Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: {PAD2047}

THE MULTIDONOR TRUST FUND FOR

KHYBER PAKHTUNKHWA, FEDERALLY ADMINISTERED TRIBAL

AREAS, AND BALOCHISTAN

PROJECT PAPER

ON A

PROPOSED RESTRUCTURING AND ADDITIONAL GRANT

IN THE AMOUNT OF US$19.0 MILLION

TO THE

ISLAMIC REPUBLIC OF PAKISTAN

FOR THE

ECONOMIC REVITALIZATION OF KHYBER PAKHTUNKHWA AND FEDERALLY

ADMINISTERED TRIBAL AREAS PROJECT (ERKF)

March 24, 2017

Trade & Competitiveness Global Practice SOUTH ASIA

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

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CURRENCY EQUIVALENTS

(Exchange rate effective December 15, 2016) Currency unit = Pakistani Rupee (PKR)

US$ = PKR 104.765 US$ = GB£ 1.213

US$ = €1.0914 FISCAL YEAR

July 1 – June 30

ABBREVIATIONS AND ACRONYMS

AF BDS BPC CIPK CPS ERKF ERR ESMP ESSAF FATA FCV FDA FM FY GoKP GoP GRDC IBRD IDA IE ISDS ISR IUFR KP M&E MDTF MG MMC MoU NPV OM PCD PCNA PDO PID PKNF PKR PMI PMU

Additional financing Business Development Services Business Plan Competition Competitive Industries Project for Khyber Pakhtunkhwa Country Partnership Strategy Economic Revitalization of KP and FATA Economic rate of return Environmental and Social Management Plan Environmental and Social Screening and Assessment Framework Federally Administered Tribal Areas Fragility, conflict, and violence FATA Development Authority Financial management Financial/fiscal year Government of Khyber Pakhtunkhwa Government of Pakistan Grant Review and Decision Committee International Bank for Reconstruction and Development International Development Association Implementation entity Integrated Safeguards Datasheet Implementation Status and Results Report Interim Unaudited Financial Report Khyber Pakhtunkhwa Province Monitoring and evaluation Multi-Donor Trust Fund for KP/FATA/Balochistan Matching grant Mohmand Marble City Memorandum of Understanding Net present value Operations Manual Project Closing Date Post-Crisis Needs Assessment Project Development Objective Project Information Document Multi-Donor Trust Fund for Crisis Affected Areas Pakistani Rupee Project Monitoring Indicator Project management unit

PPP PSC PU RF RVP SAR SMEs SMEDA SORT START TDP TF TIC TPMA US$ WBG WDR

Public Private Partnership Project Steering Committee Project Unit Results Framework Regional Vice President South Asia Region Small and medium enterprises Small and Medium Enterprise Development Authority Systematic Operations Risk-rating Tool System to Assess and Reward Talent Temporarily displaced person Trust Fund Tourist Information Center Third-party Monitoring Agent United States dollars World Bank Group World Development Report

Vice President: Annette Dixon Country Director: Patchamuthu Illangovan

Senior Global Practice Director: Practice Manager/Manager:

Anabel Gonzalez Esperanza Lasagabaster

Co-Task Team Leaders: Kiran Afzal, Connor Spreng

PAKISTAN

ADDITIONAL GRANT TO THE ECONOMIC REVITALIZATION OF KHYBER PAKHTUNKWA AND FEDERALLY ADMINISTERED

TRIBAL AREAS PROJECT

CONTENTS

Page Numbers

I. Introduction 1

II. Background and Rationale for Additional Financing 2

III. Proposed Changes 5

IV. Appraisal Summary 17

19

V. World Bank Grievance Redress

Annex 1. Revised Results Framework and Monitoring Indicators 20

Annex 2. Components Cost Allocations (Original and Revised) 27

Annex 3. Economic and Financial Analysis

Annex 4. Gender Action Plan: Proposed Activities

28

31

Annex 5. Implementation Structure

32

ADDITIONAL FINANCING DATA SHEET Pakistan

Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas (P160445) SOUTH ASIA

GTC06 .

Basic Information – Parent Parent Project ID: P124268 Original EA Category: B - Partial Assessment

Current Closing Date: 31-Mar-2017

Basic Information – Additional Financing (AF)

Project ID: P160445 Additional Financing Type (from AUS): Restructuring, Scale Up

Regional Vice President: Annette Dixon Proposed EA Category: B

Country Director: Patchamuthu Illangovan Expected Effectiveness Date: 30-Mar-2017

Senior Global Practice Director: Anabel Gonzalez Expected Closing Date: 30-Jun-2020

Practice Manager/Manager: Esperanza Lasagabaster Report No: PAD2047

Team Leader(s): Kiran Afzal, Connor P. Spreng

Approval Authority RVP Decision Please explain The Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas (ERKF) Project was prepared under OP/BP 8.00 as an emergency response lending operation entirely funded through the Multi-Donor Trust Fund (MDTF) for Khyber Pakhtunkhwa (KP), Federally Administered Tribal Areas (FATA), and Balochistan. The final approving authority was the Regional Vice President (RVP). Since this is an Additional Financing of the ERKF Project, the approval authority in this case will remain the same, that is, the RVP for the South Asia Region.

Borrower Organization Name Contact Title Telephone Email Economic Affairs Division Tariq Pasha Secretary 0092519212769 secretary@ead.gov.pk Project Financing Data - Parent MDTF (Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas - P124268) (in US$, millions) Key Dates

Project Ln/Cr/TF Status Approval Date Signing Date Effectiveness

Date Original Closing Date

Revised Closing Date

P124268 TF-99175 Effective 22-Aug-2011 11-Oct-2011 11-Oct-2011 30-Jun-2015 31-March-

2017 Disbursements

Project Ln/Cr/TF Status Currency Original Revised Cancelled Disbursed

Undisbursed

% Disbursed

P124268 TF-99175 Effective US$ 20.00 20.00 0.00 20.00 0.00 100.00

Project Financing Data - Additional Financing (Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas - P160445) (in US$, millions) [ ] Loan [X] Grant [ ] IDA Grant [ ] Credit [ ] Guarantee [ ] Other Total Project Cost: 19.00 Total Bank Financing: 0.00 Financing Gap: 0.00 Financing Source – Additional Financing (AF) Amount Partnerships and Knowledge Work 19.00 Total 19.00 Policy Waivers Does the project depart from the CAS in content or in other significant respects? No

Does the project require any policy waiver(s)? No Team Composition

Bank Staff Name Role Title Specialization Unit Kiran Afzal Team Leader

(ADM Responsible)

Senior Private Sector Specialist

SME Financing, Financial Sector Development

GTC06

Connor P. Spreng Team Leader Senior Economist Trade Policy, Private Sector Development

GTC06

Qurat ul Ain Hadi Financial Management

Financial Management Specialist

GGO24

Rehan Hyder Procurement Senior Procurement Specialist

GGO24

Danielle Malek Roosa Counsel Senior Counsel LEGES Seble Berhanu Team Member Legal Analyst LEGES

Faly Dialo Team Member Finance Officer WFALA

Ehtesham-ul Haq Team Member Program Assistant SACPK Zulfiqar Ali Raza Team Member Program Assistant SACPK

Anwar Ali Bhati Team Member Financial Analyst SACPK

Imran-ul Haq Safeguards Specialist

Consultant GSU06

Marianne Ellen Anderson

Team Member Results Measurement Specialist

Monitoring and Evaluation (M&E)

CBCD3

Michael Olavi Engman

Team Member Senior Economist Private Sector Development

GTC06

Wouter Schalken Team Member Senior Private Sector Specialist

Tourism GTC09

Martin Serrano Counsel Senior Counsel LEGES Mirza Omer Baig Team Member Consultant SACPK Mohammad Omar Khalid

Team Member Consultant GEN06

Muhammad Waqas Mushtaq

Team Member Consultant SACPK

Rahat Jabeen Environmental Specialist

Environmental Specialist

GEN06

Reshma Aftab Team Member Analyst Gender GTCSA Salma Omar Safeguards

Specialist Senior Social Development Specialist

GSU06

Sarmad Hussain Khan Team Member Consultant Project Management GTC06 Sohail Younas Moghal Team Member Consultant Value Chains GTC06 Locations Country First Administrative

Division Location Planned Actual Comments

Pakistan North-West Frontier Province

KP X

Pakistan FATA FATA X Institutional Data

Parent (MDTF-Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas - P124268) Practice Area (Lead) Trade & Competitiveness Additional Financing Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas ( P160445 )

Practice Area (Lead) Trade & Competitiveness

Consultants (Will be disclosed in the Monthly Operational Summary) Consultants Required? Consultants will be required

1

I. Introduction 1. This Project Paper seeks the approval of the Regional Vice President (RVP) of the South Asia Region (SAR) to (i) provide an additional grant in the amount of US$19.0 million to the Pakistan Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas (ERKF) Project [P124268] [TF099175]; and (ii) carry out Level 1 restructuring of the ERKF project, with changes to the Project Development Objective (PDO), project components and costing, results framework (PDO indicators and intermediate results indicators), and project closing date (PCD). This document provides the justification for and details of the additional financing (AF) and Level 1 restructuring. 2. The ongoing US$20 million ERKF project became effective on October 11, 2011, and had a PCD of June 30, 2015. Its PDO was “to support the Government of Pakistan (GoP) in the economic recovery and revitalization of the crisis-affected areas of Khyber Pakhtunkhwa (KP) and Federally Administered Tribal Areas (FATA), by creating sustainable employment opportunities through rehabilitation of small and medium enterprises (SMEs), investment mobilization, and institutional capacity building.” The original ERKF project had three components: (i) SME Development; (ii) Attracting Investment from the Diaspora; and (iii) Institution Building to Foster Investment and Implement Regulatory Reforms.

3. At the request of the GoP, the original PCD was extended four times through a Level 2 restructuring. To allow sufficient time for processing and appraising the AF, a fifth Level 2 restructuring was processed to extend the PCD to March 31, 2017. The proposed additional grant would help finance (i) a scale-up of the project’s matching grant (MG)1 activities in KP and FATA, and (ii) support to the competitive sectors of KP and FATA. The revised PCD of the Project and AF will be June 30, 2020.

4. The ERKF project has surpassed most of its end targets by providing MGs worth US$13.2 million to 1,601 (FATA 408, KP 1,193) crisis-affected SMEs (including 32 women entrepreneurs) and creating 8,843 direct jobs2 (including 126 jobs for women) across KP and FATA. It is noteworthy that the project supported the provision of public services through private providers by offering MGs to 25 micro-hydropower projects in remote districts of KP that were previously off-grid. These projects are providing electricity to small towns and villages, serving well over 2,000 households that would otherwise have no access to electricity. The project has also supported 45 K-12 schools in KP and FATA that have enrolled more than 20,000 students, of whom more than 6,000 are girls. The schools employ more than 1,000 teachers, of whom more than one-third are women.3 In addition, the MGs have supported 15 hospitals and laboratories in the region, serving more than 20,000 patients per month.

5. According to the project’s latest Implementation Status and Results Report (ISR), implementation progress and progress toward achieving the PDO are satisfactory (Table 1). The project’s financial management (FM) and procurement ratings have been consistently satisfactory. The environmental and social safeguards compliance is presently rated Moderately Satisfactory; the client has been asked to address the gaps in the Quarterly Progress Reports by providing additional details and updating the safeguards checklists to ensure that all the activities of the project are adequately covered under the relevant safeguards documents. The project has disbursed US$20 million (100 percent disbursement), and the cumulative expenditure as of February 28, 2017, is US$18.5 million (Table 2).

1For the purpose of the ERKF project, an MG is defined as a short-term temporary subsidy providing immediate financial support and/or business development services (BDS) to crisis-affected private sector enterprises on a cost-sharing basis. BDS usually include a wide variety of non-financial services such as labor and management training; extension, consultancy, and counseling; marketing and information services; and technology development and innovation. 2 Results as of November 30, 2016. 3Like the number of households receiving electricity, patients receiving health services, or students receiving education, the number of teachers employed is tracked but not directly counted in the project monitoring and evaluation framework, nor counted in the “jobs created” category, since the link between a school’s receiving the MG and the teachers being employed is not direct—for example, some of the teachers were employed before the school received the grant.

2

Table 1. Project Ratings as of November 30, 2016

Components (under original grant) Ratinga Progress Rating

Component 1: SME Development (US$14 million)

HS Progress toward achievement of PDO S

Component 2: Attracting Investment from the Diaspora (US$2 million)

MS Implementation HS

Component 3: Institution Building to Foster Investment and Implement Regulatory Reforms (US$4 million)

S Project management S

Environmental Safeguards Category B Overall safeguards MS

Table 2: Cumulative Expenditure (US$ millions) – Allocations as of February 28, 2017

Component Original October 2011

Revised June 2016

Expenditure February 28, 2017

Utilization percentage (%)

Component 1: SME Development 14 14 13.6 97 Component 2: Attracting Investment from the Diaspora 2 0.8 0.8 100 Component 3: Institution Building to Foster Investment and Implement Regulatory Reforms 4 5.2 4.1 78.8 Total 20 20 18.5 92.5

6. Partnership arrangements. The AF is being sponsored through the Multi-Donor Trust Fund (MDTF) for KP, FATA, and Balochistan, which has 13 donors: Australia, the European Union, Denmark, Finland, Germany, Italy, the Netherlands, Norway, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. In addition, the Government of Khyber Pakhtunkhwa (GoKP) is investing funds from the Annual Development Program in several activities for developing the tourism sector. The AF will complement these by supporting the tourism sector through activities under a new Component 4.

II. Background and Rationale for Additional Financing

7. Fragility, conflict, and violence (FCV) are among the most urgent global policy issues today. Approximately 2 billion people live in countries where FCV and the correlation between fragility and poverty4 have hampered progress towards the Millennium Development Goals (MDGs)5. The report ‘Forward Look: A Vision for the World Bank Group in 20306 mentions that the World Bank Group (WBG) places particular emphasis on countries affected by FCV, and thus will accord these countries a stronger share in IDA18, which will cover 2017 to 2020. This will strengthen the WBG portfolio in FCV-affected areas, since WBG interventions in such areas are 4 On average, a country that experienced major violence from 1981 to 2005 has a poverty rate 21 percentage points higher than a country that saw no violence. 5O’Meally, M., John, J. et al. (2016). Social Service Delivery, Political Economy and Forms of Violence: Explaining Progress against the Odds – A Synthesis Report. Funded by WBG-Australia “Partnership for South Asia” TF and the WBG-Korea “TF to Support Economic and Peace Building Transitions.” Version of June 24, 2016. 6 Forward Look: A Vision for the World Bank Group in 2030 (DC2016-0008), September 20, 2016

3

typically supported through trust funds (TFs), with limited involvement of the other financing instruments offered by IDA and IBRD. Pakistan is not a fragile state however few areas within the country are sensitive due to the challenges posed by previous incidents of militancy. 8. The province of KP and the FATA region are located in the country’s North-West and are home to an estimated 30 million people, 16 percent of Pakistan’s total population. This area faced severe crises due to the activities of militants, particularly between 2007 and 2009, mostly along the border with Afghanistan. The conflict has intensified the vulnerability of the region which is already one of the poorest regions of Pakistan. KP and FATA lag behind other provinces across a wide range of social and economic indicators, and the lag is even more pronounced when viewed through a gender lens.7 The militants destroyed the livelihoods of locals, caused large-scale displacement,8 damaged infrastructure, and worsened the region’s business connectivity with the rest of the country. The 2010 Post-Crisis Needs Assessment (PCNA) Report9 paved the way for development support to the region, and the MDTF was established in October 2010.

9. Through the MDTF, the WBG has been administering projects in this crisis-affected areas in three key thematic areas: (i) jobs and economic growth, (ii) service delivery, and (iii) governance. The WBG’s growing portfolio in the region includes projects for private sector development, such as the ERKF project, Competitive Industries Project for KP10 (CIPK), and two pipeline IDA projects on connectivity, trade, and tourism.

10. The proposed AF will scale up the ongoing job creation efforts of the ERKF project, primarily through MGs and also through select support for the value chains11 in those sectors of the economy, such as tourism, that have a high potential for creating jobs. The AF is aligned with the overarching goal of the WBG’s Country Partnership Strategy (CPS) 2015-19 to help Pakistan accelerate poverty reduction and build shared prosperity, with a specific focus on the crisis-affected regions of FATA, KP, and Balochistan.12 The AF would directly contribute to the private sector development pillar of the CPS by recognizing the critical role of private sector enterprises in responding to development challenges and reaching out to marginalized groups. The AF activities also incorporate two key themes: promoting gender equity and increasing the productivity of small businesses. The AF is a direct contributor to the CPS outcome of reduced vulnerability for groups at risk, including temporarily displaced persons (TDPs), as it builds on the interventions and lessons learned under Round I of the MDTF. 11. The specific reasons and justification for seeking an AF for the ERKF project are as follows.

(i) The ERKF project has performed well by creating jobs and rehabilitating the region’s economy despite

the difficult implementation conditions. It has contributed significantly toward achieving Strategic Objectives 1 and 2 of the 2010 PCNA Report13 by restoring both livelihoods and citizens’ trust in the state. This was confirmed by the Third-Party Monitoring Agent (TPMA) reports of the ERKF project. By awarding MGs to SMEs, the project supported the private sector in providing key public goods and services, especially in the remote areas of KP and FATA.

(ii) There is an increasing evidence that providing job opportunities is an effective response to post-conflict situations as it revitalizes the economy, restoring peace and citizen-state trust. The 2011 World

7 Illiteracy levels are as high as 97 percent for women in FATA, compared to 71 percent for men; the comparative figures for KP are 68 percent for women and 33 percent for men. 8 600,000 people were displaced from FATA. 9The 2010 PCNA Report for the KP-FATA region was done jointly by the GoP, WB, European Union, Asian Development Bank, and United Nations. 10 Closed in December 2015. 11 A value chain describes the sequence of productive activities that firms and workers perform to bring a good or service from its conception to end-use and beyond. In a global context, the value-added activity (goods and services) performed in one country affects others. 12The CPS for the Islamic Republic of Pakistan for FY2015–19 (Report No. 84645-PK), April 4, 2014. 13Strategic Objective 1: Build responsiveness and effectiveness of the State to restore citizen trust; Strategic Objective 2: Stimulate employment and livelihood opportunities.

4

Development Report (WDR), on “Conflict, Security and Development,” concludes that building capable and legitimate institutions, ensuring citizen security and justice, and creating jobs are essential to reducing violence. This was supported by the 2013 WDR, on “Jobs,” which finds that “poverty falls as people work their way out of hardship and as jobs empower women to invest more in their children. Efficiency increases as workers get better at what they do…Societies flourish as jobs foster diversity and provide alternatives to conflict.”14

(iii) Almost 245,246 temporarily displaced families —72 percent of the total families (338,270) —have

recently returned to their Agencies/towns in FATA.15 It is important to provide returning TDPs with livelihood opportunities, especially in North Waziristan and Khyber Agency (Barra), which have received the highest numbers of TDPs (104,000 and 92,000 families, respectively). Given the extent of destruction in the affected areas, three issues require immediate attention to avert renewed collapse of law and order: provision of food and water, restoration of livelihoods, and reconstruction of housing. The AF will facilitate the immediate restoration of livelihoods by supporting SMEs, including the firms that provide such basic services as electricity, education, and health services.

(iv) The client requires additional resources to address the evident demand for MGs. There is a backlog of

6,372 applications (FATA 5,100; KP 1,272) for MGs worth US$146 million (FATA US$ 116 million; KP US$30 million). KP and FATA would now prefer to require fresh applications for the MGs, since applications in the backlog date back to 2014 and the situation has changed with the repatriation of TDPs in FATA. Also, a large number of applications were submitted after the cut-off date of April 30, 2014. The AF will have to mitigate the reputational risks associated with disregarding the backlog. Therefore, when inviting fresh applications, it will be communicated clearly that previous applicants whose demands could not be addressed are encouraged to reapply between April and September 2017.16 A wide dissemination of this message, both in Urdu and English will be ensured.

(v) By including a new component (Component 4), the AF will be able to direct resources toward the

economic sectors identified in the growth strategies of KP and FATA, such as tourism, agribusiness and marble. Additionally, the project will support the GoKP’s Public Private Partnership (PPP) team which is striving to crowd-in private capital for feasible projects.

(vi) The WBG had considered alternative approaches before receiving the client’s request. Two separate

job creation programs for KP and FATA were about to be appraised; however, shifts in donors’ priorities meant that they were no longer able to provide the expected resources. Thus the two pipeline programs were dropped, and this AF is being processed instead. With the reduction in overall MDTF allocations, the clients are also willing to leverage ERKF’s model and add the available funds to the project. Given the urgent situation, especially with regard to the repatriation of TDPs, the AF will help expedite the utilization of resources thus creating additional and much-needed job opportunities.

12. If the MDTF receives more funds, the project activities could be scaled up; however, the AF of US$19 million alone will not be able to fully meet the expected demand from the SMEs. 13. The design of the ERKF project presents the following key advantages:

(a) It is an economic rehabilitation growth program that created strong linkages with the private sector

(local chambers of commerce, business associations, private sector training providers including 14Blog: “About the 2013 WDR on Jobs.” WB external webpage accessed on November 3, 2016 at http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTWDRS/EXTNWDR2013/0,,contentMDK:23044836~pagePK:8258258~piPK:8258412~theSitePK:8258025,00.html 15 Source: Website of FATA Disaster Management Authority http://www.fdma.gov.pk/tdps-statistics-as-of-22-03-2016 16 Application submission period to be confirmed at the completion of AF negotiations.

5

Business Edge,17 etc.). There is strong commitment from the counterparts to strengthen the project outreach mechanisms and to target previously inaccessible areas (including Barra, South Waziristan, North Waziristan, and Orakzai) in FATA and women workers/entrepreneurs.

(b) Implementation readiness. The proposed AF meets the following readiness criteria:

(i) The implementation agencies of KP and the Small and Medium Enterprise Development Authority (SMEDA) are staffed and operational. However, in FATA the employment contracts of the project staff were not renewed beyond December 31, 2016. A disbursement condition has been included in the AF Grant Agreement to ensure the appointment of key staff in FATA within two months of the AF’s effectiveness.

(ii) The procurement and FM arrangements are in place in KP and SMEDA, with agreed manuals of procedures. The procurement plans are ready, and the audit arrangements have been agreed with the client. Key fiduciary and safeguards assessment recommendations have been taken into consideration in the AF design and costs.

(iii) The monitoring and evaluation (M&E) system is in place, with agreed indicators and a data collection strategy. An impact evaluation will also be carried out for the MGs. The MDTF is in the process of hiring a TPMA for the duration of Round II. (i.e., until June 2020).

(iv) This project falls in environmental category B. The AF activities do not have adverse safeguards implications. The possible impact on the environment and society, along with proposed management and mitigation measures, was identified in the Environmental and Social Management Plan (ESMP) for the project, which was disclosed. The combined Project Information Document (PID) and Integrated Safeguards Data Sheet (ISDS) for the AF was also disclosed.

(v) There are no conditions for grant effectiveness. (vi) Key risks to achieving the PDO have been identified and, as feasible, risk mitigation measures are

included in the AF implementation arrangements.

(c) The revisions proposed as part of the AF build on the lessons learned from the implementation of the project between 2011 and 2016. These include changes in the design of Component 1 (SME Development) to ensure greater transparency in the award of MGs (explained in Section III).

(d) The AF activities will support the clients’ efforts to increase women beneficiaries through MGs and through training and capacity-building. Accordingly, changes have been introduced in the OM to provide necessary guidance to the client. The results indicators include gender disaggregation where possible (see Annexes 1 and 4 for the Results Framework and the gender action plan, respectively).

14. The proposed AF complies with OP 10.00, Investment Project Financing, as (i) the project has been rated Satisfactory for the Development Objectives for a minimum of 12 months; and (ii) there is full compliance with the key grant covenants, including the audit and financial reporting requirements. 15. In the Systematic Operations Risk-rating Tool (SORT), the overall project risk is rated Substantial and “Other (Security and Stability)” risk is rated High, given the post-conflict situation in the country’s North-West. SORT and more details on the risks are discussed later in this document.

III. Proposed Changes

Summary of Proposed Changes

The changes entailed in the AF combined with the Level 1 restructuring are as follows: 1. Revision of the PDO.

17 Program of the International Finance Corporation.

6

2. Revisions in the Project Monitoring Indicators (PMIs) and the Project Results Framework (RF). 3. Addition of a new component (Component 4), “Supporting the Competitive Sectors.” Component 2

(“Attracting Investment from the Diaspora”) will not disburse under the AF. 4. Instead of a tripartite Memorandum of Understanding (MoU) between SMEDA, KP and FATA, two

MoUs will be signed for the implementation of Component 1. One between KP and SMEDA and another between FATA and SMEDA. This will ensure better administration of the MGs.

5. At the client’s request, the name of the Grants Review and Monitoring Committee has been changed to Grants Review and Decision Committee (GRDC).

6. New disbursement conditions and legal covenants are being added to address any unforeseen delays in (i) the signing of the MoUs with SMEDA, (ii) staffing of FATA-PMU, and (iii) SMEDA receiving its operational expenses from KP and FATA.

7. A legal covenant has also been added to ensure the appointment of an internal auditor within six months of AF effectiveness.

The details of these changes are captured in the relevant sections and annexes of this paper. Change in Implementing Agency Yes [ ] No [ X ]

Change in Project's Development Objectives Yes [ X ] No [ ]

Change in Results Framework Yes [ X ] No [ ]

Change in Safeguard Policies Triggered Yes [ ] No [ X ]

Change of EA category Yes [ ] No [ X ]

Other Changes to Safeguards Yes [ ] No [ X ]

Change in Legal Covenants Yes [ ] No [ X ]

Change in Loan Closing Date(s) Yes [ X ] No [ ]

Cancellations Proposed Yes [ ] No [ X ]

Change in Disbursement Arrangements Yes [ X ] No [ ]

Reallocation between Disbursement Categories Yes [ ] No [ X ]

Change in Disbursement Estimates Yes [ X ] No [ ]

Change to Components and Cost Yes [ X ] No [ ]

Change in Institutional Arrangements Yes [ X] No [ ]

Change in Financial Management Yes [ X ] No [ ]

Change in Procurement Yes [ ] No [ X ]

Change in Implementation Schedule Yes [ X ] No [ ]

Other Change(s) Yes [ ] No [ X ]

Development Objective/Results PHHHDO

Project’s Development Objectives Original PDO

7

To support the Government of Pakistan in the economic recovery and revitalization of the crisis-affected areas of Khyber Pakhtunkhwa (KP) province and Federally Administered Tribal Areas (FATA), by creating sustainable employment opportunities through rehabilitation of small and medium enterprises (SMEs), investment mobilization, and institutional capacity building. Change in Project's Development Objectives PHHC Explanation The original PDO is being revised through the Level 1 Restructuring to reflect the changes in the original ERKF project and its RF and indicators. The revised PDO is for both the original ERKF project and its AF. Proposed New PDO - Additional Financing (AF) To support the Government of Pakistan in creating sustainable employment opportunities, generating private sector investment, and laying the foundations for the future development of selected economic sectors in Khyber Pakhtunkhwa and Federally Administered Tribal Areas.

Change in Results Framework PHHCRF Explanation: The RF is being revised, since the scale of Component 1 is being enhanced to give preference to previously inaccessible areas in FATA and a new component is being added. On the basis of the lessons learned and inputs received from the TPMA, some of the original PMIs and intermediate outcome indicators for the components are either being revised (including revisions in the indicator title and value) or dropped (tagged as “marked for deletion” in the revised RF). New PMIs for Components 1 and 4 have been added. Component 2 will not disburse under the AF; however, project performance on the relevant indicator (US$10 million investment attracted from the diaspora) will continue to be monitored over the life of the AF. The name of this indicator has been revised to allow the client to also capture the investments mobilized from private enterprises by the MGs. The PDO indicators and PMIs are now aligned as one set of indicators in the RF. All the PMIs for the ERKF project (including the AF) are listed below: 1. 13,500 direct jobs (including 315 for women) created by the enterprises supported through the project

(indicator value revised). 2. US$10 million investment attracted from the diaspora and private enterprises (indicator title revised). 3. 75 percent of the MG beneficiaries operational and productive at the completion of the project (indicator

now a PMI). 4. Investment facilitation authorities established in FATA and KP (fully achieved, and no change in the

indicator). 5. 50 private enterprises start using Tourism Management System developed by the project (new indicator). 6. 2,500 SMEs directly benefited by the grants program, of which 5 percent are owned/managed by women

entrepreneurs (indicator value revised). 7. 1,000 SMEs access business development services offered under the project (indicator value revised,

and this is now an intermediate outcome indicator).

The revised PMIs and the above-mentioned changes are explained further in the RF and Table 3 (Annex 1).

Compliance

Covenants - Additional Financing ( Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas - P160445 ) Source of Funds

Finance Agreement Reference

Description of Covenants Date Due Recurrent Frequency Action

8

PKNF Section I.B of Schedule 2 of GA.

KP, FATA and SMEDA to develop and adopt an updated OM within two months of AF effectiveness.

New

PKNF

Section I.A, paragraph 4 of the Schedule of PA of FATA and KP

The funds earmarked for SMEDA to be transferred by PMUs KP & FATA into the subaccount maintained by SMEDA PU within 15 business days after submission of cash forecast acceptable to the WB.

Quarterly New

PKNF Schedule 2 Section II.B (4) of GA.

The recipient shall engage a firm of chartered accountants as internal auditors within six months after AF effectiveness.

New

Conditions

Source Of Fund Name Type PKNF MoU Signing. Disbursement Description of Condition Section IV.B 1A(b) of Schedule 2 of GA: No disbursements under category (3) until KP and SMEDA have signed an MoU and under category (4) until FATA and SMEDA have signed an MoU. Source of Fund Name Type PKNF FATA PMU Staffing Disbursement Description of Condition Section IV.B 1A(c) of Schedule 2 of GA: No disbursements under category (4) until the FATA-PMU has appointed a Project Director and financial management specialist.

Risk PHHHRISKS

Risk Category Rating (H, S, M, L) 1. Political and Governance Substantial 2. Macroeconomic Substantial 3. Sector Strategies and Policies Moderate

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4. Technical Design of Project or Program Low 5. Institutional Capacity for Implementation and Sustainability Moderate 6. Fiduciary Substantial 7. Environment and Social Moderate 8. Stakeholders Moderate 9. Other High OVERALL Substantial

Finance

Loan Closing Date - Additional Financing ( Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas - P160445 )

Source of Funds Proposed Additional Financing Loan Closing Date MDTF for Crisi Affected Areas of NWFP/FATA/Balochistan 30-Jun-2020

Loan Closing Date(s) - Parent (MDTF-Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas - P124268 )

PHHCLCD

Explanation: The revised closing date of the AF and project will be June 30, 2020, to enable the disbursement and utilization of the AF amount of US$19 million.

Ln/Cr/TF Status Original Closing Date

Current Closing Date

Proposed Closing Date

Previous Closing Date(s)

TF-99175 Effective 30-Jun-2015 31-Mar-2017 30-Jun-2020

31-Oct-2015, 12-Dec-2015, 30-Jun-

2016, 31-Dec-2016

Change in Disbursement Arrangements PHHCDA Explanation: The SMEDA is implementing Component 1 on behalf of KP and FATA. It is a policy advisory institution of the GoP and reports directly to the federal Ministry of Industries and Production. It has been mandated to facilitate the development of the country’s SMEs and has provincial offices in all four provinces of the country, including its provincial office in Peshawar that oversees SMEDA’s operations in KP and FATA. During the project implementation, the SMEDA encountered difficulties in operating the Assignment Account due to the non-availability of budgetary allocations with FATA and KP. To address the delays, the project documents of the KP and FATA PMUs have incorporated their respective shares (Total: US$1 million; KP: US$0.65 million; and FATA: US$0.35 million) of the project unit (PU) of SMEDA (SMEDA-PU). The cash forecast from the SMEDA-PU will be approved by the WBG and the funds will be released in the Designated Accounts of KP and FATA accordingly. The PMUs will serve as “pass-through” for the SMEDA-PU operational funds. The funds will be transferred within 15 business days to the second-generation account maintained by SMEDA-PU. Change in Disbursement Estimates (including all sources of Financing)PHHCDE Explanation:

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The original allocation of US$20 million to the project has fully disbursed. For the AF of US$19 million, the disbursement estimates are based on the assumption that the project will use the first six months following AF effectiveness to collect MG applications and fine-tune the implementation plan of Component 4 activities. Disbursements are likely to pick up following the initial stage, as they did during the implementation of the original project.

Expected Disbursements (in US$ Million) (including all Sources of Financing) Fiscal Year 2017 2018 2019 2020 Annual 2.00 8.00 7.00 2.00 Cumulative 2.00 10.00 17.00 19.00

Allocations - Additional Financing (Economic Revitalization of KP and FATA - P160445)

Source of Fund Currency Category of

Expenditure Allocation Disbursement % (Type

Total)

Proposed Proposed

PKNF USD

Rehab and Upgradation Subgrants, goods, nonconsultant services, consultant services, Training & Workshops & IOCs (KP)

12,000,000

100

Rehab and Upgradation Subgrants, goods, nonconsultant services, consultant services, Training & Workshops & IOCs (FATA)

7,000,000

100

Total: 19,000,000.00

Components

Change to Components and Cost PHHCCC Explanation: The changes to the project components include (i) scaling up of Component 1 activities; (ii) no allocation of funds to Component 2 since its activities were completed under Round I of the MDTF; (iii) new name for Component 3 (Project Management and Capacity Building Support) to better reflect its scope; and (iv) addition of a new component (Component 4). The funding allocations (below) to the components are proposed allocations from the AF amount of US$19.0 million. (The original and revised project cost allocations are tabulated in Annex 2.) Component 1: SME Development (US$11.6 million—US$7.40 million for KP and US$4.20 million for FATA): The region’s economy is primarily informal and thus conducive for the growth of SMEs which are found across a variety of economic activities including the minerals (e.g. marble and gems), horticulture, tourism, trading, commerce and transport sectors. In addition to the security challenges, the SMEs in KP and FATA face several constraints including no access to finance (especially for the immediate rehabilitation), shortage of equipment, low productivity, outdated technology, and lack of skilled labor force. As in most

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other developing and post-conflict regions, the credit market for SMEs in this area is characterized by market failures and gaps including information asymmetries, inadequacy or lack of recognized collateral, high transaction costs of small-scale lending, cumbersome documentation and perceptions of high risk. In order to address these issues, many governments intervene in SME credit markets in various forms such as Credit Guarantee Schemes. The MGs address this constraint in situations where formal financial institutions are not willing to take any exposure beyond very basic financial services such as deposit collection, payments and remittances. The market failure is thus evident from the credit crunch aggravated by the post-conflict scenario. As the 2016 WBG paper (by Diana Hristova and Antoine Coste) “Experience with Matching Grants” noted, governments and development partners have often used MGs to promote SME competitiveness and growth. The earliest WBG support for an MG scheme was in Indonesia in 1986. Since then, more than 100 Bank projects have been implemented with an MG component focusing on private sector and SME development. This component will continue to be implemented by SMEDA. At the request of GoP, this component is being scaled up to address the established demand for MGs. Previous experience and the number of returning TDPs suggest that the project is likely to receive at least 2,500 fresh applications. While an allocation of US$11.6 million may not be sufficient to satisfy all of the potential demand, the project will strive to reach out to previously underserved districts in KP and those Agencies in FATA that have recently experienced the return of TDPs. Two types of MG support will be provided under this component:

(i) SME Rehabilitation: These MGs will go to SMEs whose buildings, machinery, equipment, and stocks have been damaged. SMEs may also use a portion of this grant to seek business development services (BDS) from the market. Maximum amount per MG: PKR 2.5 million.

(ii) SME Upgradation: Individual SMEs and SME clusters will use these MGs to improve their productive capacity. Beneficiaries will be able to direct a small percentage of the approved grant for BDS. Maximum amounts per MG: PKR 2.0 million (individual SME); PKR 10.0 million (cluster).

Under the original grant, this component also had a subcomponent on the BDS. Under the AF, beneficiaries will be able to direct a portion of rehabilitation and upgradation MGs for seeking BDS from the private sector, if required. The component will not support land acquisition, as the implementation of the MGs does not involve construction of new units or physical extension of the existing units. Eligibility Criteria for MGs. This component covers all the districts of KP and all the Agencies and Frontier Regions of FATA. SMEs will be eligible for a MG if they meet the following criteria agreed with KP and FATA:

(i) Ownership and citizenship. The SME owner must be a citizen of Pakistan whose business is located in KP or FATA and began operations on or before May 1, 2014.

(ii) SME profile. The SME should have been affected directly or indirectly by the conflict situation and/or natural calamities. The number of employees should be between 3 and 200 at the time of the application—except that businesses owned by women and by returning TDPs in the FATA Agencies (Barra, Upper Orakzai, North Waziristan, and South Waziristan) must employ at least 2 workers. Each applicant will submit a business plan for using the MG while SMEDA will provide applicants with templates and guidance for preparing the business plans.

(iii) Registration. The SME should be registered with the relevant government department(s) and/or a formal national/local business association. For businesses located in serviced areas, the SME should also have access to reliable electricity and water resources. All the beneficiaries of MGs will be required to open a bank account in the name of the business with a formal financial sector institution. A credit report will be generated, when applicable, to ensure that the business/owner is not a defaulter.

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(iv) SME contribution. The beneficiary’s share in MG will be at least 50 percent for both types of grants. For upgrading MGs, the beneficiary SMEs will have to contribute cash, while for rehabilitation support, the contribution could be in kind (land, machinery, stocks, working capital, etc.).

Priorities for the award of MGs. The AF does not pre-allocate funds on a sectoral or geographical basis other than the split in funding allocations for KP and FATA, nor does it pre-allocate any funds for women entrepreneurs. Among all applicants that meet the basic eligibility criteria, the applications will be given preference according to the following priorities:

• Women entrepreneurs and SMEs that employ women workers. This also includes SMEs owned by men that submit plans to use the MGs for improving the working conditions for women employees,

• SMEs located in the areas where military operations have most recently ceased (including Barra, Upper Orakzai, North Waziristan, and South Waziristan),

• SMEs that provide public goods and services—including education, health, and power generation and supply services—on a commercial basis,

• All other applicants that meet the eligibility criteria. Ineligible SMEs/Sectors. With the help of the updated project Management Information System, due diligence will be carried out to prevent SMEs from getting multiple grants. Similarly, the beneficiaries of the original project will not be eligible for support under the AF. Other businesses that are not eligible for MGs include those belonging to sectors on the official negative list (for private investment), such as those dealing in arms and ammunition, explosives, radioactive substances, securities printing, and alcoholic beverages. Beyond these exclusions, the award of MGs will not be influenced by characteristics unrelated to the business itself, such as political, ethnic, or religious considerations. The updated OM gives the complete details on the processing of applications, the composition of the GRDC, and the grants distribution process. Component 2: Attracting Investment from the Diaspora (US$0.0 million). Activities under this component were completed during Round I of the MDTF, so the component will no longer disburse under the AF. Since GoKP is following up on the prospects of formalizing the investments promised by the diaspora during an Investment Road Show in Dubai (held in 2015), progress on the relevant project indicator will continue to be monitored during the implementation of the AF. Component 3: Project Management and Capacity Building Support (US$3.40 million—US$ 1.35 million for KP, US$1.05 million for FATA, and US$1.00 million for SMEDA-PU). This component will provide support to the three implementation entities (IEs)—that is, the PMUs of FATA and KP and the SMEDA-PU. The IEs are in charge of the project management and daily implementation of the AF activities, including procurement, FM, safeguards, M&E, and communications. The activities will be tailored to build the capacity of staff to understand how the promotion of economic sectors and a conducive regulatory environment can crowd in private sector investment. This component will also provide training and resources to the IEs for reaching out to potential female beneficiaries of Components 1 and 4. The training programs will also include officials from the relevant line departments of KP and FATA, such as Tourism, Agriculture, Mines and Minerals, and the PPP Unit. Component 4: Supporting the Competitive Sectors (US$4.00 million—US$2.6 million for KP and US$1.4 million for FATA). To build on the success of the first phase of the ERKF project and to respond to client demand for support in specific sectors, this component will encourage economic growth by supporting selected economic sectors in KP and FATA. While Component 1 will address the immediate financial constraints of the existing crisis-affected SMEs, this component will support the identification of scalable pilots, introduce information management technology, and encourage new entrepreneurs. The

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activities will also include providing training and capacity development of the sector stakeholders, developing marketing linkages, and addressing information asymmetries. The initial support will be for tourism (KP) and the agribusiness and marble sectors (FATA).

4.1. Tourism Promotion in KP (US$2.30 million). Domestic and adventure tourism is a market with significant potential that KP could take advantage of to create more and better jobs. According to the 2015 Pakistan Country Report of the World Travel and Tourism Council, travel and tourism contributed 6.9 percent of Pakistan’s gross domestic product in 2014, and supported 3.5 million jobs across the country. Even though Pakistan's most scenic tourist attractions are located in KP, the job creation and revenue generation potential of tourism remains untapped. The 2015 KP Tourism Policy notes that the province receives 8.8 million (mostly domestic) tourists annually and earns revenues of PKR 12.26 billion. Domestic tourism forms the backbone of every destination area development, as it is able to provide a more stable flow of visitors. The activities under this component are designed to lay the foundations for a more comprehensive program of support to the tourism industry in KP. The following activities are planned under the AF and will be carried out in close collaboration with other development partners:

4.1.1. Tourism Management Systems: The support to the tourism sector will entail activities to improve the planning systems and information management tools of KP’s Department of Tourism (and other relevant stakeholders, including the private sector) for better management of: (i) the department revenues collected from the tourism industry; (ii) the tourism assets and their location; and (iii) the tourist flows (itineraries, numbers, and seasonality), emphasizing the identification of growth centers (or bottlenecks) during the peak tourist seasons. These systems will provide useful and concrete information on the destination development for domestic tourism and will also point authorities toward the cost-competitive tourist destinations. This includes assessment of the potential offered by the GoKP’s selected pilot sites (including Chitral, Naran, Swat, and Sheikh Badin). 4.1.2. Tourism Sector Survey. The absence of reliable and documented information hinders effective planning and decision-making for the successful development of tourist sites. A survey on the industry will help address the data and information gaps on tourism asset mapping, market players, spending patterns of tourists, and opportunities for the public and private sector to earn more revenues and become more knowledgeable about the markets (e.g., number of hotel rooms, restaurants, tourist guides, and transport vehicles; amount of domestic and international tourist traffic to different cities/sites). An annual events calendar will be prepared for KP that will help drive visitor traffic, spread socioeconomic benefits across different tourist locations, and reduce pressure on the site resources with limited capacity. Ultimately, this will translate into better service standards and efforts toward improved conservation of the tourist sites. 4.1.3. Renovation of Tourist Information Centers (TICs). The GoKP has established TICs at five locations (Abbotabad, Peshawar, Chitral, Islamabad, and Dunga Gali) as one-window facilities to inform and guide tourists. The AF will support the formulation of business plans for the renovation of these centers and the implementation of activities to enhance the TICs’ appeal, value, and user-friendliness (including separate rest rooms and praying areas for women). The activities will include the purchase of new installations such as information display boards, modern fittings for service areas, and office equipment, and training tourist guides and tour operators in hospitality and enterprise skills. The TICs will also be equipped to play an active role in capturing and disseminating the data for the Tourism Management System.

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In addition, the resources under this component can be directed toward developing master plans for select tourist destinations in KP, review of policy framework and establishment of the Destination Management Organizations. This will help the GoKP identify and plan possible interventions for the development of feasible sites. 4.2. Supporting KP’s “System to Assess and Reward Talent” (START) (US$0.30 million). START is basically a business plan competition (BPC) of the GoKP for new and aspiring entrepreneurs in KP. The initial concept of START needs additional background work and fine-tuning before START can be ready for implementation. The selection criteria need to be better defined, and the basis for choosing the preferred economic sectors (for example, manufacturing vs. services) needs to be further articulated. The AF will support the initial development of START, including its scope and eligibility criteria through development of an OM, which will include a detailed implementation plan for START.

The BPCs typically entitle winners to concept validation, mentor relationships, funding, and partnerships. Therefore, these competitions are a useful preparation for market entry and can be used to strengthen entrepreneurs’ growth by focusing on certain business aspects such as international market entry. BPC goals include (i) education and capacity building; (ii) creation of new or boosting of young companies; (iii) contribution to the entrepreneurial ecosystem; and (iv) finding solutions to specific problems. According to the initial details shared by GoKP, START will involve the province’s youth in economic development and job creation; the young entrepreneurs will be invited to compete for business innovation and incubation grants as seed funding for their business proposals.

Depending on START’s implementation readiness and AF resources available, the project can support START implementation in a phased manner by reallocating component resources. Alternatively, other funding mechanisms (including TFs and GoKP’s own resources) can also be considered to begin implementation of START.

4.3. Support to Marble and Dry Fruit Value Chains in FATA (US$1.4 million). This component will provide resources to FATA for supporting analytical and technical activities in the region’s marble and pine nut value chains, including the desired technical and safeguards assessments for link roads and processing facilities for the value chains and clusters. No physical activity (e.g., construction) will be supported under this component of the AF.

4.3.1. Feasibility Assessments for Mohmand Marble City (MMC). FATA possesses a strong comparative advantage in the marble sector. The region produced 570,000 tons of marble in 2015, 24 percent of the total national production (Source: “FATA in Numbers,” 2015). The Mohmand Agency supplies 96 percent of all marble extracted from within FATA. To harness this potential more effectively, FATA has established the MMC, a dedicated industrial estate in Mohmand Agency covering an area of 316 acres, of which 70 acres have been developed. It is expected that, with the support of public sector funds and private investment, some marble processing units will become operational during FY18. The AF will support the MMC in two areas that do not involve any land acquisition: (i) financing of the feasibility study of a marble processing facility for the MMC, while incorporating lessons learned from the closed MDTF project (CIPK-P143661); and (ii) funding of the engineering design and environmental plans of a common effluent treatment plant. The two outputs will be used to inform the Annual Development Program of the FATA Development

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Authority (FDA), which is a public sector institution established in 2006 to develop vocational and technical skills in FATA.

4.3.2. Improving Processing of the Local Pine Nut. Pine nut is an expensive dry fruit that is produced in abundance in the FATA’s South Waziristan Agency. According to “2012 FATA Assessment Study” of the United States Agency for International Development, the use of improper and primitive harvesting techniques and post-harvest management practices leads to suboptimal yields in this sector. The produce is not graded or finished (roasted) at the source, and there is overreliance on middlemen. Local women are involved in harvesting pine nuts and extracting them from the cones. The value-addition is carried out in Lahore (Punjab), where the final product is sold at high prices and therefore locals are unable to reap the benefits. Therefore, this component will strive to organize the local farmers in South Waziristan and provide them with training, information, and equipment necessary to improve the treatment, packaging, and overall quality of pine nut and its presentation. More specifically, the AF will support (i) providing appropriate harvesting tools (clippers, safety belts, etc.) and training farmers and local women in harvesting techniques; (ii) training women in pine nut processing (including grading, roasting, and packaging); and (iii) creating awareness among local farmers about the domestic markets for pine nut. The activities will be managed by the FATA-PMU in close collaboration with the FDA. The training centers, master trainers, and curriculum of the FDA will be used to implement the activities effectively. The equipment and tools purchased for the trainees will be maintained by the FDA to ensure that women trainees are given preferential treatment. The trainees will be required to contribute at least 15 percent to the total training cost to ensure their participation in the training programs. The women and TDPs will not be required to contribute. Some activities under Component 4 are still at the conceptual phase and will therefore be implemented in a phased manner. If any of the activities described above are not designed and implemented in time to be supported under the AF, some of the funding can be reallocated to Component 1 (SME Development), where the design and implementation arrangements are well tested and the anticipated demand for MGs is greater than the currently available funding. In addition to the section below, the original, current, and proposed cost allocations under the ERKF project and its AF are tabulated in Annex 2 of the Project Paper (Table 4).

Current Component Name

Proposed Component Name

Current Cost (US$ million)

Proposed Cost (US$ million)

Action

Component 1: SME Development

Component 1: SME Development 14.0 25.6 Revised

Component 2: Attracting Investment from the Diaspora

Component 2: Attracting Investment from the Diaspora

0.8 0.8 Revised

Component 3: Institution Building to Foster Investment and Implement Regulatory Reforms

Component 3: Project Management and Capacity Building Support

5.2 8.6 Revised

Component 4: Supporting the Competitive Sectors 0.0 4.0 New

Total 20.0 39.0

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Other Change(s)

Change in Institutional Arrangements

Explanation: There are only minor changes in the institutional arrangements of the AF to ensure additional support for the IEs. For swift implementation of the Component 4 activities, the PMUs of KP and FATA will collaborate closely with the relevant line departments. These arrangements are illustrated in Annex 5. Implementation Arrangements: Given the success of the ERKF project, the implementation arrangements for the AF will still include overarching Project Steering Committees (PSCs); three IEs; and two independent GRDCs for awarding/rejecting grants to SMEs.

PSCs: The AF will be overseen by two PSCs (one each for KP and FATA), each headed by the Additional Chief Secretary of its region. Each PSC will comprise members from relevant departments (KP or FATA) and private sector representatives (including the members of the relevant chambers of commerce and industry) and will provide overall guidance to the AF while overseeing the implementation progress. Project IEs: The AF of the ERKF project will be implemented through three IEs:

PMUs (FATA-PMU, KP-PMU): The PMUs established for the ERKF project will be retained for the duration of AF implementation. They will coordinate with the implementation partners to ensure that the results are achieved. They will also implement the project communications strategy to reinforce the message on state-citizen trust.

The FDA will be an implementation partner of FATA-PMU for designing and undertaking activities in FATA under Component 4. The Department of Sports, Tourism, Cultural Heritage and Youth Affairs will play a similar role for the implementation of tourism sector activities in KP under Component 4; it has been mandated by GoKP to pursue an ambitious tourism development agenda laid out by the 2015 Tourism Policy of KP.

SMEDA-PU: The SMEDA-PU will continue to be the IE for Component 1. Drawing on the work of the Documents Review Committee, which ensures the completeness of the documentary evidence provided by the applicants for the MGs, the PU will continue to evaluate grant applications and recommend cases for MG approval to the relevant GRDC. Disbursements will be made by the two PMUs through the partner commercial bank.

GRDC: The role of the GRDC is to approve/reject the MG applications recommended by the SMEDA-PU. Under the original project, there was one GRDC for both KP and FATA. Under the AF, to ensure greater transparency and quick processing of MG cases, KP and FATA will each have an independent GRDC. The GRDCs will comprise members from the FATA Secretariat and GoKP, SMEDA-PU, a designated official from SMEDA’s head office, and private sector members. In case of any bottlenecks, the GRDC will report back to the relevant PSC for remedial action.

Communication: Robust two-way communication mechanisms will ensure that the relationship between the IEs and implementation partners remains intact throughout the AF implementation. The project will also draw from the overall communications strategy developed for the MDTF. The theory of change for the strategy is that when all key players project the same consistent image and narrative under the State brand, provide regular updates to manage expectations, and share successes to show the value-addition by the State,

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the citizens understand their roles, obligations, and rights. Consequently, they contribute toward and own the State’s initiatives and responses to their needs, and the citizen-state trust is strengthened. It is important to ensure that project results are attributed to the governments of KP and FATA, and that the state is seen as the main interlocutor for the citizens. Feedback from the field suggests that beneficiary expectations need to be managed, and information on project results needs to flow throughout the life of the project. M&E: A robust M&E system is essential both during the project’s life, for a preliminary assessment of impact and adaptation of the design if needed, and after completion, to assess the attributable economic benefits. From the beginning, this notably supposes (i) establishing a sound RF with measurable, realistic, and attributable outcome and impact indicators; (ii) allocating sufficient human and financial resources to M&E to determine baselines and continuous data collection mechanisms for beneficiaries; and (iii) strengthening the existing project Management Information System to serve as an effective monitoring and reporting tool. Client M&E efforts will be complemented by the quarterly TPMA reports and an independent impact evaluation.

Change in Financial Management PHHCFM Explanation: Under the AF, the fiduciary arrangements will be slightly modified, as follows: (i) an Accounts Officer will be hired in FATA-PMU; (ii) PMUs (FATA and KP) will serve as a pass-through for SMEDA-PU operational cost (legal covenant); and (iii) a firm of chartered accountants will be engaged as internal auditors. The introduction of the new pass-through mechanism means that within 15 business days, funds will be transferred by the PMUs into the subaccount maintained by the SMEDA-PU. The SMEDA-PU will prepare its Interim Unaudited Financial Reports (IUFRs) and will share them with the WBG and both PMUs within 25 days after the end of each (calendar) quarter. On the basis of the approved IUFRs, funds will be transferred to the SMEDA-PU. For each PMU (FATA and KP), a segregated Designated Account in US dollars will be established at the National Bank of Pakistan for the receipt of funds from the WBG. To improve transparency and efficiency in the processes, the PMUs will be encouraged to disburse the MGs directly to beneficiaries’ bank accounts. Under the AF, retroactive financing of up to an aggregate amount of US$120,000 has been allowed to SMEDA-PU for meeting the eligible expenditures incurred between July 1, 2016, and AF effectiveness. This will cover the costs of implementation readiness, including the strengthening of the SMEDA-PU’s capacity for the scaled-up MG activities. There is neither an outstanding audit report nor any ineligible expenditure under the original grant. Procurement: There is no change in the procurement arrangements for AF. The Concept Memo for the AF was cleared after July 1, 2016, and WBG Management has approved an exception to the application of the New Procurement Framework for the AF. The intended procurement activities of the three IEs are unlikely to be over US$1.5-2.0 million. There will be small contract awards for the procurement of services (individuals and firms), mainly through the Selection Based on Consultants Qualifications method.

Change in Implementation Schedule Explanation: This paper proposed an extension in the PCD along with the AF. The implementation schedule will be adjusted accordingly to ensure the completion of activities and the disbursement and use of US$19.0 million by June 30, 2020.

Appraisal Summary

Economic and Financial Analysis PHHASEFA

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Explanation: The economic and financial analysis estimates the expected net present value (NPV) and economic rate of return (ERR) of the AF’s interventions. As the AF is scaling up one component (SME Development) that has the biggest allocation (US$11.60 million) from the total AF amount of US$19 million, the economic rationale of the original project applies to the AF. The updated analysis of the AF shows that at an annual discount rate of 10 percent, the NPV of the project is US$19.46 million, with an ERR of 75.6 percent. The AF of the project is thus economically viable. The detailed analysis is attached as Annex 3.

Technical Analysis PHHASTA

Explanation: To accommodate the AF scope, especially the project’s enhanced emphasis on gender inclusiveness, changes have been introduced to the Project’s OM and PMIs and to the eligibility criteria for the SME MGs. WBG’s Value-Added: In view of the weak technical capacity of line departments and, to a more limited degree, the IEs, the WBG will provide implementation support to the ERKF AF. The WBG role adds significant value to the AF from the appraisal stage, because of the involvement of global experts on post-conflict situations and because it brings knowledge of international best practices on MGs and other interventions. The WBG staff will continue supporting their counterparts in technical, procurement, FM, and safeguards matters. Experience from the implementation of the ERKF project and lessons learned from the CIPK project indicate that the quality-at-entry and subsequent implementation support are critical to achieving the PDO and related results. The support involves regular reviews and advice to the IEs on planning, designing, and implementing the AF activities to ensure that progress toward the PDO remains on track.

Social Analysis PHHASSA

Explanation: The original project was processed as an emergency operation under OP/BP 8.00. The task team therefore prepared an Environmental and Social Screening and Assessment Framework (ESSAF). According to the requirements of the ESSAF, an ESMP for the project was prepared and disclosed. By implementing the ESMP for the ERKF project, the SMEDA-PU has developed an understanding of the safeguards requirements. However, regular capacity-building will need to be continued during the AF. The ESMP, which was successfully implemented for the ERKF project, remains valid for the AF since the nature and extent of proposed AF activities will remain the same as for the original project. What proved to be instrumental in the effective implementation of ERKF was appointing a safeguards focal person within SMEDA-PU and engaging an environmental and social safeguards expert to provide technical support for ESMP implementation.

Environmental Analysis

Explanation: The MDTF ESSAF defines the environmental assessment requirements and the planning approach and requirements for assessing and mitigating adverse impacts on the environment. The requirements specific to the ERKF project are listed in the ESMP, and the relevant training refresher will be provided to the IEs. The beneficiary SMEs need to follow the environmental assessment and protection requirements defined in the national laws and regulations (Pakistan Environmental Protection Act of 1997). The ESSAF and ESMP of the original ERKF project were disclosed locally by the IEs. For the AF, the original ESMP will apply as it already has the mitigation measures for the beneficiary enterprises of the MGs.

Risk

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Explanation: According to the SORT, the overall risk to the project is still rated as Substantial. The AF is taking on the additional task of enhancing the outreach of activities under Components 1 and 4 to the women of KP and FATA. Given the experience with MGs (only 32 of 1,601 grants awarded to eligible women entrepreneurs, mainly from KP), there is a risk of not fully meeting the gender-disaggregated targets of the AF. The clients will be encouraged to mitigate this by working with local civil society organizations, Women Chambers of Commerce, SMEDA’s Women Business Development Center, and other business associations. The environmental and social risks rating remains Moderate for the AF. The environmental and social safeguards guidelines and implementation plans are already enclosed in the ESMP. A few gaps were identified during the reviews of the project Quarterly Progress Reports. SMEDA-PU is addressing this issue with guidance from the WBG and with the support of a safeguards expert hired by the project. The “Other (Security and Stability)” risks are rated High. The region, particularly FATA, continues to recover from the action of militants. Potentially restricted access to certain areas could hinder project activities. However, the team will continue to observe the situation on the ground to take timely action with the support of Management.

V. World Bank Grievance Redress Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project-related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.

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Additional Grant to the Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas Project

Annex 1. Revised Results Framework and Monitoring Indicators

Table 3 on page 26 at the end of this Annex summarizes the changes in PMIs.

.

Project Name:

Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas (P160445)

Project Stage: Additional Financing Status: DRAFT

Team Leader(s): Kiran Afzal Requesting

Unit: SACPK Created by: Kiran Afzal on 02-Aug-2016

Product Line: Recipient Executed Activities Responsible

Unit: GTC06 Modified by: Kiran Afzal on 21-Mar-2017

Country: Pakistan Approval FY: 2017

Region: SOUTH ASIA Lending Instrument: Investment Project Financing

Parent Project ID: P124268 Parent Project

Name: Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas (P124268)

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Project Development Objectives Original Project Development Objective - Parent: To support the Government of Pakistan in the economic recovery and revitalization of the crisis affected areas of Khyber Pakhtunkhwa (KP) province and Federally Administered Tribal Areas (FATA), by creating sustainable employment opportunities through rehabilitation of Small and Medium Enterprises (SMEs), investment mobilization, and institutional capacity building. Proposed Project Development Objective - Additional Financing (AF): To support the Government of Pakistan in creating sustainable employment opportunities, generating private sector investment, and laying the foundations for the future development of selected economic sectors in Khyber Pakhtunkhwa and Federally Administered Tribal Areas. Results Core sector indicators are considered: Yes Results reporting level: Project Level .

Project Development Objective Indicators

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Status Indicator Name Core Unit of Measure Baseline Actual(Current) End Target Revised Number of direct jobs created

by the enterprises supported through the Project.

Number Value 0.00 8843.00 13500.00 Date 11-Oct-2011 30-Nov-2016 30-Jun-2020 Comment A baseline for

jobs was not established at the initiation of the Project activities in 2011.

Original project end-target of 8,000 direct and indirect jobs was surpassed. Of these jobs, 126 jobs were created for women.

Target enhanced. The indicator title has been revised to remove the mention of ‘indirect’ jobs.

New Number of direct jobs created for women through the matching grants.

Number Value 0.00 126.00 315.00 Sub Type Supplemental

Revised Percentage of the matching grants beneficiaries operational and productive at the completion of the Project.

Percentage Value 0.00 93.00 75.00 Date 11-Oct-2011 11-Oct-2011 30-Jun-2020 Comment When calculated

at the time of Mid Term Review (MTR) of Project in Jan’14 and was at 93%.

Indicator name revised to remove the target value from its title.

Revised SME beneficiaries of the MGs, of which at least 5 percent are owned/managed by women entrepreneurs.

Number Value 0.00 1601.00 2500.00 Date 11-Oct-2011 30-Nov-2016 30-Jun-2020 Comment Original end-

target of 850 surpassed. 32 of the total MGs were given to women entrepreneurs.

Indicator value increased. The increased target for women beneficiaries is an aspirational target. Indicator name being

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revised to ensure consistency in the PMIs.

Revised Investment attracted from the Diaspora and private enterprises.

Amount(USD) Value 0.00 0.00 10.00 Date 11-Oct-2011 30-Nov-2016 30-Jun-2020 Comment Value of this

indicator is in US$ millions.

ERKF was unable to fully realize the investments promised by the diaspora for KP. GoKP is pursuing a few pipeline contracts, so the AF will monitor progress on this.

This will also include the private investment generated by MGs provided to the SMEs. The indicator name has thus been revised.

Revised Investment facilitation authorities established in FATA and KP.

Percentage Value 0.00 100.00 100.00 Date 11-Oct-2011 30-Nov-2016 30-Jun-2020 Comment Target fully

achieved by the project.

The indicator title has been revised as the authorities continue changing the names of the investment authorities.

New Number of private enterprises using the Tourism Management Systems developed by the project.

Number Value 0.00 0.00 50.00 Date 11-Oct-2011 30-Nov-2016 30-Jun-2020 Comment This is a new

indicator linked to Component 4

Intermediate Results Indicators

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Status Indicator Name Core Unit of Measure Baseline Actual(Current) End Target Revised Machinery pools/common

facility supported by the Project.

Number Value 0.00 2.00 6.00 Date 11-Oct-2011 30-Nov-2016 30-Jun-2020 Comment Original target

value of 11 was partially achieved.

Indicator value revised downwards to 6.

Revised SME Rehabilitation Support provided through the MGs. Number Value 0.00 1447.00 2200.00

Date 11-Oct-2011 30-Nov-2016 30-Jun-2020 Comment The original

target of 600 was surpassed. Indicator name revised to remove the target value.

Indicator value increased to reflect the scope of the AF.

Revised SME beneficiaries of the up-gradation MGs. Number Value 0.00 194.00 300.00

Date 11-Oct-2011 30-Nov-2016 30-Jun-2020 Comment The original

indicator value of 250 partially achieved. Indicator title revised to remove the target value from its title.

Original indicator value being enhanced to reflect the scope of the AF

Revised Number of SMEs/clusters that have used the Business Development Services (BDS).

Number Value 0.00 800.00 1000.00 Date 11-Oct-2011 30-Nov-2016 30-Jun-2020 Comment Target surpassed. The indicator

value is being enhanced.

New Percentage Value 0.00 0.00 80.00

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SME owners satisfied with the processing of the MGs under the AF.

Date 11-Oct-2011 30-Nov-2016 30-Jun-2020 Comment This is a new

indicator for measuring citizen engagement. It is directly linked to the AF grant processing steps.

This will be measured annually and at the end of the AF.

New Officials of the IEs and relevant departments of KP and FATA receive training in technical areas, including (i) trade and commerce, (ii) tourism, and (iii) PPPs.

Number Value 0.00 25.00 100.00 Date 31-Oct-2011 30-Nov-2016 30-Jun-2020 Comment The original grant

supported training of the 25 officials of KP, FATA, and SMEDA.

New Number of scalable investment projects and activities identified in the competitive sectors of KP and FATA.

Number Value 0.00 2.00 6.00 Date 11-Oct-2011 30-Nov-2016 30-Jun-2020 Comment GoKP has already

conducted two feasibility studies under CIPK: (i) Dates Processing Plant (KP): and (ii) Fruits and Vegetables Dehydration Unit

This is a new indicator linked to Component 4.

New Number of individuals (including women) that received training in the tourism sector.

Value 0.00 0.00 200.00 Date 11-Oct-2011 30-Nov-2016 30-Jun-2020 Comment This is a new

target linked to the Component 4.

New Number Value 0.00 0.00 100.00

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Number of individuals (including women) in FATA that received training in the pine nut value chains.

Date 11-Oct-2011 30-Mar-2017 30-Jun-2020 Comment This indicator is

linked to Component 4.

No Change Re-connect Pakistan (web tools for Diaspora) operational Number Value 6200.00 10000.00

Date 11-Oct-2011 30-Nov-2016 30-Jun-2016 Comment This is measured

by the number of hits on the website.

This was partially achieved.

Revised Diaspora Outreach program implemented: At least 7 to 10 outreach activities/events successfully organized

Number Value 0.00 5.00 7.00 Date 11-Oct-2011 30-Nov-2016 31-Mar-2017 Comment This is linked

to Component 2, which will not disburse under AF.

Partially achieved.

It will not be monitored during the AF implementation.

Marked for Deletion

Recommended regulatory/institutional reforms introduced/notified by Industries Department for private sector development in KP

Number Value 0.00 2.00 5.00 Date 11-Oct-2011 30-Nov-2016 30-Jun-2016 Comment Partially

achieved. Not directly relevant to the activities of AF.

Marked for Deletion

PPD mechanism established in KP/FATA; defining economic growth and employment generation policy reforms; proposals for implementation submitted

Number Value 0.00 0.00 6.00 Date 11-Oct-2011 30-Nov-2016 30-Jun-2016 Comment Unachieved. Not relevant to

AF activities.

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Table 3. Summary of Proposed Changes to PMIs

Original indicator Revised/new indicator Rationale

850 SMEs directly/indirectly benefited from the grants program, of which 2-3% of businesses are owned/managed by women entrepreneurs.

2,500 SME beneficiaries of the MGs, of which at least 5 percent are owned/managed by women entrepreneurs.

Target surpassed (1,601 MGs disbursed), and the indicator is being revised to reflect the scope of the AF and to remove “indirectly” from the title. The revised indicator value of 2,500 is for both the original project and its AF. The increased target for women beneficiaries (5%) is an aspirational target for the AF. Given the challenges faced during implementation of the original ERKF project, the target of women beneficiaries will be revisited at the AF’s MTR.

8,000 jobs/employment (direct and indirect) generated in enterprises supported by the project.

13,500 direct jobs (including 315 for women) created by the enterprises supported through the project.

Target surpassed (8,843 direct jobs created), and the indicator value is being enhanced. The new value is based on the trends of job creation through MGs provided by ERKF since 2011 (8,843 direct jobs created by 1,601 beneficiary enterprises). The indicator title has been revised to include a specific target for women. The AF RF includes this indicator along with a supplemental indicator to measure the direct jobs created for women.

60 percent of MG beneficiaries operational and productive at the completion of the project.

75 percent of MG beneficiaries operational and productive at the completion of the project.

This continues to be a PMI/PDO indicator and will be monitored to ascertain the sustainability of MGs. Of the parent project beneficiaries, 93 percent were operational at the time of the project MTR. This indicator will be measured for the entire duration of the original grant and AF (2011-2020), its value is being kept at 75 percent.

500 SMEs access BDS offered under the project.

1,000 SMEs access BDSs offered under the project.

This is an intermediate outcome indicator. The original project exceeded the target, as 800 SMEs availed the services. The target value is being increased.

US$10 million attracted for KP-FATA from diaspora and migrant workers settled across the country.

US$10 million investment attracted from the diaspora and private enterprises.

The target wasn’t be achieved under the ERKF project. The indicator is being revised to include investments expected from the SMEs through the MGs.

Investment facilitation authorities established in FATA and KP.

Already fully achieved. No change in this indicator.

50 private enterprises start using Tourist Management System developed by the project (new indicator).

New indicator. It includes the private sector firms that will be connected with the Tourist Management System once it is developed under Component 4.

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Additional Grant to the Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas Project

Annex 2. Components Cost Allocations (Original and Revised)

Table 4. Components allocations under the ERKF project and the AF (US$ million)

Component Name and IE(s)

Original Cost October -11

Current Cost December - 16

Proposed Cost under AF

Total Cost

(US$ in millions) 1. SME Development

FATA 4.9 4.9 4.2 9.1

KP 9.1 9.1 7.4 16.5

Component 1 Total 14.0 14.0 11.6 25.60

2. Attracting Investments from the Diaspora

FATA 0.7

0.2

0.0

0.2

KP 1.3

0.6

0.0

0.6

Component 2 Total 2.0 0.8 0.0 0.80 3. Institution Building to Foster Investment and Implement Regulatory Reforms 3. Project Management and Capacity Building Support (revised name under the AF)

FATA

1.05

1.6

1.05

2.65

KP

1.95

2.6

1.35

3.95

SMEDA

1.00

1.00

1.00

2.00

Component 3 Total 4.00 5.20 3.40 8.60 4. Supporting the Competitive Sector

FATA

New component, hence no previous allocations.

1.4

1.4

KP

2.6

2.6

Component 4 Total 4.00 4.00

Components Total

20.00

20.00

19.00

39.00

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Additional Grant to the Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas Project

Annex 3. Economic and Financial Analysis

1. The AF will provide direct support to local SMEs through MGs and will also promote the competitive sectors of KP and FATA through focused interventions. Direct support for the rehabilitation/upgradation of local enterprises is not available through the government’s current programs. Through the ERKF project, the MGs will catalyze rehabilitation/upgradation of local SMEs to generate income by creating direct jobs. This will increase spending, strengthening the consumer base of the local enterprises. The activity will also have a multiplier effect, benefiting the suppliers and vendors across value chains and creating indirect jobs. Supporting the competitive sectors will promote the use of improved information management technology, the training of the workforce, including women, and the creation of market linkages.

2. The WBG’s involvement adds significant value to the AF with the opportunity to build on the lessons learned during the first phase of the ERKF project. It has already mobilized international experts on post-conflict situations to assist in the design of the activities. The WBG will continue providing support to the IEs and implementation partners to address any capacity gaps in the technical, fiduciary, and safeguards area. Experience indicates that such support is critical to successfully achieve the PDO.

3. The economic analysis of the SME development component has been carried out considering the potential increase in sales revenues of the beneficiary SMEs and direct jobs created though the MGs. The TPMA reports verified that the MGs supported income-generation activities and job creation in addition to increasing the sales revenues of most beneficiaries. Against the target of 8,000 direct and indirect jobs, the ERKF project created 8,843 direct jobs—77 percent in KP and 23 percent in FATA; 27 percent in trading and warehousing, 23 percent in mining (marble), 22 percent in textiles (weaving and manufacturing), and 6 percent in the education sector (mostly private schools). Around 126 direct jobs (1.4 percent of the total) were for women.

4. Cost-Benefit Analysis. The economic and financial gains of the AF have been quantified through the cost-benefit analysis of Component 1 (US$11.60 million), which will continue to be the major activity under the AF (61 percent of US$19 million). Component 2 will not disburse under the AF, and Component 3 primarily supports the project IEs in implementing AF activities. Component 4 will lay the foundations for future development of select economic sectors in KP and FATA, so the scope of most activities under this component is limited to analytical assessments, feasibilities, and information management.

4.1 Assumptions and methodology. For the SME development component, it is assumed that every US dollar disbursed by the project will attract one US dollar of investment from the private sector. With this assumption, total investment injected into the two economies will be twice the amount of the MG. For determining SME sales, it is assumed that one US dollar of investment will generate one US dollar of annual sales.18 The project’s direct benefits have been based on the value-added component of the sales, which is assumed to be 30 percent, with a lag of two years. The MGs are also expected to create jobs. The average number of direct jobs created during phase I of the ERKF project, 5.6 per enterprise, has been used to estimate the number of jobs that will be created through the AF. The wages earned through these new jobs have been considered as the benefit of the project. The average wage of PKR 12,00019 has been used for estimating the cash flows from wages. An average annual wage increase of 5 percent20 has been assumed.

18 The assumption uses the investment turnover ratio, which compares the enterprise's revenues to its investment (debt plus equity). The ratio is a direct measure of how efficiently an enterprise's debt and equity generate sales. This ratio differs with sectors; however, it usually remains higher than 1. A ratio of 1 (USD 1 sales with USD 1 investment) is a conservative assumption. 19PKR 12,000 is the minimum wage set by the government and has been used as the average. SMEs operate informally and usually pay less than the minimum wage to unskilled workers and more than the minimum to trained skilled workers. 20 The average increase in wages is usually around 5-10 percent per annum. Assuming the lower value is a conservative approach. NPV remains positive even at zero growth in wages.

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4.2 Since the project offers long-term economic and financial benefits, a 10-year time horizon has been used

for calculating the NPV and ERR. An average discount rate of 10 percent has been used to discount the cost and benefit streams generated by the project. The WBG’s suggested range for the discount rate is 8-12 percent; higher growth prospects would normally imply a higher discount rate. This is based on the expectation that consumption per capita will grow rapidly in the near future—for example, in a region reviving after a shock (conflict, large scale disaster, etc.). An extreme case of sustained 6 percent annual per capita growth over the life of the AF would yield a discount rate of 12 percent.21 Since the country’s average growth rate over the past few years has been less than 6 percent, a lower discount rate of 10 percent has been used.22 Table 5 shows the results from the calculations and demonstrates that the AF of the ERKF project is economically viable.

Table 5. Base-case Results of the SME Development Component

Economic analysis Value

Benefits US$26.15 million

Costs US$6.69 million

NPV US$19.46 million

Benefit/cost ratio 3.91 ERR (%) 75.6%

4.3 . The project is exposed to a number of risks, as explained in this paper (please refer to SORT in the “Risk”

section of the datasheet23). The risk categories “Political and Governance,” “Macroeconomic,” and “Other (Security and Stability)” are rated as either High or Substantial. These risks can have both direct and indirect effects on the sales and profitability of the beneficiary SMEs and correspondingly on the AF’s economic viability. Therefore, a sensitivity analysis has been carried out to assess the effect of a drop in sales and profits on the project’s viability (NPV and ERR). Figures 1 and 2 demonstrate that the AF remains viable even at a very low sales-to-investment ratio of 0.2 and at a low value-added figure of 5 percent. Thus it is safe to assume that Component 1 activities are resilient against potential risks.

Figure 1. Sensitivity of NPV and ERR to Sales Revenues of MG Beneficiaries

21 Discounting Costs and Benefits in Economic Analysis of World Bank Projects, OPSPQ, May 2016. 22The NPV is not very sensitive to the discount rate and remains positive even at a very high discount rate of 30 percent. 23 Section III: Proposed Changes.

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Figure 2. Sensitivity of NPV and ERR to Value-Added of MG Beneficiaries

5. Component 3 activities will provide capacity-building and project management support to the IEs, contributing to knowledge creation and training of the officials of the IEs, implementation partners, and the relevant line departments of KP and FATA. Component 4 activities are forward-looking, the building blocks for the future development of such economic sectors of KP and FATA as tourism, marble, and agribusiness. Therefore, the economic and financial gains of the activities under Components 3 and 4 cannot be monetized. The RF has the relevant indicators for these components—for example, the number of individuals trained, scalable investment projects identified, and officials trained—to allow monitoring the immediate impact.

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Additional Grant to the Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas Project

Annex 4. Gender Action Plan: Proposed Activities24

1. Pakistan’s overall picture of gender equality and women’s empowerment is not encouraging; the country ranks 123rd in the Gender Inequality Index, the lowest in SAR except for Afghanistan.25 The situation is even worse in KP and FATA because of cultural, political, and religious factors, so that women are very little involved in economic activities. Conditions for women are normally perceived to be improving with time, but the 2008-2012 period of extreme militancy, along with the TDPs crisis, has actually made the situation worse.

2. Most women entrepreneurs and workers in KP and FATA are found in such traditional sectors as agriculture, livestock, personal care, textile weaving and stitching, and handicrafts. A limited number of women are employed in health care (hospitals, clinics) and educational institutions. A large number of women are involved in embroidery and handicrafts, with some prominent business clusters at D.I. Khan, Swat, Nowshera, and Haripur. Female family members also play an important role in the textile weaving cluster at Islampur in Swat.

3. The ERKF Experience. As of November 30, 2016, ERKF has awarded 1,601 MGs, of which only 32 are for women-owned businesses. Of ERKF’s 32 women beneficiaries, 45 percent own businesses like boutiques, beauty parlors, and stitching/tailoring. Around 30 percent are partners in such manufacturing industries as pharmaceuticals, and the rest own businesses in the education, merchandise, and food processing sectors. The low coverage was expected at the time of project appraisal; the implementing partners considered even the modest outreach targets an uphill task because of the barriers mentioned above and the law and order challenges in the area. The ERKF project conducted a series of awareness sessions with women chambers of commerce and local organizations to encourage women to take advantage of the MGs. The project achieved its modest target of awarding grants to 22 women entrepreneurs, facing the following constraints in the process:

• Security issues and hence problems in reaching out to women entrepreneurs, particularly in FATA; • Low basic literacy levels and limited participation of women in the region’s labor force; • Low levels of financial literacy and limited uptake of formal sector financial services in KP; and • Limited scale of women-led economic activities

In addition, women entrepreneurs and workers in KP and FATA face the same constraints as women-led businesses elsewhere in Pakistan—lack of access to markets, capacity gaps linked to important business skills/acumen, insecure and non-conducive workplaces, unavailability of documents and lack of skill providers in emerging fields. 4. Following activities are proposed to encourage women’s economic empowerment through AF: For the award of MGs, preferential treatment and more relaxed eligibility criteria will be given to SMEs that employ women workers.

(i) The AF will also give preference to SMEs that have or are willing to introduce women-friendly workplaces.

(ii) A woman representative will be included in the GRDC to ensure women’s participation in decisions on the award of MGs.

(iii) The women will be encouraged to seek BDS and skills training from the market by establishing linkages with service providers and KP’s Women Chambers of Commerce and. FDA.

(iv) The Component 4 activities will support those sectors that traditionally support or have the potential to support the participation of local women—for example, agribusiness and tourism.

24Activities being finalized in consultation with the client. 25 Human Development Report 2013.

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Additional Grant to the Economic Revitalization of Khyber Pakhtunkhwa and Federally Administered Tribal Areas Project

Annex 5. Implementation Structure

Implementation Arrangements for the AF of ERKF Project

Project Steering Committee

(each for KP and FATA)

Project Unit (SMEDA-PU)

FATA Project Management Unit (FATA-PMU)

KP Project Management Unit (KP-PMU)

Grant Review and Decision

Committee (GRDC)

(Separate for KP and FATA)

Component 1

(SME Development)

Components 3 and 4

(Project Management and Capacity Building Support, Supporting the Competitive Sectors)

Components 3 and 4

(Project Management and Capacity Building Support,

Supporting the Competitive Sectors)

Project management and capacity building support to three IEs, IPs and relevant departments of KP and FATA will continue to be provided under Component 3.

3 Implementation Entities

IP: FATA Development Authority IP: Department of Tourism, GoKP