergraduate and graduate level teaching and research. The facultiesinclude basic sciences, crop sciences, social sciences, animal husbandry,and agricultural engineering. The universities are provided grants from theUniversity Grants Commission at the Federal level, but are supervised by theprovincial education departments.

• Quality ofagriculturaleducation varies

• Poor coordinationbetweenuniversities andresearchinstitutions

• Regularexchange ofinformationamonguniversities

• More formal linkbetweenuniversities andresearchinstitutes willhave to beestablished

Appendix 2, page 5

50

EXTERNAL ASSISTANCE TO THE SECTOR

Project Purpose Amount$ million

Year

Asian Development Bank (ADB)Microfinance Sector DevelopmentProgram

Efficiently develop the microfinance sector to provide financial andnonfinancial services to the poor

150 2000 Ongoing

Small and Medium TradeEnhancement Finance Project

Improve the export finance mechanism to extend availability of credit tosmall and medium enterprises

150 2000 Ongoing

NWFP Barani Area DevelopmentProject

Assist the rural sector through agricultural finance, on-farm watermanagement, rural electrification, rural water supply, forestry, and ruralroads; provide microfinance services

52 2000 Ongoing

Trade Export Promotion and IndustryProgram

Attain higher sustainable private sector and export-led economic growth 300 1999 Ongoing

Malakand Rural Development Project Assist the rural sector through agricultural finance, on-farm watermanagement, rural electrification, rural water supply, forestry, and ruralroads; provide microfinance services

41 1999 Ongoing

Capital Market Development Program Accelerate the mobilization of long-term resources and improve theefficiency of allocation through a diversified and competitive capitalmarket

250 1997 Ongoing

Dera Ghazi Khan Rural DevelopmentProject

Assist the rural sector through agricultural finance, on-farm watermanagement, rural electrification, rural water supply, forestry, and ruralroads; provide microfinance services

36 1997 Ongoing

Bahawalpur Rural DevelopmentProject

Assist the rural sector through agricultural finance, on-farm watermanagement, rural electrification, rural water supply, forestry, and ruralroads; provide microfinance services

38 1996 Ongoing

Agricultural Credit Project(cofinanced with the World Bank)

Enhance supply of term credit for agriculture and strengthen theAgricultural Development Bank of Pakistan (ADBP) as a viable lendinginstitution

150 1990 Completed

Second Agricultural DevelopmentBank of Pakistan Project

Enhance supply of term credit for agriculture and strengthen ADBP as aviable lending institution

50 1986 Completed

Agricultural Development Bank ofPakistan Project

Enhance supply of term credit for agriculture and strengthen ADBP as aviable lending institution

50 1982 Completed

National Drainage Sector Project(cofinanced with Japan Bank forInternational Cooperation [JBIC] andADB)

Protect irrigated land and preserve surface water and groundwaterquality in the Indus Basin.

140 1997 ongoing

World BankPakistan Poverty Alleviation Project Provide grants, credit, and skills to poor communities 90 1999 OngoingPublic Sector Structural AdjustmentLoan

Improve public sector governance, including in banks 350 1998 Completed

National Drainage Program(cofinanced with ADB and JBIC

Rehabilitate and expand of the drainage network. 350 1997 Ongoing

Appendix 3, page 1

51

Project Purpose Amount$ million

Year

Agricultural Credit Project(cofinanced with ADB)

Enhance supply of term credit for agriculture and strengthen ADBP as aviable lending institution

114 1990 Completed

Financial Sector Adjustment Loan Strengthen the health and competitiveness of the banking system 150 1989 CompletedADBP Project VI Enhance supply of term credit for agriculture and strengthen ADBP as a

viable lending institution220 1986 Completed

ADBP Project V(cofinanced with the InternationalFund for Agricultural Development[IFAD])

Enhance supply of term credit for agriculture and strengthen ADBP as aviable lending institution

83 1983 Completed

ADBP Project IV(cofinanced with IFAD)

Enhance supply of term credit for agriculture and strengthen ADBP asa viable lending institution

58 1980 Completed

ADBP Project III Enhance supply of term credit for agriculture and strengthen ADBP as aviable lending institution

30 1969 Completed

ADBP Project II Enhance supply of term credit for agriculture and strengthen ADBP as aviable lending institution

10 1968 Completed

ADBP Project I Enhance supply of term credit for agriculture and strengthen ADBP as aviable lending institution

27 1965 Completed

Punjab Extension and AgriculturalDevelopment Project

Introduce the ‘‘training and visit” system of agricultural extension 12.5 1978 Completed

Sindh Agricultural Extension Project Introduce the ‘‘training and visit” system of agricultural extension 9 1979 CompletedAgricultural Research Project Upgrade agricultural research system by supporting establishment of

Pakistan Agricultural Research Council and institution building ofNational Agricultural Research Council

20 1991 Completed

Agricultural Research Project II Strengthen agricultural research at provincial level. 57 1990 Completed

Baluchistan Agricultural Extension andAdaptive Research III Project

Strengthen the ‘‘training and visit” system 8 1984 Completed

Agricultural Research Project II Improve and strengthen research capabilities at the provincial level 57 1990 CompletedJBICRural Electrification Project Improve power distribution to supply electricity to 6,300 villages 162 1998 OngoingNational Drainage Program(cofinanced with the World Bank andADB)

Rehabilitate and expand the drainage network. 100 1997 Ongoing

Malir Basin Agriculture DevelopmentProject

Construct a dam and a reservoir to increase underground recharge 2 1993 Completed

Rural Roads Construction Project Upgrade farm to market roads 96 1993 CompletedOn-farm Water Management Improve water use efficiency 69 1992 CompletedAgriculture Credit Program Enhance supply of medium and long-term loans for agriculture 100 1992 CompletedPat-feeder Canal Rehabilitation andImprovement Project

Improve irrigation and drainage facilities 13 1987 Completed

Punjab Agricultural Land DevelopmentProject

Improve land development 33 1978 Completed

Appendix 3, page 2

52

Project Purpose Amount$ million

Year

International Fund for AgriculturalDevelopmentGujranwala Agricultural DevelopmentProject

Improve household income through higher farm productivity 23 1990 Completed

Punjab Small Holder DairyDevelopment Project

Improve dairy development to augment household income 11 1985 Completed

Agricultural Credit Project Enhance supply of agriculture credit through ADBP 8 1989 Completed2nd Barani Area Development Project Improve rural roads, water system, agriculture, and livestockFood and Agriculture OrganizationPilot Program for Food Security Improve food security and promote on-farm technological innovations 2 1998 OngoingUnited Nations DevelopmentPorgrammeNorthern Areas Development Project 5 1997 OngoingArea Development Program 5 1997 OngoingArea Development Program,Balochistan

1 1997 Ongoing

National Rural Support Program

Area development programs support farming practices, communitydevelopment, and linking communities with sources of assistance.Capacity building of selected organizations to provide microcredit andsupport for sustainable livelihood through advisory services andtechnical assistance. 12 1993 Ongoing

Department for InternationalDevelopment, United KingdomFaisalabad Area Upgrading Project 26 1997 Ongoing

Aga Khan Rural Support Program

Area development programs support farming practices, communitydevelopment, linking communities with sources of assistance, andmicrocredit. 24 1997 Ongoing

Netherlands DevelopmentAssistanceParticipatory Rural DevelopmentProject

Community organization, basic education, sanitation, and livestockalong with some support for funding income-generating activities

2 1996 Completed

Appendix 3, page 3

53

POLICY MATRIX

FIRST TRANCHE CONDITIONS(1 July 2001 to 31 December 2001)

SECOND TRANCHE CONDITIONS(Expected within 18 months of First Tranche)

THIRD TRANCHE CONDITIONS(Expected within 60 months of First

Tranche)A. Improve Efficiency Of Commodity Markets1. Remove Market RestrictionsA1.1. Ministry of Food, Agriculture and Livestock(MINFAL), Ministry of Commerce (MOC), and theprovincial governments (PGs) will issueinstructions with immediate effect, to (i) remove allrestrictions on the internal movement(interprovincial and interdistrict) of agriculturalcommodities, including wheat, except thoserelating to antismuggling activities along theborders; (ii) permit free movement of seed certifiedfor a particular ecological zone by the PGs'councils, throughout each province; and (iii) ensurethat no new public sector seed corporation will beestablished in the country.

A1.2. MOC will issue a policy announcement that(i) allows the private sector (which includes bothdomestic and international firms) to import andexport agricultural products, subject to the tariffsand antidumping rules under InternationalMonetary Fund and World Trade Organizationagreements; and (ii) verifies that there are nonontariff barriers to private sector imports andexports of wheat, sugar, fertilizer, seeds, cotton,and rice.

A1.3. MINFAL and MOC will remove allrestrictions on the production, marketing, andexport of brown sugar (gur) and molasses.

A1.4. MOC will submit draft legislation to thecompetent authorities concerning the grading andstandardization of cotton.

A1.5. MINFAL and MOC will (i) permanentlyremove the zoning of sugarcane areas and theforced sale to the nearest sugar mill, and (ii) allowsugar mills to merge and relocate.

A1.6. MINFAL and PGs will issue instructions topermit private seed companies to gain unrestrictedaccess to, and research institutes to sell to bothprivate seed companies and the Punjab SeedCorporation (PSC), breeder seed for the productionof certified seed.

A1.7. The Government, through MOC,will adopt legislation, and the PGs willadopt implementing regulations,concerning the grading andstandardization of cotton.

2. Improve Public Management of Strategic Reserves of WheatA2.1. MINFAL and MOC will issue a policyannouncement that (i) the Government of Pakistanwill procure and manage a minimum of 1 milliontons of wheat strategic reserve on or before 31December 2001, for the purposes of food security

Appendix 4, page 6

59

FIRST TRANCHE CONDITIONS(1 July 2001 to 31 December 2001)

SECOND TRANCHE CONDITIONS(Expected within 18 months of First Tranche)

THIRD TRANCHE CONDITIONS(Expected within 60 months of First

Tranche)and farmer well being; the actual requirements ofthe strategic reserve will be determined by theGovernment in March and April of each year; (ii)Pakistan Agricultural Storage and ServicesCorporation (PASSCO) and the provincial fooddepartments will manage the strategic reserve ofwheat on a commercial and cost-efficient basis;and (iii) the directorates of food in the provincialfood departments of Sindh, NWFP, andBalochistan will be closed over a 5-year period.

A2.2. PASSCO will (i) mainly procure, store, anddistribute strategic reserves of wheat, but otheragriculture commodities may be marketed on acommercial and case-by-case basis, and onlywhen special circumstances warrant; (ii) beallowed to export wheat; and (iii) extend its boardrepresentation to all the PGs.

3. Phase Out Commodity Price Supports and SubsidiesA3.1 MINFAL and MOC will issue policyannouncements that:

(i) (a) for wheat with immediate effect, theissue price will not be uniform throughout theyear, but will be allowed to rise seasonally toreflect storage costs; and (b) the issue pricewill be phased out, and will be replaced by asales price that reflects the procurement priceplus the full costs of storage, distribution, andmanagement;(ii) (a) for wheat, the basis for the procurementprice will be the international reference price(export or import parity price), with marginaladjustments allowed to reflect changes incost of production; (b) for cotton, theGovernment will continue to use the exportparity price as the basis for the procurement

A3.2 The Government will prepare and submit toADB a study (the small farmers plan) of the feasibilityto replace untargeted commodity subsidies withtargeted programs for small farmers.

A3.3. The Government will eliminate theconsumer subsidy for wheat by moving toa market-based sales price.

A3.4. The Government will eliminate theproducer subsidy for wheat by movingfrom a support price to a market-basedprice for procurement (export or importparity price), unless otherwise agreedupon between ADB and the Government,except for the losses that may accrue dueto the minimum strategic reserve ofwheat.

A3.5. The Government will commenceimplementation of the agreed smallfarmers plan.

Appendix 4, page 7

60

FIRST TRANCHE CONDITIONS(1 July 2001 to 31 December 2001)

SECOND TRANCHE CONDITIONS(Expected within 18 months of First Tranche)

THIRD TRANCHE CONDITIONS(Expected within 60 months of First

Tranche)price; (c) for sugarcane, the Government willonly announce an indicative price to be usedfor procurement by the private sugar mills andthe Government will not make anyprocurement; (d) for rice and all otheragricultural commodities, public procurementwill be at market prices; and

(iii) no new subsidies will be introduced onwheat imports, public seed production andmarketing, or fertilizer production imports andmarketing.

4. Accelerate Divestiture and Restructuring of State-owned EnterprisesA4.1. (i) The Sindh Government will close theSindh Agricultural Supplies Organization and beginthe process of its divestiture, and (ii) the NWFPGovernment will close the Agriculture DevelopmentAuthority and begin the process of its divestiture.

A4.2. PASSCO’s procurement and storage costswill be borne by the provinces on a prorata basis,and any losses from exports will be borne by theGovernment.

A4.3. MOC will end all budgetary support,subsidies, and preferential credit for the TradingCorporation of Pakistan (TCP), except for financingany year-end losses in TCP’s wheat, cotton, rice,edible oil, and seed operations.

A4.4. (i) Fertilizer Import Department and Directorateof Food will be closed and the process of divestiturecommenced by MINFAL; and (ii) Sindh Governmentwill announce a plan and a timetable to close SindhSeed Corporation.

A4.5. MINFAL in consultation with the PGs willsubmit plans, acceptable to ADB, to restructurePASSCO and the provincial food departments tooperate on market-oriented lines and compete onequal terms with the private sector (the PASSCO andprovincial food departments restructuring plans), andbegin implementation (including upgrading andleasing storage facilities).

A4.6. The Government and the PGs will issue policyannouncements that all staff affected under thisProgram (both public servants and public corporationstaff) will either be placed in the surplus pool orprovided a severance package consistent with theGovernment’s guidelines.

A4.7 MOC will ensure that TCP is operatingwithout budgetary support, subsidies, or exclusivepreferential credit in wheat, cotton, and rice exports.

A4.8 The Government will cause thePGs to (a) complete implementation ofthe agreed PASSCO and Provincial FoodDepartments Restructuring Plans; (b)close the Directorates of Food in theprovincial Food Departments of Sindh,NWFP, and Balochistan and the SindhSeed Corporation, and commence theprocess of divestiture; and (c) endbudgetary support, subsidies, andpreferential credit for PASSCO except forthe costs of managing the wheat strategicreserve.

Appendix 4, page 8

61

FIRST TRANCHE CONDITIONS(1 July 2001 to 31 December 2001)

SECOND TRANCHE CONDITIONS(Expected within 18 months of First Tranche)

THIRD TRANCHE CONDITIONS(Expected within 60 months of First

Tranche)B. Strengthen Support Services1. Accelerate the Provision of Agricultural Support ServicesB1.1. The Ministry of Finance and MINFAL willissue a statement that the proceeds of the Loanunder this Program will be made available foronlending to the PGs on the same terms andconditions as those of the Program Loan, with theFederal Government bearing the entire foreignexchange risk, for the purposes of upgradingstorage facilities and financing any staff severanceprograms as well as related policy measures (thereform programs).

B1.2. MOC and PGs will determine and inform theGovernment and ADB regarding financingrequirements for (i) the reform programs; (ii) theprovincial trust funds, which will be used for the jointnongovernment organization (NGO) and extensionagent programs which focus on small farmers (thefinancing determination); and (iii) the privateassociations’ endowment funds for export promotionand quality enhancement.

B1.3. The Sindh Government will finance, throughthe provincial trust funds, a Sindh rural supportprogram similar to those programs in the otherprovinces.

B1.4. The PGs will each commenceimplementation of their financingdetermination, including financing newinitiatives in agricultural research,extension, and higher education, throughusing some of the local currency funds inthe provincial trust funds.

2. Accelerate the Strengthening and Coordination of Agricultural Support ServicesB2.1. PGs will undertake a study, acceptable toADB, of the feasibility of allowing greateradministrative and financial autonomy to provincialresearch institutes (the research institute plans).

B2.2 MINFAL and PGs will undertake studies,acceptable to ADB, of the feasibility of (i) reorganizing and strengthening the delivery

and coordination of agricultural research,extension, and higher education services (theagricultural support service plans); and

(ii) substantially reorganizing and right-sizingPakistan and National Agricultural ResearchCouncils (PARC and NARC) (the researchcouncils plan) to focus on research coordinationwith the provinces and special national topics,such as biotechnology.

B2.3. The Government and PGs willcommence implementation of theresearch institute plans, depending on theresults of the study and if agreed, (i) theagreed upon agricultural support serviceplans, and (ii) the agreed upon researchcouncils plan.

Appendix 4, page 9

62

FIRST TRANCHE CONDITIONS(1 July 2001 to 31 December 2001)

SECOND TRANCHE CONDITIONS(Expected within 18 months of First Tranche)

THIRD TRANCHE CONDITIONS(Expected within 60 months of First

Tranche)3. Quality Control and Regulation MeasuresB3.1. MINFAL will prepare draft legislation oramendments for Government and ADB review for(i) fertilizer regulation; and (ii) regulation andcontrol of agricultural chemicals, including revisionof the Environmental Protection Act of 1997, toestablish legal responsibilities for the handling,transport, storage, and disposal of agriculturalchemicals.

B3.2. The Government and PGs will ensure that (i)suppliers of imported fertilizer certify the nutrientcontents at the point of origin; and (ii) private third-party laboratories, certified by the Government, willalso be allowed to certify quality at the retail level forfertilizer and seed, subject to existing Governmentregulations.

B3.3 MINFAL will submit to Cabinet forpromulgation the draft legislation or amendment on(i) fertilizer regulation, and (ii) regulation and controlof agricultural chemicals.

Appendix 4, page 10

63

64Appendix 5, page 1

POVERTY AND SOCIAL IMPACT ASSESSMENT AND PUBLIC CONSULTATIONS

A. Introduction

1. The reforms proposed under the Program will support the long-term and pro-poor growthpolicies of the Government in general and in rural areas in particular. This will be achievedthrough (i) rationalizing the prices of agricultural inputs and outputs through market liberalization(removal of international and domestic trade restrictions), (ii) curtailing the role and expenditureon public sector marketing and storage operations, (iii) encouraging higher returns to investmentin public sector research and extension services, and (iv) generating employment throughincreased private sector investment and involvement of nongovernment organizations (NGOs).The proposed strategies reflect the recommendations of the initial and follow-up studies for theProgram that were discussed in several provincial and Federal stakeholder workshops in 2000and 2001.

2. Different studies carried out in Pakistan suggest that during the past few years theincidence of poverty has increased together with widening income disparity between the richand the poor, and between urban and rural areas. These studies also indicate that, during the1970s and 1980s, there was significant reduction in poverty, measured by various indexes. Thecontributing factors were the green revolution, industrial growth, and overseas remittances. Inthe 1990s, the poverty incidence showed a reverse trend, and increased from about 20 percentto 30-35 percent. Since about 60 percent of the population live in rural areas with relativelylower economic opportunities, the incidence of rural poverty is relatively higher.

3. The major factors responsible for the rising incidence of poverty include an increase inthe dependency ratio, slow industrial growth, fall in remittances, low investment in social,physical, and productive infrastructure (especially in rural areas), higher prices of agriculturalinputs, lower prices for outputs, lack of policy environment for increased private sectorinvestment and employment generation, and poor delivery of services by research and livestockextension staff. To reverse this trend, the Government is finalizing its poverty reductionstrategies and requiring ongoing and upcoming development programs and investments tofocus on poverty reduction.

B. Measuring the Impacts of Reforms

4. The overall objectives of the Program are to (i) improve agricultural productivity andprofitability; (ii) stabilize prices for producers and consumers; (iii) increase household incomes ofthe poor, especially marginally and very poor rural households; and (iv) make better use ofpublic sector expenditures. This will lead to capital formation in rural areas, promote the privatesector, and enhance employment generation. The savings from reduced public sectorexpenditure can be diverted to social programs, which again will have a direct impact on qualityof life of the poor people. Some of the Program recommendations may possibly have somenegative impacts, due to divestiture and downsizing of public sector institutions. Nonetheless,these will be offset by expansion in the private sector. Moreover, the reorganization ofinstitutions responsible for the provision of services will improve the output and accessibility topoor farmers, and will have a direct impact on farm productivity and household income.Similarly, there will be significant positive ramifications on the overall macroeconomic situation.

65Appendix 5, page 2

C. Methodology

5. The Bank’s methodology for conducting a social impact assessment of program loansrequires an analysis of the impact that policy actions will have on economic conditions.Budgetary savings to the Federal and provincial governments (PGs) in public expenditures andimproved efficiency in the marketing system will have major economic impacts. Two scenariosare analyzed: Scenario 1 assumes that the Government will not implement the proposed policyand institutional reforms; and Scenario 2 assumes that the Government will implement theproposed reforms under the Program.

6. The impact of each intervention of the Program is considered and grouped into fourcategories: (i) direct effects, (ii) indirect effects, (iii) macroeconomic effects, and (iv) effect on thepoor (both urban and rural and if are there any vulnerable groups). In each category, variousmeasurement indicators are discussed including (i) the Government’s budgetary position, (ii) therole of the private sector, (iii) prices of farm inputs and outputs, (iv) performance andaccessibility of delivery services, (v) farm productivity enhancement, and (vi) positive andnegative impacts on poor households.

D. Policy Options with Significant Impact on the Poor

7. The Program will have both direct and indirect impacts on the poverty level. The reforms,such as discontinuation of price support and removal of restrictions on international anddomestic trade, will have positive impacts on the income of farmers, especially small farmers,and to some extent the landless poor. Similarly, divesting of public enterprises and withdrawingbudgetary support, increasing the role of the private sector, exploring options for increasedautonomy of research institutions, revitalizing extension services, and reorganizing anddecentralizing institutions with redundant and or overlapping functions will also have both directand indirect impacts on the poor. The benefits of the Program to the poor significantly outweighthe costs to vulnerable groups, and any adverse impacts can be mitigated throughsupplementing the ongoing social safety net and food security and support programs, as well assupporting new programs targeting small farmers.

E. Impact Scenarios

1. Scenario 1: Reforms Not Implemented

8. Under this scenario, farmers will continue to receive distorted prices, for both inputs andoutputs, and as a result will have low farm incomes. The continuation of a monopolistic publicsector role in the marketing will further constrain the growth of the private sector. The budgetarysupport requirement for the wheat subsidy and the public enterprises in the sector wouldcontinue to increase substantially, and contribute to the widening government deficit. Similarly,the service delivery mechanisms (research and extension) in their present form will continue tobe inefficient and constrain growth in farm incomes. The inadequate availability of high yieldingand good quality seed will continue to be a constraint in achieving the potential for higherproductivity. Moreover, institutions that are redundant and are engaged in overlapping activitieswill continue to be a drain on public resources. The performance and accessibility of theseinstitutions to the poor will further deteriorate.

66Appendix 5, page 3

a. Direct Impact 1

9. Without reforms, the controls on prices of agricultural inputs and outputs will continue todistort the terms of trade for the agriculture sector. The Government, notably the PunjabGovernment, will continue to procure wheat at the support price but will likely not be willing toraise it because of the increasing budgetary cost and inability to dispose of rising surpluses. Inaddition, the restrictions on free interprovince and interdistrict movements will constrain openmarket initiatives, and farmers will receive lower and noncompetitive prices. At present, thesupport prices of wheat, rice, and cotton are lower than the export parity prices of the respectivecrops. Without the Program, given the projected increase in commodity prices, the divergencebetween the two would further widen. At present, the average annual farm income is less thanwhat it should be if markets were liberalized.

10. Without the Program, given the institutional inefficiencies and leakages, the expenditureand budgetary requirements will grow exponentially, and public sector marketing and tradingcompanies will continue to lose money and increasingly depend on budgetary support. Atpresent, the average annual public sector expenditure on organizations such as PakistanAgricultural Storage and Supplies Corporation (PASSCO), and the provincial food departmentsresponsible for wheat procurement, storage, and subsidy is about $143 million. In addition tothis, the other related state-owned enterprises (SOEs)2 incur an operation loss of about $15-20million annually. This expenditure is expected to grow due to increasing operational costs. If thistrend continues, the Government will have to reduce the investment in other sectors, especiallythe social sectors. This will have a direct impact on the quality of life and accessibility to socialservices for the poor segments of the population.

b. Indirect Impact

11. Without reforms, the price fixation policy will continue to distort the relative profitability ofcrops. In the case of sugarcane, for which Pakistan does not have a comparative advantage,the support price is higher than the import parity price. This has led to inefficient allocation ofland and water resources, which otherwise can be allocated to crops such as wheat, rice, cottonand to other high-value crops for which Pakistan has a comparative advantage. Consequently,the negative balance of trade would continue to increase. Government budgetary support willcontinue to provide protection to inefficient SOEs, and will discourage private sectorinvestments in marketing and agribusiness. Similarly, as the public sector capacity to produceand disseminate high-yielding good quality seed is limited, the yields will continue to be lowerthan its potential, and will discourage the private sector seed industry that could meet thedemand for the quality seed. The bureaucratically administered research institutions, with theirtop-down approach, will continue to offer insufficient incentive to researchers, and hence lowreturns. Without adaptive and problem-solving research support, farmers will remain reluctant toinvest in new farm production measures, adjust cropping patterns to changes in dwindling wateravailability regimes, or adopt other post harvest and storage methods. The continuation ofinstitutions with redundant and overlapping functions will waste public resources.

1 The estimated magnitude of impact in terms of yields, prices, household incomes, and budgetary savings has

been adopted from “Report on the Financial, Economic, and Poverty Impacts of the Proposed Policy Reforms,” forADB TA 3229: Agriculture Sector Program, Islamabad, June 2001.

2 These organizations include the Fertilizer Import Department, National Fertilizer Development Centre, Sindh SeedCorporation, Sindh Agricultural Supplies Organization, and Agriculture Development Agency.

67Appendix 5, page 4

c. Macroeconomic Impact

12. Without reforms, the continuation of distorted prices will result in retarded growth inagriculture, misallocation of resources towards inefficient crops, and increased urban-ruralincome disparities, falling agricultural rates, increased requirement of foreign exchange toimport food grains to feed the increasing population, and decreased balance of payments.Continued misallocation of resources to public marketing institutions will encourage the flow offunds out of the agriculture sector to nonagriculture sectors. This will also discourage privatesector investments. Restrictions on the movement of commodities and storage by public sectorinstitutions will continue to increase. Similarly, the research and extension services will continueto be inefficient, and public expenditures will have poor payoffs and little impact on farmproductivity. The continuation of institutions with redundant and overlapping agenda will putcontinuous pressure on resources. The overall macroeconomic impact will be low growth ratesin agriculture, and decreasing balance of payments.

d. Impact on the Poor

13. The distorted price policy has an adverse impact on small farmers’ incomes due tounfavorable terms of trade and low marketable surpluses of food crops. Due to inefficient publicsector trading enterprises and trade restrictions, the prices of inputs are relatively higher and forthe prices of outputs lower than what may prevail in a free trade environment. This istantamount to a regressive tax, especially on the poor and small farmers. Similarly, restrictedmovement of farm commodities also has an adverse impact on the incomes of poor farmers andconsumers. Poor farmers typically do not benefit from research and new technologies,especially access to newly developed high-yielding varieties, and good quality seed. Even ifthey are available, they reach poor farmers after a considerable time lag, resulting in lowproductivity and income.

2. Scenario 2: Program Reforms Implemented

14. The reforms (Scenario 2) would positively affect farm productivity, prices of inputs andoutputs, household incomes in rural areas (particularly of small, poor, and landless farmers),research and extension services, agricultural growth rates, and balance of payments. There willbe some negative impact on the household expenditure of the urban poor and nonagriculturepoor, but this will be offset by support to these groups from poverty reduction and food securityprograms. This support to the poor can be financed either through savings from reducedagriculture subsidies and public expenditure or support from external funding, including the localcurrency proceeds of the Program Loan.

a. Direct Impact

15. The discontinuation of price interventions with respect to agricultural inputs and outputswill improve the terms of trade for agriculture. The prices for inputs and outputs will bedetermined in open and competitive markets. Moreover, farmers will be able to increase theirincomes and modify their cropping patterns in response to changes in prices and relativeprofitability. It is estimated that with the discontinuation of support prices and liberalization oftrade, by 2005, the real prices of wheat, basmati paddy, short grain paddy, and seed cotton willincrease by 11, 24, 8, and 7 percent, respectively. In the long run (by 2010), based on projectedinternational prices,3 farmgate prices are expected to increase respectively by 17, 37, 19, and

3 Commodity Market Report, World Bank, March 2001.

68Appendix 5, page 5

23 percent, over the base year. It is also anticipated that by 2005, with adjustment to importparity prices, sugarcane prices will fall by 27 percent.

16. Production levels will also change. It is estimated that the production of wheat, paddy,and seed cotton will increase in 2005 by 12, 19, and 11 percent, respectively. In the case ofsugarcane, it is estimated that, due to crop substitution, initially the production will decreasefrom 46.3 million tons to 20.5 million tons, but by 2005, it will increase to 23 million tons due toimproved seed adoption and to research and extension support services. The major thrust in theincrease in yield, especially in the long run (to 2010), will be realized by wider availability ofnewly developed high-yielding varieties and good quality seed, produced and marketed byprivate sector seed enterprises. This will ensure more quantity of seed, both existing and newvarieties, better quality, and more timely delivery at lower prices to farmers.

17. In the likely event that research institutions become increasingly autonomous, they willbe more responsive to the needs and priorities of farmers. The research institutes will be able togenerate funds through contract research. This will also provide incentives to researchers todevelop packages using new technologies that are responsive to sector needs. Similarly, theProgram will revitalize the extension activities, and strengthen their capacity and capability toprovide accessible services to farmers in general and to marginal and poor farmers in particular.This will have a direct impact on farm incomes, especially of marginal, small, and poor farmers.In addition, higher productivity together with the efficient marketing infrastructure will stabilizeboth producer and the consumer prices. NGO involvement in innovative extension programswith government support will be able to effectively target small farmers.

18. It is estimated that by 2005, the annual farm income of an average farm household willincrease by 27 percent, and by a total of 67 percent by 2010, based on current prices. Thechange in income will accrue from removal of price distortions, changes in cropping patterns,and increased farm productivity due to access to improved research and extension support.

19. With the closure of and withdrawal of budgetary support to the public marketing andtrading enterprises, the pressure on public expenditures will be eased. It is estimated that, withthe reorganization and improved management of PASSCO, and with the closure of SOEs andprovincial food departments, there will be a net saving of $135-$140 million annually. With thesavings thus generated, the Government will be able to invest in other sectors, especially socialsectors. This will have a direct impact on the quality of life and accessibility to social services ofthe poorer segments of the population. Moreover, the divestment of public marketing agencieswill promote private sector investment and employment generation. This will also have a directimpact on reducing poverty.

b. Indirect Impact

20. As subsidies are eliminated and markets liberalized, prices will no longer be fixed butdetermined in open markets and farmers will receive higher prices. This will encourage capitalformation in the sector due to the reduced risk for investment, both at the farm level and at theprocessing level. This will also encourage the adoption of new technologies at a faster rate andfurther expand capital formation in the agriculture sector. The reorganization and redefinition ofthe roles of institutions with redundant and or overlapping functions will save publicexpenditures and will facilitate institutions being responsive to farmers' needs. The public sectortrading companies will be phased out and the private sector will fill the gaps through increasedinvestment and employment opportunities. The seed industry, which was constrained by thepublic sector monopoly, will be encouraged to invest in the production and marketing of good

69Appendix 5, page 6

quality seed at competitive prices. With increased autonomy to research institutions,researchers will address farmers needs, and hence higher returns will be obtained from efficientallocation of research funds. With the increase in farm productivity, the farm labor requirementwill also increase. It is estimated that the policy reforms alone will generate about 15 millionperson-days or about 2.4 percent of the current annual labor requirement. With the increaseduse of certified seed and improved research and extension support, the total annual laborrequirement will go up to about 37 million person-days or 6 percent of the current annual laborrequirement. This will provide job opportunities and higher income to landless labor.

c. Macroeconomic Impact

21. With the price and market reforms, it is estimated that, by 2005, the incrementalcontribution of agriculture will be about $1.9 billion. In addition, with improved access to seedsand better research and extension support services to farmers, the productivity gains willincrease by 2010 to about $2.0 billion. It is also anticipated that the annual growth rate ofagriculture by 2005 will improve to about 5.5 percent. With improved seed delivery and use, andmore effective support services, an overall growth rate of about 6.7 percent can be realized by2010.

d. Impact on the Poor

22. It is anticipated that, with the improved returns in agriculture and increased farm labordemand, the existing poverty incidence of about 35 percent will decrease to around 33 percent.However, it is estimated that the annual food expenditures of nonfarm households will increasein 2005 by 0.5 percent, and in 2010 by 1.0 percent, or $7.50 in rural areas and $10 in urbanareas. With market and price liberalization, the prices of inputs and outputs will be rationalized.The lower prices of inputs and higher prices for outputs will translate into higher farm incomes.Similarly, free movement of farm commodities will stabilize prices for farmers. The rationalizedprices and favorable terms of trade will have positive impacts on farm income especially forsmall and poor farmers. The increased role of the private sector will generate employmentopportunities for the underemployed and the unemployed. In addition, the accessibility of thepoor to public services will also increase, and poor farmers will benefit in terms of increasedfarm productivity and farm income.

F. Public Consultations

23. Two provincial workshops and one Federal-level stakeholder workshop were held in2000 during the preparation of the Program to obtain feedback from a mix of policy makers,planners, research and extension specialists, representatives of farmer organizations, andNGOs. The proposed policy and institutional reforms were discussed. In addition, consultationswere held, most recently in April 2001, with representatives of the Federal Government, the fourPGs, farmers, heads of farmer associations in Punjab and Sindh, NGOs, and private sectorinput companies.

24. The stakeholders consulted generally agreed with the proposed policy reforms, such asliberalization of marketing and trade activities, divestment of SOEs, removal of prohibitions onthe interdistrict and interprovincial movement of agricultural commodities, etc. However, thefarmers were in favor of a continuation of a wheat support price policy. Although farmers arguedfor a continuation of subsidy on inputs, they agreed that the private sector should also beallowed to import and market inputs without restrictions. However, farmers asserted that theGovernment should regulate and monitor the activities and business practices of the privatesector so that cartels and collusion of traders and importers do not exploit the farming

70Appendix 5, page 7

community. Farmers generally endorsed the idea of monitoring the quality standards of inputsand outputs. However, they did not favor any addition to the present agricultural tax structureand felt that the sector is already overtaxed. They felt that a crop-based income tax is preferableto the current agricultural income tax.

25. Regarding the provision of support services, the stakeholders consulted agreed with theplans under the National Drainage Program to relocate extension agents along the hydraulicboundaries working closely with the newly formed farmer organizations. However, they felt thatthe extension agents do not have much to offer, as their knowledge is outdated, and henceneed training. Most participants agreed that a major reorientation of extension and research isrequired. The farmers felt that the veterinary services (both preventive and curative) andartificial insemination services should continue to be provided free by the livestock extensiondepartments. There was general agreement on the proposal to hire women extension agents,especially to work with women on kitchen gardening, fruit and vegetable preservation, andlivestock activities.

COMPLIANCE MEASURES FOR TRANCHE RELEASES AND MONITORING INDICATORS

Policy Conditions Actions Required for Compliance ResponsibleAgency

Tranche Monitoring Indicators

A. Improve the Efficiency of Commodity Markets1. Remove Market RestrictionsA1.1. Ministry of Food, Agriculture andLivestock (MINFAL), Ministry of Commerce(MOC), and the provincial governments (PGs)will issue instructions with immediate effect, to (i)remove all restrictions on the internal movement(interprovincial and interdistrict) of agriculturalcommodities, including wheat, except thoserelating to antismuggling activities along theborders; (ii) permit free movement of seedcertified for a particular ecological zone by thePGs' councils, throughout each province; and (iii)ensure that no new public sector seedcorporation will be established in the country.

A1.2. MOC will issue a policy announcementthat (i) allows private sector (which includes bothdomestic and international firms) to import andexport agricultural products, subject to the tariffsand antidumping rules under InternationalMonetary Fund and World Trade Organizationagreements; and (ii) verifies that there are nonontariff barriers to private sector imports andexports of wheat, sugar, fertilizer, seeds, cotton,and rice.

A1.3. MINFAL and MOC will remove allrestrictions on the production, marketing, andexport of brown sugar (gur) and molasses.

A1.4 MOC will submit draft legislation to thecompetent authorities concerning the gradingand standardization of cotton.

For all conditions, a report of the stepstaken and relevant materials is to besupplied, including� Confirmation by the Government of

review and necessary amendmentsto relevant legislation and orders,including the Grains Act, S144 of theCode of Criminal Procedures to applyto senior officials only, and theprovincial market committeelegislation.

� Instructions issued by ministers/secretaries.

� Policy announcement� Confirmation of review and necessary

amendments to relevant legislationand orders

� Confirmation of review and necessaryamendments to relevant legislationand orders

� Announcement to public

� Copy of draft legislation andimplementing regulations.

MINFAL,MOC, PGs

MOC

MINFAL,MOC

MOC, PGs

1st

1st

1st

2nd

• Producer prices correspondto relevant border prices.

• Private sector’s share intotal market seed increasesfrom 50 to 75 percent.

• Private sector’s share inexports of wheat, cotton,and rice increase to at least90 percent by 2005.

• Private sector’s share inimports of fertilizer andsugar increase to 90percent.

• The marketing and exportof brown sugar andmolasses by the privatesector increases by at least50 percent.

� Increased use ofinternational grades andstandards by privateexporters of cotton andcotton products.

Appendix 6, page 1

71

Policy Conditions Actions Required for Compliance ResponsibleAgency

Tranche Monitoring Indicators

A1.5. MINFAL and MOC will (i) permanentlyremove the zoning of sugarcane areas and theforced sale to the nearest sugar mill, and (ii)allow sugar mills to merge and relocate.

A.1.6. MINFAL and PGs will issue instructionsto permit private seed companies to gainunrestricted access to, and research institutes tosell to both private seed companies and thePunjab Seed Corporation (PSC), breeder seedfor the production of certified seed.

A.1.7. The Government, through MOC, willadopt legislation, and the PGs will adoptimplementing regulations, concerning thegrading and standardization of cotton.

� Copy of instructions.� Confirmation by the Government and

PGs of review and necessaryamendments to relevant legislationand orders.

� Copy of instructions.� Confirmation by the Government and

PGs of review and necessaryamendments to relevant legislationand orders.

• Copy of legislation and regulations.

MINFAL,MOC, PGs

MINFAL, PGs

MOC, PGs

2nd

2nd

3rd

• Domestic sugar pricesconverge to internationallevels.

• Efficiency of sugar mills (asreflected by income ratios)improves.

• Research institutesincreasingly selling theirvarieties to both private andpublic sector seedcompanies.

• Farmers use of certifiedseed increase by 25percent

• Exports of cotton increase,and proportion of highquality cotton lint and cottonproducts (e.g., yarn andtextiles) in total exportsincrease.

.2. Public Management of Strategic Reserves of WheatA2.1.MINFAL and MOC will issue a policyannouncement that (i) the Government ofPakistan will procure and manage a minimum of1 million tons of wheat strategic reserve on orbefore 31 December 2001, for the purposes offood security and farmer well being; the actualrequirements of strategic reserve will bedetermined by the Government in March andApril of each year; (ii) Pakistan AgriculturalStorage and Services Corporation (PASSCO)and the provincial food departments will managethe strategic reserve of wheat on a commercialand cost-efficient basis; and (iii) the directoratesof food in the provincial food departments ofSindh, NWFP, and Balochistan will be closedover a 5-year period.

A2.2 PASSCO will (i) mainly procure, store,and distribute strategic reserves of wheat, but

� Copy of policy announcement.

� Confirmation of review and necessaryamendments to relevant legislation

MINFAL,MOC

MINFAL

1st

1st

• Private sector’s share inmarketed surplus wheatincreases from 25 to 60percent or more.

• Wheat stocks in the publicsector begin to decreasenationwide, and the privatesector share of the wheatmarket increases.

� Time-bound plans to closeand divest the provincialFood Departments areprepared.

� PASSCO's and theprovincial food departmentsoperations in the wheatmarket are reduced from 75to 40 percent or less.

Appendix 6, page 2

72

Policy Conditions Actions Required for Compliance ResponsibleAgency

Tranche Monitoring Indicators

other agriculture commodities may be marketedon a commercial and case-by-case basis, andonly when special circumstances warrant; (ii) beallowed to export wheat; and (iii) extend its boardrepresentation to all the PGs.

and orders.� Copy of relevant instructions.� Confirmation of changes to

PASSCO’s Memorandum andArticles of Association.

• PASSCO and provincialfood department's stocks ofwheat nationwide arereduced annually and theprovincial food departmentsof Sindh, NWFP, andBalochistan have sold theirremaining stocks.

• PASSCO is managing onlywheat and disposes of itsother stored commodities;and PASSCO procures onlylimited quantities ofcommodities other thanwheat.

• PASSCO increases wheatexports.

• PG’s have representationon PASSCO's board andare influencing itsmanagement decisions.

3. Phase Out Commodity Price Supports and SubsidiesA3.1 MINFAL and MOC will issue policyannouncements that

(i) (a) for wheat with immediate effect,the issue price will not be uniformthroughout the year, but will beallowed to rise seasonally to reflectstorage costs; and (b) the issue pricewill be phased out, and will bereplaced by a sales price thatreflects the procurement price plusthe full costs of storage, distribution,and management;

(ii) (a) for wheat, the basis for theprocurement price will be theinternational reference price (exportor import parity price), with marginaladjustments allowed to reflectchanges in cost of production; (b) forcotton, the Government will continueto use the export parity price as thebasis for the procurement price; (c)for sugarcane, the Government will

� Copy of policy announcements.� Confirmation of review and necessary

amendments to relevant legislationand orders.

� Copy of instructions from cabinet orrelevant body.

MINFAL,MOC, PGs

1st • Annual updates onannounced Governmentsupport prices (issue andprocurement) for wheat,cotton, rice, and sugarcane.

• The subsidiary on wheat isreduced from about PRs12billion to about PRs4 billionby 2003.

• Revenues from sales ofwheat stocks will increase,and private sector storageand sale of wheat willincrease.

• Government agencies willprocure only limitedquantities of wheat andother commodities; and theprivate sector share ofother commodity marketswill be 90 percent or more.

Appendix, 6, page 3

73

Policy Conditions Actions Required for Compliance ResponsibleAgency

Tranche Monitoring Indicators

only announce an indicative price to beused for procurement by the privatesugar mills and the Government will notmake any procurement; (d) for rice andall other agricultural commodities, publicprocurement will be at market prices;and

(iii) no new subsidies will be introduced onwheat imports, public seed productionand marketing, or fertilizer productionimports and marketing.

A3.2 The Government will prepare and submit toADB a study (the small farmers plan) of thefeasibility to replace untargeted commoditysubsidies with targeted programs for smallfarmers.

A3.3 The Government will eliminate theconsumer subsidy for wheat by moving to amarket-based sales price.

A3.4. The Government will eliminate theproducer subsidy for wheat by moving from asupport price to a market-based price forprocurement (export or import parity price),unless otherwise agreed upon between ADB andthe Government, except for the losses that mayaccrue due to the minimum strategic reserve ofwheat.

A3.5. The Government will commenceimplementation of the agreed small farmers plan.

� Copy of small farmers plan.

� Copy of Government sales pricesannouncements.

� Copy of PASSCO and provincial fooddepartments’ financial records.

� Copy of Government procurementprice announcements.

� Copy of price analysis comparingdomestic procurement and marketprices with comparable internationalprices.

� Government acceptance of plan.� Evidence of implementation.

MINFAL, PGs

MINFAL, PGs

MINFAL, PGs

MINFAL, PGs

2nd

3rd

3rd

3rd

Any annual losses ofPASSCO will be reportedand financed by the PGs.

• Subsidies will no longer bein effect, except wheatstrategic reserves, and notbe reintroduced foragricultural commodities.

• Targeted programs forsmall farmers and the poorwill be prepared andsubmitted by the 2ndtranche; and allocations toprograms targeting smallfarmers will increase.

• The wheat subsidy will beeliminated by the thirdtranche.

• Private sector share ofwheat market and exportswill increase from about 25to 90 percent.

• Prices to farmers will be themarket prices based oninternational prices.

• Rural poverty will decreasefrom 35 to 33 percent.

• Small farmers targeted withassistance.

Appendix, 6, page 4

74

Policy Conditions Actions Required for Compliance ResponsibleAgency

Tranche Monitoring Indicators

4. Accelerate Divestiture and Restructuring of State-owned Enterprises

A4.1. (i) The Sindh Government will close theSindh Agricultural Supplies Organization andbegin the process of its divestiture, and (ii) theNWFP Government will close the AgriculturalDevelopment Authority and begin the process ofits divestiture.

A4.2. PASSCO's procurement and storagecosts will be borne by the provinces on a proratabasis, and any losses from exports will be borneby the Government.

A4.3. MOC will end all budgetary support,subsidies, and preferential credit for the TradingCorporation of Pakistan (TCP), except forfinancing any year-end losses in TCP's wheat,cotton, rice, edible oil, and seed operations.

A4.4 (i) Fertilizer Import Department andDirectorate of Food will be closed and theprocess of divestiture commenced by MINFAL;and (ii) Sindh Government will announce a planand a timetable to close Sindh Seed Corporation.

A4.5. MINFAL in consultation with the PGswill submit plans, acceptable to ADB, torestructure PASSCO and the provincial fooddepartments to operate on market-oriented linesand compete on equal terms with the privatesector (the PASSCO and provincial fooddepartments restructuring plans), and beginimplementation (including upgrading and leasingstorage facilities).

� Copy of cabinet decisions and detailsof divestiture ADA target date 30June 2001.

� Copy of Cabinet decision.� Copy of PASSCO’s and provincial

Food Departments’ annual financialrecords.

• Copy of Government decision.• Copy of TCP’s annual financial

records.

� Copy of cabinet decisions and detailsof divestiture actions.

• Copy of PASSCO and provincial fooddepartment reorganization plans.

Sindh andNWFP

Governments

MINFAL, PGs

MOC

MINFAL, PGs

MINFAL, PGs

1st

1st

1st

2nd

2nd

• SOEs are closed and theprocess of liquidatingassets has started.

• Employees of SOEs areabsorbed in the provincialand Federal surplus poolsor adequatelycompensated.

• PASSCO will becomeaccountable to theprovinces, and itsoperations will be moreefficient.

• TCP's market shares incotton and rice decline tonot more than 10 percent ofthe market.

• SOEs are closed, and theprocess of liquidatingassets has started.

• Employees of SOEs areabsorbed in the provincialand Federal surplus poolsor adequatelycompensated.

• PASSCO and provincialfood departments will bedownsized andreorganized, and willoperate more efficiently.

• Plans for Sindh, NWFP,and Balochistan will befocused on phase-out andclosure of food directoratesby the third tranche.

Appendix 6, page 5

75

Policy Conditions Actions Required for Compliance ResponsibleAgency

Tranche Monitoring Indicators

A4.6. The Government and the PGs will issuepolicy announcements that all staff affectedunder this Program (both public servants andpublic corporation staff) will either be placed inthe surplus pool or provided a severancepackage consistent with the Government'sguidelines.

A4.7. MOC will ensure that TCP is operatingwithout budgetary support, subsidies, orexclusive preferential credit in wheat, cotton, andrice exports.

A4.8. The Government will cause the PGs to (a)complete implementation of the agreed PASSCOand Provincial Food Departments RestructuringPlans; (b) close the Directorates of Food in theprovincial Food Departments of Sindh, NWFP,and Balochistan and the Sindh SeedCorporation, and commence the process ofdivestiture; and (c) end budgetary support,subsidies, and preferential credit for PASSCOexcept for the costs of managing the wheatstrategic reserve.

• Copy of policy announcements.

• Copy of Instruction from MOC.

• Copy of Instructions fromGovernment and PGs.

• Evidence of implementation andsubstantial downsizing of PASSCOand provincial food departments.

MINFAL,MOC, PGs

MOC

MINFAL, PGs

2nd

2nd

3rd

• Surplus SOE employeesare reemployed oradequately compensated.

• TCP’s procurement, sales,and market shares (incotton, rice, and wheat)decline by at least 50percent and private sectormarket shares increase byat least 50 percent.

• SOEs closed and divested.• PASSCO and the Punjab

food departmentrestructured and competingeffectively with the privatesector in wheat marketingand trade.

• Private sector share ofwheat market increased.

B. Strengthen Support Services1. Accelerate the Provision of Agricultural Support ServicesB1.1. The Ministry of Finance and MINFAL willissue a statement that the proceeds of the Loanunder this Program will be made available foronlending to the PGs on the same terms andconditions as those of the Program Loan, withthe Federal Government bearing the entireforeign exchange risk, for the purposes ofupgrading storage facilities and financing anystaff severance programs as well as relatedpolicy measures (the reform programs).

• Copy of relevant statements. MOF,MINFAL,

PGs

1st • PGs submit proposals forfunding, using thecounterpart funds availableunder the Program Loan.

• Proposals for provincial andFederal projects andprograms will be submittedfor approval of the FederalGovernment, consistentwith the objectives of theProgram.

Appendix 6, page 6

76

Policy Conditions Actions Required for Compliance ResponsibleAgency

Tranche Monitoring Indicators

• MINFAL, with the support ofMOC and MOF, willexamine the proposals forfinancing, determine whichones are eligible forfunding, and provide thefunds.

B1.2. MOC and PGs will determine and informthe Government and ADB regarding financingrequirements for (i) the reform programs; (ii) theprovincial trust funds, which will be used for thejoint nongovernment organization (NGO) andextension agent programs which focus on smallfarmers (the financing determination); and (iii)the private associations’ endowment funds forexport promotion and quality enhancement.

B1.3 The Sindh Government will finance,through the provincial trust funds, a Sindh ruralsupport program similar to those programs in theother provinces.

B1.4 The PGs will each commenceimplementation of their financing determination,including financing new initiatives in agriculturalresearch, extension, and higher education,through using some of the local currency funds inthe provincial trust funds.

� Copy of Cabinet or relevant bodies’decisions.

� Copy of expenditures and financialprojections.

� MOF acceptance of financingdetermination.

� Copy of expenditure and financialprojections.

� Evidence of implementation.

MINFAL,MOC, PGs

SindhGovernment

MINFAL,MOC, MOF,

PGs

2nd

2nd

3rd

• Proposal completed andcirculated to ADB and thePGs for comments.

• The Sindh Rural SupportProgram will be establishedand begin operations toassist small farmers andpoor rural people in farmand nonfarm activities.

• Projects and programsbased on the financingdetermination will bestarted.

2. Accelerate the Strengthening and Coordination of Agricultural Support ServicesB2.1 PGs will undertake a study, acceptable toADB, of the feasibility of allowing greateradministrative and financial autonomy toprovincial research institutes (the researchinstitute plans).

� Copy of research institute plans. MINFAL, PGs 2nd • The delivery of extensionservices to small farmerswill improve.

• The efficiency andcoordination of research willimprove, and theGovernment will experiencecost savings.

Appendix 6, page 7

77

Policy Conditions Actions Required for Compliance ResponsibleAgency

Tranche Monitoring Indicators

B2.2 MINFAL and PGs will undertakestudies, acceptable to ADB, of the feasibility of

(i) reorganizing and strengthening thedelivery and coordination of agriculturalresearch, extension, and highereducation services (the agriculturalsupport service plans); and

(ii) substantially reorganizing and right-sizing Pakistan and National AgriculturalResearch Councils (PARC and NARC)(the research councils plan) to focus onresearch coordination with the provincesand special national topics, such asbiotechnology.

B2.3 The Government and PGs willcommence implementation of the researchinstitute plans, depending on the results of thestudy and if agreed, (i) the agreed uponagricultural support service plans, and (ii) theagreed upon research councils plan.

� Copy of draft agricultural supportservice plans.

� Copy of draft research councils’ plan.

� Copy of cabinet and/or relevantinstructions.

� Acceptance of plans.

MINFAL, PGs

MINFAL, PGs

2nd

3rd

• The agricultural supportservices plans will becompleted and circulatedfor cabinet decision.

• The research councils’ planwill be completed andcirculated to ADB and thePGs for comments.

• The research institutesplans will be implemented.

• The agricultural supportservices plan will beimplemented.

• The research councils’ planwill be implemented.

3. Quality Control and Regulation MeasuresB3.1 MINFAL will prepare draft legislation oramendments for Government and ADB reviewfor (i) fertilizer regulation, and (ii) regulation andcontrol of agricultural chemicals, includingrevision of the Environmental Protection Act of1997, to establish legal responsibilities forthe handling, transport, storage, and disposal ofagricultural chemicals.

B3.2 The Government and PGs will ensure that(i) suppliers of imported fertilizer certify thenutrient contents at the point of origin, and (ii)private third-party laboratories, certified by theGovernment, will also be allowed to certifyquality at the retail level for fertilizer and seed,subject to existing Government regulations.

• Copy of draft legislation andimplementing regulations andcomplementary legislation drafted byPGs.

� Copy of cabinet and/or relevantinstructions.

� Evidence of private sector certificationactivities.

MINFAL, PGs

MINFAL ,PGs

1st

2nd

• Regulations will beprepared for ADB andGovernment review andcomments, and will berevised accordingly.

• Private sector participationwill increase in fertilizerquality control.

• Sale of quality fertilizers tofarmers will increase by 50percent.

Appendix 6, page 8

78

Policy Conditions Actions Required for Compliance ResponsibleAgency

Tranche Monitoring Indicators

B3.3 MINFAL will submit to Cabinet forpromulgation the draft legislation or amendmenton (i) fertilizer regulation, and (ii) regulation andcontrol of agricultural chemicals.

� Copy of draft legislation andimplementing regulations andcomplementary legislation drafted byPGs.

MINFAL, PGs 2nd • Pesticide quality willimprove, and the properdisposal of discarded orexpired agriculturalchemicals will take place.

• Private sector certificationwill increase.

Appendix 6, page 9

79

80Appendix 7

INELIGIBLE ITEMS

No withdrawals will be made in respect of

(i) expenditures for goods included under the following harmonized system1 chapters orheadings:

Chapter Heading Description of Items

22 22.03 – 22.08 Alcoholic beverages

24 24.01 Tobacco, unmanufactured; tobacco refuse

24 24.02 Tobacco, manufactured (whether or not containingtobacco substitutes)

28 28.50 – 28.52 Radioactive and associated materials

71 71.01 – 71.04 Pearls; precious and semiprecious stones,unworked or worked

71 71.05 – 71.06 Jewelry of gold, silver, or platinum group metals71.09 – 71.15 (except watches and watch cases); and goldsmiths’

or silversmiths’ wares (including set gems)

71 71.07 – 71.08 Gold, nonmonetary (excluding gold ores andconcentrates) instruments

84 84.59 Nuclear reactors and parts thereof, fuel elements(cartridges), nonirradiated for nuclear reactors.

(ii) expenditures for goods intended for a military or paramilitary purpose or for luxuryconsumption;

(iii) expenditures for pesticides categorized as extremely hazardous or highly hazardous inClass 1a and 1b, respectively, of the World Health Organization’s Classification ofPesticides by Hazard and Guidelines to Classification;

(iv) expenditures for goods supplied or to be supplied under any contract that a national orinternational financing institution or any other financial agency has financed or agreed tofinance, including any contract financed or to be financed under any loan from the AsianDevelopment Bank; and

(v) expenditures incurred more than 180 days prior to loan effectiveness.

1 Harmonized system means the Harmonized Community Description and Coding System of the Borrower, which is

based on Customs Co-operation Council Nomenclature established by the Convention for the Classification ofGoods in Customs Tariffs, concluded at Brussels in June 1983.

81Appendix 8, page 1

OUTLINE TERMS OF REFERENCE FOR CONSULTING SERVICES

1. Consulting services comprising 36 person-months of international and 102 person-months of domestic consulting services will be provided under the Program to effectivelysequence, implement, and coordinate the key reforms. These consulting services have beengrouped into (i) program coordination, including legal, monitoring, and environmental services;(ii) improving the efficiency of commodity markets; (iii) small farmer extension, research, andsafety nets; and (iv) reorganization and restructuring of state-owned enterprises (SOEs). Thetechnical assistance (TA) is planned to be implemented over a 2-3 year period commencing inFebruary 2002.

A. Component I: Program Coordination

1. Senior Policy Advisor (international, 14 person-months)

2. A senior policy advisor will serve as the team leader and will be responsible for theoverall management of the TA and the timely delivery of all outputs. The advisor will have twosets of functions. In an administrative role, the advisor will (i) monitor the progress of, andcoordinate TA implementation, in close collaboration with the deputy team leaders (forcomponents II, III, and IV); (ii) liaise between the Government, the Executing Agency, the AsianDevelopment Bank (ADB), and other financing agencies; (iii) bring to the attention of theGovernment, the Executing Agency, and ADB any issue that needs to be addressed immediately tofacilitate TA implementation; and (iv) prepare a work plan, progress reports, and the final TA report.In addition, the advisor will directly supervise the legal expert, the monitoring and evaluationspecialist, and the environment specialist. The advisor will work over two split terms.

3. In substantive terms, the advisor will (i) maintain the consistency of outputs with theProgram’s objectives of enhancing agricultural productivity and profitability, including monitoring andhelping the Government in liberalizing output markets, creating market-based incentives forproducers and input markets, and ensuring the availability and efficient use of increased farmproductivity; (ii) review all outputs for consistency in promoting efficient markets; (iii) recommend tothe Government effective measures for price and subsidy reforms, with particular reference towheat; (iv) ensure that TA outputs improve the terms of participation of small farmers incommodity markets; (v) incorporate the success of ongoing alternative approaches for extensionservices while integrating agricultural research, education, and extension with private sectorparticipation; (vi) ensure that SOEs are reorganized with adequate emphasis on goodgovernance and sustainability; and (vii) sequence TA components to ensure complianceconditions for tranche releases. The advisor will be a recognized expert with demonstratedexperience in guiding agricultural polices towards an efficient market-based system and will havefamiliarity with Pakistan's agriculture sector and its problems.

2. Legal Expert (domestic, 14 person-months)

4. The legal expert will assist the Government in reviewing, amending, and introducinglegislation for the reforms covered under the Program. In coordination with the sector specialistsand experts, the legal expert will (i) review all regulatory requirements including any legislationor policy statements concerning policy reforms; (ii) assist the Ministry of Food, Agriculture, andLivestock (MINFAL), the Ministry of Commerce (MOC), and the provincial governments (PGs)concerning the steps required to deregulate, lift restrictions, and remove subsidies; and (iii)assist the Government in preparing draft legislation, amendments, and administrativeregulations/guidelines for the proposed reform measures.

82Appendix 8, page 2

3. Monitoring and Evaluation Expert (domestic, 10 person-months)

5. The expert will (i) assist MINFAL to identify private research institutions for use incollecting data concerning the prereform period (benchmark or baseline data), coveringsocioeconomic and institutional set-ups; (ii) assess the current data collection process and thekey indicators for baseline and periodic review related to the issues being addressed under theProgram; (iii) suggest necessary changes so that an efficient and scientific process is adaptedin monitoring the implementation; (iv) assess the information needs of small farmers to improveinformation symmetry; (v) review all TA outputs, including draft regulations, guidelines, andlegislation, to ensure that information for carrying out an effective monitoring system for theimplementation of the Program is efficiently collected and collated; and (vi) assist the specialistsand experts in integrating monitoring and evaluation aspects in their outputs.

4. Environment Expert (domestic, 6 person-months)

6. The environment expert will review all legislation, guidelines, and plans to ensure theirconsistency with prevailing environmental guidelines and their compliance with ADB requirements.In particular, the specialist will review the legislation and guidelines pertaining to fertilizer, agriculturalchemicals, the research institute plans, and the research councils plan.

B. Component II: Improving the Efficiency of Commodity Markets

1. Commodity Market Specialist (international, 6 person-months)

7. Reporting to the senior policy advisor, the commodity market specialist, with expertise inwheat marketing, as the deputy team leader for this component will (i) guide and coordinate theactivities of the specialists in Component II; (ii) assist the Government and the PGs, inimplementing wheat reforms and promoting private sector marketing, storage, and export ofwheat; (iii) ensure adequate stakeholder consultations; (iv) analyze consultant inputs at everystage to facilitate interministerial and Federal and provincial coordination; (v) provide the basisfor the legal expert to draft the legislation and guidelines for fertilizer and agricultural chemicals;cotton grading and standardization; zoning laws and merger and relocation of sugar mills; and levelplaying field between public and private sectors in research, production, and marketing of seed; and(vi) review the draft final report.

2. Fertilizer Expert (domestic, 6 person-months)

8. The expert, along with the legal expert, will (i) evaluate the draft fertilizer and agriculturalchemicals regulations prepared by MINFAL; (ii) conduct an independent assessment of theimpact of the draft regulations on enhancing private sector participation and on fertilizermarketing; (iii) evaluate existing procedures and mechanisms for certifying quality of fertilizersand agricultural chemicals along the distribution chain; (iv) conduct stakeholder consultations;and (v) in consultation with the legal expert, assist the Government in preparing appropriateguidelines to implement the draft regulations and, if required, in amending the draft legislationprior to promulgation.

3. Cotton Trading Expert (domestic, 6 person-months)

9. The expert will (i) undertake a quick review of the prevailing procedures for grading andstandardization of cotton; (ii) conduct workshops to discuss inadequacies and their consequences;(iii) acquaint stakeholders with international best practices; (iv) develop a consensus on the

83Appendix 8, page 3

benchmarks for grading and standardization; (v) assess the legislative, administrative, and technicalissues involved and changes required; (vi) along with the legal expert, assist MOC and the PGs inpreparing draft legislation and implementation guidelines; (vii) conduct workshops to discuss thedraft with key stakeholders, and incorporate agreed amendments; and (viii) with the assistance ofthe legal expert, prepare the final draft of the legislation and the implementation guidelines forgrading and standardization benchmarks.

4. Sugar Industry Expert (domestic, 6 person-months)

10. The expert will (i) conduct a quick update of the prevailing policy, legislation, andadministrative arrangements governing the sugar industry; (ii) suggest changes in the overallarrangements to eliminate zoning laws and forced sale of sugar to the nearest mill; (iii) with advicefrom the institutional restructuring specialist, determine the sequence of steps required for mergerand relocation of sugar mills; (iv) provide the content for the legal expert to prepare draft legal andadministrative changes, and discuss the same with MINFAL, MOC, and the PGs; (v) undertakebroader stakeholder consultation through provincial and national workshops including with farmergroups; and (vi) in coordination with the legal expert, draft the legislation and administrativeguidelines for elimination of zoning laws and enabling merger and relocation of sugar mills.

5. Seed Marketing and Distribution Expert (domestic, 6 person-months)

11. The expert will (i) undertake a quick review of the seed sector based on secondaryinformation; (ii) assist MINFAL and the PGs in reviewing the seed acts for creating a level playingfield between public and private agencies engaged in research, production, marketing, intellectualproperty rights, and breeding royalties; (iii) conduct stakeholder consultations on the proposedchanges, and incorporate suggestions; and (iv) with the assistance of the legal expert, harmonize,as far as possible, the provincial seed acts, and finalize the amendments.

C. Component III: Small Farmer Extension, Research, and Safety Nets

1. Agriculture Research and Extension Specialist (international, 8 person-months)

12. As the deputy team leader responsible for this component, the specialist will (i) guideand coordinate the activities of the consultants in Component III; (ii) ensure adequatestakeholder consultations, especially with regard to small farmers, nongovernmentorganizations (NGOs), and rural support programs; (iii) analyze consultant inputs at every stageto facilitate interministerial and Federal and provincial coordination; (iv) keep the senior policyadvisor informed of critical issues; and (v) finalize the small farmers plan, the agriculturalsupport services plans (provincial), the research institute plans (provincial), the researchcouncils' plan (national); the Sindh Rural Support Program; and the financing determinations(provincial) including provincial trust funds, and accompanying legislative drafts, administrativeguidelines, and monitoring arrangements; and (vi) assist the Government in the preparatorysteps leading to implementation.

2. Social Safety Net Expert (domestic, 6 person-months)

13. The expert will (i) study options to replace untargeted subsidies with targeted programs toassist small farmers and consumers of wheat; (ii) in coordination with the financial and economicanalyst, prepare simulation models to assess household consumption patterns at different prices ofstaple food items; (iii) conduct workshops to present the findings; (iv) assist MINFAL in the

84Appendix 8, page 4

preparation of the small farmers plan with targeted programs integrated and anchored with theongoing or planned social safety net initiatives; (v) develop a detailed implementation plan andarrangements; (vi) help building consensus on the small farmers plan through national andprovincial workshops including special workshops for small farmers and their associations; and (vii)assist MINFAL in the preparatory steps leading to the implementation of the small farmers' plan.

3. Agricultural Research Expert (domestic, 6 person-months)

14. The agricultural research expert will (i) evaluate the existing agricultural researchactivities; (ii) recommend strategies for increased participation of the private sector and ensuringfarmers’ (particularly small farmers’) participation in agricultural research; (iii) conductstakeholder consultations with particular emphasis on small farmers; and (iv) in coordinationwith the agricultural extension specialist, draft the agricultural support services plans, theresearch institute plans, and the research councils plan for reorganizing researchestablishments, including competitive allocation of research grants between private and publicsector institutions.

4. Agricultural Extension Expert (domestic, 6 person-months)

15. The agricultural extension expert will (i) assess existing agriculture extension programsbeing pursued by the PGs, agricultural universities in Pakistan, and other programs; (ii) assessthe success in reaching small farmers and the associated constraints; (iii) assess farmers’participation; and (iv) in consultation with other members of the team, recommend measuresrequired for a meaningful interaction across education, research, and extension programs, andpolicies as inputs for the agricultural support services plans, the research institute plans, and theresearch councils plan.

5. Community Mobilization Expert (domestic, 6 person-months)

16. The community mobilization expert will (i) review the degree of participation of smallfarmers in research and extension; (ii) assess the corresponding legal framework andgovernment policies; (iii) identify approaches that can help introduce a bottom-up approach forincreased participation of small farmers in formulating agricultural research priorities; (iv)recommend improvements in the existing pilot projects for the dissemination of extensionservices including strategies for increased participation of women in agricultural activities; (v)undertake extensive stakeholder consultation including that with NGOs and small farmergroups; (vi) with assistance of the legal expert, analyze the organizational and financial aspectsof NGOs; (vii) assist the team leader in establishing the Sindh Rural Support Program; and (viii)provide inputs to ensure small farmer orientation of the agricultural support services plans, theresearch institute plans, and the research councils plan.

6. Education and Curriculum Expert (domestic, 6 person-months)

17. The education and curriculum expert will (i) evaluate the effectiveness of the existingcurriculum of agricultural education at public sector institutions; (ii) assess the potential in theprivate sector to improve the quality and effectiveness of agricultural education and to expandits scope to include agribusiness, business administration, etc.; (iii) ensure the synergy ofcombining agricultural education, research, and extension through the agricultural supportservices plans, the research institute plans, and the research councils plan; and (iv) provideinputs to adequately incorporate measures in the agricultural support services plans, the

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research institute plans, and research councils plan that will ensure greater focus of theresearch and education on small farmers to improve their productivity and profitability levels.

7. Financial and Economic Analyst (domestic, 8 person-months)

18. The financial and economic analyst will (i) assess the financial and economic viability ofthe proposed interventions; (ii) conduct sensitivity analyses to ascertain the likely changes in thestreams of benefits intended for small farmers using different scenarios of public-private sectorparticipation; (iii) provide the financial and economic justification for finalizing the small farmers'plan, the agricultural support services plans, the research institute plans, the research councilsplan, and the Sindh Rural Support Program; (iv) assist in the preparation of the financingdeterminations for implementing those components of the plans that relate to small farmers; and(v) structure the provincial trust fund arrangements.

D. Component IV: Reorganization and Restructuring SOEs

1. Institutional Restructuring Specialist (international, 8 person-months)

19. As the deputy team leader responsible for this component, the institutional restructuringspecialist will (i) guide and coordinate the activities of the consultants, (ii) analyze consultantinputs at every stage to facilitate interministerial and Federal and provincial coordination, and(iii) keep the senior policy advisor informed of critical issues. The specialist will (i) undertakediagnostic review of the identified organizations, their operations, systems, and procedures; (ii)assess the institutional capacity of each institution to meet the program objectives; (iii) defineorganizational and operational weaknesses; (iv) assess capacity building and institutionalstrengthening requirements; (v) identify measures to promote organizational and operationalefficiency and strengthen managerial capacity; and (vi) with inputs from other team members,prepare restructuring and reorganization plans for provincial research institutes, the PakistanAgricultural Research Council, the National Agricultural Research Council, the TradingCorporation of Pakistan, and the provincial food departments. The specialist will preparedetailed analysis of the Pakistan Agricultural Storage and Supplies Corporation (PASSCO) inview of its critical role in maintaining the strategic wheat reserve, and assist MINFAL and thePGs in preparing the PASSCO and provincial food departments restructuring plans and theSindh Seed Corporation closure plan.

2. Corporate Governance Expert (domestic, 6 person-months)

20. The corporate governance expert will (i) assess the existing corporate governanceframework, including institutional and incentive structures; (ii) assist in implementing a corporategovernance framework to assure autonomy with accountability, transparency of operations, checksand balances, means for evaluating performance, and penalties or rewards for performance; (iii)establish monitoring and surveillance systems to undertake corrective action, and developcoordination mechanisms with MINFAL, MOC, the Ministry of Finance, and the PGs; and (iv)conduct workshops on corporate governance for key government officials and regulators to improveunderstanding of the proposed structures for corporate governance.

3. Financial Policy and Strategy Expert (domestic, 4 person-months)

21. The financial policy and strategy expert will (i) conduct creditor-debtor forum(s) to diagnoseconstraints and difficulties in undertaking restructuring, (ii) recommend options for asset disposal

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and alternative asset resolution strategies, and (iii) identify funding sources for debt and equitycapital to support restructuring.

E. Costs

22. The table below gives the cost estimates and financing plan for the TA.

Cost Estimates and Financing Plan($'000)

ItemForeign

Exchan geLocal

Currenc yTotalCost

A. Asian Development Bank Financing

1. Consultants a. Remuneration and Per Diem

i. International Consultants (36 person-months) 864 0 864 ii. Domestic Consultants (102 person-months) 0 510 510

b. International and Local Travel 60 40 100 c. Reports and Communications 20 0 20

2. Workshops and Seminars 0 60 603. Stakeholder Consultations and Surveys 0 100 1004. Administration, Equipment, and Support Costs 10 60 705. Contingencies 146 130 276

Subtotal A 1,100 900 2,000

B. Government Financing

1. Counterpart Services 0 180 1802. Office Accommodation 0 160 1603. Workshops and Meetings 0 140 1404. Documents Data, etc. 0 140 1405. Domestic Travel 0 180 180

Subtotal B 0 800 800

Total 1,100 1,700 2,800