from the British people

S i x M o n t h l y U p d a t e

Multi Donor Trust Fund forAccelerating Growth and Reforms

APRIL-SEPTEMBER 2017

AGR

Acronyms and Abbreviations

AEOI Automatic Exchange of Information

AIT Agriculture Income Tax

BE Bank executed

BoR Board of Revenue

CCP Competition Commission of Pakistan

CG Corporate Governance

DGPC Directorate General for Petroleum Concessions

DMR Debt Management Reform

DMU Debt Management Unit

DPCO Debt Policy Coordination Office

EAD Economic Affairs Division

EE&C Energy Efficiency and Conservation

EF External Finance

EL Energy Label

ETD Excise and Taxation Department

FBR Federal Board of Revenue

FCCL Fiscal Commitment and Contingent Liabilities

GDP Gross Domestic Product

GoP Government of Pakistan

ICT Information and communication technology

IFC International Finance Corporation

LTU Large Taxpayer Unit

M&E Monitoring and Evaluation

MOF Ministry of Finance

MPNR Ministry of Petroleum and Natural Resources

MTDS Medium Term Debt Management Strategy

MWP Ministry of Water and Power

NEECA National Energy Efficiency and Conservation Authority

NEPRA National Electric Power Regulatory Authority

OGRA Oil and Gas Regulatory Authority

PEECA Punjab Energy Efficiency and Conservation Agency

PED Punjab Energy Department

PEFMA Pakistan Electric Fans Manufacturers Association

PPP Public Private Partnership

PRA Punjab Revenue Authority

PRAL Pakistan Revenue Automation Limited

PSE Public Sector Enterprise

RE Recipient executed

RETF Recipient-executed trust fund

ROSC Report on Observance of Standards and Codes

RTO Regional Tax Office

SECP Security and Exchange Commission of Pakistan

SOE State-owned enterprise

TA Technical assistance

TAGR Trust Fund for Accelerating Growth and Reforms

TPA Third Party Access

TRU Tax Reform Unit

WBG World Bank Group

Table of Contents

Debt Management Reforms ..................................................................................................... 1

Energy Sector Reforms ............................................................................................................ 4

Energy Sector – IFC Support................................................................................................... 6

Private Sector Development .................................................................................................... 8

Tax Policy and Administration Reforms ............................................................................... 12

1

Debt Management Reforms

Program Development Objective: To ensure that government debt management in Pakistan (both at the

national and subnational levels) is on a sound policy and operational footing, to contribute to the wider

objectives of sustaining macroeconomic stability and ensuring the efficiency of the government’s financial

management.

Execution Mode: Bank Executed (BE) and Recipient Executed (RE)

Duration: December 2014-December 2019

Allocated Budget:

BE: US$ 950,000

RE: US$ 1,526,000

Outstanding Commitments:

BE: US$ 22,840

RE: ---

Disbursement till September, 2017:

BE: US$ 801,514

RE: US$ 295,740

Expenditure forecast for the next 6 months:

BE: US$ 100,000

RE: US$ 700,000

Overview

The Debt Management Reform (DMR) component is aimed at strengthening debt management at the

federal and sub-national levels. At the federal level, DMR is expected to help the Government of Pakistan

(GOP) monitor and evaluate a debt management strategy that contributes to fiscal and debt sustainability

while minimizing funding costs. Achieving this will require building capacity in the entities responsible for

different debt management functions. Accordingly, the federal program supports three institutions: Debt

Policy Coordination Office (DPCO) Ministry of Finance (MOF), the External Finance (EF) Wing (MOF)

and the Economic Affairs Division (EAD). The federal component is designed to help authorities strengthen

three key functions: (i) the monitoring and evaluation (M&E) of a debt management strategy and risk

management at the DPCO; (ii) external debt recording and reporting at the EAD; and (iii) funding in

external markets at the EF Wing. These activities will be carried out through two standalone Recipient

Executed Trust Funds (RETFs) - one for the DPCO and EF Wing (MOF), and the other for the EAD.

With the introduction of the 18th Constitutional Amendment, Pakistan's fiscal architecture has undergone a

fundamental change. On July 1 2015, the National Economic Council allowed the provinces to borrow in

the domestic market. This change has heightened the need to strengthen not only federal, but also provincial

debt management and thus, the program also works at the subnational level in Sindh and Punjab (account

for almost 75 percent of total subnational debt).

Implementation Performance and Achievements as of September 2017

At the federal level, the MOF (DPCO and EF Wing) in particular, the Trust Fund (TF) made good progress

since the signing of the grant agreement in June 2017. Under Component 1 of the project, DPCO has been

able to strengthen its analytical capabilities by hiring four finance and risk management specialists and

credit risk specialists in the first quarter. Two of these specialists have also been trained on designing and

implementing debt management strategies. Moreover, the visibility of DPCO within internal stakeholders

2

(MOF and EAD) has improved considerably as the office takes on the enhanced role of a debt management

middle office at the federal level. The DPCO has been working to produce a public debt management risk

report for the period ending June 2017. The report will guide on compliance with strategic targets in

accordance with the Pakistan Mid Term Debt Management Strategy (MTDS) 2015/16 - 2018/19.

Under Component 2, the plan for improving the capacity of the EF Wing (MOF) in sourcing external market

funding has initiated and the first in-house training on market intelligence, reporting and international best

practices was organized in Islamabad in August 2017. Thus, the EF Wing has initiated building its

capacity to start producing market monitoring reports by the end of this fiscal year. Beside EF Wing,

participants from DPCO and Budget Wing also attended this training. The objective of having

diverse participation from within MOF is twofold: (i) to build staff capacity broadly across MOF, and (ii)

to provide a platform to strengthen coordination among various debt management agencies at the federal

level.

The federal component has also supported EAD in setting up the RETF in terms of fiduciary and

procurement related activities. Moreover, the World Bank (WB) has initiated the documentation cycle

required for project effectiveness. This project revolves around upgrading the current version of the Debt

Management and Financial Analysis System by United Nations Conference on Trade and Development and

the associated capacity building. Given the extensive requirements needed to kick-start RETF, the setting

up of this window has been under process for a while.

At the subnational level, the Government of Punjab has published two Punjab Debt Bulletins1 in less than

six months. The production of these bulletins largely draws upon the continued capacity building through

the program at the subnational level and is a key milestone in terms of improving visibility as well as

transparency of debt data. Moreover, the subnational component continued to support the Government of

Sindh in designing an appropriate debt management strategy as part of a multi-year Technical Assistance

(TA).

The debt cash flow projection tool for both Sindh and Punjab is at the finalization stage. In this regard, Debt

Management Unit (DMU) officials from both governments attended a session in July 2017 in Islamabad.

The objective was to get the authorities’ feedback early in the process so that suggestions and comments

can be taken on-board before the tool is finalized and deployed at the respective offices. This was a follow-

up discussion to the WB training held in December 2016 in which officials from both Punjab and Sindh

participated. The development of such a tool will enable the staff of sub-national DMUs in Pakistan to

accurately track their debt repayment obligations by generating and aggregating the individual cash flows

of all their outstanding public debt which is mostly in the form of foreign debt on-lent from Federal

Government. Nonetheless, such a tool cannot replace a debt management information system, with secure

database and processing capabilities.

Planned Activities

At the federal level, MOF will be supported in executing the RETF (October 2017-March 2018).

Specifically, DPCO will be supported in the M&E of MTDS 2015/16 – 2018/19, improving coordination

amongst all federal debt agencies and managing inherent risks in Pakistan’s debt portfolio. In addition, this

sub-component will facilitate EF Wing in continuing the capacity building program envisaged under the

project (next training to be held in December 2017). Moreover, EAD will be supported in initiating its

RETF (November 2017- February 2018) following the approval of the grant agreement most likely by

December 2017. The program also envisages supporting MOF on the domestic market’s absorption

capacity of government debt and the development of an Annual Borrowing Plan (demand-driven).

1 For the periods ending end-December 2016 and end-June 2017.

3

Furthermore, this sub-component will strive to enable client agencies' staff to participate in international

and local specialized training as and when required.

At the subnational level, the Governments of Punjab and Sindh will continue to be supported in finalizing

and deploying the debt cash flow projection tool as well as in designing a debt management strategy and

fiscal rules for Sindh. Both the governments will be assisted in preparation for executing their domestic

debt issuance plan2. The program also envisages continuing knowledge-sharing events for all provinces and

enabling subnational government staff to participate in local and international debt management training

and forums.

2 Within the National Economic Council (NEC) limits.

4

Energy Sector Reforms

Program Development Objective: To support the GoP's energy sector reforms program by strengthen

capacity of key institutions to design, implement, monitor and communicate the reform agenda.

Execution Mode: Bank Executed (BE)

Duration: December 2014 - December 2018

Allocated Budget: USD 3,100,000

Outstanding Commitments: USD 180,000

Disbursement till September, 2017: USD 2,700,000

Expenditure forecast for next 6 months: USD 600,000

Overview

The primary focus of the Energy Program during the reporting period was on supporting the Government

in the gas sector to put in place a comprehensive market, structural and regulatory reform in the mid-stream,

downstream and upstream of oil and gas sector. Significant progress was made in supporting the gas sector

reform process during this period.

Implementation Performance and Achievements as of September, 2017

Gas Sector Reform

The gas sector reform process is driven by the Ministry of Petroleum and Natural Resources (MPNR) and

involves key sector entities, including the Directorate General for Petroleum Concessions (DGPC) and Oil

and Gas Regulatory Authority (OGRA). A practical support program is now in place to strengthen and

revise the regulatory framework, and operationalize the Government’s reform vision. In the last six months,

a series of key tasks were completed as part of the work plans to support the downstream and upstream gas

sectors. The tasks involved activities by working groups comprising key sector stakeholders (OGRA, Sui

companies, MPNR, DGPC and E&P companies, among others), supported by team of the World Bank staff

and consultants.

Downstream

• Third Party Access / network code: Third Party Access (TPA) rules Working Group,

comprising of key sector participants and supported by experts funded through TAGR, submitted

a proposed TPA rules to OGRA as an input to its deliberations. OGRA plans to initiate public

consultations on the TPA rules. The network code accompanying the TPA rules has been drafted

by the working group, and was formally delivered to OGRA for further consideration.

• Licensing: Drafts of new transmission, distribution and shipper licenses to operationalize the new

sector structure were completed by the licensing working group and are currently under

consideration of OGRA.

• Tariffs: Tariff methodology working group completed its proceedings, and submitted the

recommended tariff methodology to OGRA for further consideration.

Upstream

• Study on regulatory roles and functions: A study was undertaken at the request of MPNR,

focusing on a review of existing allocation of upstream regulatory roles and responsibilities, and

development of recommendations for a potential independent upstream regulatory agency. The

final report was delivered to MPNR in July 2017, and this was followed by the establishment of a

Government-led working group, supported by TAGR-financed experts, to develop options for an

independent upstream oil and gas regulator.

5

• Proposed independent upstream regulator: The technical working group on independent

upstream regulator produced two key documents for the consideration of the Gas Sector Leadership

Committee, which met on September 28, 2017. These were: (i) white paper on independent

regulation in the upstream oil and gas sector; and (ii) draft legislation on the establishment of

Pakistan Petroleum Exploration and Production Regulatory Authority.

Power Sector Reform

Program implementation in the power sector was relatively slow during the reporting period, in view of the

pending changes to the NEPRA Act that are currently under consideration in the legislature. In September,

the team initiated discussions on the next set of tasks to support NEPRA in fulfilling its regulatory mandate

in support of the report. In this period, there was no significant activity with the Ministry of Water and

Power (MWP) and Privatization Commission reflecting the progress in those agencies’ work program and

evolving priorities.

Planned Activities

• Support NEPRA on the following key topics: (i) review of performance standards and licensing

for transmission and generation; (ii) transition to competitive power market regime; and (iii)

regulatory economics advisory

• Support gas sector reform implementation: The technical, advisory and implementation

support provided through the Sector Reform Support Team will continue. Specific tasks

anticipated include: (i) direct support to MPNR leadership on moving forward in implementing

the sector reform; (ii) support for the sector financial sustainability working group led by MPNR

support to OGRA on public consultations on draft TPA rules and network code; (iii) support to

MPNR on sector unbundling process oversight; (iv) development of approach for

operationalization of proposed independent upstream regulator; and (v) assessment of MPNR

policy function institutional strengthening needs.

6

Energy Sector – IFC Support

Overview

The Energy Efficiency and Conservation (EE&C) policy and regulatory framework is a recent phenomenon

in Pakistan, especially in Punjab. The national level framework, National Energy Efficiency and

Conservation Authority (NEECA) Act, was approved in July 2016. The implementation of national EE&C

policy and legal framework is delegated to the provinces. With World Bank Group’s (WBG) assistance,

Punjab has taken the lead in developing a strategic framework for the EE&C initiative in line with the

related national objectives. The absence of this framework in the past was a major barrier to drive a systemic

change on EE&C covering both EE&C related standards and labelling as well as addressing behavioral

tendencies in energy consumption. The labeling scheme has just been approved (NEECA Act) and the

applications for labels received through our assistance.

The WBG is assisting the Government of Punjab to develop the fan replacement program which will be

implemented by the government and the Asian Development Bank (ADB), About 200,000 fans will be

replaced initially in schools. Typically, it takes a few years for this scheme to take effect, but it has been

moving very quickly due to the urgency to get the fans out by this cooling season. The WBG has helped

prepare a project to replace 1 million fans in public buildings to continue the momentum. It is difficult to

demonstrate impacts from a Standards & Labelling program in such a short time period. Due to WB’s work

in the province and directly with manufacturers, 23 fan models have been certified for energy labels, and

an estimated 83,000 Energy Label fans are available in the Punjab market. The government has started

advertising labeled fans in Punjab.

Implementation Performance and Achievements as of September, 2017

• Certification of 23 Pakistan Energy Label (EL) fans: a substantial increase from the 12

certified fans reported in the previous six-months. NEECA has played a significant role towards

this achievement. The project facilitated links between NEECA, Pakistan Electric Fans

Manufacturers Association and the Punjab Energy Department.

• Baseline market research on fans: the first market research on energy-efficient Pakistan Energy

Label fans in Punjab. The report has been shared with the Punjab Energy Department.

• Baseline market research on small motors: A market research for the supply chain dynamics of

small motors in Punjab was also commissioned. The quality of data for small motors is poor due to

the sector being informal and disorganized, however it provides an important starting point for

future work.

• Punjab Energy Efficiency and Conservation Agency (PEECA) media campaign to launch

Pakistan Energy Labels: a catalyst in enhancing the awareness campaign budget of the Punjab

Energy Department to about USD 600K compared to USD 50K earlier. A successful media

campaign was conducted by the Punjab Energy Department, which was supplemented by about a

USD 1 million national campaign led by NEECA, and an additional estimated USD 4 million

contribution to the advertising campaign on energy labels by fan manufacturers.

• PEFMA collaboration with NEECA and PEECA: helped conduct two stakeholder workshops,

one in Gujrat and the other in Lahore, followed by a series of smaller stakeholder dialogues to

discuss issues as they arose. The most recent meeting involved sharing results of the trial fan

replacements implemented by the project with the fan manufacturers, NEECA and Pakistan

Council of Scientific & Industrial Research.

7

• Documentary: commissioned the production of a short documentary of the project to enable

greater dissemination of the important achievement and recognize the contributions of key

stakeholders, and enhance awareness for the continued success of S&L in Punjab and Pakistan.

• Procurement of EL fans by Punjab Government: supported PEECA in convincing the Punjab

central procurement agency to request the procurement of EL fans by all government

departments. It is encouraging to note that the conversion to EL fans successfully took place in

2017 as the fan manufacturers received large orders from various Government departments in

Punjab. Data is being gathered to verify where these fans have been installed.

• Monitoring, Verification and Enforcement framework: A draft plan has been shared with

NEECA, PEECA and the fan manufacturers. This will be finalized based on stakeholder feedback.

• EL fan replacement trials: The project arranged to replace 400 EL fans in selected education and

health facilities and conducted a monitoring visit to all the sites, one-month after installation. This

process has yielded valuable data, such as complaints of low airflow, especially in areas where the

utility voltage is low. These issues were shared with all stakeholders. These concerns can be

overcome by some product modifications and EL standards set by NEECA before the next cooling

season of 2018.

• Meetings with potential donors: During September 2017, a number of meetings were held with

donor agencies such as German Society for International Cooperation, Japan International

Cooperation Agency (JICA), Asian Development Bank, United Nations Industrial Development

Organization, United Nations Development Programme, Department of Foreign Affairs and Trade

(DFAT) – Australia, and the French Government to provide an update and explore potential for

additional finance. A few have expressed interest including DFAT (requested a concept note for

funding the proposed 20,000 EL fans replacement project), and JICA, which is supporting NEECA

for the next three years. The development partners requested more evidence of the implementation

capacity of the newly-established PEECA.

Planned Activities

• Finalize and submit the revised Million+ Fan Project to the Punjab Energy Department (PED) based

on their feedback

• Assist the PED with sample EL fans being installed by various departments of the Punjab

Government

• Explore funding from Energy Sector Management Assistance Program for continued strategic

support towards market penetration of the Pakistan Energy Label. This would include continued

support for market penetration of EL fans, and support for S&L for future appliances, for which

refrigerators and air conditioners have been prioritized.

• Facilitate coordination between PEFMA, NEECA and Pakistan Council of Scientific and Industrial

Research (PCSIR) to make necessary modifications in both the EL fan products and the EL standard

to address the initial complaints of low airflow.

• Share the revised Monitoring, Verification and Enforcement framework with the Punjab Energy

Department.

• Review the documentary film on energy labeling and finalize it for dissemination.

• Contact DFID to add procurement condition of Energy Label fans for their sub-contractor IMC

(Humqadam in Pakistan) that is constructing an estimated 15,000 classrooms in Punjab schools,

which means an addition of an estimated 30,000 ceiling fans.

8

Private Sector Development

Program Development Objective: To support the Government of Pakistan in designing and implementing

a strategic framework for PSE reforms, including effective privatization. The overall goal is to reduce the

Government's direct participation in product and factor markets within a number of sectors, while increasing

private sector participation and fostering competition.

Execution Mode: Bank Executed (BE)

Duration: December 2014- December 2019

Allocated Budget: USD 2,705,000

Outstanding Commitments: USD 97,433

Disbursement till September, 2017: USD 2,301,514

Expenditure forecast for the next 6 months: USD 1,150,000

Overview

The private sector development pillar (formerly SOE Reforms and Privatization) has made considerable

progress during the reporting period as signified by total disbursements increased from USD1.8 million in

March 2017 to USD2.3 million as of September, 2017 (30% increase). The increase is commensurate with

the number and scope of activities initiated under the different subtasks. The cornerstone of implementation

over the reporting period has been a conscientious effort made the task team to build synergies among

activities that they (analytics, capacity building, advisory services etc.) reinforce the development and

growth of the private sector, whether it is through enhanced competition, increased private investment

grounded in improved corporate governance, or through the removal of informational asymmetries aided

by focused analytics.

Implementation Performance and Achievements as of September, 2017

1. Jobs Diagnostic

The team has made significant progress on three analytical products as part of its on-going work on

delivering a comprehensive jobs diagnostic to the Government of Pakistan. The following three analyses

have been prepared:

• Demographics and Structural Transformation and Jobs: This analysis examines aggregate

trends in employment and productivity and factors behind GDP per capita and labor productivity

changes.

• Workers and Jobs: This analysis provides the most up-to-date information on the supply side of

the labor market in Pakistan. It looks at key labor market outcomes for different population groups

(by age, gender, education, etc.) across provinces and tracks trends over time.

• Firms and Jobs: This analysis contains detailed trends of employment by sector including by

province and by gender using LFS data.

In August 2017, the team also fielded a mission to consult with relevant stakeholders on the findings of

these analyses.

2. PPPs

Engagement at the subnational level continued during the reporting period. The World Bank team provided

a training to its counterparts in Sindh on Fiscal Commitment and Contingent Liabilities (FCCL) and Fiscal

9

Management Framework (FMF). These instruments evaluate, monitor and report the entire range of fiscal

commitments and contingent liabilities which can be created using a PPP framework. Similarly, the team

also introduced the PPP Project Identification, Prioritization and Selection tool to Khyber Pakhtunkhwa’s

PPP Unit and Galiyat Development Authority (GDA) to support selective tourism development activities

planned under the Khyber Pakhtunkhwa Tourism Policy 2015.

3. Capacity Building of the Competition Commission of Pakistan (CCP)

The team has been extensively engaged with the CCP during the reporting period. Amongst other activities,

a report reviewing the newly adopted merger regulations was submitted to the CCP. Guidelines for the

economic analysis of mergers were prepared based on a review of the competition act and other relevant

legislation. These guidelines will improve the interaction between the merging parties and the CCP outside

the merger hearing process, adjust the time allocated to merger review according to the complexity of the

case, besides supporting the sound economic analysis of mergers.

Two sectoral competition assessments on the telecom and aviation sectors were initiated, which entail a

review of the impact of recent developments (regulatory or market driven) and market features on

competition dynamics within the two sectors.

The team also fielded a mission to Pakistan during September 2017. During this mission, a training on

‘market definition methodologies and merger assessments’ was delivered to the staff of the Competition

Commission of Pakistan. In addition, consultations were held with the relevant stakeholders (market

players, regulators etc.) of the two competition assessments on the objective, scope and preliminary findings

of the assessments.

4. Cascade Approach

The “cascade approach” will facilitate the creation of markets and address constraints to private sector

development through the mobilization of commercial financing. The team has initiated consultations with

the Government of Pakistan to operationalize the cascade. This approach will help expand the options

available to governments for financing and delivering on development goals.

5. Economic Empowerment of Women

A concept note on economic empowerment of women is being developed based on a corporate survey

which was undertaken to understand the drivers of employment of women in Pakistan. This concept note

has benefitted from WB cross sector consultations to ensure that the analytics prepared leverage cross-

sectoral synergies.

6. Corporate Governance

The team fielded two missions on the Corporate Governance (CG) Report on Observance of Standards and

Codes (ROSC) (March 2017 and July 2017) during the reporting period. The mission in March, which was

fielded jointly with Deloitte Pakistan, focused on the CG of listed companies. This also entailed a review of the newly amended Companies Act and resultant changes to the Corporate Governance Rules. The

mission in July focused on the implementation of the PSE Corporate Governance Rules. The final CG

ROSC report therefore will provide feedback on corporate governance in the private sector along with in

PSEs.

7. SOE Monitoring and Regulatory Framework

The team continued giving support to the Corporate Finance Unit of the Finance Department, Government

of Punjab in developing a reporting format, data requirements, and administrative regulations for provincial PSEs to report on financial performance and compliance with the Corporate Governance Rules issued by

the SECP.

10

Planned Activities

1. Jobs Diagnostic

• Finalize the worker and jobs analysis: incorporate poverty and jobs, informality, and skills based

on skill survey’s findings

• Constraints to female labor force participation: expand on the existing analysis to better

elaborate on such dimensions as home based work, high wage differentials in the manufacturing

sectors, and relationship between female employment, household labor supply, and poverty.

• Household enterprises: finalize analysis of informal employment and productivity of household

enterprises which employ a large share of the employed.

• Stock-take of government programs: complete the stock-taking to identify specific areas where

the WBG can focus its interventions in the short to medium term to maximize impacts on jobs.

• Review of labor regulations: compare Pakistan’s labor laws against benchmark countries and

analyze the current labor legislation in Pakistan at the federal and provincial levels.

• Jobs potential of ICT sector: finalize a short note estimating the jobs potential of ICT and

discussing policies to maximize the economic and social impact of ICT

2. PPPs

Technical assistance to the Sindh government in operationalizing the FCCL, including the development of

standard operating procedures for the FCCL, will continue. WB will also work closely with Khyber

Pakhtunkhwa’s PPP unit to identify initiatives in the tourism sector with potential PPP approach.

3. Capacity Building of the Competition Commission of Pakistan

• Guidelines on steps for exemptions authorization: review efforts and priorities of the CCP when

pursuing companies to apply for exemption authorizations and to strengthen the legal analysis on

Exemption Regulations with the economic analysis of efficiencies vs. competition restraints.

• Designing guidelines for market inquiries: improve the effectiveness of CCP market inquiries

by reviewing the guidelines for the collection and examination of market information.

• Drafting guidelines on pro-competitive design of tenders: minimize risks of bid rigging in the

public procurement process.

• Training on cartel investigations and abuse of dominance

• Competition assessments: on-going work on the two competition assessments

4. Cascade

The cascade will be operationalized in consultation with the Government of Pakistan.

5. Economic Empowerment of Women

The concept note will be finalized and subsequently sector specific analyses on high value services, retail

and apparel sectors will be commissioned.

6. Corporate Governance

• Dissemination of Accounting and Auditing ROSC. The recently completed accounting and

auditing ROSC will be disseminated in December 2017. The overall theme is to improve corporate

governance in the digital era.

• Training of Staff of Audit Oversight Board (AOB). Select staff of the AOB will be trained at the

Public Company Accounting Oversight Board (PCAOB), USA. This training will strengthen the

capacity of the audit oversight board in supervising auditors working with public interest entities.

• Audit Quality Survey. A baselines survey to assess audit quality and its impact on the capital

market in Pakistan will be commissioned. This report, amongst other things, will delineate

11

recommendations to improve corporate governance and audit performance of public interest

companies.

• Corporate Governance ROSC. The ROSC report will be completed and disseminated in the

coming reporting period.

7. SOE Monitoring and Regulatory Framework

Assist Implementation and Economic Reforms Unit to build its internal capacity to ensure the sustainability

of the Annual PSE Report.

12

Tax Policy and Administration Reforms

Program Development Objective: To increase tax collection by at least 2 percentage points of GDP (from

2013/14) and by no less than the average inflation rate.

Execution Mode: Bank Executed (BE) and Recipient Executed (RE)

Duration: December 2014- December 2018

Allocated Budget: USD $8,786,087

Disbursement till September, 2017: USD $1,579,912

Expenditure forecast for the next 6 months: BE: USD $2,500,000, RE: USD $4,900,000

Overview

The taxation component advanced rapidly with strong client demand during the first two years of

operations, however it is now at a strategic turning point. A series of comprehensive diagnostics sets out

detailed plans for the reforms planned over the implementation period. The WB has shared with Federal

(FBR) and provincial authorities in Sindh and Punjab key deliverables, including ICT strategy, change

management programs, implementation plans, tax audit strategy, track and trace project document, process

mapping and business process reengineering, among others. The WB is now placing more emphasis on

monitoring the implementation of the key pillars in the Tax Component. The Work Program is expected to

end in 2018 and thus going forward, the challenge is to sustain the reform agenda and successfully

implement the various reform initiatives.

TAGR Taxation Component Results Framework

Taxation

Ch

ild

Fun

d

- Increased tax collection by at least 2 percentage points of GDP (from 2013/14) and by no less than the average inflation rate. Fi

nal

Ou

tco

me

Inte

rmed

iate

Ou

tco

mes

- Elimination of Statutory Regulatory Orders granting concessionary tax exemptions; - Tax expenditure reduced by at least 0.5% of GDP; - Increase in number of active taxpayer by no less than 5% of per annum; - Annual ballot-based audits up from 0 to 15%; - Increased integration of FBR IT software.

Act

ivit

ies

1. Tax Policy - Building analytical capacity to improve the quality of the tax system and inform the budget process with realistic revenue targets.

2. Tax Administration - Strengthening core tax administration operations to improve control and facilitate compliance.

3. ICT Systems - Automation to facilitate compliance, improve access to information, support efficient processing of taxpayer filings and increase accountability.

4. Provincial Tax Systems- Support for tax policy and administration in Punjab & Sindh.

13

Implementation Performance and Achievements as of September, 2017

Strong client demand drove rapid implementation in the first two years of TAGR operations, led by a series

of diagnostic reports. A preliminary functional review of FBR fed into the work plan and strategy for

subsequent activities. Following the functional review, Key Performance Indicators were drafted to

measure ongoing FBR performance and were subsequently integrated into FBR’s own applications. A

costed IT strategic plan was developed and approved by FBR in December 2016. A process mapping of

key tax functions was developed and the associated recommendations integrated into the overall IT reform

plan. On audit, mentoring, training, and study tours were intensified and work is underway to introduce

risk-based audit frameworks at the federal and provincial levels. In Punjab, an assessment of the ICT

infrastructure for the Punjab Revenue Authority was conducted. Also, drafts of analytical studies were

produced. In Sindh, the World Bank completed in March 2017 the ICT assessment of SRB that included a

remediation plan with actions, and earlier in December 2016, submitted a draft property tax study.

Federal Board of Revenue

1. Tax Policy – Building analytical capacity to improve the quality of the tax system and inform the

budget process with realistic revenue targets.

Tax Policy Supported by TAGR Research: A new Recipient Executed project was recently approved.

This project component aims to support the establishment of a tax policy unit which is expected to

produce analytical work on revenue forecasting, tax expenditure, and tax compliance gap. The WB will

support this initiative by replicating similar work that is being conducted in Punjab.

2. Tax Administration – Strengthening core tax admin operations to improve control and facilitate

compliance

Tax Audit: The training program started in November 2015. Five workshops on basic audit techniques

were completed by June 2016, and four training workshops conducted between October 2016 and January

2017. A new three-day workshop on computer assisted audit techniques was held in March 2017.

Additionally, TAGR has provided mentoring of tax auditors on forensic audit and supported the review of

tax audit regulations, development of a risk assessment framework for tax audit wing and the elaboration

of tax audit policies. The mentoring activity covered Regional Tax Offices (RTOs) and Large Taxpayer

Unit (LTU) across the country (Islamabad, Rawalpindi, Lahore, and Karachi). The activity resumed in

October 2016. Subsequent mentoring missions were conducted in November and December 2016, and in

February, March, April, and May 2017. 49 LTU cases and 61 RTO cases were selected based on specific

criteria and completed under the supervision of Bank experts. In the LTUs, 30 cases were finalized

generating an additional revenue of approximately Rps 3.9 billion and 21 cases to be concluded soon with

a potential of 4.51 billion to be generated. Similarly, 31 cases were finalized at the RTOs generating an

additional Rps 656 million and 17 cases are close to be finalized with approximately Rps 417 million to be

generated.

To complement the training and the mentoring, one study tour covering audit techniques, risk-based

frameworks, computer-assisted solutions, and operations, was conducted in April, 2017. FBR and Punjab

Revenue Authority (PRA) officers visited Lebanon where they were hosted by the Lebanese tax

Administration. Another study tour, specialized in risk-based frameworks, was also conducted in May,

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2017 where middle and top management officers – including member audit and member IT from FBR -

visited the Australian Tax Administration.

TAGR also produced roadmap and a strategy guideline document on risk-based audit framework in

February and April 2017. The roadmap outlines the key steps required, the owner, and the expected

timeframe. The first step is to develop a risk-based strategy, and as such, a guiding document was developed

to guide FBR in outlining the strategy. The document covers what the strategy entails and outlines the key

parameters and questions FBR needs to consider while drafting its strategy.

International Taxation: The TAGR is supporting the FBR in the area of international taxation, to assist

Pakistan in working towards the OECD’s Automatic Exchange of Information (AEOI) Common Reporting

Standard. A mission prepared a detailed presentation on AEOI, attended by the FBR’s Unit Chief, the

International Taxation unit, and the IT and Policy wings. A roadmap for the adoption of the Common

Reporting Standard and a pilot program with a partnering jurisdiction were discussed at length.

In April, 2017, a technical assistance mission on international tax (transfer pricing) visited Pakistan with

the objective is to strengthen FBR’s Transfer Pricing knowledge, tax policy and building the

administrative capacity through training, case studies and audit assistance. In particular, this mission

focused on organizing training workshops on transfer pricing audit to build capacity through case studies

and mentoring. This reform agenda, some of it in collaboration with the OECD, has already began to yield

benefits. Pakistan has made a significant progress over the last 10 months. The country has signed the

Multilateral Competent Authority Agreement (MCAA) and have adopted all the required legislations. The

MCAA is a framework that provides a standardized and efficient mechanism to facilitate the automatic

exchange of information. Pakistan is now working on the confidentiality aspects and data safeguards

systems and procedures.

Other past achievements include:

• A detailed audit diagnostic report (December 2016). The report builds on the FBR functional review

and the process mapping exercise with the objective of identifying performance gaps, key challenges,

and corrective measures. The diagnostic examines the institutional and legal frameworks, operations,

and the overall compliance risk management framework.

• Key Performance Indicators (KPIs) and Management Information System (MIS). The MIS was

delivered and discussed in September 2016 and soon after installed and deployed in FBR servers with

the assistance of Pakistan Revenue Automation Limited (PRAL) personnel. The Bank provided a list

of recommendations, including the set-up of a small team within FBR to manage the KPI task, the

launch of a pilot process with a set of strategic indicators, and the imitation of the pilot. In December

2016, FBR decided to integrate the KPIs tool into their own applications, developing a new integrated

module using the provided KPIs model.

• Process Mapping of Tax Functions. A process mapping exercise covering key tax functions was

completed with the aim of assessing the existing baseline and identifying recommendations to

simplify procedures and improve productivity in each area. Recommendations were evaluated

according to complexity and impact to prioritize and deduce quick-wins. The recommendations were

summarized and communicated to FBR, which in early 2017 integrated the process mapping

recommendations into its overall IT Action Plan.

15

3. ICT Systems – Automation to facilitate compliance, improve access to information, support efficient

processing of taxpayer filings and increase accountability.

In April and June 2017, a series of visits were organized to review progress made by the IT Wing of the

FBR with respect to the Action Plan originally developed in three phases (including the progress of PRAL).

The status of the implementation of the original Action Plan (132 actions) was reviewed and 24 (18%) were

considered as either done or obsolete, 34 (26%) are in progress and actively being worked on by the FBR

or PRAL and 74 (56%) are still pending. In addition, in close collaboration with the FRB Chief Information

Technology, an updated document was prepared, called “Implementation plan for the Strategic Plan” as an

amendment to the current strategic plan that details how it will be implemented (including some process

mapping/reengineering actions)

A three-day workshop on Architecture and Integration was provided, 17 people from PRAL and FBR

attended

Other past achievements include:

• Building on a comprehensive IT strategic plan, the TAGR conducted a functional review of

the IRIS system which is the integrated revenue system that is supporting FBR businesses

processes. The review was carried out in September and October 2016 and key findings and

recommendations communicated to FBR.

• Discussion sessions were coordinated to receive comments on the functional review of the

IRIS system. The meetings focused on the responsibilities of a new architecture workforce, the

process for implementing a quality assurance review and an operation al feedback mechanism, and

the vision of completing new functionalities for systems.

• A series of visits were organized to review progress made by the IT Wing of the FBR with

respect to the Action Plan originally developed in three phases (including the progress of PRAL).

The status of the implementation of the original Action Plan (132 actions) was reviewed and 24

(18%) were considered as either done or obsolete, 34 (26%) are in progress and actively being

worked on by the FBR or PRAL and 74 (56%) are still pending. In addition, in close collaboration

with the FRB Chief Information Technology, an updated document was prepared, called

“Implementation plan for the Strategic Plan” as an amendment to the current strategic plan that

details how it will be implemented (including some process mapping/reengineering actions).

Punjab Province

Beneficiary institutions: Finance Department, Punjab Revenue Authority (PRA), Board of Revenue

(BoR), and Excise and Taxation Department (ETD).

Discussion on revenue analysis with departments and preparation of reforms (PRA, BoR and ETD):

The WB presented first drafts of studies, providing potential estimates and suggesting related reforms, in

the areas of General Sales Tax, Urban Immoveable Property tax, transaction taxes, Agriculture Income Tax

and professional tax. The findings of these studies were discussed during workshops with departments (both

provincial and field representatives). The studies are being updated and finalized based on the comments.

On the basis of the analytical studies, and extensive discussions with the departments, the Bank helped

prepare medium-term reforms roadmap for all three revenue authorities.

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The review of selected non-tax revenue sources and minor taxes is ongoing. In addition, a policy note on

motor vehicle tax potential is being prepared. These analytical studies will also inform the revenue

mobilization strategy of the province.

Key achievements are as follows:

Revenue Analysis: Regular mentoring and on-the-job training in revenue analysis has been provided to

Tax Reform Unit (TRU) staff (Finance Department). The Unit has produced quarterly, bi-annual, and

annual revenue reports. TRU is also providing support in budget making, revenue mobilization committee

meetings, and for high-level discussions on revenue measures with federal and other provincial

governments.

Audit - The Bank provided advice on a training program and on a risk-based system to select taxpayers for

audit. Punjab Revenue Authority (PRA) officials participated in the study tours to Lebanon and Australia

in April and June 2017.

Tax litigation handbook is developed, including case-studies to facilitate better understanding in this area.

Other areas: Support was also provided in organizing Punjab Tax Day event held in April 2017, by sharing

concept note for key awareness raising activities, and participation of international expert.

Other past achievements include:

• A functional review of the PRA was completed in 2016, assessing the strengths and weaknesses of

the PRA to guide interventions over the medium to long term. A human resources manual, audit

manual, and tax litigation manual were also developed.

• ICT assessment of PRA has been completed that includes a remediation plan with actions that PRA

can undertake to address related challenges. The Bank team reviewed the status of implementation

of recommendations in January-February 2017. In coordination with PRA’s IT Director, the team

prepared the outline of a strategic plan and documented the IT Vision of the department.

• An international property tax workshop was conducted for BoR and ETD in April/May 2016 in

Lahore. An international visit was organized for ETD officials to study UK’s property tax systems

(Bradford and Belfast) in February 2017. A workshop was also conducted with the officials of BoR

in March 2016 to discuss Agriculture Income Tax (AIT) reforms and related challenges.

Sindh Province

Beneficiary Institutions: Finance Department, Sindh Revenue Board (SRB), Board of Revenue (BoR),

and Excise and Taxation Department (ETD).

Key achievements are as follows:

Building analytical Capacity – The Bank team advised on the TORs of Tax Policy Unit (TPU) of the

Finance Department. After the recruitment of relevant staff, the team will work with them to build capacity

in forecasting, conducting revenue analysis and other related research for informed decision-making.

Related modules are being prepared.

17

HR assessment and audit – A risk-based audit model has been developed, which is being adapted for

Sindh Revenue Board. This will be complimented by training on a risk-based system. Further, the HR

assessment of SRB will be conducted in October 2017, which will help inform its HR strategy, HR manual

and training plan.

Agricultural Income Tax (AIT) – The Bank team has shared the first draft of the study. Additional data

is being collected from the field for estimating the potential in AIT.

Other past achievements include:

• In March 2017, an ICT Assessment was completed for SRB that included a remediation plan with

actions that SRB can undertake. The areas with opportunities to be improved are: Strategic

Thinking, IT Governance, Process Management, Software Engineering, HR development and

training.

• The first draft of the property tax study was submitted (to BoR and ETD) in December 2016. The

study highlights the key problems of underassessment, an incomplete valuation roll, and lack of

automation, and makes recommendations for improvement

An international workshop was conducted for SRB officials on subnational taxation (especially GST and

property taxes). Also, international visits were arranged to study sales tax administration of India (in

2015) and property tax administration of UK (Bradford and Belfast; in February 2017).

Progress towards Results Framework Indicators (as of September 2017)

Outcome

Level

Target 2015-17 Progress

Final

Outcome

Increased tax collection by

at least 2 percentage points

of GDP (from 2013/14)

and no less than the

average annual inflation

rate.

On track.

Baseline 2013-14: 10.5% of GDP.

Projection for 2016-17: 12.8%of GDP.3

Increase of 2.3%

Intermediate

Outcomes

Elimination of Statutory

Regulatory Orders (SROs)

granting concessionary tax

exemptions.

Achieved.

Legislation was passed permanently limiting the

issuance of SROs.

Tax expenditure reduced

by at least 0.5% of GDP.

Achieved.

The government has eliminated tax concessions and exemptions amounting to about 0.9 percent of GDP

since 2014.

Increase in number of

active taxpayers by no less

than 5% per annum.

Partially achieved.

2015-2016

Registered taxpayers: 3,802,008 (tax year 2015)

Tax filings: 1,025,084 (up to June 2016)

Tax payments (incl. Customs): Rs 2,565,744 million

Tax payments (excl. Customs): Rs 2,223,867 million

3 IMF Staff Report for 2017 Article IV Consultations, Tables 4a and 4b.

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Outcome

Level

Target 2015-17 Progress

2016-2017

Registered taxpayers: 3,977,998 (tax year 2016)

Tax filings: 1,186,551 (up to June 2017)

Tax payments (incl. Customs): Rs 2,565,744 million

Tax payments (excl. Customs): Rs 2,749,151 million

Active taxpayers rose by 4.6%

Net Revenues increased by 7.1%. (including customs)

Annual ballot-based audits

up from 0% to 15%

Indicator adjusted. The TAGR is supporting the shift from ballot-based

audits to risk-based audit – an international good

practice. In 2017, risk parameters were introduced by

FBR and cases selected accordingly. A full risk-based

model is in the design stage.

Increased integration of

FBR IT software.

On track.

The FBR has an approved ICT Strategic Plan. Actions

will be monitored following a detailed Implementation

Plan.

Planned Activities

Federal Board of Revenue

ICT:

• October-December 2017 : Monitoring and workshops - FBR/PRAL

• October 2017: HR assessment in SRB

• Jan-Mar 2018: Support on ICT Strategy – SRB

Audit:

• October 2017: Resumption of mentoring missions

• October/November 2017: Support on Risk-based Audit and Compliance Program

• December 2017 onwards: Possible resumption of training workshops

• Early 2018: Oversee the introduction and automation of risk based audit

International Taxation

• Analyze the draft primary and secondary legislation and provide comments

• Plan workshops focusing on case studies, on theory, and organizational issues

Provinces: At the provincial level, the team will continue to support partners in Punjab and Sindh with

revenue policy and administration reforms.

Punjab

Finance Department (Tax Reform Unit; TRU)

• Review of minor taxes and non-tax revenues (completing the report)

• Review of current revenue monitoring and reporting mechanism

• Develop modules for training on revenue analysis and forecasting techniques for TRU and all

provincial revenue bodies; and relevant international study tour

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• Conduct key stakeholders workshop to inform the process of updating and formalizing the

strategy and discuss implementation arrangements

Punjab Revenue Authority (PRA)

• Support in adapting the risk-based audit model for PRA and provide trainings on risk-based

system

• Review of current laws

• Support in piloting the concept of ‘populated tax returns’, as part of PRA’s electronic invoice

monitoring system. The Bank will share global experience, and organize session with Spanish tax

authority to demonstrate real time functioning of the system

• Support provincial coordination for revenue mobilization

Excise and Taxation department (ETD)

• Produce a policy note analyzing potential in motor vehicle tax and related reforms

• Conduct a business process mapping

• Conduct an HR assessment to inform HR strategy and develop training program

Board of Revenue (BOR)

• Conduct a functional review of the organization (incl. strategic, HR and IT assessments)

• Support development of HR manuals and training plans

Sindh

Finance Department (Tax Policy Unit; TPU)

• Conduct studies on GST, transaction taxes, motor vehicle tax, non-tax revenues and minor taxes

• Provide (after the establishment of TRU) on-the-job mentoring and training on revenue analysis

• Develop an assessment of tax burden, and concept note for field experimentation to improve

voluntary compliance in collaboration with the TRU

Sindh Revenue Board (SRB) and Excise and Taxation Department (ETD)

• Support in adapting the risk-based audit model and providing trainings on risk-based system

• Complete the HR assessment to inform HR strategy, and develop training plan

• Support in designing the survey for professions tax (ETD)

• Study tour on Audit and Value-Added Tax to Lebanon (SRB, November 2017)

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