From YOUSAF RAFIQ
Special Correspondent, Islamabad
Nov 29 - Dec 05, 2002

ECC gives recommendations

The Economic Coordination Committee of the Cabinet in its meeting held on September 13, 1999 considered Pakistan Poverty Alleviation Fund Project — Relending Terms. The ECC appointed a committee to determine within the framework of the agreement signed with the World Bank, the parameters for on-lending the funds to the ultimate beneficiaries on a reasonable rate with mandatory regional distribution.

After deliberations, the committee has given the following recommendations: (i) The rate of interest should not be more than the rate of interest charged by the Commercial Banks on loans. A cap on the high rate of interest charged by Partner Organizations (POs) to the ultimate borrower is necessary to safeguard the poor. The Pakistan Poverty Alleviation Fund Company (PPAFC) may impose 16 per cent maximum lending rate to the ultimate beneficiaries. Charging a higher rate of interest from the poor will carry political cost to the government. (ii) The POs intermediation cost, including bad debts and funding, on the average be fixed at 8 per cent. (iii) Since the PPAFC will re-lend credit to well established POs; the risk of loan loss should be negligible. The Committee has found no justification for the proposed default rate of 3 per cent on account of loan loss and recommends that this may be reduced to less than 1 per cent. Also, it is necessary to reduce the proposed operational cost of PPAFC. (iv) Allowing PPAFC 1.25 per cent IDA charges, 3.25 per cent for operational expenses and provision for bad loans of 1 per cent the margin of 2.5 per cent available to PPAFC (8 per cent-5.5 per cent) should be used with the approval of the government. (v) The PPAFC should ensure regional balance in the allocation of credit.

The World Bank and the Government of Pakistan have entered into an agreement on July 7, 1999 for International Development Association (IDA) program assistance of SDR 66.5 million. The main objective of the program assistance is to alleviate poverty, and to increase incomes of the poor households by providing loans and technical assistance, increasing access of the poor to physical infrastructure and enhancing institutional capacity of NGOs and Community Organizations. The Pakistan Poverty Alleviation Fund Company (PPAFC) will be responsible for implementation of the program.

Under the program, the World Bank has agreed to extend a multi currency loan equivalent to SDR 66.5 million to Government of Pakistan. The loan is for a period of 34 years (inclusive a grace period of 10 years). The bank will not charge any interest on the loan but will receive a commitment fee on the principal amount not withdrawn at the rate not exceeding one half of one per cent per annum. The bank will also charge a service fee at the rate of three forth of one per cent per annum on the principal amount. The Credit Agreement

will become effective upon signing of Subsidiary Loan Agreement between Government of Pakistan and PPAFC. The closing date of the Credit Agreement is December 31, 2004.

The foreign currency available under the loan will be used to cushion GOP's foreign currency reserves. A part of the loan proceeds (equivalent SDR 33.2 million) will be passed on to PPAF as a loan to be repaid in 23 years including a grace period of 8 years. The PPAF shall pay GoP interest at the rate of three-forth of one per cent per annum on the principal amount of credit withdrawn and outstanding. PPAF shall also pay GoP commitment fee on the principal amount of the credit not withdrawn at the rate not exceeding one half of one per cent. The remaining amount of proceeds of the loan equivalent SDR 33.3 million will be passed on to PPAF as a grant on non-reimbursable basis. A major portion of grant (SDR 20 million) will be spent through POs/COs on small scale community infrastructure development projects as karezes, small dams, water courses, link roads, bridges, wells and tube-wells etc.

The sources say that the proposed relending terms of the proceeds of the loan to PPAFC widely deviate from the Standard Relending Terms of the GOP. The Standard Terms of the Government entail that the GoP will charge interest rate of 8 per cent and additional 6 per cent will be charged on account of exchange risk fee and that maximum relending rate for the final borrower will be 17 per cent inclusive of exchange risk fee. The Standard Terms further state that the maximum period of the loan shall be 15 years including a grace period of 2 years.

According to the Ministry of Finance, the PPAFC is a major initiative of the GOP, assisted by IDA of the World Bank, for eradication of poverty in the country. The IDA credit is interest free long tenure facility that will also augment foreign currency reserves of the Government of Pakistan. Therefore, the Government may like to be flexible in relending terms of the proceeds of the loan.

The objective of the project is to alleviate poverty by improving the access of the rural and urban poor to economic resources and services. The project will take care of the financing of micro-projects to support income generating activities, including agriculture and livestock development, off-farm activities and micro-enterprises; and small scale community infrastructure development projects, including the development, construction and for improvement of karezes (indigenous irrigation channels), other irrigation channels, small dams, water courses, land-levelling, agro-forestry and water harvesting structures; bunds, check dams and other flood protection works; link roads, bridges, culverts, causeways and pony tracks; and, deep-wells, hand-pumps, tube-wells, water reservoirs, overhead tanks and gravity flow pipelines. The project will also take institutional capacity building measures. It will strengthen the operational capacity of PPAF, through the provision of office buildings, equipment and vehicles, technical assistance for improving data management and financial systems and for carrying out studies, training and funding for incremental operating costs; and, Partner Organizations (PO), through the provision of equipment, training in implementing poverty alleviation [programs, with emphasis on community mobilization and participatory approaches, and funding for incremental costs.

 

Pakistan Poverty Alleviation Fund-II to get $100 million World Bank loan

 Ahmed Mukhtar
7/3/2003

ISLAMABAD (July 03 2003): Out of World Bank's $ 200 million in pipeline
for Pakistan Poverty Alleviation Fund-II (PPAF-II), the Fund would
receive $100 million to largely focus on its existing farm sector and
entrepreneurial skills developed for utilising micro-credit.

Moreover, PPAF will get an additional $50 million grant to increase its
outreach to poor households in all parts of the country.

Sectoral distribution of $ 100 million loans is expected to be as
follows: 35 percent for livestock, 30 percent for agriculture and 35
percent for enterprise development. First time loans are likely to range
between Rs 5,000 and Rs 7,000 (approximately $ 85 to $ 120), and
repeater loans between Rs 10,000 and Rs 20,000 (approximately $170 to
$340), says a World Bank document.

Tentative date for the approval of Phase-II of PPAF would be July 28,
2003.

Within three years of operation, PPAF's infrastructure schemes have
benefited some 3.7 million men and women.

Additional $50 million of grant funding would increase outreach to
countrywide poor households.

Apart from conventional community infrastructure projects, PPAF would
also undertake new initiatives aimed at dissemination of low-cost,
appropriate and innovative technologies, such as drip/sprinkler
irrigation, small hydropower projects, desalination and windmill
projects, as well as towards reducing poverty in drought-stricken areas
through implementation of its Drought Mitigation & Preparedness Plans,
(DMPPs).

These interventions would involve provision of sustainable
infrastructure facilities to the poor in a holistic and systematic
manner and would be integrated with a credit facility for SME
development.

Repayments from its partners have generated some $15 million at PPAF.

Interest income from the $10 million endowment, invested in long-term
Government securities, is also contributing towards PPAF's overall
revenues.

According to estimates, there are approximately 2.5 million micro-credit
clients in Pakistan. Of these, nearly 70 percent are clients of the
PPAF. Its clients have doubled every year for the past three years.

Moreover, the small number of overall clients in a potential market of
at least 5 million indicates that there is huge need for funding in this
sector.

Although issues of retail capacity cannot be undermined, fundamentally
limited resources have prevented expansion. PPAF has effectively
enhanced retail capacity in a country where the poor have had very
limited access to micro-credit.

PPAF has also been particularly successful in graduating a number of
small/emerging POs and taking them to scale.

Incremental disbursements of such institutions and their borrowers have
both increased by nearly 170 percent with PPAF assistance, demonstrating
that these institutions are capable of increasing their outreach to the
poor.

Under the first Project, $28 million were allocated to PPAF to complete
approximately 2,400 community infrastructure projects, over 5 years
(1999-2004), in remote and underdeveloped areas of Pakistan.

These projects were designed to be completed while working closely with
POs and their poor communities.

There were $45 million was allocated to PPAF for micro-credit under the
first Project to reach approximately 380,000 poor men and women in
different parts of the country.

Of the total funds allocated for micro-credit, approximately $ 32.09
million have been disbursed and $23 million committed through legally
bound lines of credit with 30 POs.

In the past three years, PPAF's POs have extended 187,000 loans from
PPAF funding to more than 180,000 borrowers, 41 percent of whom are
women.

The average loan size is $ 178--well below the individual loan ceiling
of $ 500.

Repayments by POs to PPAF are also at 100 percent and have generated $
15.32 million at PPAF.

Of the total funds allocated for community infrastructure, $ 13.26
million have been disbursed and $ 13.21 million committed under
financing agreements. As of April 2003, PPAF was working with 23 POs and
had approved 6,610 projects for implementation in 75 districts of the
country.

Of these, 2,735 projects had been completed, while 5,963 were in
progress.

All completed projects are being fully maintained by communities.