Report and Recommendation of the President to the Board of Directors

Project Number: 43448-014 Loan Number: 3057-NEP August 2019

Proposed Loan for Additional Financing and Technical Assistance Grant Nepal: Bagmati River Basin Improvement Project

Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Access to Information Policy.

CURRENCY EQUIVALENTS (as of 8 August 2019) Currency unit – Nepalese rupee/s (NRe/NRs) NRe1.00 = $0.008819 $1.00 = NRs113.3865

ABBREVIATIONS

ADB – Asian Development Bank BRB – Bagmati River basin EIRR – economic internal rate of return HPCIDBC – High Powered Committee for Integrated Development of the Bagmati Civilization IT – information technology MOUD – Ministry of Urban Development PAM – project administration manual RBO – river basin organization TA – technical assistance WWTP – wastewater treatment plant

NOTE

In this report, “$” refers to United States dollars.

Vice-President Shixin Chen, Operations 1 Director General Hun Kim, South Asia Department (SARD) Director Mio Oka, Environment, Natural Resources and Agriculture Division, SARD Team leader Arnaud Cauchois, Principal Water Resources Specialist, SARD Team members Brando Angeles, Associate Environment Officer, SARD Pamela Barrameda, Associate Operations Officer, SARD Jelle Beekma, Senior Water Resources Specialist, Sustainable Development and Climate Change Department Cynthia Pancracia Ceniza, Senior Operations Assistant, SARD Douglas Perkins, Principal Counsel, Office of the General Counsel Rebekah Ramsey, Social Development Specialist, SARD Arun Rana, Senior Project Officer, SARD Suman Subba, Senior Social Development Officer (Gender), SARD Peer reviewer Frank Radstake, Principal Water Resources Specialist, Central and West Asia Department

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page PROJECT AT A GLANCE I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 3 C. Outputs 3 D. Investment and Financing Plans 4 E. Implementation Arrangements 5 III. TECHNICAL ASSISTANCE 6 IV. DUE DILIGENCE 6 A. Technical 6 B. Economic and Financial 7 C. Governance 8 D. Poverty and Social 9 E. Safeguards 9 F. Risks and Mitigating Measures 10 V. ASSURANCES AND CONDITIONS 10 VI. RECOMMENDATION 10

APPENDIXES 1. Revised Design and Monitoring Framework 11 2. List of Linked Documents 16

Project Classification Information Status: Complete

PROJECT AT A GLANCE

1. Basic Data Project Number: 43448-014 Project Name Bagmati River Basin Improvement Department SARD/SAER Project - Additional Financing /Division Country Nepal Executing Agency Ministry of Urban Borrower Nepal Development

2. Sector Subsector(s) ADB Financing ($ million) Agriculture, natural Rural flood protection 0.20 resources and rural Water-based natural resources management 0.20 development Water and other urban Other urban services 32.13 infrastructure and services Renovation and protection of cultural heritage 5.53 Urban sewerage 24.94 Total 63.00

3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic growth Pillar 2: Access to economic CO2 reduction (tons per annum) 168 (IEG) opportunities, including jobs, made Climate Change impact on the Low more inclusive Project Environmentally sustainable Disaster risk management growth (ESG) Global and regional transboundary ADB Financing environmental concerns Adaptation ($ million) 1.96 Natural resources conservation Mitigation ($ million) 2.55 Urban environmental improvement

4. Drivers of Change Components Gender Equity and Mainstreaming Governance and capacity Institutional development Effective gender mainstreaming development (GCD) Organizational development (EGM) 5. Poverty and SDG Targeting Location Impact Geographic Targeting Yes Rural Low Household Targeting No Urban High General Intervention on No Poverty SDG Targeting Yes SDG Goals SDG6, SDG11, SDG13 6. Risk Categorization: Low . 7. Safeguard Categorization Environment: B Involuntary Resettlement: B Indigenous Peoples: C . 8. Financing Modality and Sources Amount ($ million) ADB 63.00 Sovereign Project (Concessional Loan): Ordinary capital resources 63.00 Cofinancing 0.00 None 0.00 Counterpart 15.80 Government 15.80 Total 78.80 Note: An attached technical assistance will be financed on a grant basis by the Technical Assistance Special Fund (TASF-6) in the amount of $600,000.

Currency of ADB Financing: USD

Source: Asian Development Bank This document must only be generated in eOps. 04072019214230372255 Generated Date: 08-Aug-2019 10:32:43 AM

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to Nepal for the additional financing of the Bagmati River Basin Improvement Project. The report also describes proposed technical assistance (TA) for the Capacity Building of the Bagmati River Basin (BRB) Water Management Institutions, and if the Board approves the proposed loan, I, acting under the authority delegated to me by the Board, approve the TA.

2. The Bagmati River Basin Improvement Project (current project) will improve river health and flood management in the BRB. The additional financing is required to expand the current project, including (i) consolidation of water management institutions; (ii) expansion of riverbank beautification works; (iii) mobilization of the riverine community; and (iv) the design, building, and operation of a wastewater treatment plant (WWTP). The additional financing is also required to cover cost overruns associated with the current project,1 the performance of which is on track.2 II. THE PROJECT

A. Rationale

3. The BRB has important cultural and economic value for the people of Nepal. The water of the Bagmati River is considered holy and is used for cultural and ritual ceremonies practiced at the many significant riverbank temples. The river flows through Kathmandu Valley, which is the administrative and economic center of the country, and Nepal’s gateway for tourism. The river provides most of the city’s drinking water in its upper basin, with hydropower generation in the upper and middle basins, and large-scale irrigation in the lower basin.

4. The BRB is considered the most water-stressed river basin in Nepal. Kathmandu City’s rapid and unplanned expansion has placed tremendous pressure on the upper river system. In the absence of appropriate solid waste and wastewater management, the river has become an open sewer with high fecal contamination, a heavy solid waste load, and physicochemical pollutants. River pollution is further aggravated in the dry season when 80% of the river flow is withdrawn for drinking purposes. The condition of the riverbanks has been increasingly degraded by solid waste dumping, encroachment, and uncoordinated works by various government departments. The physical deterioration of the riverine environment has created a public health hazard, as well as the loss of cultural and recreational amenities for urban communities.

5. The Government of Nepal has long attempted to address the degradation of the BRB. In the 1990s efforts were made to improve river management through creation of the High Powered Committee for Integrated Development of the Bagmati Civilization (HPCIDBC), and by embracing the principles of integrated water resources management.3 The Bagmati Action Plan approved by the government in 2009 formed the basis for Asian Development Bank (ADB) involvement in the BRB improvement effort. The current project supported further policy, legal, and institutional improvements by assisting in the development of a new Federal Integrated Water Resources Policy, which was finalized in late 2018 and is being considered for approval by the Cabinet. The

1 Cost overruns resulted primarily from depreciation of special drawing rights vs. the United States dollar, which could not be predicted. 2 Asian Development Bank (ADB). Nepal. Bagmati River Basin Improvement Project. The current project is financed by an Asian Development Fund (ADF) loan of $25.5 million equivalent (Loan 3057-NEP, which as of 1 January 2017 is a concessional loan from ADB’s ordinary capital resources), an ADF grant of $4.5 million (Grant 0367-NEP), and about $0.5 million in cofinancing from the Multidonor Trust Fund under the Water Financing Partnership Facility. The project was declared effective in February 2014 and is expected to close by 29 February 2020. 3 Government of Nepal. 2002. Water Resources Strategy. Kathmandu; and Government of Nepal. 2005. National Water Plan. Kathmandu. 2 policy provides the foundation for a new water act, which is under preparation and is expected to be submitted for approval by Parliament during the first quarter of 2020. Approval of the act will enable the long-term establishment of river basin organizations (RBOs), including the Bagmati RBO, which was established temporarily through an executive order approved by the cabinet on 19 January 2017. The BRB is a sub-basin of the Koshi River basin for which an RBO will be formed to oversee the entire river basin including the Bagmati RBO.

6. ADB support to the Bagmati River basin. ADB approved the current project on 31 October 2013 to support government and civil society initiatives to improve water management and the river environment in the upper BRB (footnote 1). Output 1 of the current project supports the establishment of an RBO with adequate capacity and decision support systems to implement integrated water resources management. Output 2 aims to improve the riverbank’s environment in Kathmandu Valley through riverbed oxygenating weirs, riverbank beautification, and community mobilization and awareness-raising. Output 3 aims to increase water availability in the river during the dry season through the construction of upstream water storage, pilot groundwater recharge schemes, and upstream watershed management. Output 4 provides a flood forecasting and early warning system to reduce flood impacts on riverine communities along the BRB. The current project is complemented by the Kathmandu Valley Wastewater Management Project, which is financing the design, construction, and management of strategic WWTPs.4

7. Performance of the current project. The performance of the current project is considered satisfactory. The current project was rated on-track for the past 12 months and exceeds its contract awards and disbursement projections. The current project is due to close on 29 February 2020. In terms of physical achievements, output 1 activities were completed in December 2018; output 2 activities should be completed by December 2019; output 3 activities should be completed by February 2020; and output 4 activities were completed in July 2018.5

8. The need for continued support for Bagmati River preservation. Under the current project, civil society organizations were established and have become active stakeholders in the protection of sections of the upper Bagmati River in the Kathmandu Valley. The organizations need to be further strengthened, and their activities extended to other stretches of the river. Beautification works have used nature-based solutions, which have renewed residents’ appreciation of the Bagmati River, but these works cover only about half of the urban area. Expanding their scope to include other culturally significant river stretches, including restoring riverine heritage buildings, would significantly increase the current project’s impact. These historic buildings, which were severely damaged during the 2015 earthquakes, are closely related to the river and have significant cultural importance for Kathmandu’s citizens. River water availability will increase through the completion of upstream water storage under the current project, which will allow targeted releases of water during the dry season, but additional work is needed to capture and treat contaminated water from the Tukucha tributary to improve water quality for reuse in the main river branch. A flood forecasting and early warning system was developed, but more end- user training activities are needed to enhance communities’ response to flood warnings. The need to scale up the current project scope was anticipated,6 and feasibility studies and preparation of detailed designs were undertaken under the current project for this purpose.

4 ADB. Nepal. Nepal. Kathmandu Valley Wastewater Management Project (approved in 2013 in the amount of $80 million). 5 More details are provided in Summary of Project Performance (accessible from the list of linked documents in Appendix 2). 6 ADB. 2013. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Grant and Administration of Technical Assistance Grant to Nepal for the Bagmati River Basin Improvement Project. Manila.

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9. Eligibility for additional financing. The primary reason for the additional financing is to scale up and expand the current project. The additional financing will also address a cost overrun, estimated at $2.2 million, resulting from the unforeseen depreciation of special drawing rights against the United States dollar which was not possible to forecast.

10. The proposed additional financing project meets the eligibility criteria for additional financing. The overall project (i) remains technically feasible and economically viable; (ii) is accorded high priority by the government; (iii) is consistent with the project’s development objectives; (iv) is consistent with ADB’s country partnership strategy for Nepal, 2013–2017;7 and (v) is aligned with ADB’s Strategy 2030 operational priorities on (a) making cities more livable; (b) tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability; and (c) strengthening governance and institutional capacity.8 The additional financing project is included in ADB’s country operations business plan, 2019–2021.9

11. The proposed additional financing will strengthen the current project achievements. It will ensure continuity in actions by the government and civil society to restore the Bagmati River.

B. Impact and Outcome

12. The project is aligned with the following impact: a clean, green, and healthy Bagmati River system that is full of life and valued by all.10 The project will have the following outcome: river health and flood management improved.11

C. Outputs

13. The additional financing has four key outputs, the same as the current project.

14. Output 1: Systems and capacity for integrated and participatory river basin management established. The additional financing will (i) construct and equip a new regional building for the Koshi River basin office, (ii) purchase information technology (IT) equipment for the Koshi River basin office and the Bagmati RBO to support river management, and (iii) provide capacity building to the Koshi River basin office and the Bagmati RBO staff through attached transaction TA.

15. Output 2: Riverbank environment in urban areas improved. The additional financing will (i) finance cost overruns of the current project’s river environment civil works; (ii) stabilize and beautify an additional 5.75 kilometers of riverbank, including landscaping and restoration of 23 historic cultural monuments located on the riverbanks; and (iii) mobilize, raise awareness, and build capacity of local government and communities for riverbank management and maintenance.

16. Output 3: Water availability in the basin during dry season increased and watershed conservation improved. The additional financing will construct and operate a WWTP to clean

7 ADB. 2013. Country Partnership Strategy: Nepal, 2013–2017. Manila. The strategy was extended until 2019. It supports Nepal’s peace and development by promoting (i) broad-based and inclusive economic growth, (ii) inclusive social development, (iii) governance and capacity building, and (iv) environmental sustainability. 8 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific. Manila. 9 ADB. 2018. Country Operation Business Plan: Nepal, 2019–2021. Manila. 10 Government of Nepal, Water and Energy Secretariat. 2018. Integrated River Basin Development and Management Plan. Kathmandu. The document has not yet been approved by the Government of Nepal. The current impact was formulated following the previous design and monitoring framework guidelines. The overall impact was updated to align with the current policy: Bagmati River Basin Integrated Development and Management Plan, 2018-2038.” 11 The original and aggregate targets are in the revised design and monitoring framework (Appendix 1).

4 the polluted water of the Tukucha tributary, which flows into the Bagmati River. About 17 million liters of treated effluent will be released in the river daily and contribute to increased Bagmati River flow in the dry season. The WWTP will be built on the bank of the Bagmati River at the confluence with the Tukucha tributary. Located in a highly populated area, the WWTP will be odorless, and integrated into the riverbank landscape. A sludge digester will be built to produce electric power and reduce the plant’s power and sludge disposal expenses. The additional financing will also fund the civil works cost overruns and tree planting under the environmental management plan for the upstream water storage being constructed under the current project.

17. Output 4: Functioning flood forecasting and early warning system for the Bagmati River basin utilized. The additional financing will provide funds for a civil society organization to train 18 communities along the Bagmati River downstream of Kathmandu in implementing a community-based flood early warning system. This system was designed and piloted in communities under the current project.

D. Investment and Financing Plans

18. The overall project is estimated to cost $114.8 million, including additional financing of $78.8 million (Table 1). Detailed cost estimates by expenditure category and detailed cost estimates by financier are included in the project administration manual (PAM).12 Table 1: Project Investment Plan ($ million) Current Additional Item Total Amounta Financingb A. Base Costc 1. Systems and capacity for integrated and participatory river 2.2 0.2 2.4 basin management established 2. Riverbank environment in urban areas improved 15.1 27.5 42.6 3. Water availability in the basin during dry season increased 6.5 32.2 38.7 and watershed conservation improved 4. Functioning flood forecasting and early warning system for 0.5 0.2 0.7 the Bagmati River basin utilized 5. Efficient project management with effective stakeholder 3.7 0.0 3.7 communication established Subtotal (A) 28.0 60.2 88.2 B. Contingenciesd 7.3 17.0 24.3 C. Financing Charges During Implementatione 0.7 1.6 2.3 Total (A+B+C) 36.0 78.8 114.8 Note: Numbers may not sum precisely because of rounding. a Refers to the original amount. Includes taxes and duties of $6.0 million financed from government resources. b Includes total taxes and duties of $7.9 million to be financed from cash government contributions. c In 2019 prices as of April 2019. d Physical contingencies computed at 10% for civil works, 5% for equipment, and 5% for other goods and services. Price contingencies computed on all costs except international and national consultants, based on annual cost escalation factors of 6.5% for 2019–2024 for local currency costs; 1.5% for 2019–2020 and 1.6% for 2021–2024 on annual foreign exchange costs; includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate. e The concessional ordinary capital resources loan interest rate has been computed at 1.0% per year during the grace period and 1.5% per year thereafter. Source: Asian Development Bank estimates.

19. The government has requested a concessional loan of $63.0 million from ADB’s ordinary capital resources to help finance the project.13 The loan will have a 32-year term, including a grace

12 Project Administration Manual (accessible from the list of linked documents in Appendix 2). 13 In 2019 prices as of April 2019.

5 period of 8 years; an interest rate of 1.0% per year during the grace period and 1.5% per year thereafter; and such other terms and conditions set forth in the draft loan agreement.

20. The financing plan is in Table 2. Table 2: Financing Plan Currenta Additional Financing Total Amount Share of Amount Share of Amount Share of Source ($ million) Total (%) ($ million) Total (%) ($ million) Total (%) Asian Development Bank 30.0 83.3 63.0 80.0 93.0 81.0 OCR (concessional loan) 25.5 70.8 63.0 80.0 88.5 77.1 Special Funds resources 4.5 12.5 0.0 0.0 4.5 3.9 (grant) Government of Nepal 6.0 16.7 15.8 20.0 21.8 19.0 Total 36.0 100.0 78.8 100.0 114.8 100.0 OCR = ordinary capital resources. Note: Numbers may not sum precisely because of rounding. a Refers to the original amount. Source: Asian Development Bank estimates. 21. Climate adaptation is estimated to cost $2.3 million and climate mitigation $3 million, exclusive of taxes and duties. ADB will finance 85% of this cost. This includes financing of (i) extra civil works costs because of the adoption of a longer flood return period than government norms for the WWTP and riverbank beautification works, and (ii) a sludge digester that will burn methane produced by the plant to produce electric power.

22. The feasibility studies and detailed designs of the civil works were financed under the current project. ADB provided $225,000 for small-scale TA to review the quality of the technical and economic studies, undertake safeguards due diligences, and prepare the project costs.14

E. Implementation Arrangements

23. The implementation arrangements are summarized in Table 3 and described in detail in the PAM (footnote 12). They follow those of the current project. Table 3: Implementation Arrangements Aspects Arrangements Implementation period December 2019–November 2024 Estimated completion 30 November 2024 date Estimated loan closing 31 May 2025 date Management (i) Oversight body Project steering committee: Secretary, MOUD (chair); joint secretary, MOUD; project manager, HPCIDBC; director general, DOWRI; director general, DHM; chief warden, SNNP; a representative each from DHM, MOF, PID KUKL, KVDA, KVWSMB, DOAr, and WECS; project director, PCMU (secretary) (ii) Executing agency MOUD (iii) Key implementing HPCIDBC, WECS, DOWRI agencies (iv) Implementation unit PCMU located in Kathmandu HPCIDBC building with 27 staff PIU WECS located in Kathmandu WECS office with 5 staff PIU DOWRI located in Kathmandu DOWRI office with 11 staff

14 ADB. 2017. Technical Assistance to Nepal for the Additional Financing of Bagmati River Basin Improvement Project. Manila (TA 9337-NEP).

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Aspects Arrangements Procurement OCB 6 contracts $52.80 million RFQ 1 contract $8,600 Consulting services Consulting Firm: QCBS 425 person-months for $3.30 million 90:10 construction supervision 120 person-months NGO: QCBS to undertake community $1.15 million participation 87 person-months to train communities in NGO: CQS flood warning systems $0.20 million Retroactive financing Advance contracting will be used for (i) civil works under the current project for and/or advance which there are cost overruns and (ii) consulting services and civil works under contracting the additional financing. Disbursement The loan proceeds will be disbursed in accordance with ADB's Loan Disbursement Handbook (2017, as amended from time to time) and detailed arrangements agreed between the government and ADB. ADB = Asian Development Bank, CQS = consultants’ qualification selection, DHM = Department of Hydrology and Meteorology, DOAr = Department of Archeology, DOWRI = Department of Water Resource and Irrigation, HPCIDBC = High Powered Committee for Integrated Development of the Bagmati Civilization, KUKL = Kathmandu Upatyaka Khanepani Limited, KVDA = Kathmandu Valley Development Authority, KVWSMB = Kathmandu Valley Water Supply Management Board, MOF = Ministry of Finance, MOUD = Ministry of Urban Development, NGO = nongovernment organization, OCB = open competitive bidding, PCMU = project coordination and management unit, PID = project implementation directorate, PIU = project implementation unit, QCBS = quality- and cost-based selection, RFQ = request for quotation, SNNP = Shivapuri Nagarjun National Park, WECS = Water and Energy Commission Secretariat. Source: Asian Development Bank estimates. III. TECHNICAL ASSISTANCE

24. The proposed transaction TA will support capacity building of the BRB water management institutions under project outputs 1 and 4. The TA will focus on capacity building in IT applications for improved river basin management. It will have three outputs: (i) capacity and tools for river asset management and water quality data processing by the Bagmati RBO developed; (ii) capacity of the Bagmati RBO and the Koshi River basin office to use a geographic information system and the decision support system for water management scenarios improvement, and display results to the BRB stakeholders, increased; and (iii) flood forecasting and measures improved through routine use and extension of the flood forecasting and early warning system by Bagmati RBO, Koshi River basin office, and the Department of Hydrology and Meteorology. These outputs will be supported through associated TA because the tasks are specialized and require specific consultant skills and functional IT systems and networks in the offices. The transaction TA is estimated to cost $620,000, of which $600,000 will be financed on a grant basis by ADB’s Technical Assistance Special Fund (TASF 6). The government will provide counterpart staff, office space, workshop venues, and other in-kind contributions. The Water and Energy Commission Secretariat (WECS) will be the executing agency for the TA, which will be implemented over 3 years.15

IV. DUE DILIGENCE

A. Technical

25. Civil works. The Tukucha WWTP will have the capacity to purify 17.3 million liters of sewage per day which corresponds to the wastewater produced by a town with 144,170 inhabitants. The WWTP will be constructed on the bank of the Bagmati River. An innovative design was supported by ADB to address several constraints, including (i) limited space for construction; (ii) a location close to residential areas, a cultural heritage area, and within the

15 Attached Technical Assistance Report (accessible from the list of linked documents in Appendix 2).

7 flooding area of the Bagmati River; (iii) high fluctuations in the quantity and quality of the wastewater; and (iv) integration into the urban landscape. To address these, the WWTP will adopt compact treatment technology with covered basins and cover slabs above the flood level. The proposed purification technology comprises an activated sludge plant operating according to the sequencing batch reactor process. This process has a smaller footprint than other activated sludge plants and is well known in the subregion but was not yet adopted in Nepal. Polluted air will be drawn out of the buildings and passed through air filtration and purification facilities to remove any harmful emissions and nuisance odors. The construction will be built partially underground and partially above ground, and will consider a 50-year flood return period. The basins will be covered and planted with grass. All plant amenities will be designed following the local architectural style, and the aesthetics of the site will be enhanced through landscaping.

26. ADB value addition also focused on the designs for the riverbank beautification work and the Tukucha WWTP. These designs were produced with the support of an urban architect and cultural heritage specialist. They will use local materials (e.g., stones, wood, and traditional bricks) for construction, and incorporate local cultural amenities and architectural features in the design. The design exceeds local standards for flood management to anticipate climate change impacts.16

27. An assessment of the condition and structural design of the damaged cultural heritage buildings was undertaken by cultural heritage architects and structural engineers, and reviewed by a cultural heritage specialist working for the United Nations Educational, Scientific and Cultural Organization. The designs and construction methodology follow national standards for cultural heritage restoration. All buildings will be restored, renovated, or rebuilt in accordance with the original ancient design, with the inclusion of specific structural improvements to ensure earthquake resilience.

B. Economic and Financial

28. All project outputs are nonrevenue generating. Therefore, a financial sustainability analysis was completed to consider whether the owners of the assets developed by the project additional financing will be able to support the operation and maintenance costs of (i) landscaping along the riverbanks of the Bagmati, (ii) restored historic temples and monuments, and (iii) the Tukucha WWTP. The asset owners can sustainably cover the recurrent costs associated with the project assets, but mitigation measures have been put into place to address the associated risks.

29. For the economic analysis, a comprehensive nonmarket valuation exercise was completed to estimate the economic benefits from the additional financing using a survey-based method. A sample of households in urban Kathmandu were asked how much they are willing to pay for improved water quality in the Bagmati River, landscaping along the riverbanks, and restoration of historic temples and monuments along the riverbanks. Survey results were analyzed by developing econometric models to estimate the willingness-to-pay of an individual household; these results were then scaled up to all households in the urban Kathmandu area. The results showed urban Kathmandu households are willing to pay $15.83 per year for an improved Bagmati River environment. A separate nonmarket valuation exercise estimated the willingness-to-pay of international visitors to the project area; these visitors are willing to pay

16 Increased flood intensity is the main potential risk associated with climate change. To account for this risk, the project considered a 100-year flood return period for the design of the infrastructure. This is the maximum flood that can be accommodated within the available space of the river corridors. Flood return periods considered by the government are more typically 25–50 years.

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$23.90 for the amenity values provided by the project. The economic analysis only included the benefits to Kathmandu households to focus on the “within country” benefits of the project.

30. Using the nonmarket valuation estimate of economic benefits and the additional financing costs, the estimated economic internal rate of return (EIRR) is 6.7%; the economic net present value is $120.1 million. The EIRR is higher than the economic opportunity cost of capital estimated at 6.0%, which is the rate used in ADB environment projects.17 This indicates that the additional financing is economically viable. A 6% social discount rate is used for ADB environment projects, instead of the usual social discount rate of 9%. In addition, for this project, the lower discount rate threshold is justified by the omission of benefits to international visitors— if included, these would raise the EIRR to 18%. A sensitivity analysis was conducted using simulation to estimate the risk around the EIRR and economic net present value results. Simulation results showed that the EIRR ranged from a minimum 0.0% to a maximum 12.1%, with a probability of about 30% that the EIRR was less than the threshold discount rate of 6.0%.

C. Governance

31. Financial management. A financial management assessment of HPCIDBC, the Department of Irrigation, and WECS was carried out in accordance with ADB guidelines during the current project preparation, and updated for the additional financing. 18 The overall risk assessment for the project is moderate. HPCIDBC has experience in implementing the current project and has proven ability to manage funds adequately. The project accounts will be audited yearly by the Office of the Auditor General.

32. The main risks include (i) lack of a comprehensive internal audit function, (ii) inadequate variance analysis in financial and physical targets, and (iii) turnover of financial management staff during implementation. These risks will be mitigated through the following measures: (i) a financial management specialist will be engaged to provide support and capacity building to the project, (ii) regular training on ADB’s financial management procedures and requirements will be provided to the project’s financial management staff, (iii) the quarterly and annual financial reporting will be enhanced, and (iv) the external audit’s terms of reference will be strengthened in examining the project’s internal control framework.

33. Procurement. The procurement of goods and works, and recruitment of consultants will follow the ADB Procurement Policy (2017, as amended from time to time) and Procurement Regulations for ADB Borrowers (2017, as amended from time to time). The updated procurement capacity assessment concluded that the overall procurement risk for the project is low. The project coordination and management unit and WECS have experience in procurement in accordance with ADB requirements and have demonstrated their capacity under the current project. International and national procurement specialists are provided by ADB to prepare the design– build–operate bidding documents and support the evaluation process. Funds were allocated in the project to provide consulting services to assist with contract management.

34. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and the Ministry of Urban Development (MOUD). The specific policy requirements and supplementary measures are described in the PAM (footnote 12).

17 ADB. 2017. Guidelines for the Economic Analysis of Projects. Manila. 18 ADB. 2005. Guidelines for the Financial Management and Analysis of Projects. Manila.

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D. Poverty and Social

35. The project is classified effective gender mainstreaming. A Gender Equality and Social Inclusion Action Plan was designed for the current project and updated for the additional financing based on implementation performance; currently (i) women hold 16% of civil works contract employment, (ii) women make up 53% and excluded social groups 37% of those involved in watershed conservation groups, and (iii) women account for 66% and excluded social groups for 33% of those involved in training related to rainwater harvesting. While the primary project beneficiaries are the people living in the BRB, all residents (including the poor and socially excluded) will benefit from (i) improved water security, (ii) conservation of the watershed and increased river flow, (iii) improvements to sanitation and the river environment, (iv) reduced flood hazards impacts, (v) improved governance through establishment of a dedicated RBO, and (vi) capacity development of local residents.

36. The additional financing will provide women, the poor, and socially excluded with access to project benefits. Job reserves will allocate 20% of employment in project construction created for women and 10% for socially excluded people, while 33% of membership in community group platforms created by the project will be reserved for women members, and 20% for poor and socially excluded groups. In addition, the needs of women, children, and the disabled and elderly will inform disaster management responses in all community-based flood adaptation programs. The current project has prepared a stakeholder communication strategy for community awareness and participation to mobilize stakeholders for widespread and meaningful participation.

E. Safeguards

37. Environment. The additional financing is classified category B for the environment in accordance with ADB’s Safeguard Policy Statement (2009). The additional financing will have no significant adverse impacts and will improve the condition of heritage buildings and enhance the water quality of Bagmati River. Environmental impacts associated with air quality and construction waste will be temporary and mitigated with respect to anticipated riverbank works in the urban area, the proposed project design will contribute to improvement of their environment. Stakeholders were and will continue to be consulted. ADB will post the final initial environmental examination and environmental monitoring reports on its website.19

38. Social safeguards. The additional financing is classified category B for involuntary resettlement in accordance with ADB’s Safeguard Policy Statement. Stabilization and landscaping of riverbanks under the additional financing will cause involuntary resettlement impacts to 18 affected persons, including (i) permanent physical displacement of 17 nontitle holders and (ii) temporary physical displacement of 1 nontitle holder (a holy man who will temporarily move during construction and return to live in a shrine). A resettlement plan was prepared and will be disclosed on the ADB website.20

39. The project is classified category C for indigenous peoples in accordance with ADB’s Safeguard Policy Statement. Project screening confirms that indigenous peoples are not present in the project area, and that those living in the river basin area will benefit equally from the project.

19 Initial Environmental Examination (accessible from the list of linked documents in Appendix 2). 20 Resettlement Plan (accessible from the list of linked documents in Appendix 2).

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F. Risks and Mitigating Measures

40. Major risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.21 Table 4: Summary of Risks and Mitigating Measures Risks Mitigating Measures Delayed government approval of a legal ADB, the World Bank, and executing and implementing and institutional framework for integrated agencies will continue to work closely together to assist the water resources management and government to approve the legislation that is being finalized with establishment of a strong river basin ADB technical assistance.a organization for the Bagmati River. Inadequate revisions to drinking water and ADB’s South Asia Urban Development and Water Division is sewerage tariffs result in reduced financial assisting the KVWSMB and KUKL to prepare submissions on sustainability of the Tukucha WWTP. revised tariffs aiming for at least full cost recovery of the operational expenditures to the Water Supply Tariff Fixation Commission.b A loan covenant requires the government to revise sewerage tariffs to ensure that Tukucha WWTP treatment services are chargeable. ADB = Asian Development Bank, KUKL = Kathmandu Upatyaka Khanepani Limited, KVWSMB = Kathmandu Valley Water Supply Management Board, WWTP = wastewater treatment plant. a ADB. 2013. Technical Assistance to Nepal for Institutional and Legal Support for Improved Water Management Systems and Formation of the Bagmati River Basin Organization. Manila (TA 8500-NEP). b ADB. 2013. Report and Recommendation of the President to the Board of Directors: Proposed Loan to Nepal for the Kathmandu Valley Wastewater Management Project. Manila (Loan 3000-NEP). Source: Asian Development Bank. V. ASSURANCES AND CONDITIONS

41. The government and MOUD have assured ADB that implementation of the project shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and loan documents.

42. The government and MOUD have agreed with ADB on certain covenants for the project, which are set forth in the loan agreement.

43. Conditions for loan effectiveness include completion of procurement for two contracts for the construction subprojects in output 2 and a contract for the engineering consulting firm.

VI. RECOMMENDATION

44. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of $63,000,000 to Nepal for the additional financing of the Bagmati River Basin Improvement Project, from ADB’s ordinary capital resources, in concessional terms, with an interest charge at the rate of 1% per year during the grace period and 1.5% per year thereafter; for a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board.

Takehiko Nakao President 30 August 2019

21 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

Appendix 1 11

REVISED DESIGN AND MONITORING FRAMEWORK

Impact the Project is Aligned with Current project Improved water security in the Bagmati River basin Overall project A clean, green, and healthy Bagmati River system that is full of life and valued by all (Bagmati Integrated River Basin Development and Management Plan 2018–2038)a

Data Sources and Reporting Results Performance Targets and Indicators with Baselines Mechanisms Risks Chain Outcome Current project Kathmandu Valley Current By 2020:b Wastewater project Bathing water quality standard (DO > 3 mg/l) achieved at RBO Secretariat Management River health Pashupatinath when reservoir water is released (2012– (HPCIDBC) Project and flood 2013 baseline: highest DO = 1 mg/l in dry season) water quality implementation is management Overall project assessment delayed and does improved By 2026: reports not achieve the Unchanged target of meeting Overall the effluent project Current project Department of standards of Unchanged By 2020:b Water Induced WWTPs at Annualized cost of flooding in Bagmati River Basin Disaster Gokarna and reduced by 10% (1993–2013 baseline: $850,000)c Prevention Guheshwori. Overall project annual reporting By 2026: Unchanged

Current project DBO contract None third party audit Overall project report By 2026: Amount of wastewater flowing in the Bagmati River reduced by 17.3 MLD (2019 baseline: Not applicable) Outputs 1a. 1a.–e. Project The Government Current project progress reports of Nepal delays Current By 2018:b prepared by the approval of a project 15-year IRBDMP for Bagmati approved by majority of Water and suitable legal and 1. Systems basin stakeholders (2013 baseline: Not applicable) Energy institutional and capacity Overall project Commission framework for for integrated Unchanged Secretariat and integrated water and 1b. HPCIDBC resources participatory Current project management and river basin By 2018:b establishment of a management Water resources (including quality and quantity) real-time strong RBO for established data and decision support systems in place (2013 the Bagmati River. baseline: Not applicable) Overall Overall project project Unchanged Unchanged 1c. Current project By 2019:b RBO legally established, financed, and staffed (2013 baseline: Not applicable) Overall project By 2019: Unchanged 1d. Current project None 12 Appendix 1

Data Sources and Reporting Results Performance Targets and Indicators with Baselines Mechanisms Risks Chain Overall project By 2023: Bagmati RBO offices equipped and staff trained (2019 baseline: Not applicable) 1e. Current project None Overall project By 2023 Koshi River basin office built, equipped and staffed (2019 baseline: Not applicable) Current 2a. 2a.–g. Project Inadequate project Current project progress reports operation and 2. Riverbank By 2019:b prepared by the maintenance on environment 7.2 km of river corridor constructed with aesthetic river Ministry of beautified in urban walls, green zones, and recreational amenities Urban corridors and areas employing 20% of women and 10% poor and socially Development restored heritage improved excluded as workers during construction (2013 baseline: and HPCIDBC building results in 0) asset Overall Overall project deterioration. project By 2023: Unchanged 12.95 km of river corridor constructed with aesthetic river walls, green zones, and recreational amenities employing 20% of women and 10% poor and socially excluded as workers during construction (2019 baseline: 7.2 km) 2b. Current project By 2019:b 11 aeration weirs constructed (2013 baseline: 0) Overall project Unchanged 2c. Current project By 2019:b 2 regulators rehabilitated (2013 baseline: 0) Overall project Unchanged 2d. Current project None Overall project By 2024: 23 historic monuments along the Bagmati River corridor restored to agreed archaeological and architectural standards (2019 baseline: 0) 2e. Current project By 2019:b Nine wards user community groups platform, comprising at least 33% women members and 20% from poor and socially excluded groups, mobilized to monitor and prevent solid waste disposal into the river corridor (2013 baseline: 0) Overall project By 2024: 22 wards user community groups platform, comprising at least 33% women members and 20% from poor and

Appendix 1 13

Data Sources and Reporting Results Performance Targets and Indicators with Baselines Mechanisms Risks Chain socially excluded groups, mobilized to monitor and prevent solid waste disposal into the river corridor (2019 baseline: Nine wards) 2f. Current project By 2018: 300 households adopt improved solid waste management (2013 baseline: 0) Overall project By 2019: 650 households adopt improved solid waste management (2019 baseline: 300) 2g. Current project By 2019: 2 km of riverbank maintained with private sector support (2013 baseline: 0) Overall project Unchanged Current 3a. 3a.–d. Project Inadequate project Current project progress reports revisions to 3. Water By 2020:b prepared by sewerage tariffs availability in 850,000 m3 of storage capacity established with the Ministry of result in reduced the basin Dhap dam (2013 baseline: 0) Urban financial during dry Overall project Development, sustainability of season By 2020: Department of the Tukucha increased Unchanged Water WWTP and 3b. Resources and watershed Current project Irrigation, and conservation By 2019: HPCIDBC improved 178,000 m3 rooftop water harvested annually by 2,500 households to provide 45,000 m3 of water supply and 3e. DBO Overall recharge 135,000 m3 of groundwater (2013 baseline: 0) contract third project Overall project party audit Unchanged Unchanged report 3c. Current project By 2019: 12.5 hectares erosion-prone cultivated area in the Shivapuri Nagarjun National Park stabilized with fruit-tree planting and improved cropping practices (2013 baseline: 0) Overall project Unchanged 3d. Current project By 2019: 80% of households converted from traditional wood stoves to energy-saving stoves (baseline 2013: 296 households in the Shivapuri Nagarjun National Park use traditional stoves) Overall project Unchanged 3e. Current project None Overall project

14 Appendix 1

Data Sources and Reporting Results Performance Targets and Indicators with Baselines Mechanisms Risks Chain By 2023: One wastewater treatment plant commissioned releasing about 17.3 MLD of treated effluent in the Bagmati river (2019 baseline: 0) (RFI A) Current 4a. 4a.–c. Department of project Current project Water and Hydrology and 4. By 2018:b Energy Meteorology does Functioning Flood early warning system in place (2013 baseline: Not Commission not receive flood applicable) Secretariat and adequate forecasting Overall project Department of financing for and early Unchanged Hydrology and maintenance of warning 4b. Meteorology the hydro-met system for Current project annual reports network and the Bagmati By 2018:b FFEWs River basin Flood warnings disseminated 72 hours before flood utilized events (2013 baseline: 24 hours before flood events with low reliability) Overall Overall project project Unchanged Unchanged 4c. Current project By 2018: 25 most flood-prone riverine villages implement community-based flood adaptation programs with protocols that consider needs of women, children, disabled, and elderly during disasters (2013 baseline: 0) Overall project By 2022 Unchanged Activities with Milestones 1. Systems and capacity for integrated and participatory river basin management established 1.1 Recruit DSS, FFEW, IRBDMP, and water quality consultants (completed). 1.2 Select and mobilize RBO and legal consultants (completed). 1.3 Conduct consultations for finalization of RBO structure (completed). 1.4 Draft new water act and legislature for RBO (Q1 2017–Q2 2019 changed). 1.5 Procure equipment for DSS, and water quality (completed). 1.6 Develop and implement DSS and water quality monitoring system (completed). 1.7 Develop IRBDMP (completed). 1.8 Recruit additional financing capacity-building consultants (Q1 2020–Q3 2020, added). 1.9 Build Koshi River basin office building (Q2 2021–Q2 2022, added). 1.10 Procure and install information technology equipment (Q1 2022–Q3 2022, added). 1.11 Koshi River basin office and Bagmati RBO staff capacity building (Q2 2020–Q2 2023, added) 2. Riverbank environment in urban areas improved 2.1 Tender river improvement works (current project completed, additional financing Q1 2019–Q3 2019). 2.2 Recruit NGOs for river community mobilization, gender and solid waste management (current project completed, additional financing Q1 2018–Q3 2019). 2.3 Form community groups, establish stakeholders’ consultations and gender groups for the duration of the project (current contract completed; additional financing Q4 2019–Q4 2020). 2.4 Undertake community mobilization, stakeholders’ interaction, and gender activities (current project April 2016–October 2018, additional financing Q4 2020–Q4 2023). 2.5 Undertake detailed design by consultant (completed). 2.6 River improvement works construction (current project Q4 2016–Q2 2019, changed; additional financing Q4 2019–Q2 2023, added) 2.7 Restore historic temples and monuments (Q3 2019–Q4 2024, added). 3. Water availability in the basin during dry season increased and watershed conservation improved 3.1 Process approval of environmental impact assessment for Dhap Dam (completed). 3.2 Tender design and build contract for Dhap Dam (completed).

Appendix 1 15

Activities with Milestones 3.3 Recruit Nagmati dam design consultants (completed). 3.4 Recruit NGOs for watershed management and rainwater harvesting (completed). 3.5 Undertake detailed design for Dhap Dam by contractor (completed). 3.6 Undertake detailed design for Nagmati dam (completed). 3.7 Implement environmental management plan for Dhap Dam construction works (Q1 2015–Q1 2022, changed). 3.8 Construct Dhap dam (Q4 2015–Q2 2019 changed). 3.9 Implement rainwater harvesting and watershed management (Q3 2016–Q3 2019, changed). 3.10 Prepare detailed design of WWTP for Tukucha River tributary (Q2 2020–Q4 2020, added). 3.11 Build WWTP for Tukucha River tributary (Q1 2021–Q2 2023, added). 3.12 Operate WWTP for Tukucha River tributary (Q2 2023–Q2 2028, added). 4. Functioning flood forecasting and early warning system for the Bagmati River Basin utilized 4.1 Mobilize FFEW consultants under DSS contract (completed). 4.2 Procure equipment for FFEW (completed). 4.3 Develop, implement, and test FFEW (completed). 4.4 Recruit NGO for communities’ flood early warning training (Q4 2019–Q2 2020, added). 4.5 Implement community early warning trainings (Q2 2020–Q2 2022, added). Project Management Activities Recruit the project management and construction supervision consultants (Q2 2018–Q3 2019). Set up financial management system (Q1 2020). Set up project performance monitoring system (Q2 2020). Undertake midterm review (Q2 2022). Prepare project completion report (Q4 2024). Inputs Asian Development Bank Loan Grant Technical Assistance Grant $25.5 million current $4.5 million current $0.5 current $63.0 million additional $0.0 additional $0.6 million additional $88.5 million overall $4.5 million overall $1.1 million overall

Water Financing Partnership Facility Loan Grant Technical Assistance Grant $0 current $0 current $0.5 million current $0 additional $0 additional $0.0 additional $0 overall $0 million overall $0.5 million overall

Government $6.0 million current $15.8 million additional $21.8 million overall

Assumptions for Partner Financing Current project None Overall project Unchanged DO = dissolved oxygen, DSS = decision support system, FFEW =flood forecasting and early warning system, HPCIDBC = High Powered Committee for the Integrated Development of the Bagmati Civilization, IRBDMP = integrated river basin development master plan, km = kilometer, m3 = cubic meter, mg/l = milligram per liter, MLD = million liters per day, NGO = nongovernment organization, Q = quarter, RBO = river basin organization, WWTP = wastewater treatment plant. a Government of Nepal, Water and Energy Secretariat. 2018. Integrated River Basin Development and Management Plan. Kathmandu. The document is yet to be approved by the Government of Nepal. The current impact was formulated following the previous design and monitoring framework guidelines. The overall impact was updated to align with the current policy: Bagmati River Basin Integrated Development and Management Plan, 2018-2038.” b Milestone dates revised to reflect current project implementation progress. c The costs of flooding are based on average costs from 2000 to 2004 and the costs of the large flood in 1993, amortized. Contribution to the ADB Results Framework RFI A: Wastewater treatment capacity added or improved (cubic meters per day). Target: 17,300. Source: Asian Development Bank.

16 Appendix 2

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=43448-014-3

1. Loan Agreement 2. Sector Assessment (Summary): Agriculture, Natural Resources, and Rural Development 3. Project Administration Manual 4. Summary of Project Performance 5. Contribution to the ADB Results Framework 6. Development Coordination 7. Attached Technical Assistance Report 8. Economic Analysis 9. Financial Analysis 10. Country Economic Indicators 11. Summary Poverty Reduction and Social Strategy 12. Gender Equality and Social Inclusion Action Plan 13. Initial Environmental Examination 14. Resettlement Plan 15. Risk Assessment and Risk Management Plan

Supplementary Documents 16. Climate Change Assessment 17. Detailed Economic Analysis 18. Financial Management Assessment