Asian Development Bank Rrp: Nep 32239

ASIAN DEVELOPMENT BANK RRP: NEP 32239

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

BOARD OF DIRECTORS

ON A

PROPOSED LOAN

TO THE

KINGDOM OF NEPAL

FOR THE

URBAN AND ENVIRONMENTAL IMPROVEMENT PROJECT

November 2002 CURRENCY EQUIVALENTS (as of 15 October 2002)

Currency Unit – Nepalese rupee (NRe/NRs) NRe1.00 = $0.013 $1.00 = NRs76.73

ABBREVIATIONS

ADB – Asian Development Bank CBO – community-based organization DUDBC – Department of Urban Development and Building Construction, MPPW EA – executing agency EIA – environmental impact assessment EIRR – economic internal rate of return FIRR – financial internal rate of return GTZ – Gesellschaft für Technische Zusammenarbeit (German Agency for Technical Cooperation) IA – implementing agency ICB – international competitive bidding IEE – initial environmental examination KfW – Kreditanstalt für Wiederaufbau (German Development Bank) LCB – local competitive bidding Lcd – litres per capita per day MOF – Ministry of Finance MOPE – Ministry of Population and Environment MPPW – Ministry of Physical Planning and Works NWSC – Nepal Water Supply Corporation O&M – operation and maintenance PA – project advisor PCO – project coordination office PIU – project implementation unit PPMS – project performance monitoring system RUPP – Rural-Urban Partnership Program TDF – Town Development Fund UEIP – Urban and Environmental Improvement Project UNDP – United Nations Development Programme VDC – village development committee WACC – weighted average of capital cost

NOTES

(i) The fiscal year (FY) of the Government ends on 15 July. FY before a calendar year denotes the year in which the fiscal year ends. (ii) In this report, "$" refers to US dollars

This report was prepared by a team consisting of Keiichi Tamaki (team leader), J. Kongoasa, A. Azimi, M. Sultana, G. Atay, K. Panday, N. Sapkota, and T. Iwaki.

CONTENTS Page

LOAN AND PROJECT SUMMARY iii STRATEGIC ECONOMIC LINKAGES OF UEIP TOWNS viii MAP ix

I. THE PROPOSAL 1

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, 1 AND OPPORTUNITIES A. Performance Indicators and Analysis 1 B. Analysis of Key Problems and Opportunities 1

III. THE PROPOSED PROJECT 4 A. Objectives 4 B. Components and Outputs 5 C. Special features 9 D. Cost Estimates 10 E. Financing Plan 10 F. Implementation Arrangements 12

IV. PROJECT BENEFITS, IMPACTS, AND RISKS 15 A. Project Benefits and Impacts 15 B. Risks 16

V. ASSURANCES 16 A. Specific Assurances 16 B. Conditions for Loan Effectiveness 19 C. Conditions for Withdrawals from Loan Account 19 D. Conditions for Award of Contract 20

VI. RECOMMENDATION 20

APPENDIXES 1. Project Framework 21 2. Urban Policy in Nepal 27 3. Town Development Fund 29 4. Nepal's Town Development Act 33 5. Water and Sanitation Sector Strategy 35 6. External Assistance to Nepal's Urban Development 36 7. Summary Poverty Reduction and Social Strategy 37 8. Detailed Cost Estimates 41 9. Organizational Arrangements for Implementation 44 10. Implementation Schedule 45 11. Proposed Contract Packaging 46 12. Land Acquisition and Resettlement (Summary) 47 13. Summary Initial Environmental Examination 48 14. Economic and Financial Analyses and Financial Sustainability 53

SUPPLEMENTARY APPENDIXES (available upon request) A. Minutes of Town Workshops, and Minutes of Consultative Meeting on Water Supply System for Panauti, Banepa and Dhulikhel B. Revisions to Water Supply Schemes C. Sample Initial Social Assessment for Land Pooling Scheme D. Terms of Reference for Consultants E. Project Performance Management Systems F. Land Acquisition and Resettlement (Full-version) G. Summary Initial Environmental Examination (Full-version) H. Economic and Financial Analyses and Financial Sustainability (Full-version) I. Chronology J. Problem/Opportunity Tree for Project Implementation iii

LOAN AND PROJECT SUMMARY

Borrower The Kingdom of Nepal

Classification Poverty Classification: Other Thematic: Human development, good governance, and environmental protection

Environmental Category B. An initial environmental examination (IEE) was Assessment undertaken and the summary IEE is a core appendix.

Project Description The Project will promote sustainable urban development in the selected nine urban growth nodes surrounding Kathmandu Valley by addressing critical urban and environmental infrastructure/service improvement needs. To achieve that goal, training activities for institutional capacity building and revenue improvement will first be provided for the relevant municipal staffs. Then, a number of capital investments in essential urban and environmental infrastructure and facilities will be implemented. At the same time, public health awareness campaigns and sanitation education programs will be carried out at the community level in the participating towns. The Project will also provide overall project implementation assistance.

Rationale Rapid urbanization is taking place in Nepal through significant rural-to-urban migration. Population growth rates in the 58 designated urban areas, especially those in the central region, are as high as 7% per annum, which is roughly three times the average national population growth rate of 2.3% per annum. Nepal’s population density of around 600 persons per square kilometer of arable land, which is one of the highest in the world, exceeds the carrying capacity of the rural areas. As a result of the rapid population growth in the urban areas, serious urban environmental issues are emerging, including inadequate drinking water supply; haphazard disposal of solid waste and human waste, which is causing various pollution problems; and uncontrolled urban/physical development. To date, the existing centralized public administration system has failed to respond to these urban management challenges. To address this institutional failure, the Government is now starting a serious effort to decentralize urban management. This Project is the Government's first step in realizing this decentralization policy. The Project will also address the issues of disparities between Kathmandu Valley and areas outside the valley, and help mitigate the increasing trend of reverse to the capital region, with all its negative environmental and social consequences.

Objectives and Scope The Project intends to bring about sustainable urban development in the nine urban areas outside Kathmandu Valley by improving essential urban and environmental infrastructure and services, and strengthening the relevant institutions. As a result of the Project, personal hygiene, environmental sanitation and overall quality of life are expected to improve in these areas.

The Project will have five main components: A. municipal institutional strengthening and revenue mobilization, B. provision of urban and environmental infrastructure, C. provision of supplementary urban facilities, D. community development, and E. project implementation assistance. Relevant municipal staffs will first go through training for institutional capacity building and revenue improvement under component A. Under component B, the Project will finance major infrastructure improvements in five subsectors: B (i) sanitation and wastewater management, B (ii) water supply, B (iii) neighborhood road, drainage, and water supply development, B (iv) river training, and B (v) road upgrading. These major infrastructure improvements are complemented by improvements to supplementary urban facilities in component c, which has two subcomponents: C (i) small urban community facilities, and C (ii) revenue-generating urban facilities. Financing for these supplementary urban facilities, which are small compared with those in component B, will be carried out through the Town Development Fund (TDF). Public-private partnership is encouraged for this component. Under component D, various health awareness campaigns and sanitation education programs will be carried out at the community level in the participating towns. Under component E, overall project implementation assistance will be provided.

Additionally, the Project will be linked to two parallel schemes. One scheme will promote rural-urban partnership, which will contribute to poverty reduction not only in the main urban areas but also in the surrounding rural areas within the municipalities. The other scheme will address the solid waste management issue by promoting composting. Funding for the parallel schemes is being arranged separately.

Cost Estimates The estimated project cost is $37.50 million equivalent, comprising foreign exchange costs of $12.62 million (33.7%) and local currency costs of $24.88 million equivalent (66.3%).

Financing Plan ($ million) Source Foreign Local Total Percent Exchange Currency Cost Asian 12.62 17.38 30.00 80.0 Development Bank Government 4.40 4.40 11.7 Project Town/ 3.10 3.10 8.3 Community/ Private Sector Participation Total 12.62 24.88 37.50 100.0

Loan Amount and Terms A loan of SDR22,699,000 ($30 million equivalent) from ADB's Special Funds resources will be provided. The loan will have a 32- year term including a grace period of 8 years, with an interest rate charge of 1% per annum during the grace period and 1.5% per annum thereafter.

Allocation and Relending Municipalities are required to provide up-front counterpart funds. Terms By relending a portion of the ADB loan (SDR7,285,000), the Government will provide the municipalities with some matching grant funds whose amount/percentages are primarily determined by the subsector concerned. The Government will provide the balance for the municipalities in the form of loans. The loans will have an interest rate of 8% per annum with a 20-year repayment period including a grace period of 5 years. In parallel, the Government will relend a portion of the ADB loan (SDR2,562,000) to the TDF with an interest rate of 5% per annum with a 20-year repayment period including a grace period of 5 years. The TDF will onlend the funds to the municipalities with an interest rate of 8% per annum and a 12-15 year repayment period including a grace period of 3 years. The Government will bear the foreign exchange risk.

Period of Utilization Until 31 March 2010

Estimated Project 30 September 2009 Completion Date

Implementation The Ministry of Physical Planning and Works (MPPW) will be the Arrangements Executing Agency (EA) for the Project. It will discharge its duties through its Department of Urban Development and Building Construction (DUDBC), which will establish a project coordination office (PCO) for the Project. The nine participating municipalities (including one prospective municipality of Dhadingbesi) will be the Implementing Agencies (IAs) for the majority of the subprojects. Implementation at the municipal level will be managed using one of two possible models: the project advisor (PA) model and the project implementation unit (PIU) model. The PA model is preferred by two municipalities with relatively advanced institutional capabilities (Bharatpur and Hetauda), while the PIU model is preferred by the remaining six municipalities whose institutional capabilities are still weak. The PA model envisages that the municipal administration will essentially be in charge of implementation management, assisted by a PA without executive function. The PIU model envisages that a PIU will be formed and staffed by the EA, and will assume the executive function for managing implementation, subject to general guidance from the municipality concerned. Considering the limited personnel resources at DUDBC, from which secondment staff will be drawn for PAs/PIUs, a staggered implementation schedule will be used.

Executing Agency MPPW

Procurement All procurement under the Project will be carried out in accordance with ADB's Guidelines for Procurement. Contracts for civil works estimated to cost $1.0 million equivalent or more will be carried out using international competitive bidding (ICB) procedures, while those estimated to cost less than $1.0 million equivalent will be carried out under local competitive bidding (LCB) procedures. Goods to be procured will preferably be grouped into packages of $500,000 equivalent or more to be suitable for ICB procedures. Contracts for miscellaneous minor goods estimated to cost less than $500,000 equivalent will be procured through international shopping (IS) procedures. Minor items estimated to cost less than $100,000 equivalent per contract may be purchased directly, following proper procedures.

Consulting Services Consulting services of 29 person-months (international) and 747 person-months (domestic) are planned. All consulting services will be selected and engaged in accordance with ADB's Guidelines on the Use of Consultants and/or other arrangements satisfactory to ADB for engaging domestic consultants.

vii

Project Benefits and The Project will directly benefit the urban population of about Beneficiaries 320,000 in the selected nine urban areas with improved personal hygiene, environmental sanitation, and overall quality of life. In particular, the EIRRs for the water supply subprojects are estimated to be around 22-28%. The management and financial capacities of the participating local institutions, including municipalities and prospective water supply utilities under municipal control, will be strengthened for sustainable urban development. Furthermore, the regional integration of water supply services for improved efficiency will be pioneered for a cluster of a few neighboring urban areas. Thus, the Project is expected to contribute to the Government's decentralization policy for better governance and improvements to the framework for public-private partnership.

Risks and Assumptions The main risks include the (i) limited capacities of the municipal government staff; (ii) uncertainty regarding continued political support for decentralization with sufficient administrative budget allocation/transfer; (iii) uncertainty regarding continued municipal revenue improvement; and (iv) uncertainty regarding the willingness of the local communities to contribute time, counterpart funds, and other resources for project implementation. To mitigate most of these risks, sufficient measures have been incorporated in the Project in the form of various training activities and community education/awareness campaigns.

KERUNG (TIBET) KHASA (TIBET)

LINKAGE POINT TO CHINA LINKAGE POINT TO CHINA viii

KODARI

BIDUR BHIMESHWOR MARKET CENTRE/TRADE/ COMMERCE/TOURISM TRADE-INFOTECH EDUCATION DHADINGBESI 122km TRANSPORT MARKET CENTRE/ AGRO-TRADE POKHARA BANEPA 6km DHULIKHEL 26km 70km TOURISM EDUCATION 20km 24km HEALTH Strategic Economic MUGLING NOUBISE

157km 122km

MALEKHU GALCHI KATHMANDU PANAUTI RATNANAGAR VALLEY MARKET CENTRE KAMALAMAI TOURISM-CULTURE BUTWAL MARKET CENTER MARKET CENTRE AGRO-INDUSTRY TRADE/COMMERCE EAST-WEST HWY TOURISM HETAUDA 77 km INDUSTRY 113km MARKET CENTRE VOCATIONAL EDUCATION 38km

BHARATPUR INDUSTRY 29km EAST-WEST HIGHWAY DHALKEBAR Linkages of UEIP Towns TRADE COMMERCE

HEALTH SIMARA 22km TOURISM 109km (RELIGIOUS) BARDIBAS TRANSPORT 19km

26km

BHAIRAWA

BIRGANJ JANAKPUR 4km

2km

SUNAULI (INDIA) SITAMAD (INDIA) LINKAGE POINT TO INDIA LINKAGE POINT TO INDIA RAKSAUL (INDIA) LINKAGE POINT TO INDIA

Highway

Road in Poor Condition

Secondary Route

Planned Route

UEIP Town

Node Town

Future Agglomeration

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed loan to the Kingdom of Nepal for the Urban and Environmental Improvement Project.

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1

A. Performance Indicators and Analysis 2. To date, Nepal is still one of the least urbanized countries in Asia, with approximately 14% of its total population of about 23 million people (Central Bureau of Statistics Preliminary Result of Population Census 2001) living in 58 designated urban areas. Even so, the pace of urbanization has increased markedly in the last two decades, with the urban population growing at up to 7% per annum, which is roughly three times the average national population growth rate (2.3% per annum). The reason for rapid urbanization is mainly the population pressure in rural areas: Nepal’s population density of around 600 persons per square kilometer of arable land is one of the highest in the world and exceeds the carrying capacity of the rural areas. This results in deforestation, environmental degradation, poverty, and, eventually, migration to urban areas. While Nepal’s total population is expected to reach about 30 million by the year 2011, its urban population by then will have risen to about 6.8 million, or approximately 23% of the total population. Over the last two decades, the industry and services sector with predominantly urban activities has grown by an average of 6.4% per annum, which is slightly less than the growth of the urban population. In other words, urban gross domestic product per capita has been more or less stagnant. About 25% of urban-based employment is estimated to be in the informal sector.

3. The rapid growth of the urban sector, coupled with the inability of the Government to keep pace with the demand for infrastructure and services for urban population, has caused the emergence of a number of urban environmental issues, especially in the central region of Nepal. Urban land is polluted due to the absence of urban services, haphazard disposal of human waste, uncontrolled growth, haphazard physical development, and institutional failure to respond to these challenges. The lack of adequate sanitation facilities often leads to pollution of surface water and groundwater. Major polluting industries, such as tanneries, sugar, paper, canning, cement, brewery, and pharmaceutical industries, are invariably located in or near urban areas and often dispose of their industrial waste, including toxic waste, to roadside drains and open spaces. Also, disposal of hospital waste, which can be hazardous, does not appear to be properly controlled.

B. Analysis of Key Problems and Opportunities 4. Piped water supply covers only a small portion of urban residents, and the supply is usually not continuous but intermittent. About one in three households faces a serious water shortage at least once a year, and about one in six all year round. Water quantity delivered is mostly below 50 litres per capita per day (lcd). In addition, water quality often falls below World Health Organization standards for drinking water, mainly due to bacteriological contamination caused by poor sanitation facilities. Only about three quarters of the urban population have access to proper sanitation facilities. On-site sanitation systems, such as septic tanks, are not a viable option especially for densely populated core town areas. Sewerage systems, often combined with storm water drainage systems, exist in a number of urban areas; however, their

1 See also Nepal Urban Development Sector Study; Water Supply, Urban Development and Housing Division. December 2001. 2 coverage is limited, and final treatment of the sewage is often inadequate, if not totally nonexistent. As a result, rivers in urban areas have often practically become open sewers, especially in upland towns during the dry season. In contrast, urban areas located in lowlands often experience health hazards during the rainy season when flooding and rising groundwater tables render the existing wastewater disposal systems ineffective. Overall, these deficiencies of urban and environmental infrastructure and services pose a serious threat to health and sanitation of the residents.

5. To address these critical urban environmental issues, the Government and the Asian Development Bank (ADB) signed a Memorandum of Understanding on 5 November 1999 to launch technical assistance (TA) with the objective of preparing a project to improve the urban environment in 6-10 towns in the central region of Nepal.2 Project preparation was then carried out for the nine selected towns, which are now included in the proposed Project, through intensive participatory processes involving municipal officials and other stakeholders. The project framework is in Appendix 1. Minutes of two key workshops can be found in Supplementary Appendix A. Further, intensive workshops were conducted in each project town, involving numerous participants from outside the bureaucracy.

6. Nepal’s Seventh Five-Year Plan (1987-1992) included some urban policy components for the first time (Appendix 2). During that period, the urban institutional framework was created for the Ministry of Housing and Physical Planning (now the Ministry of Physical Planning and Works [MPPW]), Nepal Water Supply Corporation (NWSC), Urban Development Training Centre (UDTC), and town development committees (TDC) in each municipality. During the Eighth Five-Year Plan (1992-1997), the Town Development Fund (TDF) was established. The role, past performance, and assessment of the TDF is elaborated in Appendix 3. Also, amendments to the Town Development Act were passed. This Act, which is summarized in Appendix 4, enables a local body to conduct guided land development (GLD) and/or land pooling projects. During the Ninth Five-Year Plan (1997-2002), the Local Self-Governance Act and the Nepal Water Supply Regulation were passed. The proposed Project, which reflects the Government's urban policies elaborated in Appendix 2, will be the first decentralized urban development project, except for the earlier Kathmandu Urban Development Project, which covered only the capital city.

7. In the water supply and sanitation sector, the Government's policy emphasizes municipal responsibility in line with its decentralization policy. Various principles including (i) demand- driven approach; (ii) importance of institutional development; (iii) user involvement; (iv) integration of water supply and sewerage in urban areas; (v) cost recovery of 50% of capital investments, which is a transitional arrangement toward full cost recovery, and 100% of O&M in urban areas; and (vi) importance of establishing an independent regulatory body are also recommended. The policy is summarized in Appendix 5.

8. Until 1999, the octroi tax was the main source of urban revenue, comprising typically about 65% of a municipality’s own-source revenue. That tax has since been replaced by the local development tax, which is a 1.5% levy charged on all imports and distributed to the municipalities. This tax is meant to be a transitional solution only, and to be replaced by other local revenue sources including the property tax as the single most important component. Projections for the future financial capacity of a given municipality are therefore affected by a considerable degree of uncertainty.

2 ADB. 1999. Technical Assistance to Nepal for Urban Environmental Improvement. Manila. 3

9. Currently ongoing external assistance to Nepal’s urban sector includes activities of the United Nations Development Programme (UNDP) (especially in the fields of decentralization, support to private sector participation in urban development), and strengthening of rural-urban linkages through its Rural-Urban Partnership Program (RUPP); the World Bank (especially support to private sector participation); German Agency for Technical Cooperation (GTZ) (support to the establishment of the TDF and through its program Urban Development Through Local Efforts [UDLE]); and Danida (especially in the field of decentralization and urban self- governance). More information can be found in Appendix 6.

10. Major lessons learned from ADB’s previous, similar projects3 in urban infrastructure development in Nepal are summarized as follows: (i) Complex and multicomponent projects should be avoided where the executing agencies (EAs) have limited experience. Institutional capacities with respect to land acquisition, procurement of consultants, etc. should be thoroughly explored, (ii) All stakeholders should be fully involved in project identification and design from an early stage. In particular, water user committees (WUCs), if they are expected to operate and maintain the systems, need to be established and fully involved before the start of physical works. Sufficient information on nongovernment organizations (NGOs) and community-based organizations (CBOs) active in the project area should be gathered to facilitate their involvement in the project, (iii) Institutional strengthening should be given the greatest possible emphasis. Key staff should be in place before board consideration,4 (iv) Physical works should be tendered in relatively large packages to attract bigger and more experienced contractors. No contractor should be allowed to bid for further packages before he has substantially completed his current project, (v) Likewise, consulting services should be tendered in relatively large packages to attract bigger and more experienced consultant companies. This is also to reduce the workload of coordination for the EA/implementing agency (IA), (vi) Advance procurement action, especially for consulting services, should be seriously considered to reduce delays at project start-up, (vii) Project implementation scheduling should be realistic and take into account the time needed for IAs to constitute themselves; for inexperienced IAs to conduct the tendering process in accordance with ADB’s guidelines; for municipalities and communities to provide their contributions; and foreseeable delays caused by a project’s location, seasonal adverse weather conditions, and festivals and holidays. (viii) Consulting services should be guided following interactive processes, working closely with the target groups, producing user-friendly outputs, and emphasizing hands-on advice and on-the-job training instead of mere production of reports,

3 These lessons learned were derived from these previous projects: Kathmandu Urban Development Project; Institutional Strengthening of Kathmandu Metropolitan City; Second Water Supply and Sanitation Project ; and Third Water Supply and Sanitation Project . 4 The Asian Development Bank and the Ministry of Finance agreed in 1998 that a precondition to loan negotiations is the appointment of a project manager and the establishment of a project office, including the appointment of core staff. 4

(ix) An appropriate management information system (MIS) should be developed and installed with the EA, and realistic and relevant performance indicators should be identified, (x) To maximize project impact on poverty reduction, project designs should incorporate specific components that will benefit the poor, (xi) Project designs should incorporate better environmental monitoring mechanisms, including the collection of baseline data, (xii) ADB review missions need to supervise more closely the quality of project implementation, even though some project locations may be remote. They also need to focus more on institutional and social concerns, and encourage frequent and intensive interaction between EA, IA, and the beneficiaries.

III. THE PROPOSED PROJECT

A. Objectives 11. The Project aims to bring about sustainable urban development in the nine urban areas outside Kathmandu Valley by improving essential urban and environmental infrastructure and services, and strengthening the relevant institutions. As a result of the Project, personal hygiene, environmental sanitation, and overall quality of life are expected to improve in the nine areas.

12. The Project will help the Government carry out its policy of decentralization. The Project will also address the issues of disparities between Kathmandu Valley and areas outside it, and the increasing trend of migration to the capital region, with all its negative environmental and social consequences. The Project will cover nine urban areas all located in the central region of Nepal. Three are close to Kathmandu Valley (Banepa, Dhulikhel, and Panauti), two are located in the uplands (Bidur and Dhadingbesi), and four are in the lowlands (inner terai; i.e., Bharatpur, Ratnanagar, Hetauda, and Kamalamai). The populations of the nine areas range from about 12,000 to about 89,000. All the municipalities involved require substantial institutional strengthening, substantial improvements to their physical infrastructure, and emphatic efforts to reduce urban poverty. Since this is the first decentralized urban project for Nepal, this rather conservative choice of target urban areas, which are relatively close to Kathmandu, can be justified. The Project is, thus, expected to establish an important precedent for a series of similar projects that could follow.

13. Currently, Dhadingbesi is administratively only a part of four village development committees (VDCs) but is being considered for municipality status by the consolidating few villages. Because the current borrowing capacity will not allow it to undertake the envisaged investments and no effective municipal administration is in place yet, it does not appear sensible to start project activities in Dhadingbesi before the conversion to municipality status is completed. Therefore, only limited project activities are planned in Dhadingbesi, and implementation will not start before a municipality is formally established. The TDF, which is expected to provide financing for all the subprojects in Dhadingbesi, will start onlending only when the municipality is established.

14. With respect to decentralization, in addition to the strengthening of the municipalities, the Project is also expected to help establish financially and institutionally self-sustainable water supply utilities under municipal control for the municipalities of Bharatpur, Hetauda, Banepa, Panauti, and Dhulikhel. Furthermore, regional integration of the water supply services is envisaged for Banepa, Panauti, and Dhulikhel, which are neighboring municipalities. Through 5 various interventions in the urban infrastructure/services, in particular in the water supply subsector, the Project is also expected to contribute to the improvement of the framework for public-private partnership (para. 34).

B. Components and Outputs 15. The Project will comprise the following main components, A - municipal institutional strengthening and revenue mobilization, B - provision of urban and environmental infrastructure, C - provision of supplementary urban facilities, D - community development, and E - project implementation assistance. 1. Municipal Institutional Strengthening and Revenue Mobilization (Component A) 16. Component A will cover the nine towns with a more or less uniform set of interventions, which will be implemented 1-3 years for each town. Most of the interventions are technical training, for municipal staff and will mostly be delivered by training institutions or consultants selected and contracted by the project coordination office (PCO). Some interventions are meant to raise public awareness about various urban issues and enlist political support for elected representatives and local political leaders. Training will be delivered, as appropriate, to mayors, deputy mayors, elected representatives, municipal secretaries, municipal technical staff including section and sub-section heads and senior staff, key local institutions, elected ward representatives and staff, the private sector, and community representatives. Where possible, training will be hands-on and performance based, and linked to measurable outputs to judge that required skill levels have been achieved, and to verify that the training received is actually being used on the job. With the early establishment of the project performance monitoring system (PPMS), the municipal institutional strengthening, revenue mobilization, and human resource department/capacity building programs will be monitored and evaluated at regular intervals throughout the project. Component A is further broken down into three subcomponents.

17. Subcomponent A (i) - general municipal institutional strengthening and support for revenue mobilization is designed to introduce new and improved urban management and revenue generation procedures and practices. Depending on existing (preproject) institutional capability, some project municipalities will receive all interventions included in the package, whereas others will require only certain activities. Nevertheless, some activities are mandatory and will be given to all municipalities, irrespective of their existing institutional capacities. The aim of this subcomponent is to raise urban management and revenue generation capability such that the municipalities will be able to prepare and implement action plans that respond to critical needs. Specific training will be targeted at improving the revenue mobilization capacity of the municipalities, through preparation of detailed urban mapping, house numbering programs, house tax and customer databases of various urban services, and implementing improved computerized tax and service fee collection systems. Subcomponent A (i) will include training in urban management orientation, organization management, investment planning, improved budget preparation, local area planning, improved accounting, revenue mobilization, contract management and supervision, urban planning, O&M, customer client relations, public relations, public-private partnerships, monitoring and evaluation, community mobilization, and community awareness. To support and encourage the implementation of action plans, the municipalities will identify/select various small urban facilities or urban service activities to be executed as subprojects. These can be funded under component C provision of supplementary urban facilities. 6

18. Subcomponent A (ii) - support for implementation of urban and environmental infrastructure includes specific training and support for the successful implementation/operation of urban and environmental infrastructure components. It will cover the following subsectors: water supply, sewerage, sanitation, roads, drainage, land development, and river training. The training modules will address, among other things, the following issues: O&M, cost recovery, user groups, and public-private partnership.

19. Subcomponent A (iii) - support for supplementary urban facilities includes training for the execution and operation of supplementary urban facilities.

2. Provision of Urban and Environmental Infrastructure (Component B) 20. The component will cover the subsectors of B (i) sanitation and wastewater management; B (ii) water supply; B (iii) neighborhood road, drainage, and water supply development; B (iv) river training; and B (v) road upgrading. The component will constitute approximately 60% of the project cost, and will provide a multitude of physical facilities whose exact composition will vary widely from town to town. The proposed subprojects have been subject to initial environmental evaluations (IEEs) and estimations of economic internal rates of return (EIRRs) and financial internal rates of return (FIRRs), where required.

21. To ensure that the detailed engineering designs reflect the views of the municipalities and communities, all design work will be carried out by domestic consultants in close consultation with the municipalities. The domestic consultants will establish design (and subsequently construction supervision) offices in the respective municipalities. PCO, assisted by their consultant for project implementation support, will review critical design elements and may hold approval of the tendering of the respective physical works contract until necessary design improvements have been made.

22. The sanitation and wastewater management subcomponent will provide expanded sewerage pipe networks and a number of simple wastewater treatment plants in nine urban areas. Where required, the expanded pipe networks will be designed for the combined collection of rainwater and domestic wastewater (this may include wastewater from small nondomestic sources such as cottage industries). Otherwise, the pipe network will be designed to collect only domestic wastewater. The treatment plants will be innovative, appropriate- technology reed bed treatment plants, in line with the least-cost and appropriate-technology philosophy adopted here. The systems will be designed to give the urban poor adequate access to improved sanitation, and will be operated and maintained by the respective municipalities. The expected benefits are public hygiene and public health improvements in the urban areas concerned, and reduced pollution of groundwater and surface water in the vicinity.

23. The water supply subcomponent will basically cover five urban areas only, namely, the municipalities of Bharatpur, Hetauda, Banepa, Panauti, and Dhulikhel, the latter three as beneficiaries of a potential regionally integrated water supply system. It will involve development of new water sources, and construction of transmission lines, water treatment plants, reservoirs, and distribution networks. In particular, investments will be made so that maximum use of existing facilities can be achieved. The expected benefits are public hygiene and public health improvements in each urban area so served. Each scheme will be designed so that the costs for capital investment and O&M can be fully recovered in a sustainable manner. As an indication of the existing demand for improved piped water supply services, in Kathmandu the willingness to pay ranges from $0.43/cubic meter (m3) (poor household; upgraded from unconnected to 7 shared connection) to $0.86/m3 (non-poor household; already connected).5 The existing willingness to pay in Banepa, Panauti, and Dhulikhel is expected to be roughly the same, while the equivalent figure in the two inner terai towns (Bharatpur and Hetauda) must be somewhat lower because alternative sources of well water are available. Each scheme will be designed to ensure that the urban poor have adequate access to improved water supply physically as well as financially. 24. The neighborhood road, drainage, and water supply development subcomponent will promote orderly urban expansion with plot readjustment. Areas that can accommodate the high demand for urban growth will be identified. They will be developed in a proactive and orderly manner using the land pooling scheme (para. 36) to avoid scattered and haphazard urban sprawl, driven entirely by uncoordinated individual efforts, which have become one of the main issues of environmental degradation in Nepal. This subcomponent will not only reduce the negative environmental impact of urban expansion, but also increase the efficiency of providing urban infrastructure in the context of such proactive and orderly urban expansion. 25. The river training subcomponent will be required in three urban areas only (Bharatpur, Hetauda, and Kamalamai). It will comprise embankment protection works where urban settlements or valuable agricultural land are threatened by erosion or abrasion. 26. Activities in the road upgrading subcomponent will be limited to surface improvements of existing roads (excluding realignment, straightening, and widening) so that no land acquisition and resettlement issues will arise and the associated negative environmental impact will be virtually nil.

3. Provision of Supplementary Urban Facilities (Component C) 27. Component C will provide C (i) small urban community facilities, and C (ii) revenue- generating urban facilities, whose composition and cost will vary widely from town to town. As these urban facilities are still small compared with those in component B, funding will be channeled through the TDF, which was established in 1989 to facilitate financing of urban infrastructure projects in municipalities or urbanizing villages. The TDF is authorized to receive grant and loan funds from the Government and other organizations, foreign Governments, and international agencies for its programs. It provides grants and loans to any institution engaged in town development including government and nongovernment institutions, user groups, VDCs, and municipalities according to its investment policies and procedures. The urban facilities to be provided under this component will be identified with intensive community participation during implementation (Appendix 3). Detailed engineering design and construction supervision for subprojects under this component will be carried out by the same domestic consultants from the design and construction supervision office to be established in each municipality. 28. Small urban community facilities will include public toilets, public waste collection points, improvements to public places and to places of worship, improvements to neighborhood lanes, sports grounds, and small public recreation parks. 29. Revenue-generating urban facilities will be established mostly with private sector participation and will include bus terminals, bus/truck parks, marketplaces, small slaughterhouses, cold storage facilities, recreational facilities, and vocational training centers. 30. Dhadingbesi is currently only a part of four VDCs administratively but it is being considered for municipality status through the consolidation of a few villages. For this reason, fund channeling to Dhadingbesi under the Project will be all through the TDF instead of directly from the Ministry of Finance (MOF) under a subsidiary loan agreement. The TDF is not

5 RTI study: Willingness to Pay for Improved Water Supply in Kathmandu Valley, Nepal, August 2001. 8 expected to start its onlending for any of the subprojects in Dhadingbesi, under both components B and C, until a municipality has formally been established.

4. Community Development (Component D) 31. Ccomponent D will consist mainly of public health awareness campaigns and education programs, in particular targeting women. These campaigns and programs will be implemented more or less uniformly in all urban areas so as to mobilize the local communities. Local NGOs will be contracted to implement them. The component consists of D (i) mass communication and demonstration of public health awareness campaigns involving the production of materials such as posters, folders, leaflets, storybooks, and spots on the local radio and TV; D (ii) public health education programs confined to the community under the responsibility of the Community Development Subsection of the Environment and Community Development Section; and D (iii) school public health education programs confined to the urban school system where rehabilitation and construction of school sanitation facilities will be undertaken under the Project. 32. In Component D, the project town staff, representatives of CBOs, and women's groups (WGs) to be formed will be trained to undertake educational functions for the community in the areas of public health. Each project town will have an Environment and Community Development Section, with overall responsibility for public health awareness campaigns and education programs. This section, in turn, will direct the Community Development Subsection to organize the community and conduct these campaigns and programs in close collaboration with the ward committees (WCs),6 NGOs, WGs, and representative leaders of the community. The representative leaders will function as an important link between the community, Environment and Community Development Section, and WCs. More details on social strategy are in Appendix 7.

5. Project Implementation Assistance (Component E) 33. Component E comprises various consulting service assignments and incremental administration costs. The required consulting services include E (i) support for the project implementation management at PCO, including the development and implementation of the project performance management system (PPMS), international and local; E (ii) advice and support for institutional reforms, technical arrangements, and tendering for the water supply system improvements at the five municipalities that will have a water supply subcomponent,7 international and local; E (iii) assistance to project advisors/project implementation units (PAs/PIUs) in supporting the municipalities, local; and E (iv) a pool of short-term experts at the disposal of the PCO, local.

34. Under subcomponent B (ii), each of the five municipalities, MPPW, and NWSC as the owner of the existing urban water supply system must agree on the arrangements for capital investment project management as well as subsequent operational arrangements for the resulting water supply system before awarding the relevant civil works contracts . The Government policy of gradually transferring the authority to manage water supply from NWSC to local governments must be followed. At the latest, each municipality must assume full responsibility8 for the water supply service by the time the resulting water supply system starts

6 As defined in the Local Self Governance Act (1999), the ward committee is a group of elected representatives at ward level (a ward is a geographic and administrative subunit of a municipality). 7 Banepa, Panauti, Dhulikhel, Bharatpur, and Hetauda. 8 Each municipality must choose an appropriate form of management. Potential forms include establishment of (financially independent) municipal water supply department, contracting out to private operator, contracting out to government operator (such as NWSC), delegating responsibility to water user groups, and a combination thereof. 9 its operations. To guide the five municipalities in carrying out the necessary institutional reform processes, action steps have been elaborated for Bharatpur and Hetauda (individual scheme) and for Banepa, Panauti, and Dhulikhel (regional scheme (para. 35 has more information), in Supplementary Appendix B Revisions to Water Supply Schemes. Furthermore, to address these rather demanding institutional reform exercises, a significant amount of consulting services is expected under subcomponent E (ii). The Government requested ADB's assistance in identifying potential grant funding for this pioneering sector reform initiative. If such grant funding has been successfully identified, this item will be dropped from the loan funding. C. Special Features 35. Specifically for Banepa, Panauti, and Dhulikhel, which are adjacent to one another, a regional and least-cost approach is recommended to permit the construction of an integrated water supply system for all three municipalities. This approach will be more efficient than letting each of the three expand its existing water supply system individually. A neutral party (a government agency, a government-controlled corporation, a joint venture among the three municipalities concerned, or a private firm) will be identified and tasked with physical implementation of this subproject. The eventual operating entity will then either operate the complete water supply system for the three municipalities, or act as a bulk water supplier to them or to water user groups/committees within these municipalities, which would then handle local distribution. If a private operator is charged with operating this proposed integrated water supply system, it will be advisable to establish a controlling public body, which will procure such a private operator through a competitive, transparent bidding process. These processes will be supported by consultants recruited under the Project so that such a system is physically constructed within the time frame of the Project. The regulating body, the National Water Supply Regulatory Board (NWSRB), which the Government intends to establish specifically for the water supply sector in conjunction with the Melamchi Water Supply Project (Loan 1820-NEP) will oversee the development of a sustainable water tariff structure in all locations, and continuously monitor and regulate the subsequent tariff revisions.

36. The expected population growth rates in the project towns are high (e.g., 5% in Bharatpur). To address the corresponding urban spatial growth demands, land acquisition for the neighborhood road, drainage, and water supply development subcomponent will be conducted through the mechanism of land pooling, instead of the usual straight purchase. Land pooling, which was already implemented under the Kathmandu Urban Development Project (Loan 1240-NEP), envisages that all land within a voluntarily agreed-upon development perimeter is temporarily pooled and, later on, redistributed to the original owners, after a necessary percentage of the land to be used for public purposes has been deducted. This is to reduce haphazard development and urban sprawl and land speculation. The selection of perimeters to be developed under this approach is such that involuntary resettlement ultimately will not occur. Procedures and requirements to be followed, including eligibility criteria based on expected public benefits, public notification and consultation processes, and financial requirements are summarized in Appendix 4 and Supplementary Appendix C.

37. In parallel with the Project, a cluster of activities designed specifically to support the poorer groups living in the rural farming communities within the municipalities covered by the main Project, is proposed. This scheme will be designed based on the UNDP-supported RUPP, which has been successfully implemented in Nepal for several years. It is expected to contribute to poverty reduction, not only in the main urban areas but also in the surrounding rural areas within the municipalities. Its approximate total cost of $2.2 million is expected to be funded from other resources. 10

38. Also in parallel with the Project, selected activities in the solid waste management subsector focusing on composting of biodegradable waste is proposed. Its approximate total cost of $1.0 million is expected to be funded from other resources.

D. Cost Estimates 39. The total cost of the Project is estimated at $37.50 million equivalent (including taxes and duties of $4.38 million), of which $12.62 million (33.7%) is the foreign exchange cost including $0.78 million in interest charges during construction, and $24.88 million equivalent (66.3%) is the local currency cost. Table 1 gives a summary of the estimated costs. Details are in Appendix 8. Table 1: Summary of Project Cost Estimates ($ million) Item Foreign Local Total Exchange Currency Costs A. Base Cost a/ 1. Municipal Institutional Strengthening and Revenue Mobilization 0.22 0.34 0.56 2. Urban and Environmental Infrastructure (incl. Land Acquisition) 7.91 11.61 19.52 3. Supplementary Urban Facilities 1.37 2.91 4.28 4. Community Development 1.04 1.04 5. Project Implementation Assistance 0.79 3.44 4.23 Subtotal (A) 10.29 19.34 29.63 B. Contingencies 1. Physical b/ 1.03 1.94 2.97 2. Price c/ 0.52 3.60 4.12 Subtotal (B) 1.55 5.54 7.09 C. Service Charges During Construction 0.78 0.78 Total d/ 12.62 24.88 37.50 % 33.7 66.3 100.0 a/ In September 2002 prices. b/ 10.0% for civil works, 10.0% for equipment and vehicles, and 10.0% for consulting services. c/ 2.4% per annum for foreign and 8% per annum for local costs throughout the implementation period. d/ Includes duties and taxes estimated at $4.38 million. - Figures may not add up to totals due to rounding. E. Financing Plan 40. ADB will provide a loan in the amount of SDR22,699,000 ($30.00 million equivalent) from its Special Funds resources, which will represent 80% of the total cost of the Project. The loan will have a 32-year term, including a grace period of 8 years, and an interest of 1% per annum during the grace period and 1.5% per annum thereafter. It will cover the entire foreign exchange cost of the Project in the amount of $12.62 million (including interest and other charges amounting to $0.78 million), and will finance $17.38 million equivalent, or 69.9%, of the local currency cost. The local currency cost to be financed by ADB will cover portions of the civil works, equipment and vehicles, consulting services and project management support, but excluding duties and taxes estimated at $4.38 million. ADB’s financing of local currency expenditure is justified by the nature of the Project, which will address local poverty and health issues within the project areas. Local currency financing of $4.40 million equivalent, or approximately 11.7% of the total project cost, will be provided by the Government, and will cover part of the cost of civil works and consulting services, and the cost of counterpart staff required for the proposed central PCO, the PAs, and the PIUs. The project towns and user groups, including the private sector, will contribute $3.10 million equivalent, or around 8.3% of the total 11 project cost. The proposed financing plan is summarized in Table 2. The Borrower is the Kingdom of Nepal. Table 2: Financing Plan ($ million) Source Foreign Exchange Local Currency Total % Asian 12.62 17.38 30.00 80.0 Development Bank Government 4.40 4.40 11.7 Project Town/ 3.10 3.10 8.3 Community/PSP Total 12.62 24.88 37.50 100.0 41. The funding percentages for the various components/subcomponents of the Project are summarized in Table 3. Table 3: Funding Ratios by Component and Subcomponent ADB Loan Contribution Contribution Contribution Converted to ADB Loan from from Users/ from Converted to Government Municipality Community Government Subloan (%) Component Grant (%) (%) (%) (%) A: Municipal Institutional Strengthening and Revenue 30 50 20 Mobilization B(i): Sanitation and 50 30 8 12 Wastewater Management B(ii): Water Supply 50 30 8 12 B(iii): Neighborhood Road, Drainage, and Water Supply 100 Development B(iv): River Training 30 50 4 4 12 B(v): Road Upgrading 30 50 4 4 12 C(i): Small Urban 30 40 8 4 18 Community Facilities C(ii): Revenue-Generating 80 8 12 Urban Facilities a/ D: Community 30 50 4 4 12 Development E: Project Implementation 20 Assistance Central 80 E: Project Implementation Assistance Municipal 80 8 12 Land Acquisition 100 Incremental Admin. Central 70 30 Incremental Admin. Municipl 80 10 10 a/ Can be municipality or private sector initiated.

42. The Government will relend a portion of the loan funds to the eight municipalities through rupee-denominated subsidiary loan agreements (SLAs) in accordance with government regulations on relending, including standard terms and conditions for implementing subprojects . The subsidiary loans will have an interest rate of 8% per annum with a repayment period of 20 years including a grace period of 5 years. The municipalities and community will also provide counterpart funds – for example, 8% of project capital costs in a combination of cash (at least 5%) and in kind (no more than 3%) for water supply subprojects. The Government will bear the foreign exchange risk. Funds will be repaid to the Government according to terms and conditions defined in the SLAs, which will need to be acceptable to ADB. 12

43. For supplementary urban facilities and all subprojects in Dhadingbesi, the Government will relend the ADB loan to the TDF through a rupee-denominated SLA at an interest rate of 5% per annum with maturity of 20 years including a grace period of 5 years. The TDF will, in turn, onlend the funds to relevant entities as subloans at an interest rate of 8% per annum with a maturity of 12-15 years including a grace period of 3 years. The Government will bear the foreign exchange risk. The TDF may use the repayments for financing similar town projects until the maturity of its borrowing from the Government. 44. The Government, the municipalities, TDF, and ADB will jointly review the relending and onlending rates every 2 years from the date of loan effectiveness to ensure that the rates are in line with the general economic conditions of the country.

F. Implementation Arrangements

1. Project Management 45. MPPW will be the EA for the Project and will carry out its responsibilities for overall supervision and execution of the project through its Department of Urban Development and Building Construction (DUDBC). The EA will discharge its duties in overall implementation management mainly through the PCO to be headed by the PCO director. The participating municipalities will be the Implementing Agencies (IA) for all subprojects. This approach is in line with the decentralization objectives of the Local Self Governance Act of 1999 and the related bylaws, and it will encourage the municipalities to display a greater sense of ownership of their subprojects. Moreover, according to a review of previous urban projects, it is important that the municipalities take a lead role to ensure the sustainable O&M of subprojects, and to strengthen urban management capacity. However, the overall supervision of the water supply subprojects to be built for the municipalities of Banepa, Dhulikhel, and Panauti under subcomponent B (ii) will be carried out in accordance with arrangements mutually acceptable to the Government and ADB. Also, the participating municipalities may discharge their duties through duly appointed third parties where required, particularly for subprojects under subcomponent C (ii).

46. Implementation at the municipal level will be managed using one of two possible models: the PA model, or the PIU model. The PA model is preferred by two municipalities with relatively advanced institutional capabilities (i.e., Bharatpur and Hetauda), while the PIU model is preferred by the remaining municipalities whose institutional capabilities are still weak. The PA model envisages that the municipal administration9 will essentially be in charge of implementation management, headed by a project manager and assisted by a PA without executive function. The PIU model, on the other hand, envisages that a PIU, headed by a project manager who is DUDBC staff seconded to the municipality, will be established by the respective municipality and staffed with the assistance of the EA, and that this PIU will assume the executive function for implementing the Project, subject to general guidance from the municipality in question. Each PIU is expected to manage not only the main project but also the two parallel schemes on rural-urban partnership and solid waste management. For municipalities that adopt the PA model, some additional support will be provided either for relevant municipal units or for the PAs in order to help them manage these two parallel schemes. DUDBC will use its own personnel resources and enlist the support of other government agencies, as necessary, for establishing an effective PCO as well as effective PIUs for municipalities that require one. The organizational structure for implementing the Project is in Appendix 9.

9 including its council, board, committees, sections, subsections, and units. 13

2. Implementation Period 47. The Project will be implemented over 6 years from 2003 to 2009. Considering the limited personnel resources at DUDBC and other relevant central Government agencies from which staff will be seconded for PAs/PIUs, a staggered implementation arrangement will be used. The implementation schedule is in Appendix 10.

3. Procurement 48. All procurement services for the Project will follow ADB's Guidelines for Procurement. Contract for civil works estimated to cost $1.0 million equivalent or more will be carried out using international competitive bidding (ICB) procedures while contracts that are estimated to cost less than $1.0 million equivalent will be carried out under local competitive bidding (LCB) procedures. Good to be procured will preferably be grouped into packages equivalent to or larger than $500,000 to be suitable for ICB procedures. Miscellaneous minor goods that cannot be grouped into larger contracts and are estimated to cost less than $500,000 per contract will be procured through international shopping (IS) procedures. Minor items estimated to cost less than the equivalent of $100,000 per contract may be purchased directly, following proper procedures to ensure economy, efficiency, and quality. The proposed contract packages are shown in Appendix 11.

4. Consulting Services 49. All consulting services to be financed under the Project will be selected and engaed following the ADB's Guidelines on the Use of Consultants, using QCBS method, and other arrangements satisfactory to ADB for engaging domestic consultants. A total input of 29 person- months of international and 747 person-months of domestic consulting services is planned. The consulting inputs will cover a wide range of expertise and will result in substantial strengthening of administrative and management capacity and skills of the EA and IAs.

50. The consulting services are designed to support the project as well as build the longer term capacity of the agencies and institutions responsible for planning and delivering urban services. They will cover broad areas of expertise including (i) project implementation support and project performance monitoring; (ii) topographic surveys, mapping, geotechnical investigations, and water testing; (iii) engineering design and construction supervision; (iv) institutional reforms in the water supply sector; (v) training; and (vi) community development. Indicative terms of reference for the major packages are in Supplementary Appendix D.

5. Disbursement Arrangements 51. DUDBC will be responsible for preparing disbursement projections and requesting budget allocations for counterpart funds. It will establish an imprest account for the program. The initial amount will be no more than a 6 month projected disbursement, or 10% of the loan amount, whichever is lower. The imprest account will be established, managed, and liquidated in accordance with ADB's Loan Disbursement Handbook. Statement-of-expenditure (SOE) procedures may be used to reimburse eligible expenditures not exceeding $100,000, and to liquidate advances made into the imprest account in accordance with the guidelines. DUDBC will coordinate the timely release of funds. This is essential because project activities will take place at different locations and simple mechanisms are required to disburse small funds quickly through decentralized decision making while maintaining acceptable levels of financial control. Auditors satisfactory to ADB will audit the use of the imprest account and SOE procedures. A separate audit opinion on the use of the imprest account and SOE procedures will be included in the annual audit report. 14

6. Accounting, Auditing, and Reporting 52. The Government, acting through DUDBC, will maintain records and accounts adequate to identify works, goods, and services financed out of the loan proceeds. Specifically, DUDBC will (i) maintain separate accounts for the Project; (ii) ensure that project accounts and financial statements are audited annually in accordance with sound accounting principles by independent auditors satisfactory to ADB; and (iii) submit to ADB, not later than 9 months after the close of each fiscal year, certified copies of audited accounts and financial statements and the auditor's report on them.

53. DUDBC will prepare quarterly progress reports, in a format satisfactory to ADB, with information on (i) progress made against established targets, including pre-identified monitoring indicators; (ii) delays and problems encountered, and actions taken to resolve them; (iii) compliance with loan covenants; (iv) proposed program of activities to be undertaken during the next quarter; and (v) expected progress during the next quarter. Within 3 months of physical completion of the project, the Government will prepare and submit to ADB a project completion report on the execution of the project, including the costs and compliance with the loan covenants.

7. Project Performance Monitoring and Evaluation 54. In accordance with ADB's PPMS Handbook, a shortlist of verifiable performance indicators for monitoring and evaluation was prepared (Supplementary Appendix E). PPMS activities will be conducted periodically to gather information through multiple sources so as to determine whether the input deliveries for implementing the subprojects have rendered the expected benefits to the intended beneficiaries. PPMS also seeks to detect any deficiency and discrepancy between the plan and the execution of a subproject in using the resources efficiently so that timely corrections can be made to adjust the project design and thus improve the benefits, outcomes, and impact. PCO, with the assistance of a project-financed consultant team, will develop comprehensive PPMS procedures and plans in accordance with ADB's Handbook within 9 months of loan effectiveness. The PPMS procedures, performance indicators, and their targets have been reviewed and approved by ADB, and most are incorporated in the Project framework (Appendix 1). PCO, with the help of their consultant, will then undertake a quantitative and qualitative project performance monitoring for each project component to evaluate the delivery of the planned facilities and the project benefits accrued. The nine municipalities and their respective PAs/PIUs will assist PCO and the PPMS consultant team to carry out PPMS activities. These activities will be conducted annually: one immediately before the ADB midterm review and the one upon project completion to be more comprehensive than the others.

8. Project Review 55. The Project will be reviewed jointly by the Government and ADB semiannually to assess progress and at midterm more comprehensively. Taking into account the PPMS performance monitoring results, the midterm review will (i) evaluate the Project’s scope, design, and implementation arrangements; (ii) evaluate the progress of the institutional strengthening processes, including reforms for the water supply subsector; (iii) identify changes needed in any of the areas reviewed; (iv) assess implementation performance against agreed-upon performance indicator targets in the logical framework; (v) identify critical issues and constraints, if any; and (vi) recommend adjustments to the Project design and/or implementation arrangements, if necessary. 15

9. Land Acquisition and Resettlement 56. The Project will require the permanent acquisition of a total of 26.7 hectares (ha) of land, of which 11.0 ha is owned by the Government, 6.9 ha by municipalities, 0.6 ha by other Government agencies, and 8.2 ha by private landowners. Acquisition of the identified land is not expected to result in significant loss of livelihood or loss of community resources. The short Land Acquisition and Resettlement Action Plan (Supplementary Appendix F) includes details on land acquisition requirements identified by the Project. A summary of the plan is in Appendix 12.

IV. PROJECT BENEFITS, IM PACTS, AND RISKS

A. Project Benefits and Impacts 57. The Project will directly benefit the urban population of about 320,000 in the selected nine urban areas through improved personal hygiene, environmental sanitation, and overall quality of life. In particular, the EIRRs for the water supply subprojects are estimated to be around 22-28%. The participating local institutions, including municipalities and prospective water supply utilities under municipal control, will be strengthened in terms of management and financial capacities for sustainable urban development.

58. As the first decentralized urban project for Nepal, this Project is expected to establish an important precedent for a series of similar projects that could follow. With respect to decentralization, in addition to strengthening the municipalities themselves, the Project is also expected to help establish financially and institutionally self-sustainable water supply utilities under municipal control in Bharatpur, Hetauda, Banepa, Dhulikhel, and Panauti. Furthermore, regional integration of the water supply service is anticipated for Banepa, Panauti, and, additionally, Dhulikhel. These will help the Government's effort to arrest the increasing trend of migration to Kathmandu. Through various interventions, the Project will help improve the framework for public-private partnership, too.

59. As a part of the project preparatory technical assistance, an IEE was carried out for the entire Project. The IEE concluded that the subprojects and components for all the 9 project towns will have negligible adverse impacts on the environment, which could be overcome through adequate mitigation measures and regular monitoring during the design, construction, and operation phases. The Project is expected to bring about significant improvements in personal, household, and community hygiene, and environmental sanitation, thereby enhancing the quality of life and community health. The individual IEE conducted for each town also showed no apparent adverse or harmful environmental impacts of any significance and, therefore, a full-scale environmental impact assessment is not required for any of the subprojects. An example of summary IEE (SIEE) is attached as Appendix 13.

60. Economic and financial analyses of the proposed subprojects were prepared in accordance with ADB's Framework for the Economic and Financial Appraisal of Urban Development Sector Projects. Base case EIRRs for water supply, which constitute about 23% of the total project cost, varies from 22.3% to 28.9%, confirming the economic robustness of the proposed subproject. The least-cost analysis was applied to sanitation and wastewater management, river training works, and road upgrading subprojects. The sanitation and wastewater management subproject was subjected to least-cost analysis with reed bed treatment system as the least-cost option for all the towns except Dhadingbesi, where the conventional wastewater treatment has marginally lower cost. The river training works were subjected to least-cost analysis with gabion box-based embankment protection for three towns (Bharatpur, Hetauda, and Kamalamai) as the least-cost option. Road upgrading was subjected to least-cost analysis with black topping the earthen road for three towns (Banepa, Dhulikhel, 16 and Ratnanagar) as the least-cost option. The FIRRs were calculated for the revenue- generating subcomponent and water supply. The water supply subprojects in all the five towns were found to be financially viable, with base case FIRRs ranging from 6.5% to 9.0%, exceeding the weighted average cost of capital of 4.6%. The results of economic and financial analyses and the financial projections for the nine project towns are in Appendix 14.

B. Risks 61. The main risks include (i) limited capacities of the municipal government staff to carry out the investment project (considering the history of difficulties in conducting procurement in Nepal), and operate and maintain the resulting facilities on a sustainable basis; (ii) uncertainty regarding the continued political support for decentralization, including sufficient budget allocation; (iii) uncertainty regarding the planned municipal revenue improvements whose failure would endanger the municipalities' repayment of their loans to the Government; (iv) uncertainty regarding the willingness of local communities to contribute time, counterpart funds, and other resources for project implementation; and (v) the general political stability and security in the country, given the recent insurgency. During implementation, procedures will be developed to mitigate the effects of the conflict on the Project. The staggered schedule for beginning activities in the project towns provides some flexibility to defer activities when security conditions are unfavorable.

62. Regarding component C supplementary urban facilities, TDF management's capacity to professionally appraise/screen the proposals during project implementation is another risk. Whether or not a proposal involves private sector participation, it should yield sufficient financial return.

63. Regarding the water supply subcomponent, the uncertainty regarding continued political support for water supply sector reforms is a risk. In particular, NWSC must smoothly transform itself in accordance with the Government's decentralization policy for the urban water supply sector.

64. The expected benefits and positive impacts outweigh the costs of associated risks presented in paras. 61-63. Decentralization is one of the Government's commitments towards reform and, thus, this Project is a timely contribution to the reform process. Furthermore, the Project is expected to complement the Melamchi Water Supply Project in addressing the water supply sector reform.

V. ASSURANCES

A. Specific Assurances 65. In addition to the standard assurances, the Government has given the following assurances, which are incorporated in the legal documents:

1. Execution of Project a. Implementation Arrangements

66. Project Coordination Office. The PCO will be based within DUDBC and maintained throughout the project implementation period with adequate staffing and other resources as may be agreed-upon by the Borrower and ADB. The PCO will be headed by a project director, who will be responsible for day-to-day management of the Project at the central level. The PCO will provide the required professional, subprofessional, and support staff to carry 17 out its duties of planning, coordination, monitoring, and supervision. The task includes providing the necessary specialized engineering staff, whenever required, to review designs, conduct field checks for critical elements of the detailed design of physical facilities for the Project.

67. Project Implementation Units and Project Advisors. The Borrower will cause the municipalities of Banepa, Dhulikhel, Panauti, Bidur, Ratnanagar, and Kamalamai to establish the PIUs within 3 months of loan effectiveness and to maintain the PIUs with adequate staffing and other resources throughout the implementation of their respective subprojects. (The PIU for Dhadingbesi will be established as and when it has become a municipality). The PIUs will be headed by Project Managers who will be DUDBC staff seconded to the municipalities and will be responsible for day-to-day implementation of the subprojects in their respective municipal areas.

68. The municipalities of Hetauda and Bharatpur will appoint their respective Project Managers within 3 months of the loan effectiveness. DUDBC will second a project advisor (PA) to each of these two municipalities. The PAs will assist the staff of subject municipalities in subproject implementation, and will not have any executive functions. The Borrower will also cause the municipalities to retain the PAs during project implementation and to make the necessary resources available for the conduct of their functions.

69. Project Steering Committee (PSC). The Borrower will establish the PSC within 1 month of the loan effectiveness and maintain it throughout project Implementation with the same composition: chaired by the secretary of MPPW and comprising representatives from MPPW, Ministry of Finance, Municipal Management Division of the Ministry of Local Development, DUDBC, Department of Water Supply and Sanitation of MPPW, National Planning Commission, TDF, the chairperson of the Municipal Association of Nepal, two mayors nominated on a rotation basis from among the mayors of the municipalities, and ADB as an observer. DUDBC will serve as the secretariat for the PSC. The PSC will meet at least once every two months initially, and as often as necessary afterwards, and provide guidance to the EA and the municipalities, as the IAs, in project implementation matters.

70. Municipal Steering Committee (MSC). The Borrower will cause each municipality to establish a MSC within 3 months of the loan effectiveness, comprising the mayor, deputy mayor, three members of the municipal council to be appointed by such council, secretary, relevant department heads of the municipality, chief of the Division Office of DUDBC, four members representing the local disadvantaged communities, NGOs, community based organizations, and the private sector, to be appointed by the municipal council, and respective Project Manager (and the PA for Hetauda and Bharatpur). The Project Manager will serve as the secretary to each MSC. The MSC will advise the municipality concerned in subproject implementation matters. b. Relending and Onlending Arrangements 71. TDF's Onlending. The Borrower will ensure that, subject to PCO's approval, the TDF onlends the TDF subsidiary loan - under terms and conditions satisfactory to ADB - to the municipalities for the selected subprojects under component C, and to Dhadingbesi for the selected subprojects under components B and C, as may be agreed-upon between the TDF and the municipality concerned or Dhadingbesi, as the case may be. The municipalities and Dhadingbesi will carry out feasibility studies for the selected subprojects under component C, in such details and format satisfactory to the Borrower and the Bank, prior to seeking financing from the TDF. The TDF will subsequently review and endorse the feasibility studies with respect to the financial viability of the underlying subproject before submitting them to the PCO for approval. 18

72. Security for Subsidiary Loans. The Borrower will ensure, and cause the TDF to ensure, that the municipalities provide appropriate and adequate collateral, satisfactory to ADB, to secure their respective obligations under the subsidiary loan agreements and the subloan agreements.

2. Other Matters a. Cost Recovery/Affordability and Sustainability of Water Supply 73. The Borrower will ensure, and will cause municipalities that implement water supply subprojects to ensure that (i) a cost recovery plan, which includes, among others, volumetric tariffs and connections charges; and (ii) arrangements for the management and operation of such subprojects, all of which will be satisfactory to ADB, are prepared and approved by the relevant authority of the Borrower before relevant civil works contracts are signed. (refer to para. 83(i) for corresponding condition). b. Regional Water Supply 74. The Borrower will ensure that financing for the water supply subprojects Banepa, Panauti, and Dhulikhel does not exceed 80% of the capital investment cost that would be required under a regional and least-cost approach and will cause those municipalities to adopt such an approach with respect to their water supply requirements. c. Counterpart Funding 75. The Borrower will ensure that the Project is maintained as a priority project of the Borrower and adequate budgetary allocations of required counterpart funds are made and released in a timely manner to DUDBC and the municipalities for each year of project implementation. d. Land Acquisition, Resettlement and Water Rights

76. The Borrower will ensure that (i) all land, rights-of-way, and other land-related rights for any subproject are acquired or otherwise made available to the municipality concerned, free of all encumbrances, before the relevant civil works contract are signed; (ii) all land for the Project is acquired in accordance with the land acquisition plan prepared for the Project and agreed upon by the Borrower and ADB; (iii) perimeters for the proposed subprojects are selected in a way that minimizes or does not cause any involuntary resettlement; (iv) involuntary resettlement, if any, under the Project is undertaken in accordance with (a) the resettlement framework already prepared and approved by the Borrower, (b) the individual resettlement plans to be prepared for each municipality in accordance with the resettlement framework, and (c) ADB's Handbook on Resettlement; and (v) all water rights and related rights for any subproject are acquired or made available to the municipality concerned, free of all encumbrances, before the relevant civil works contract are signed. e. Environment 77. The Borrower will ensure, and cause the municipalities and the TDF to ensure, that (i) the Project is carried out, and all project facilities are designed, constructed, operated, 19 maintained, and monitored in conformity with the existing environmental laws and regulations of the Borrower and the environmental guidelines of ADB, in particular the Environmental Assessment Requirements of the Asian Development Bank ; (ii) all monitoring and mitigation measures enumerated in the IEE and the Environmental Monitoring and Management Plan prepared for the Project in consultation with stakeholders are duly undertaken; and (iii) local communities are duly consulted during the implementation period on such measures. f. Gender Issues 78. The Borrower will ensure that (i) training is provided, under component A, to all women staff and women ward members of the municipalities; (ii) women ward members participate in planning the subprojects in their respective municipalities; (iii) women ward members and local women leaders identified by the respective municipalities, in consultation with local NGOs, are included in the public health awareness campaigns and education programs under component D; and (iv) facilities to be built under the Project, particularly bus terminals and public markets, are designed in such a way that they provide public toilets segregated by gender, an adequate portion of trading space reserved exclusively for women vendors, appropriate day-care facilities for young children, and unrestricted access to bulletin boards with information on prevailing market prices. g. Disadvantaged Groups 79. The Borrower will cause the municipalities to ensure that (i) members of disadvantaged groups appropriately benefit from the Project through provision of sanitation facilities in poor neighborhoods and employment opportunities in carrying out various subproject activities; and (ii) community leaders of such disadvantaged groups, both women and men, are included in the awareness campaigns and education programs to be undertaken under component D. h. Project Performance Monitoring and Evaluation 80. The Borrower will ensure that, within 9 months of loan effectiveness, the PCO, assisted by the consultants recruited under the Project, develops a comprehensive PPMS, including the respective procedures and plans, in accordance with the relevant guidelines of the ADB. The Borrower will cause the PCO to undertake quantitative and qualitative project performance monitoring for each project component by using PPMS to enable the Borrower to evaluate the delivery of the planned facilities and the project benefits accrued.

B. Condition for Loan Effectiveness 81. The following is the condition for loan effectiveness: The subsidiary loan agreements, with terms and conditions satisfactory to ADB, will have been duly signed and become legally binding for the Borrower and three municipalities (Bharatpur, Dhulikhel, and Hetauda) and for the TDF. C. Conditions for Withdrawals from Loan Account 82. No withdrawals will be made from the Loan Account for financing the subprojects in parts of the project area that comprise the municipalities of Banepa, Ratnanagar, Panauti, Bidur, and Kamalamai, under component B of the Project until: 20

(i) Relevant subsidiary loan agreement has been duly executed between the Borrower and the municipality concerned, and delivered to ADB on behalf of the Borrower. (ii) The municipality concerned has agreed, in writing, to be bound by the terms of the Project Agreement between ADB and the municipalities of Bharatpur, Dhulikhel, and Hetauda, as if originally parties thereto. D. Conditions for Award of Contract 83. The following are the conditions for award of civil works contracts: (i) For each water supply subprojects, MPPW, NWSC as the owner of the existing urban water supply system, and the municipality concerned will have agreed on the arrangements, satisfactory to ADB, for capital investment project management as well as subsequent operational arrangements for the resulting water supply system before the relevant civil works contracts are signed. (ii) For each neighborhood road, drainage, and water supply development subproject, all the stakeholders concerned, including landowners, and registered and nonregistered land users, and the municipality concerned will have agreed in writing to the planned arrangements for the land pooling scheme that is proposed for the subproject site before the relevant civil works contracts are signed. Also, the following supporting documents must be submitted to ADB for review for each such subproject: (a) feasibility study and a financing and cost-recovery plan; (b) complete baseline socioeconomic survey on all the stakeholders concerned, including landowners, and registered and nonregistered land users (e.g., tenants and sharecroppers), through a field survey, household interviews, and review of land titles and tenant registrations from the Land Revenue and Cadastral Survey Offices. The survey should include an assessment of the impact on indigenous peoples as appropriate (Refer to Supplementary Appendix C Sample Initial Social Assessment for Land Pooling Scheme, for example); (c) full social risk assessment, resettlement plan, if necessary, to mitigate any losses in accordance with the agreed-upon resettlement framework, and mitigation measures, as appropriate, for any indigenous peoples affected; and (d) environmental monitoring and management plan, if necessary.

VI. RECOMMENDATION 84. I am satisfied that the proposed loan would comply with the Articles of Agreement of ADB and recommend that the Board approve the loan in various currencies equivalent to Special Drawing Rights 22,699,000 to the Kingdom of Nepal for the Urban and Environmental Improvement Project from ADB’s Special Funds resources with an interest charge at the rate of 1% per annum during the grace period and 1.5% per annum thereafter; 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 and Project Agreements presented to the Board.

Tadao Chino President

18 November 2002 Appendix 1 21

PROJECT FRAMEWORK

Design Summary Performance Indicators/Targets Monitoring Mechanisms Assumptions and Risks Goals By 2015, conditions in each of the 9 project towns will have improved over 2001 (baseline), as follows:

1. Urban poverty reduced Percentage of the urban population in · Government absolute poverty reduced by economic statistics 5 percentage points · Government

health statistics 2. Public health improved Incidence of waterborne diseases · Hospital/medical reduced by 20% clinic records

Infant mortality reduced by 20% · Periodic spot sampling 3. Environmental degradation BOD 5 and E-coli count in surface arrested waters surrounding each Project town · Sample surveys reduced by 20% · OED special impact evaluation 4. Migration to Kathmandu Population growth from 2005 to 2015 in studies Valley reduced each project town 1.3 times higher than · OED project in the respective district as a whole performance audit report (PPAR)

Purpose By loan closing date (2010), conditions in each of the 9 project towns are as follows: 1. Self-sustainable urban Increased number of bank branch Municipal financial · Legal, political, development, compatible offices records and fiscal with environmental Water supply systems, sewerage Sample surveys conditions improvement, in all project systems, and revenue-generating urban remain con- towns facilities operate without subsidies. Asian Development ducive to Municipal administrations show marked Bank (ADB) project decentralization. increase in quantity and competence of completion report staff. Ratio of total annual revenue to (PCR) · Political support total annual expenditure (including debt for reform and service) is 1.25. Annual revenue · ADB/Government / decentralization increase between 2002-2005, 50%; municipalities in the water between 2005-2008, 20%; and 2008 tripartite review supply sector onward, 10%. Property tax collection remains high. efficiency, 30% by 2005; and 90% by 2009. · The public’s Ward committees, community-based willingness organizations including women's to utilize and groups, and nongovernment pay for organizations participate actively in improved urban managem ent of new urban services infrastructure facilities. remains high. Number of connections to water supply system and resulting revenue increase steadily. Number of connections to sewerage collection system and resulting revenue increase steadily. 1.7 Effluent from sewage treatment plants meets appropriate environmental standards. 22 Appendix 1

Design Summary Performance Indicators/Targets Monitoring Mechanisms Assumptions and Risks Outputs By end of project (2009): 5 professional staff in each project town Urban and Environmental · Political stability have attended training courses in Improvement Project · Continued - urban management and revenue (UEIP)-specific project support for generation, performance monitoring water supply - urban and environmental infrastructure system (PPMS) sector reforms project implementation and operation monitoring and reporting · Water supply and maintenance (O&M), and by customers - identification, appraisal, 1. Project coordination willing to pay implementation, and operation of office (PCO), supported more for better supplementary urban facilities. by project advisors or services such project implem entation that financial units on behalf of the requirements municipalities under the · Trimester project Project are met progress reports · Annual project reports · Periodic sample surveys 20 elected representatives, community · Executing Agency and group leaders including women, (EA) PCR and representatives of disadvantaged 2. ADB project officer groups have attended orientation · Quarterly project courses in performance report - urban management and revenue (PPR) generation, · Semiannual ADB - urban and environmental infrastructure review missions project implementation and O&M, and · ADB PCR - identification, appraisal, implementation, and operation of supplementary urban facilities 2. Urban and environmental Expansions and improvements to infrastructure subprojects sewerage collection and treatment completed in all project systems, including 18 reed bed towns treatment plants, are implemented as Sanitation and planned in all project towns. wastewater Expansions and improvements to water management supply systems in 5 municipalities, Water supply including 1 regionally integrated system Neighborhood road, (serving 3 municipalities), are drainage, and water implemented as planned and deliver 3.3 supply development million m 3 additional water per year by River training, and 2009. unaccounted-for water reduced to Road upgrading 35% by 2006; and 30% by 2009. Locations for neighborhood road, drainage, and water supply development subprojects are identified and projects are implemented according to agreed-upon procedures. One year after completion, land value is 3 times of 2003 value. Embankment protection works for river training are completed in 3 project towns according to approved plans. Minor road upgrading works in selected towns are completed according to approved plans. General time overrun not more than 30%; cost overrun not more than 15%. Appendix 1 23

Design Summary Performance Indicators/Targets Monitoring Mechanisms Assumptions and Risks 3.Supplementary urban facility 18 small urban community facilities subprojects completed in all completed. (type, scope, distribution, and cost to be project towns Small urban community determined in a participatory manner during implementation) facilities (i.e., public toilets,

public waste collection

points, improvements to public places, places of worship, neighborhood

lanes, sports grounds, and

small public recreation

parks) Revenue-generating urban facilities (i.e. bus terminals, 15 revenue-generating urban facilities bus/truck parks, completed with private sector marketplaces, small participation. slaughterhouses, cold storage facilities, (type, scope, distribution, and cost to be recreational facilities, and determined in a participatory manner during implementation) vocational training centers ) 4. Community development Training completed for 20 key local participants in each project town. (i.e., project town staff, local NGOs, and women's groups) Public health awareness campaigns conducted in each project town. Public health education programs conducted in each project town. Activities 1. Fundamental organizational Project steering committee (PSC), UEIP-specific PPMS Willingness of local monitoring and reporting communities to preparations municipal steering committees (MSCs), project coordination office (PCO), and by contribute time, project implementation units (PIUs) 1. PCO, supported by PAs money, and other established and provided with all or PIUs on behalf of the resources required resources; project advisors municipalities Security conditions (PAs) and project managers identified · Trimester project under control Start: Loan Effectiveness; Duration: 3 progress reports Competent key personnel (in months; Responsible: Government. · Annual project Project Implementation Support reports Government, project 2. Procurement of key consulting services procured, advisory · Periodic sample towns, consultant technical assistance consulting services for integrated water surveys teams, and supply procured 2. ADB project officer contractors) Start: Loan effectiveness; Duration: 6 · Quarterly PPR months; Responsible: Government. · Semiannual ADB

3. Organizational preparations Design and supervision consulting review missions services procured in each municipality Start middle of year 1 for batch 1 towns,

middle of year 2 for batch 2 towns; middle of year 3 for batch 3 towns; Duration: 6 months; Responsible: municipalities. 4. Design of sub-projects Technical team established and

provided with all required resources, cooperation mechanism with PIUs/ PAs

established Start: middle of year 1 for Batch 1 towns, middle of year 2 for Batch 2 towns, middle of year 3 for Batch 3 towns; Duration: 6 months; Responsible: municipalities. 24 Appendix 1

Design Summary Performance Indicators/Targets Monitoring Mechanisms Assumptions and Risks Responsible: municipalities. 5. Implementation of sub- Detailed engineering designs and other tender documents for physical facilities projects available; detailed plans for institutional strengthening measures available; detailed plans for community development activities available Start: beginning of year 2 for batch 1 towns, beginning of year 3 for batch 2 towns, beginning of year 4 for batch 3

towns; Duration: 6 months; Responsible: PIUs/municipalities. 6. Coordination and Construction of physical facilities, communication implementation of institutional strengthening measures and of community development measures according to agreed-upon plans Start: middle of year 2 for batch 1 towns, middle of year 3 for batch 2 towns, middle of year 4 for batch 3 7. Monitoring of project towns; Duration: 30-39 months; implementation Responsible: PIUs/municipalities. PSC, MSCs, Implementing Agencies (IAs), and ADB are supplied with required information in a timely manner Start: Loan effectiveness; Duration: 78 months; Responsible: PCO with support of all other parties to the Project. PPMS applied; Environmental 8. Financial Administration Monitoring and Management Plan (EMMP) applied; loan covenants monitored; regular trimester and annual

reports published Start: Loan effectiveness; Duration: 78 months; Responsible: PCO with support of PIUs/municipalities Adequate accounting records of all Project-related expenditures available in a timely manner and regularly audited. Start: Loan effectiveness; Duration: 78 months ; Responsible: PCO with support of PIUs/municipalities

Inputs ADB Loan Total $30.0 million Trimesterly · Political support 1. Civil Works $18.7 million (disbursement) reports: with counterpart $2.9 million · IAs municipal fund allocation 2. Equipment & Materials $0.6 million · EA · Government fulfill 3. Training $1.0 million ADB Project grant funding 4. Community Development $3.6 million commitments as 5. Consulting Services 29 person-months international; agreed 747 person-months domestic

Table A.1 Town Infrastructure and Environmental Status Item Dhadingbes

Unit Banepa Dhulikhel Panauti Bharatpur Ratnanagar Hetauda Bidur Kamalamai i Estimated population 2001 15,586 14,388 25,656 108,052 35,335 100,134 24,215 28,071 14,693 Total Households 2001 No 3,077 2,005 4,247 14,998 5,996 17,714 3,739 4,566 2,661 Household size person 5 7 6 7 6 6 6 6 6

Municipal area ha 828 1,401 3,378 7,746 3,697 4,787 3,290 20,979 3,120 Population density person/h 19 10 8 14 10 21 7 1 5 A. Water supply

Water produced (dry season) m3/d 810 1,270 1,244 4,420 230 7,600 2,037 880 1,987 Household connections No 890 885 524 4,500 300 8,363 553 903 186 Standpipes No 37 27 55 100 12 22 165 48 50 Population served % 65% 48% 15% 35% 7% 27% 37% 20% 15% NWSC and Water operator NWSC WUC NWSC NWSC DWSS DWSS/WUC WUC WUC Supply hours per day hr/d Insufficient 24 Insufficient 4 Insufficient 4 Insufficient Sufficient

B. Sanitation Household latrines No 1,705 1,411 2,130 10,000 10,195 1,800 1,800 700

Household latrine coverage % 55% 70% 50% 67% 0% 58% 48% 39% 26% Public latrines No 3 None 1 5 3 5 None 1 None Sewer length km None None None None None None None None None Solid waste collection Fair Fair Fair Fair Fair Fair Poor Poor None

Dumped on Dumped on Dumping on Dumped to Dumped to Dumping on Dumping on Dumped to Dumped to Solid waste disposal purchased roadside river bank forest forest river bank river bank river/forest river bank land land Drainage (open) km 7.0 12.6 2.0 22.3 2.0

Drainage (covered) km 8.3 9.0 3.7 C. Environmental

status

River pollution Serious Significant Serious Serious Serious Serious Serious Serious Significant Land pollution Some Some Minor Some Some Some Minor Minor Minor Mill & Cement Air pollution Some Some Minor Cement Some factory/ Minor Minor Minor factory Industries Other problems Riv. Erosion Overall environmental status Poor Fair Fair Poor Poor Fair Poor Poor Poor

D. Roads Roads total km 22.5 25.9 88.0 448.0 140.0 165.0 54.0 49.0 65.0

Surfaced km 4.7 9.9 6.0 107.0 20.0 40.0 15.0 - Appendix 1 Gravel km 3.4 3.0 22.0 215.0 100.0 55.0 22.0 15.0 16.0 25

Table A.1: Town Infrastructure and Environmental Status (continued) Dirt km 14.4 13.0 60.0 126.0 20.0 70.0 17.0 34.0 49.0 Appendix 1 E. Electricity and

telephone

Electricity connections No 2,519 1,914 3,806 15,000 3,500 10,915 2,075 4,000 Telephoconnections No 1,720 450 200 5,000 990 758 250 183

F. Other urban

facilities Bus Park Not used No Limited Limited No Limited No No To be Markets No No No Informal No Informal Informal Informal Informal Hospitals Beds 2 hosp 50 No 165 No 50 15 15 15 Health Post No 1 2 6 1 1 1 1 - Educational Institutions No 28 24 37 57 35 61 28 34 18 Football Parks/playgrounds No Yes Yes No No No Planned Yes field 92 cottage 23 hotels 113 cottage 68 cottage 111 cottage 97 cottage Industries No 3 large 22 65 ind. 78 cottage ind. Ind. ind. ind. ind. Banepa to Included Proposed Banepa to Road to G. Municipal Cultural Cultural Study for Bidur to Tibet Bardibas ADB ropeway to Bardibas Malekhu development heritage heritage drainage border road plans highway STWSSP Ktm highway upgrading Study for Tourism Tourism Industrial Design for

sewerage potential potential WWTP drainage Drainage Latrine IT Park design Construction

Appendix 2 27

URBAN POLICY IN NEPAL 1. A review of national policies mentioned in Nepal’s Ninth Five-Year Plan and draft Tenth Five-Year Plan reveals the following basic features: · Urban development and environment protection-related policies are directly concerned with urban and environment improvement while the local development, nongovernment organization (NGO) and poverty-reduction related policies are intended to facilitate the goal of urban environment improvement (UEI). · The policy on decentralization indicates the process to be followed for undertaking UEI- related development activities. · All policies are intended to encourage the adoption of participatory development processes in the sense that all development actors—local government institutions (LGIs), NGOs, private sector, government agencies and communities—are to be actively involved in UEI-related projects. · The policies give special emphasis on institutional and capacity building for the development actors at both central and local levels. · Although the policies are rightly developed as per the needs of Nepal’s urban development and environment promotion, they are not consistent with the relatively low level of Nepal's overall institutional and administrative capacity. Hence, the outputs of implementing these policies will obviously be quite limited. 2. Thus, on the whole, although the policies are rightly conceived, their implementation is largely weak, with adverse implications on urban development and environment improvement activities. Further details of these policies are summarized below. A. Urban Development and Land Use · Making LGIs especially municipalities fully responsible for urban development and management (UDM) · Involving communities, private sector, NGOs in the process of UDM and strengthening the role of government as facilitator and initiator · Enhancing urban-rural linkages · Clarifying the economic role of cities · Undertaking organizational improvement and human resource development activities · Streamlining interinstitutional coordination in infrastructure development · Highlighting the need for preparing comprehensive land use plans and mapping · Appropriating land for developing and extending municipalities, newly urbanizing areas, and new settlements · Undertaking the tasks of legal improvement · Constituting a Land Use Council B. Environment Improvement · Raising public awareness on the need for environment conservation and promotion at the initiative of local communities, LGIs, NGOs, and the private sector · Motivating people for environment conservation · Forging mutual cooperation of government and NGOs for environmental protection · Promoting private sector and joint-venture investment with active participation of LGIs in solid waste management · Motivating people engaged in the recycling business for the purpose of recycling solid wastes 28 Appendix 2

· Improving institutional arrangements - reviewing the management style of the Environment Protection Fund, setting up small environment information centres at local level, capacity building for environment sections of sectoral ministries; and updating the environment data center C. Decentralization and Strengthening Local Governance · Institutional development of local autonomous bodies · Integration and coordination among local development programmers · Building economic/financial capacity of LGIs · Promoting the participation of women and backward ethnic groups in decision-making processes · Developing local personnel system to ensure the accountability of the employees to the LGIs · Enhancing the effectiveness of project implementation and monitoring systems · Institutionalizing participatory development process · Mobilizing user groups and NGOs in development processes at local level · Enhancing transparency in the work performance of LGIs D. Local Development · Gradual devolution of overall responsibility for local development, making LGIs responsible for overall management of local development ranging from project identification to monitoring and evaluation, with central Government providing needed training facilities, and technical and financial support · Strengthening the management capacity of municipalities · Integrating physical and economic planning · Implementing programs with direct involvement of local communities · Enhancing the participation of the private sector · Strengthening rural-urban linkages · Gradually developing facilities in suitable urbanizing rural settlements E. NGOs · Making improvements in NGO-related legal arrangements · Classifying NGOs at national, regional and local levels · Involving NGOs in poverty reduction and socioeconomic development, related policy formulation and project implementation · Mobilizing resources, training/capacity building for LGIs · Introducing one-window system to encourage international nongovernment organizations (INGOs) in the area of resource mobilization · Channeling resources by INGOs only through NGOs · Establishing collaborative relations between NGOs and LGIs · Strengthening the role of the social welfare council F. Poverty Reduction · Directing all development sectors to undertake poverty reduction activities · Providing health, education, and drinking water facilities · Undertaking social mobilization and programs for empowering the poor · Expanding employment and income-generating activities · Forming a poverty alleviation commission and a poverty alleviation fund · Developing an effective poverty monitoring system Appendix 3 29

THE TOWN DEVELOPMENT FUND A. History, Ownership, and Organizational Structure

1. The Town Development Fund (TDF) was established under the Ministry of Physical Planning and Works (MPPW) in 19891 to facilitate financing of urban infrastructure projects in municipalities or urbanizing villages. It is governed under Town Development Act 2053 (1997), with investment policies and procedures stipulated in the related Town Development Fund Rules, 1997. The legislation establishes the TDF as a Government-owned autonomous body to provide financial, technical, and institutional support and research to institutions engaged in town development. The TDF board comprises the secretary or the representative from MPPW (chair), Ministry of Finance (MOF), and Ministry of Local Development (MLD); five Government- nominated mayors representing the five regions; two board-nominated financial and technical experts; and an executive director appointed by the board through open competition. Others may participate as observers, as necessary. 2. With Government approval, the TDF may act with any foreign government or organization in areas of its activities. It is authorized to receive grant and loan funds from the Government and other organizations, foreign governments, and international agencies for its programs. It may invest funds, issue debentures within prescribed regulations, and retain service charges. The TDF may give grants and loans to any institution engaged in town development: government and nongovernment institutions, user groups, village development committees (VDCs), and municipalities. The TDF stipulates the terms and conditions of its loan or grant and specifies conditions of recourse in the event of default, including seizure of pledged security. The board has an Investment Promotion Committee for preparing investment policies and procedures. 3. The TDF is organized under four divisions: (i) Loans and Grants Division; (ii) Technical and Monitoring Division; (iii) Finance Division; and (iv) Administration Division. Additional staff or consultants are employed on an as-required basis. As a result, the TDF maintains a lean organization. B. Performance 1. Financial 4. TDF's funding for loan and grant projects to date has originated from the World Bank, United Nations Development Programme, Kreditanstalt fur Wiederaufbau (KfW) , and Deutsche Gesellschaft fur Technische Zusammenarbeit (German Agency for Technical Cooperation [GTZ]) and Government contributions. As of the end of FY1999, the TDF had accumulated grant funds of $2.90 million, Government contributions of $0.19 million, and World Bank loan of $1.35 million, with retained earnings and capital fund totaling $0.42 million. Assets were $4.47 million, including project loans of $3.56 million to municipalities. 5. As of the end of FY1999, the TDF had disbursed $1.8 million in World Bank loans, $0.2 million in KfW loans, $1.4 million in grants from GTZ, and $0.5 million in loans plus $1.6 million in grants from KfW. Almost all interest and principal repayments have been paid on the agreed- upon terms, with overdue interest representing 4% of total interest charged. Two municipalities have not met the agreed-upon term, requiring the payments to be collected directly from the Government. To date, no provision for loan losses has been made since repayment performance has been strong, with loans' performance exceeding 95% of interest and principal due. Although loan agreements generally have recourse to payment through the Government, the TDF bears the primary risk for loan losses. Recently agreed-upon terms for a second phase

1 Town Development Fund Board (formation) Order 2045 (1989). 30 Appendix 3 of KfW funding will require the TDF to provide a minimum of 4% of interest due for more than 6 months, and 2% on outstanding principal amounts. The terms also include the recommendation of a recent external policy review2 that the TDF should retain and transfer 2% of its interest income to a special contingency reserve for potential loan losses. 6. Loan approvals have averaged $560,000 annually over the past 3 years The average loan size has increased in recent years to about $110,000, the largest being $440,000. The TDF currently finances projects in all but 2 of the original 36 municipalities, with 65 projects completed and 70 in progress. Social infrastructure development projects include public toilets and drainage, water systems, feasibility studies, solid waste collection equipment and sanitary landfills, school buildings, and bus parks. Commercial loans include those to commercial retail buildings. In total (including grant projects), the TDF has handled over 553 projects worth almost $8.5 million. 7. The net income for TDF has averaged NRs6.5 million3 over the past 3 years, with a 3.3% average return on assets and 10.0% return on equity. Operating costs have averaged NRs5.8 million, about 45% of the financial margin. The financial statements are audited by an independent auditor and are submitted to the Government. The board has an audit subcommittee that reviews and acts on the auditor's report. The audited financial statements of 1997, 1998, and 1999 were reviewed. The audits included a rigorous compliance review of loan procedures and terms for each project, and the board was responsive to the auditor's comments. 2. Operational 8. Over its 10 years of operation, TDF has developed policies, procedures4 and standardized documents for grant and loan applications, evaluations, grant approvals, loan agreements, tendering, fund disbursement, and repayment monitoring. Projects under KfW funding are financed by grants or loans, depending on the nature of the project and the income of the municipality. It has been recommended that future grants apply only to low-income municipalities and be restricted to the areas of sanitation, environment, and school projects. Grants are provided with counterparts funds from the municipalities. The tendering and contracting of projects financed under KfW funding are monitored by TDF's own staff at no charge to the municipalities. The TDF supplies technical support to municipalities with inadequate engineering capacity to plan, evaluate, and oversee implementation of their projects. It also provides financial and accounting training, support, and post-implementation monitoring of operations to assess financial and operational performance.

9. To procure consulting services, the TDF maintains a roster of 24 prequalified consultants for each architecture and planning project as well as engineering project. A roster of 12 prequalified consultants is maintained for each category of projects. Depending on performance, consultants are removed from the list and others added. For competitive bidding, a shortlist group of six consultants is drawn from the appropriate pool, based on a regular rotation. If less than three proposals are received, additional consultants are invited from the next group. The TDF prepares the terms of reference in all projects requiring consulting services. After an invitation for proposals, consultants are briefed in a prebid meeting. A two-envelope system is used, with 80% weight placed on the technical proposal and 20% on the financial proposal, with minimum requirements for each. Proposals that pass technical evaluation are forwarded to the

2 Analysis of the Economic Situation of the Town Development Fund and Evaluation of the Loan and Grant Policy, prepared by German consultants for KfW, Frankfurt, Germany, October 1999. 3 Conversion rate: NRs1=$0.0138 as of 16 August 2000. 4 TDF. 1999. Guidelines for Procurement of Works and Services. The guidelines define the procedures and rules for all funding under the KfW cooperation fund. Appendix 3 31

TDF for review and approval before the financial bids are opened with the tenderers present. Contracts are awarded on a combined weighted technical and financial score. In the case of supervision assignments to a design consultant (if prequalified by TDF), negotiations are conducted directly with the consultant who prepared the master plan or design. Services, studies, and designs are awarded by competitive bidding if the contract value is greater than NRs0.2 million. With contracts not exceeding NRs0.5 million, direct negotiation may be used. The guidelines specify recourse in the event of cost overruns from construction delays caused by either the contractor or the municipality. All projects exceeding NRs1.5 million, or where competent domestic consultants are not available, must be supervised by a consultant appointed by the TDF.

10. For procurement of construction works, projects costing less than NRs1.0 million may be executed through a user committee or by municipalities utilizing force account, or by suppliers offering the lowest price, based on quotations in three sealed envelopes (records to be maintained by the committee). Local shopping may be used for small purchases that cannot be included in other works, or where items are readily available through local suppliers. Three sealed quotes must be obtained, evaluated, and submitted to the TDF for approval. Construction projects valued over NRs1.0 million are procured by tender, using standard tender documents as specified in a project appraisal report. The tendering process is similar to the bidding process for procuring consulting services, except that tenders are nationally advertised. Technical evaluation is based on financial and technical past performance and capacity to undertake the work. Contractors are required to provide performance security. Contracts include both penalties for nonperformance and incentives for early completion. C. Capacity for Management of Project Loan Financing 1. Financial

11. Projections were prepared to determine the financial capacity of the TDF to undertake the proposed Project. As a relatively small financial institution, the TDF must have sufficient spread between the relending rate from MOF and the onlending rate to the subprojects and adequate financial capacity to cover project-related costs in the intervening period until subloan repayments begin to provide cash flow and revenue. The incremental operation costs for staff, logistical support, financial training program, and administration are based on TDF estimates. Construction costs were developed based on four phases of 44 construction projects, with 8 starting in the first quarter of 2001, and 12 each in the fourth quarters of 2002, 2003, and 2004, respectively. Each project is assumed to average NRs62.5 million in 1999 prices. Loan disbursements are based on 25% of construction costs being disbursed semiannually over a 2- year construction period. Based on the ratio of foreign costs to local costs, construction costs are assumed to increase 5% per year, and the price contingency will be adequately covered by Asian Development Bank (ADB) financing being in dollars. Local inflation is estimated to continue at 7.0%, foreign inflation is assumed as 2.4%. As the water users and sanitation committees (WUSCs) will have no funds to pay interest until operations begin, interest during construction is assumed to be capitalized for both WUSC and TDF. Interest on borrowing to cover cash-flow deficits is assumed at 12%, current commercial bank rates on overdrafts and loans ranging from 11.5% to 15%. Interest income on surplus funds available for investment is assumed at 4%, current commercial rates on deposits ranging from 3% to 8%.

12. Financial projections incorporate the incremental cash-flow impacts of the Project, with projections for existing TDF operation. The TDF cash-flow projections are premised on operational plans before the recently agreed-upon new KfW funding. The projections show that the Project will initially have a negative impact on TDF incomes during the period 2001-2003 32 Appendix 3 until interest revenues from the subloans flow in starting 2004. However, cash flow should be more than sufficient to cover interim expenses relating to the Project. While the overall financial positions are healthy over the projection period, the current ratios will deteriorate until 2005 and improve marginally thereafter, indicating inadequacy of long-term capital and the need to finance operations with short-term borrowings. This aspect will need to be monitored closely. KfW recently approved DM14.0 million5 funding for the TDF for a second phase of the town development program for grants and establishment of a long-term sustainable revolving fund for financing municipal infrastructure. Plans for managing these funds have not yet been finalized. The new funding will strengthen, rather than weaken, TDF's financial capacity; therefore, the financial projections conservatively present TDF's financial outlook.

2. Operational

13. The Project is much larger than anything the TDF has handled to date, but the TDF's performance record indicates that it has developed significant experience in working with municipalities, and has developed an efficient and effective mode of operation. Over 10 years of operation, the TDF has developed clear policies, procedures, and standardized documents. It has gained much practical experience in project identification and design, to ensure the projects are appropriate and responsive to the needs of the community. It has also gained considerable experience in working with local contractors, improving procedures over time. As an autonomous body, it has been flexible and responsive in project implementation, and gained trust through transparent operations. 14. It currently has a trained staff of 38, of whom 15 have graduate or postgraduate qualifications in finance and business administration, engineering, architecture, and law. Further capacity building is ongoing through professional training. The TDF estimates that the additional work for the Project could be handled with an additional staff of two or three engineers, a financial specialist, sociologist, accountant, and additional support staff of drivers and a secretary. Under the recently approved second-phase KfW funding, the technical assistance and international consultant support will be continued. This is additional assurance to ADB that there will be continuity in monitoring and the standards of TDF operations during project implementation.

5 Conversion rate: DM1=$0.4467 as of 16 August 2000. Appendix 4 33

NEPAL'S TOWN DEVELOPMENT ACT

1. The Act was passed in 1988, subsequently amended in 1991 (twice), again in 1992, and finally in 1997. It facilitates town planning by “Local Bodies,” which are defined as (i) village development committees (VDCs); (ii) municipal corporations, submunicipal corporations, and municipalities; and (iii) town development boards (committees).

2. Plans of VDCs and municipalities must be approved by a board, or a higher authority if no board exists. The membership of a board is determined by the government. (Only 4 of the 18 members are democratically elected.) The government can alter the membership as it sees fit.

3. Local bodies have duties and functions under the Act, namely, to (i) define land use zones; (ii) set standards and norms; (iii) conduct programs for proper development; (iv) restrict development; (v) conduct land development programs; (vi) stop development or subdivision of land for a maximum period of 2 years; (vii) regulate, control, or prohibit development; (viii) impose conditions when granting approval for development; (ix) require unauthorized development to be removed at no cost; and (x) acquire land in its name for the purpose of town planning.

4. The Town Development Act provides an elaborate legal framework for executing town planning. More specifically, for land development programs, the Act empowers a local body to conduct guided land development (GLD) and/or land pooling projects, and provides the means to overcome legal objections that may arise if such projects are implemented under the Local Self-Governance Act.

5. For land pooling, it gives local bodies authority to (i) recover management and capital costs through the sale of reserve plots; (ii) conduct land pooling in any area required; (iii) conduct land pooling in any area where 75% of the owners/tenants demand, providing that more than 50 families reside in the area; (iv) conduct land pooling through a user committee; (v) prevent subdivision, sale, and development of land for 2 years while land pooling is conducted; (vi) use prevailing land values to determine contribution ratios; and (vii) enable owners with plots that are too small to buy additional land. 34 Appendix 4

6. For guided land development, it gives local bodies authority to (i) acquire land for roads (50% of the cost will be paid by the board and 50% by the landowners who benefit); (ii) form a user committee to plan and implement GLD; and (iii) allow GLD if 75% of owners apply, providing that 50 families reside in the area (but the cost of any land acquired for the scheme will be borne entirely by the beneficiaries). 7. The Act also facilitates local bodies' town planning projects by providing exemption from land transfer fees and other regulations, such as the land ceiling. Moreover, the penalties for infringement of rules and regulations are much higher than specified in the LSGA, namely, a maximum of (i) NRs100,000 and/or 1 year in prison for unauthorized development, (ii) NRs25,000 and/or 6 months in prison for obstruction or hindrance of the Act, and (iii) NRs5,000 for failure to comply with the order or directive of the board.

8. Finally, the Act enables local bodies to prepare bylaws for executing town planning. Appendix 5 35

WATER AND SANITATION SECTOR STRATEGY

(Excerpts from "Nepal Water Supply and Sanitation Medium-Term Expenditure Framework for the Draft Tenth Five-Year Plan")

1. A demand-driven approach with maximum local resources will be used in rural water supply schemes. Nongovernment agencies, community-based organizations, and the private sector will be mobilized as partners in developing the sector.

2. Priority will be given to the use of appropriate simple technologies that the community can support. Technologies like rainwater harvesting, solar pumps, hydrams, etc. will be used wherever a perennial water source is not available.

3. Effective and sustainable development will be achieved by strengthening implementation, operation and maintenance (O&M), and leakage control arrangements by involving local users committees/agencies from the planning stage.

4. Priority will be given to rehabilitating yet-to-be-handed-over old rural water supply schemes and incomplete schemes.

5. A policy for developing and conserving water resources within a watershed area by integrated use management of ground water and surface water sources will be adopted. Institutional development for integrated use management of watersheds will be made to improve and augment the water supply in Kathmandu Valley.

6. National quality guidelines will be prepared and the quality monitoring and control system will be strengthened to provide safe water.

7. Emphasis will be put on the skills and capability of users committees or nongovernment organizations for implementing water supply schemes by mobilizing them.

8. Sanitation programs will be implemented parallel to the development of water supply schemes. Sewerage systems in densely populated areas and on-site sanitation in other areas shall be promoted.

9. Water supply schemes will be operated on cost recovery basis. In rural areas, a policy of cost recovery of O&M and users community operation will be adopted. Cost recovery of capital cost along with O&M cost will be adopted in urban areas.

10. Besides encouraging private sector involvement in managing of water supply systems in urban areas, water supply services will be developed and expanded by involving municipalities in the responsibility as provided for in Nepal’s decentralization policy.

11. A regulatory body for monitoring water supply services operated by government agencies, semigovernment agencies, user committees, or private sector entities in urban and semiurban areas will be established.

36 Appendix 6

EXTERNAL ASSISTANCE TO NEPAL'S URBAN DEVELOPMENT 1997 - 2002 Amount Development Program/Project Loan/Grant Source Start Finish ($’000)

1 National Sanitation Action Plan FTC/Grant UNICEF 1997 2001 454 2 Rural-Urban Partnership Programme FTC/Grant UNDP/UNCHS 1997 2002 4,995

3 Second Tourism Development Project IPA /Loan ADB 1997 2001 17,200 4 Solidarité Tiers Monde (Cooperation with FTC/Grant France 1997 1998 52 Tansen Municipality)

5 Yala Urban Health FTC/Grant United Mission to Nepal 1997 2004 685 6 Healthy City Programme Grant WHO 1998 1999

7 Kathmandu Valley Mapping Project Grant EU 1998 2003 5,961a 8 Mapping for 2001 Census FTC/Grant FINNIDA 1998 1999 205 9 Melamchi Water Supply Project FTC/Grant WB/ADB/JBIC 1998 2010 533

10 NGO/CBO Participatory Learning and Advisory Grant DFID 1998 2003 4,074 Project 11 Sindhuli Road Project Grant JICA/OECF 1998 2007

12 Corporate Accounting System for KMC (TA) Grant USAID 1999 2000 7,274 13 Institutional Strengthening of KMC (TA) Grant ADB 1999 2000

14 Master Plan for Agricultural Marketing in Grant FAO 1999 2000 119 Kathmandu Valley 15 Privatisation of Nepal Water Supply Loan/Grant WB/NORAD 1999 2000 Corporation (Melamchi) 16 City Development Strategy for KMC Grant WB 2000 2000

17 Environment Sector Programme Support Grant Danida 2000 2004 18 Strengthening Institutional Capacity of MuAN Grant UNV/UNDP 2000 2003 205

19 Urban and Environmental Improvement Project Grant ADB 2000 2001 750 (PPTA)

ADB = Asian Development Bank, CBO = community-based organization, Danida = Danish International Development Assistance, DFID = Department of International Development, EU = European Union, FAO = Food and Agriculture Organization, FINNIDA = Finnish International Development Agency, JBIC = Japan Bank for International Cooperation, JICA = Japan International Cooperation Agency, KMC = Kathmandu Metropolitan City, NORAD = Norwegian Agency for Development Cooperation, OECF = Overseas Economic Cooperation Fund, UNCHS = United Nations Centre for Human Settlements, UNDP = United Nations Development Programme, UNICEF = United Nations Children’s Fund, UNV = United Nations volunteer, USAID = United States Agency for International Development, WB = World Bank, WHO = World Health Organization. a Converted from €5,870,000 at an exchange rate of $1.00 = €0.9847. Appendix 7 37

SUMMARY OF POVERTY REDUCTION AND SOCIAL STRATEGY

A. Linkages to the Country Poverty Analysis

Sector identified as a National Priority in Yes Sector identified as a National Priority in Yes Country Poverty Analysis? Country Poverty Partnership Agreement?

Over the last decade the number of absolutely poor has increased to 9 million in Nepal. That is approximately 45% of the total population (UNDP 1998). If $1 per day per capita is taken as the yardstick for measuring of poverty, the percent of the poor in Nepal is 53%. The Nepal Living Standard Survey 1996 revealed that 42% of the population remained as absolute poor. The 9th Plan (1997-2002) emphasizes poverty reduction as the sole development objective and it became a major agenda. Until recently, Nepal’s economy has been based largely on rural agriculture. But as the country develops toward a more urban economy, it faces a number of special circumstances associated with environmental degradation, high-income inequalities, entrenched poverty, and formation of slums and squatter settlements. The main factors that have contributed to the rapid rise in overall urban populations are high level of rural to urban migration, extension of municipal boundaries, and designation of new municipalities. Municipalities are growing at an average rate of 5.2%, while the national population as a whole is growing at about 2.4%, indicating that Nepal could have half of its population living in municipal areas 3 decades from now (UNDP 2001). However, poverty in urbanizing Nepal is somewhat different since substantial portions of municipal areas and the population are, in fact, rural in both occupational structure and village settlement pattern. These villages and settlements in the municipalities lack basic infrastructure such as water supply, usable roads, drainage, solid waste collection service, electricity, and accessible schools. When poor villages are incorporated into municipalities, they lose all district- level village support from government. Municipalities, which are supposed to assume this support, are largely unable to do so due to low levels of revenue sources and lack of external support for programs focusing on the urban poor in Nepal. Given that substantial portions of the population in municipal areas are in fact rural in occupational structure, rural urban linkages remain poor in most regions in terms of markets, transportation, information and service access. Poor farmers face high costs, inadequate information, and other barriers to agriculture and nonagriculture activities. In the project towns, about 51% of the sample households have access to piped water, 24% are using public standpipes, and the rest do not have access to safe drinking water. The water supply often is only intermittent. About one in three households faces a serious water shortage at least once a year, and about one in six all year around. Water quantity delivered is mostly below 50 liters per capita per day. In addition water quality often falls below World Health Organization standards for drinking water, mainly due to bacteriological contamination as a result of poor sanitation facilities. Only about three quarters of the urban population have access to toilets while about a quarter are forced to defecate in open spaces such as riverbanks, drainage, and fields. Sewerage systems, often combined with storm water drainage systems, are limited in urban areas. The final treatment of sewage is often inadequate. As a result, rivers in urban areas have often practically become open sewers, especially in towns during the dry season. Most municipalities collect only 50-60 % of the domestic solid waste generated, and the balance is often burned or disposed of haphazardly on the roadside. The shortage of good quality water and inadequate sewage system have an adverse effect on public health and the urban environment. Given that women are mainly responsible for family health maintenance and collection of water, the lack of basic piped water supply facilities is a greater burden on women.

ADB’s country strategy for Nepal emphasizes water supply, sanitation and urban development, and the need to target excluded groups, to reduce both poverty and inequality. The Project will foster institutional development in nine urban areas and will finance infrastructure improvements with a focus on water supply, sewerage/wastewater management, and solid waste management as well as small urban infrastructure, such as bus terminal/bus park, market, slaughterhouse, and environmental awareness program. In addition, the Project will be linked with a parallel scheme on Rural Urban Partnership Program (RUPP). The Project aims to improve living condition and health status of the people in project towns. Access to safe drinking water, improved sanitation and environment will reduce vulnerability to environmental hazards for the communities in the project towns. Improved quantities and quality of domestic water supply and sanitation facilities will reduce morbidity and mortality factor for young children. Availability of safe drinking water supply will reduce water-carrying time for women. Better environment in the urban area will improve the quality of health and productive capacity of the people. 38 Appendix 7

B. Poverty Analysis Proposed Classification Socioeconomic survey in the project towns indicates that a total of 22% of sample households belong to below poverty line. The distribution of poverty among the project towns is found to be unequal. The highest percentage of poor households (59%) is in Dhadingbesi, followed by Bidur (31%) and Ratnanagar (21%). Most of the poor households belong to lower castes. Urban poverty in the project towns is multifaceted, ranging from lack of employment, basic services, such as water supply and sanitation, to substandard housing. The proposed Project will provide water supplies to the poor and low-caste communities through public water stand posts. The sanitation and wastewater management subcomponent will provide public toilets, expanded sewerage pipe networks and simple wastewater treatment plants in nine urban areas. The system will be designed to give the urban poor adequate access to improved sanitation. The expected benefits are public hygiene and public health improvement in low-income areas of the project towns, and less pollution of groundwater and surface water in these urban areas. The improved public health would contribute to a more productive labor force. The community-based solid waste management and recycling component would create employment for the urban poor. Socioeconomic survey data indicates that over 70% of the poor in all municipalities suffered from lack of employment opportunities. The direct impact of the Project on poverty reduction will be through employment generation in construction works. In the project towns, 54% of the poor are employed in agriculture, while 26% are casual laborers. RUPP will develop linkages between rural and urban producer groups to strengthen the local economy and enhance employment and income-earning opportunities for the urban poor, low-caste people, and Daliths (lowest caste people). The producer groups as well as urban petty vendors often face problems related to the market center, license for vending, space for vending cart, etc. RUPP would provide an improved market-place, collection centers, and market information to poor producer groups and the vendors. These would help them compete with bigger markets and to increase income of the small producers and vendors.

C. Participation Process Stakeholder Analysis: yes Participation strategy required: yes The investment component of the Project was discussed with various stakeholders. To strengthen community participation in local level governance in the project towns, the Project will adopt the following measures: (i) community- level committees should be formed to undertake solid waste management and recycling of waste; (ii) water user association will include men and women from the communities; (iii) low-caste communities and ethnic minority groups will be represented in the user committees for different project components; and (iv) producer groups will be formed. Nongovernment organizations/community-based organizations will participate in implementing the solid waste management. Community-level committees will be formed to conduct awareness campaign for solid waste management in their respective communities.

D. Potential Issues

Significant/ Strategy to Address Issues Plan Required Nonsignificant/ Uncertain/ None Resettlement Nonsignificant The investment component of the Project will require only minor land acquisition.

The neighborhood road, drainage and water Resettlem ent supply development component will convert framework and short some agricultural land for commercial resettlement plan for development. subproject (Mostly voluntary resettlement)

Appendix 7 39

Gender Significant At present the involvement of ward members in Gender strategy the municipal activities is minimal. The Project will facilitate strengthening the role of women ward members in municipal governance through (i) training and human resources development (HRD) activities, (ii) participation in the municipal committee for planning of project activities and general municipal development works, (iii) representation in various users groups, and (iv) participation in solid waste management committee. Each user committee will have at least one woman ward commissioner. The women staff member of the municipality will be included in the HRD training. The infrastructure component of the Project will address gender issues in the following ways: (i) separate toilet facilities for men and women in the bus terminal/bus park, (ii) marked area for women vendors in the marketplace and bus terminal/bus park, and (iii) employment in civil works for women from the poor households. Women producers group will be formed. Provision for day-care center in the marketplace for the children of women vendors will be initiated. Involvement of women citizens in project implementation will be ens ured through their participation in the users committees for different project components. In the user committee, one woman representative should be from the low-caste communities. Preference will be given to women staff for the project implementation unit. Affordability of services Nonsignificant Ensured by financial analysis None

Labor Nonsignificant The Project will ensure fair wages for the None laborers in construction works as well as equal wages for men and women laborers for same types of construction works. Indigenous People / Significant Most of the poor households belong to the low Measures Low-caste caste. These groups live in areas that lack incorporated in the communities water supply and sanitation facilities more than Project design the other areas of the project towns. The Project will address the needs of these groups by (i) providing public water stand posts in their neighborhoods, (ii) constructing toilet facilities in the low-caste neighborhoods, (iii) employing women (at least 30%) in the community-based solid waste management program, (iv) having women and men community leaders participate in the users groups, (v) fostering participation in environmental awareness program, and (vi) employing labor from low-caste community in civil works.

Other Risks/ None None Vulnerability 40 Appendix 7

GENDER STRATEGY

1. The design feature of the Project will include the following measures to address gender issues:

A. Urban Governance

2. To increase the participation of women ward members in the municipal activities and to strengthen their role, the Project will facilitate

(i) capacity building training for women ward members in municipal development work;

(ii) participation of women ward members in planning project activities in their respective municipalities and wards;

(iii) including at least one woman ward member in each user committee formed under the Project;

(iv) including women ward members in the solid waste management committee and environmental awareness committee;

(v) including female staff of the project municipalities in capacity building training for municipal staff, and

(vi) including women leaders from the project municipalities in planning solid waste management and environmental awareness campaigns. At least one woman leader from the low caste will be in each of the committees for the planning/campaign in the respective municipalities.

B. Urban Infrastructure

(i) In bus terminal/bus park and market areas, separate toilets facilities will be built for women and men; and

(ii) An area reserved for women will be built in the market.

C. Rural-Urban Partnership Program

(i) There will be separate groups for men and women producers.

(ii) An area will be reserved for producer groups in the market.

(iii) Day-care facilities around the marketplace will be provided for women vendors and women workers.

(iv) There will be mechanisms for reaching the women producer groups to provide market and extension information. Appendix 8 41

DETAILED COST ESTIMATES Table A8.1: Cost Estimates by Component

Cost in $ million No. Item Foreign Local Total 1 Civil Works B(i) Sanitation and Wastewater Management 0.994 2.985 3.979 B(ii) Water Supply 3.927 2.691 6.618 B(iii) Neighborhood Road, Drainage and Water Supply Development 0.829 1.935 2.764 B(iv) River Training 0.260 0.390 0.650 B(v) Road Upgrading 0.205 0.531 0.736 C(i) Small Urban Community Facilities 0.160 0.471 0.631 C(ii) Revenue-Generating Urban Facilities 1.115 2.250 3.365 Subtotal (Civil Works) 7.490 11.253 18.744

2 Equipment and Materials B(i) Sanitation and Wastewater Management 1.064 1.705 2.769 B(ii) Water Supply 0.119 0.037 0.156 Subtotal (Equipment and Materials) 1.183 1.742 2.925 3 Institutional Support 0.217 0.344 0.561

4 Community Development 1.041 1.041

5 Land Acquisition and Compensation 0.619 0.619

6 Consulting Services (i) Engineering Design and Construction Supervision 0.607 0.910 1.517 (ii) Other Technical Assistance Support 0.790 1.271 2.061 Subtotal (Consulting Services) 1.397 2.181 3.578

7 Incremental Administrative Expenses (i) Incremental Administration Central-Level 1.108 1.108 (ii) Incremental Administration Municipal-Level 1.050 1.050 Subtotal (Incremental Admin. Exp.) 2.158 2.158 Total Base Costs 10.287 19.339 29.626

8 Contingencies Physical Contingencies 1.029 1.934 2.963 Price Contingencies 0.524 3.600 4.124 Subtotal (Contingencies) 1.553 5.534 7.087

9 Service Charges on Bank Loan 0.784 0.784 Total Project Cost 12.624 24.873 37.497 Taxes and Duties 10 4.382 4.382 (Note: Taxes and duties are included in the Total Base Cost.) 42

Appendix 8

Table A8.2: Project Costs by Town and by Component ($ million)

Item Banepa Dhulikhel Panauti Bharatpur Ratnanagar Hetauda Bidur Kamalamai Dhading Total A. Base Cost a a. Municipal Institutional Strengthening and Revenue Mobilization 0.085 0.085 0.085 0.085 0.085 0.085 0.017 0.017 0.017 0.561 b. Provision of Urban and Environmental Infrastructure b 3.299 3.551 1.911 4.238 1.876 3.567 0.309 0.450 0.328 19.529 (i) Sanitation and wastewater management 1.145 0.997 0.516 1.623 1.083 1.581 0.106 0.061 0.107 7.219 (ii) Water supply 1.341 1.771 1.025 1.791 0.000 1.320 0.000 0.000 0.000 7.248 (iii) Neighborhood road, drainage and water supply development 0.412 0.412 0.308 0.412 0.308 0.412 0.195 0.308 0.192 2.959 (iv) River training 0.000 0.000 0.000 0.412 0.000 0.205 0.000 0.078 0.000 0.696 (v) Road upgrading 0.203 0.112 0.000 0.000 0.473 0.000 0.000 0.000 0.000 0.789 (vi) Land acquisition 0.198 0.259 0.062 0.000 0.012 0.048 0.008 0.003 0.029 0.619 c. Provision of Supplementary Urban Facilities b 0.585 0.423 0.495 1.198 0.633 0.233 0.314 0.124 0.269 4.275 (i) Small urban communities 0.090 0.111 0.111 0.106 0.076 0.048 0.048 0.018 0.065 0.674 (ii) Revenue generating urban facilities 0.494 0.311 0.384 1.092 0.557 0.185 0.265 0.106 0.204 3.601 d. Community Development 0.116 0.116 0.116 0.116 0.116 0.116 0.116 0.116 0.116 1.043 e. Project Implementation Assistance 0.563 0.563 0.563 0.523 0.518 0.523 0.322 0.322 0.322 4.219 (i) Other technical assistance 0.249 0.249 0.249 0.249 0.204 0.249 0.204 0.204 0.204 2.061 (ii) Incremental administration central level 0.154 0.154 0.154 0.114 0.154 0.114 0.088 0.088 0.088 1.108 (iii) Incremental administration municipal level 0.160 0.160 0.160 0.160 0.160 0.160 0.030 0.030 0.030 1.050 Subtotal (A) 4.648 4.738 3.170 6.161 3.228 4.524 1.077 1.029 1.052 29.627 B. Contingencies 1. Physicalc 0.465 0.474 0.317 0.616 0.323 0.452 0.108 0.103 0.105 2.963 2. Priced 0.651 0.631 0.433 0.784 0.518 0.632 0.161 0.152 0.162 4.124 Subtotal (B) 1.116 1.105 0.750 1.400 0.841 1.084 0.269 0.255 0.267 7.087 C. Service Charges During Construction 0.119 0.120 0.083 0.171 0.083 0.122 0.029 0.028 0.027 0.784 Totale 5.883 5.963 4.004 7.732 4.153 5.731 1.375 1.312 1.346 37.498

a In September 2002 prices. b Includes necessary engineering design and construction supervision. c 10.0% for civil works, 10.0% for equipment and vehicles, and 10.0% for consulting services. d 2.4% per annum for foreign costs, and 8% per annum for local costs throughout the implementation period. e Includes duties and taxes estimated at $4.38 million.

Table A8.3: Project Costs by Town and by Component ($ million)

No. Item Banepa Dhulikhel Panauti Bharatpur Ratnanagar Hetauda Bidur Kamalamai Dhadingbesi Total

1 Civil Works B(i) Sanitation and Wastewater Management 1.050 0.356 0.482 0.815 0.523 0.631 0.042 0.031 0.049 3.979 B(ii) Water Supply 1.243 1.603 0.948 1.616 - 1.208 - - - 6.618

B(iii) Neighborhood Road, Drainage & Water Supply Development 0.385 0.385 0.288 0.385 0.288 0.385 0.182 0.288 0.179 2.764 B(iv) River Training - - - 0.385 - 0.192 - 0.073 - 0.650 B(v) Road Upgrading 0.190 0.105 - - 0.442 - - - - 0.736

C(i) Small Urban Community Facilities 0.084 0.104 0.104 0.099 0.071 0.045 0.045 0.017 0.061 0.631 C(ii) Revenue-Generating Urban Facilities 0.462 0.291 0.359 1.021 0.521 0.173 0.248 0.099 0.191 3.365 Subtotal (Civil Works) 3.414 2.844 2.182 4.319 1.845 2.633 0.517 0.509 0.480 18.744

2 Equipment and Materials B(i) Sanitation and Wastewater Management 0.020 0.576 - 0.702 0.489 0.847 0.056 0.026 0.051 2.769 B(ii) Water Supply 0.010 0.052 0.010 0.058 - 0.026 - - - 0.156 Subtotal (Equipment and Materials) 0.031 0.628 0.010 0.761 0.489 .873 0.056 0.026 0.051 2.925 3 Institutional Support 0.085 0.085 0.085 0.085 0.085 0.085 0.017 0.017 0.017 0.561 4 Community Development 0.116 0.116 0.116 0.116 0.116 0.116 0.116 0.116 0.116 1.041

5 Land Acquisition and Compensation 0.198 0.259 0.063 - 0.012 0.048 0.008 0.003 0.029 0.619 6 Consulting Services (i) Engineering Design & Construction Supervision 0.241 0.243 0.153 0.356 0.163 0.245 0.040 0.037 0.037 1.517

(ii) Other Technical Assistance Support 0.249 0.249 0.249 0.249 0.204 0.249 0.204 0.204 0.204 2.061 Subtotal (Consulting Services) 0.490 0.492 0.402 0.605 0.367 0.494 0.244 0.241 0.241 3.578 7 Incremental Administrative Expenses

(i) Incremental Administration Central-Level 0.154 0.154 0.154 0.114 0.154 0.114 0.088 0.088 0.088 1.108 (ii) Incremental Administration Municipal-Level 0.160 0.160 0.160 0.160 0.160 0.160 0.030 0.030 0.030 1.050 Subtotal (Incremental Admin. Exp.) 0.314 0.314 0.314 0.274 0.314 0.274 0.118 0.118 0.118 2.158

Total Base Costs 4.647 4.738 3.172 6.159 3.228 4.524 1.076 1.031 1.051 29.626 8 Contingencies Physical Contingencies 0.465 0.474 0.317 0.616 0.323 0.452 0.108 0.103 0.105 2.963

Price Contingencies 0.651 0.631 0.433 0.784 0.518 0.632 0.161 0.152 0.162 4.124 Subtotal (Contingencies) 1.116 1.105 0.750 1.400 0.841 1.084 0.269 0.255 0.267 7.087

9 Service Charges on Bank Loan 0.119 0.120 0.083 0.171 0.083 0.122 0.029 0.028 0.027 0.784 Appendix 8 Total Project Cost 5.882 5.963 4.006 7.730 4.152 5.730 1.373 1.314 1.346 37.497 10 Taxes and Duties 0.701 0.667 0.494 1.084 0.465 0.733 0.114 0.104 0.019 4.382 (Note: Taxes and duties are included in the total base cost.)

44 Appendix 9

ORGANIZATIONAL ARRANGEMENTS FOR IMPLEMENTATION

Asian National Planning Commission Project Steering Committee Development Bank Nepal Resident Mission Ministry of Local Ministry Ministry of Physical Town Development of Planning and Works Development (MLD) Finance (Executing Agency) Fund

Municipal Development Department Department of Division (MMD) of Water Urban Develop- Supply and ment and Building Sanitation Construction

Project Coordination Project Implementation Office (PCO) Support Advisory Team

Municipal Association of Short Term Experts Pool Nepal (MuAN)

Municipal Municipal Steering Council Committee

Municipal Board Mayor / Deputy Mayor / Secretary

Project Project Advisor (PA) or Manager Project Implementation Unit (PIU)

Technical Consultants to Municipality Nongovernment Coordination organizations, Group In the case of In the case of Community-based the PA model the PIU model organizations, and User Groups

Parties contracted for Project implementation Line of Command Line of Coordination Line of Advice / Policy Guidance Permanent unit Temporary unit for project implementation Membership

IMPLEMENTATION SCHEDULE

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year AcActivitya 7

1 Fundamental organizational preparations

2 Procurement of key technical assistance

Batch 1 Towns

3 Organizational preparations

4 Design of subprojects

5 Implementation of subprojects

Batch 2 Towns

6 Organizational preparations

7 Design of subprojects

8 Implementation of subprojects

Batch 3 Towns

9 Organizational preparations

10 Design of subprojects

11 Implementation of subprojects

12 Coordination/Communication

13 Project implementation monitoring

14 Financial administration Estimated Project Completion, 30 Sep 2009 Estimated Loan Effectiveness, 1 Oct 2003 Loan Closing, 31 Mar 2010

Notes: Appendix 10 Batch 1 towns: Bharatpur, Ratnanagar, and Hetauda; batch 2 towns: Banepa, Panauti, and Dhulikhel; batch 3 towns: Bidur, Kamalamai, and Dhadingbesi. Selection of towns for each batch is only indicative. 1 =establishment of project steering committee (PSC), municipal steering committees (MSCs), project coordination office (PCO), and project implementation units (PIUs); identification of project advisors (PAs) and of project managers in each town; 2 = procurement of project implementation support (PIS) consultant, of advisory consultant for water supply, and of design and supervision consultants; 3,6,9 = establishment of municipal technical team, preparation and propagation of standard operation procedures, procurement of essential working equipment; 4,7,10= identification of supplementary urban facilities and site selection, engineering design of all physical facilities, design of institutional strengthening activities and of community development activities; 5,8,11= construction of physical facilities 45 (incl. supervision), implementation of institutional strengthening activities and of community development activities. Implementation in Batch 3 towns will require less time because the envisaged subprojects are fairly simple; 13 = implementation of project performance monitoring system (PPMS) and environmental monitoring and management plan (EMMP), and monitoring of loan covenants.

46 Appendix 11

PROPOSED CONTRACT PACKAGING

Procured Method Amount No. Description of Works Package by ($’000) 1 Consulting services for project implementation Single contract PCO ICB 1,587 Support (including topographic surveys, mapping, geotechnical investigations, and water testing) 2 Design and supervision consulting services 9 contracts (1 for each town) M LCB 1,517 (prequalified consultants) 3 Short-term experts Multiple small contracts PCO SSP 250 4 Advisory technical assistance in development Single contract PCO ICB 225 of municipal and regional water supply systems (grant funding being sought) 5 Supply of office equipment and vehicles for Multiple small contracts PCO DP 139 PCO 6 Supply of computer hardware, mapping, and 9 contracts (1 for each town) M LCB/DP 285 office equipment for municipalities 7 Supply computer software for billing, 1 contract for PCO and 9 towns PCO LCB/DP 9 accounting, and MIS for municipalities, including training 8 Supply all required equipment and materials for 1 contract each for Hetauda M / ICB/LCB 6,774 water supply systems, construct or rehabilitate and Bharatpur; 1 contract for Joint body water supply transmission and distribution the regional water supply systems, including water treatment plants, system for Panauti, Banepa, reservoirs, and service connections and Dhulikhel; and potentially several additional contracts for local distribution systems 9 Carry out upgrading works on roads and 3 contracts (1 each for Banepa, M LCB 736 surface drains Dhulikhel, and Ratnanagar) 10 Supply all required equipment and materials, 9 contracts (1 for each town) M ICB/LCB 4,978 and carry out sewerage rehabilitation and extension works including service connections 11 Construct reed bed sewage treatment plants Multiple contracts PCO LCB 1,770 (specialized contractor required) 12 Carry out river bank protection works, and 3 contracts (1 each in M LCB 650 neighborhood road, drainage and water supply Bharatpur, Hetauda, and development projects Kamalamai) 13 Carry out neighborhood road, drainage, and 9 contracts (1 in each town) M LCB 2,764 water supply development projects 14 Construct small urban community facilities Multiple contracts M LCB 631 (1 or more for each town) 15 Construct revenue-generating urban facilities Multiple contracts M or LCB 3,365 (1 or more for each town) private sector 16 Formal training courses and study tours in Multiple contracts PCO DP 128 Nepal 17 Provision of services and equipment for Multiple contracts for each town M DP/LCB 1,041 community development programs by local NGOs Total 26,849 Excluded Land Acquisition 619 Incremental Administration 2,158 Grand Total 29,626

DP = direct purchase, ICB = international competitive bidding, LCB = local competitive bidding, M = municipality, MIS = management information system, NGO = nongovernment organization, PCO = project coordination office, SSP = single source procurement. Appendix 12 47

LAND ACQUISITION AND RESETTLEMENT (SUMMARY) 1. Land acquisition for the Project will not be large and no directly caused resettlement is anticipated. There is no building on any of the required plots, except for one temporary shed on the prospective sewerage treatment plant site in Bidur. Nonetheless, entitlement determination and compensation procedures were laid out based on the procedures that had been established under the Melamchi Water Supply Project (Loan 1820-NEP). Note that the specific procedures for land acquisition and resettlement for the neighborhood road, drainage, and water supply development subcomponent (i.e., land pooling scheme) are elaborated separately. (Refer to Appendix 4-Nepal's Town Development Act and Supplementary Appendix C-Sample Initial Social Assessment for Land Pooling Scheme).

2. Tables A11.1 and A11.2 summarize the land acquisition required for the Project by subcomponent and by project town, respectively. As shown in Table A11.1, most land acquisition is for the sanitation and wastewater management subcomponent, particularly sewage treatment plants, in terms of both land area (84%) and number of project-affected families (92%).

Table A12.1: Land Acquisitiona by Type of Ownership and Households Affected by Project Subcomponent Project Type of Ownership Private Land Only Subcomponent Number Forest of Govern- Users Agricultural Number of tenant Private Municipality ment Committee Total Land landowners farmers Sanitation and 159.80 74.00 28.37 0.00 262.17 126.30 71 1 Wastewater Management Water Supply 6.50 9.00 22.00 11.10 48.60 6.00 6 0 Total 166.30 83.00 50.37 11.10 310.77 132.30 77 1 a Unit of land: ropani; 1 ropani = 508.9 m².

Table A12.2: Land Acquisitiona by Type of Ownership and Households Affected by Project Town Project Town Type of Ownership Private Land Only Number Munici- Govern- Forest Users Agricultural Number of of tenant Private pality ment Committee Total Land landowners farmers Banepa 38.00 8.00 20.00 10.05 76.05 38.00 20 0 Dhulikhel 28.00 0.00 13.00 0.00 41.00 28.00 19 0 Panauti 26.00 7.00 0.00 1.05 34.05 26.00 7 0 Bharatpur 2.00 64.00 0.00 0.00 66.00 2.00 3 0 Ratnanagar 20.00 0.00 10.00 0.00 30.00 0.00 1 0 Hetauda 36.50 0.00 2.00 0.00 38.50 26.00 9 0 Bidur 4.50 0.00 0.00 0.00 4.50 3.00 2 1 Kamalamai 5.30 4.00 0.00 0.00 9.30 3.30 4 0 Dhadingbesi 6.00 0.00 5.37 0.00 11.37 6.00 12 0 Total 166.30 83.00 50.37 11.10 310.77 132.30 77 1 a Unit of land: ropani; 1 ropani = 508.9 m².

48 Appendix 13

SUMMARY INITIAL ENVIRONMENTAL EXAMINATION A. Introduction 1. In compliance with the Asian Development Bank’s (ADB's) environmental requirements, an initial environmental examination (IEE) was conducted. This appendix covers the project town of Hetauda as a representative sample for the nine project towns. For the initial screening, ADB's checklist of environmental parameters for selected infrastructure development projects was used. The potential major impacts or benefits of the Project were identified next and an analysis of whether or not a further study was warranted followed. The summary IEE (SIEE) summarizes the screening of potential environmental impacts of the Project, suggests mitigation measures, and describes the institutional requirements and environmental monitoring program. The SIEE is based on information gathered during the feasibility study, a review of reports available in the core subproject areas, and data collected during fact-finding by staff of the Asian Development Bank (ADB). The Project aims to address critical environmental improvement needs by preparing subprojects to facilitate sustainable urban development in the municipality of Hetauda. 2. The subcomponents concerned with urban and environmental infrastructure improvements are (i) sewage treatment, (ii) water supply, and (iii) urban land development. 3. The 1997 Environmental Protection Regulations stipulates that an IEE is necessary for the subprojects. The land to be acquired for project activities is mostly agricultural land. The development of infrastructure will bring positive impacts. Temporary, limited negative impacts that will occur during construction can easily be mitigated. B. Description of the Subprojects 1. Sewage Treatment Plant 4. The system proposed is the constructed wetland (CW) system. CW is a biological wastewater treatment technology designed to mimic processes found in natural wetland ecosystems. These systems utilize wetland plants, soils, and their associated microorganisms to remove contaminants from wastewater. The basic features of CW are a bed of uniformly graded sand or gravel with plants such as reeds growing on it. 5. The bed is lined with plastic or clay to prevent wastewater from leaching into the ground and polluting groundwater. Wastewater is evenly distributed on the bed and flows through it either horizontally or vertically. As the wastewater flows through the bed, it gets treated through natural processes – potential pollutants in the wastewater stream are mechanically filtered, chemically transformed, and biologically consumed. 2. Water Supply 6. Details of the water supply subproject are summarized in the table. Sewerage and Sewage Treatment Water Supply Combined sewerage system will be used and the Rehabilitation of 3 existing treated wastewater discharged into the river. Two systems, including rehabilitation of CW treatment plants proposed with capacities of an existing infiltration gallery; 341 and 808 cubic meters/day. Some land has to be construction of a tube well, a water purchased. Other components include laying of treatment plant, and 4 reservoirs of about 12.7 km sewers and cleaning of about 4.5 km 300-500 m3; laying transmission existing drains and sewers mains and distribution pipes Appendix 13 49

C. Description of the Environment 1. Physical Resources 7. Hetauda is an inner terai municipality situated 76 kilometers (km) east of Bharatpur. The Chure, Mahabharat, and Chandragiri mountain ranges run from south to north of the Makwanpur District and Hetauda lies south of the district. The elevation of the valley ranges from 300 to 600 meters (m) above mean sea level between the Mahabharat and Chure ranges. The soil of the valley is made up of alluvium, gravel, boulder, sand, and clay. The climate of Hetauda is tropical. The winter is dry and mild, and the summer hot and moist. Average annual rainfall (from the southwest monsoon) is 2,313 millimeters. There is plenty of surface water in Hetauda. The main river is the Rapti, which enters Hetauda in a southwest direction and is joined by the Karra and the Kukhreni Kholas. Rivers border the municipality on all sides. The groundwater table fluctuates from 2 to 4 m. Groundwater is also used as a source of drinking water. 2. Ecological Resources 8. There are endangered fauna species in the vicinity, but there is no threat to them during or after construction, since environmental improvements are proposed in the core urban areas. The flora is dominated by tropical deciduous forests consisting of Shorea robusta, terminalia tomentosa, Dalbergia sisoo, Acacia catechu, and Adina cordifolia. Globally threatened birds in Hetauda are the white-rumped vulture (Gyps bengalensis), long-billed vulture (Gyps indicus), and lesser adjutant (Leptoptilus javanicus). An endangered reptile species is the Indian python (Python morulus). 3. Human and Economic Development 9. The population of Hetauda is 68,482 (2001). The town is the rural areas service center, for education, health, and commerce. It had been undergoing rapid industrialization, which slightly declined recently. Agriculture is still the main occupation. 10. The population served by piped water is 27%. The water is not of good quality due to lack of proper treatment. Household latrine coverage is 58%. There are no sewage treatment facilities in the town and sewage is ultimately discharged into nearby rivers. Surface drainage is poor. The town is accessible by road, has power supply from the national grid, and has telecommunication facilities and hospitals. 4. Quality of Life 11. Average household occupancy in Hetauda is 9.1 persons. Water supply, sanitation, and drainage facilities are inadequate and pose an environmental health hazard. D. Anticipated Environmental Impacts and Mitigation Measures 12. Screening of environmental impacts from the individual subprojects (sewage treatment and water supply) indicates that most interventions result in either positive or insignificantly adverse socioeconomic or environmental impacts. 1. Sewage Treatment a. Environmental Impacts due to Location 13. No adverse environmental impacts are foreseen due to project location. b. Environmental Impacts due to Design 14. There should be no major adverse impacts on the environment with the biological wastewater treatment plants, since it would improve the health of the people. Furthermore, the treatment system will be the CW system that uses reed beds that are aesthetically pleasant with no standing water for breeding mosquitoes, requires no electricity and mechanical equipment, 50 Appendix 13 and has removal efficiencies of more than 97% for BOD 5 and total suspended solids, and removal rates of more than 99% for total coliforms, E-coli and streptococcus. 15. During design, the following aspects must be carefully looked into, planned, designed, and monitored: (i) adequate capacity of the system, (ii) adequate protection of groundwater with the use of an impermeable lining, and (iii) proper sludge disposal. 16. Land acquisition will be necessary in the town. Government and ADB guidelines in compensating for land acquired will be followed. c. Environmental Impacts due to Construction 17. During construction of the sewerage/drainage system, care should be taken to minimize soil erosion and disruption of traffic. The works of the contractors should be carefully monitored to see whether they are following the environmental mitigation measures specified in the contract documents (workers' safety, sanitation at camps, use of local people as far as possible, and avoidance of child labor). There will be no significant negative impact during construction of the CW system since the technology is very simple (using gravity flow, gravel, sand, and reeds). d. Environmental Impacts due to Operations 18. Inadequate monitoring of the effluent and management could lead to river pollution. Mitigation measures to minimize adverse impacts will be to design an efficient impermeable lining system on the bottom of the reed beds to avoid groundwater pollution and to ensure proper operation and management training. 19. Positive impacts from sewage collection and treatment follow: (i) The town will become neater and cleaner. (ii) The rivers will be less polluted. (iii) Tourists will be attracted, thereby generating revenue. (iv) Health hazards are minimized. 2. Water Supply 20. Surface water and, to a very limited extent, groundwater are the water sources for the water supply subcomponent in Hetauda. a. Environmental Impacts due to Location 21. There are no adverse environmental impacts due to project location in Hetauda. (i) Resettlement is not required as the land for the deep tubewell and for the reservoirs belongs to the municipality. (ii) No historical/cultural monuments exist around the sites for the deep tubewell and for the reservoirs and along the routes of the transmission mains. b. Environmental Impacts due to Design 22. If the following points are considered during the design phase, adverse environmental impacts can be mitigated: (i) The new tubewell should be well protected with good drainage (for surface sources). Distribution pipes should be kept away from drains so that drain water cannot infiltrate the distribution system and contaminate drinking water. The town should also have a good drainage system to avoid ponding. Sedimentation and filtration (for surface water sources) and chlorination should be done so that appropriate residual chlorine is available. A monitoring plan should be prepared to regularly monitor the distribution system for leaks and the availability of residual chlorine. Appendix 13 51

(ii) Sludge from sewage treatment plants should be disposed of properly on low lands. The sludge disposal areas should be identified during design. (iii) Provision should be made for security fencing and good drainage and security personnel at the intake, treatment, and reservoir sites. (iv) Trees should be planted around the compound to keep down any noise generated. (v) The storage, in-plant handling (occupational health hazards), and dosages of chemicals must be addressed during the design phase, and procedures set up and guidelines developed for handling chlorine (both bleaching powder and gaseous chlorine) and first-aid measures in case of emergencies. (vi) The laying of transmission lines in trenches during construction will not lead to loss of precious ecology, loss of environmental aesthetics and soil erosion, and damage to water quality and land values, as the transmission line will be underground. Grass that will be destroyed during construction in laying the mains will rapidly grow back. c. Environmental Impacts due to Construction 23. Minor, temporary adverse impacts to the environment can occur, but the following mitigation measures can minimize the impacts: (i) Precautionary measures should be taken during construction to avoid collapses when excavating for reservoirs and boring deep wells. All excavated material should be safely disposed of. Excavated trenches should be backfilled properly and construction activities during the rainy season should, if possible, be minimized. (ii) Safety measures for workers, especially during construction of the reservoir, should be considered. The contractor should be responsible for all safety measures, especially eye protection, safe handling of chemicals, provision of hard hats and safety boots, and sanitation in the camps. As far as possible, local labor should be hired. The site manager should properly monitor the construction activities of the contractor to ensure that the mitigation measures specified in the contract documents are followed. d. Environmental Impacts due to Operations 24. Minor adverse impacts could occur during the regular operation of the system, but they can be avoided by adequate staff training and operational supervision. E. Institutional Requirements and Environmental Monitoring Program 25. As Executing Agency, the Ministry of Physical Planning and Works (MPPW) will be responsible for coordinating and implementing the Project. The Department of Urban Development and Building Construction (DUDBC) under MPPW will be the primary Government agency responsible for project implementation. 26. The Project has been prepared using community participation at all stages of development, and it promotes implementation through nongovernment organizations (NGOs), community-based organizations (CBOs), and the private sector, wherever feasible and appropriate. The municipality will be the Implementing Agency for all the components, except for the capacity building component. A full-time project advisor (PA) will advise on all technical aspects, and assist with recruiting consulting services and other implementation activities. 1. Environmental Procedures and Institutions 27. The Government has in recent years felt the importance of environmental impact assessment (EIA) and made it mandatory for development programs. Separate environmental guidelines for some sectors have been formulated and implemented. The Ministry of Population and Environment (MOPE) was established in 1996, and the Environment Protection Act (1997) and the Environmental Protection Regulations (1997) have been promulgated. Furthermore, the first amendment to the regulations took effect on 5 April 1999. 52 Appendix 13

28. Besides MOPE, which is in charge of environmental management for all sectoral agencies, MPPW has overall responsibility for environmental monitoring of all subprojects. MOPE gives final approval to an EIA. MPPW gives it to an IEE. 29. The town will need to establish two units for water supply, and sewerage and sewage treatment plant with adequately qualified staff to operate, maintain, and regularly monitor the systems. The human resources required to effectively run the systems have been identified and secured. 2. Environmental Monitoring and Management Plan 30. The environmental monitoring and management plan (EMMP) will be so designed that the contractor is monitored during the construction phase to see that the work is done according to the contract documents in which mitigation measures are specified. The EMMP will also require regular monitoring of the actual environmental impacts during project operations over the years following project completion. The Social and Environmental Division of the municipality will be in charge of this monitoring. Impacts that are monitored will be compared with the anticipated impacts. The town will be equipped with a portable water quality testing kit to regularly monitor water and wastewater qualities. The details, extent, and frequency of testing will be determined at the detailed design stage. 3. Implementation of the EMMP a. During Design 31. EMMP monitoring activities will become a regular part of the town's activities. During the design phase, the project coordination office, PA, supported by his consultant, will ensure that mitigation measures are included in the design and the contract documents in compliance with the Environmental Protection Act and Regulations. b. During Construction 32. The supervising officers concerned and contractors will ensure that works carried out are according to the contract documents and that mitigation measures are carried out accordingly, with the overall guidance of PA and PCO. c. After Construction 33. The parties that will be responsible during the postconstruction phase are the established units (water supply and sewerage) that would regularly monitor the systems, prepare monthly reports, and carry out necessary remedial actions. The staff of each unit will be adequately trained to look after the systems, environmental issues, and monitoring aspects so as to comply with environmental regulations. F. Findings and Recommendations 34. The subprojects for Hetauda are expected to have only negligible negative impacts on the environment. Such impacts will be mitigated through adequate measures and regular monitoring during the design, construction, and operation phases. The Project is expected to bring about significant improvements in personal, household, and community hygiene and in environmental sanitation, thereby enhancing the quality of life. G. Conclusion 35. The individual IEE conducted shows no adverse or harmful impacts of any significance are expected and, therefore, full-scale EIA is not required for any of the subprojects. Appendix 14 53

ECONOMIC AND FINANCIAL AN ALYSES AND FINANCIAL SUSTAINABILITY

A. General 1. Economic and financial analyses conducted under the project preparatory technical assistance were reviewed and revised in accordance with the Asian Development Bank's (ADB’s) Framework for the Economic and Financial Appraisal of Urban Development Sector Projects. Economic internal rates of return (EIRRs) were calculated for major subcomponents in the nine project towns, using ADB’s Guidelines for the Economic Analysis of Projects. For revenue-generating components, financial internal rates of return (FIRRs) were calculated following ADB’s Guidelines for the Financial Analysis of Projects . Financial sustainability of the towns was assessed based on the Guidelines for the Financial Governance and Management of Investment Projects Financed by the Asian Development Bank. B. Economic Analysis 2. The estimated costs and benefits of major subprojects1 were valued at their economic prices using the domestic price numeraire, which adjusts border price equivalent values to their equivalent domestic prices and entails the application of shadow price adjustments to convert the estimated financial costs to their equivalents. Taxes and duties were excluded, a standard exchange rate factor of 1.11 was applied to the price of tradable goods, and a shadow wage rate factor of 0.70 was used to adjust for underemployment in the country.2

3. The economic analysis is divided into water supply subprojects for five project towns, and other infrastructure and service improvement subprojects including sanitation and wastewater management, neighborhood road, drainage, and water supply development, river training, road upgrading, and supplementary urban facilities.

1. Water Supply 4. The assumptions in the economic analysis of water supply follow. The capital and operation and maintenance (O&M) costs are based on the design capacity requirements in the planning period of 20 years. A capital allowance equivalent to 10% of the total capital cost is made every 10 years to cover the cost of replacing the pump and other equipment, in addition to the ordinary O&M expenditures for pressurized schemes. For gravity schemes, an allowance of 2% every 10 years is provided for capital replacement. Water meters for pressurized schemes are assumed to be replaced every 7 years. A residual value equivalent to 50% of project costs is assumed in year 20 to take account of the remaining economic life of the civil works and pipelines, which have an assumed economic life of 40 years. The major O&M costs for each subproject are (i) operation, (ii) personnel, (iii) power, and (iv) maintenance. 5. Table A13.1 presents a summary of the base case EIRRs, the economic net present values at a 12% discount rate, and the average incremental economic cost (AIEC) per unit of water sold in the five project towns that have a water supply subproject. The AIEC provides a measure of the cost per cubic meter of the proposed subprojects and indicates tariffs needed to meet full cost recovery for water supply. The AIEC is the discounted value of incremental capital costs and operating costs (in economic prices) over a 20-year period divided by the discounted value of incremental quantity of water sales as a result of the proposed investment. Capital

1 In accordance with the Asian Development Bank's Framework for the Economic and Financial Appraisal of Urban Development Sector Projects, smaller subprojects such as bus terminal and market improvements were not subjected to a detailed economic internal rate of return analysis, but were examined using the cost-effectiveness criteria. 2 These adjustment factors are consistent with those used in other ADB-funded projects in Nepal such as the Small Towns Water Supply and Sanitation Sector Project approved in September 2000. 54 Appendix 14 costs include economic cost of the water supply subprojects. The discount rate used is the social opportunity cost of capital (SOCC) estimated at 12%. Table A14.1: Summary of Economic Evaluation for Water Supply Town EIRR (%) ENPV AIEC (NRs million) (NRs/m3)

Banepa 28.9 163.13 31.80 Panauti 25.1 101.13 28.52 Dhulikel 22.3 118.74 51.38 Bharatpur 22.6 141.42 17.07 Hetauda 23.0 92.76 20.67 AIEC = average incremental economic cost, EIRR = economic internal rate of return, ENPV = economic net present values.

6. Table A13.2 summarizes the sensitivity of the results tested in different scenarios. It is noted that even in the worst-case scenario, which combines a 10% decrease in benefits and 10% increase in costs, all subprojects are still viable with EIRRs above 12.0%. The economic benefits are generally less sensitive to capital costs and O&M than to benefit streams. These results indicate that the success of the Project will depend heavily on the realization of the benefit streams.

Table A14.2: Summary of the Sensitivity Analyses for Water Supply Town EIRR and Base Capital Cost O&M Cost + Capital and Benefits SI Case +10% 10% O&M Cost –10% +10% (1) (2) (1) + (2) Banepa EIRR (%) 28.9 26.9 28.8 26.8 26.6 24.6 SI 0.69 0.05 0.73 0.80 1.49 SV (%) 146.00 2165.00 137.00 124.00 67.00 Panauti EIRR (%) 25.1 23.4 25.0 23.3 23.1 21.5 SI 0.67 0.05 0.71 0.78 1.45 SV (%) 150.00 2172.00 141.00 128.00 69.00 Dhulikel EIRR (%) 22.3 20.6 22.2 20.6 20.4 18.8 SI 2.44 1.86 2.46 2.53 3.12 SV (%) 41.00 54.00 41.00 40.00 32.00 Bharatpur EIRR (%) 22.6 20.9 22.1 20.5 20.3 18.3 SI 0.73 0.19 0.91 1.00 1.88 SV (%) 138.00 516.00 110.00 100.00 53.00 Hetauda EIRR (%) 23.0 21.2 22.7 20.9 20.7 18.7 SI 0.77 0.14 0.91 1.00 1.87 SV 129.00 720.00 110.00 100.00 54.00 EIRR = economic internal rate of return, O&M = operation and maintenance, SI = sensitivity indicator (percentage change in EIRR/ percentage change in variable tested), SV = switching value (percentage of present value of net benefits to the present value of a variable using a discount rate of 12%).

2. Other Project Components

a. Sanitation and Wastewater Management Subprojects 7. The sanitation and wastewater management subprojects were subjected to least-cost analysis. Sanitation improvements that include sewage collection and reed bed treatment are considered. Collection and off-site treatment are necessary because the density of population in the municipalities makes it impractical to install septic tanks. For the least-cost analysis, the sewage collection/reed bed wastewater treatment and the sewerage collection/conventional wastewater treatment are compared. Appendix 14 55

8. For the municipalities of Banepa, Panauti, Hetauda, and Bharatpur, information and cost estimates of sanitation projects together with water use and significant amount of cos t information for water systems were available. For the five other municipalities, information on sanitation projects was available, but there was no data on water use. The cost of the conventional treatment plant was based on earlier studies of a wastewater treatment plant for Kathmandu in 2000. The unit cost was adjusted for inflation to arrive at the present rate of NRs13,400 for construction of a wastewater treatment plant with capacity of 1 m3/day. Table A14.3: Summary of Sanitation Least Cost Analysis (NRs million) Town Sewerage System with Reed Sewerage System with Least-Cost Bed Treatment Conventional Treatment Option Capital O&M NPV Capital O&M Cost NPV Cost Cost Cost (2009) (2009) Banepa 113.77 0.73 93.85 108.27 1.73 94.95 Reed Bed Dhulikhel 106.83 0.60 87.65 102.33 1.37 88.10 Reed Bed Panauti 49.42 0.46 41.55 46.32 1.09 42.36 Reed Bed Bharatpur 137.42 0.70 112.37 133.09 1.54 113.20 Reed Bed Ratnanagar 92.29 0.55 75.90 89.14 1.18 76.67 Reed Bed Hetauda 117.51 0.61 96.17 111.89 1.48 96.34 Reed Bed Bidur 5.52 0.21 5.45 4.30 0.40 5.51 Reed Bed Kamalamai 4.96 0.17 4.80 4.33 0.39 5.51 Reed Bed Dhadingbesi 6.82 0.31 7.04 5.64 0.47 6.96 Conventional Treatment NPV = net present value, O&M = operation and maintenance.

9. Table A13.3 shows the result of sanitation least-cost analysis with reed bed treatment system as the least-cost option for all towns except Dhadingbesi where the conventional wastewater treatment system is the least-cost.

10. Furthermore, past experience in operating a wastewater treatment plant in Nepal shows that O&M costs and ease of operation with minimum use of electromechanical equipment are crucial for sustainable operation. Because the reed bed wastewater treatment system meets these requirements, in addition to being less expensive than the conventional system in most of the project towns, it was adopted for the Project. The analysis shows that revenue from sewerage is sufficient to meet its O&M cost. b. River Training Subprojects 11. River training involves construction of embankments to protect against erosion in Bharatpur, Hetauda, and Kamalamai. River training in the three project towns will benefit these areas: low-lying land on the Rapti river at wards 1 and 11 and on Karra River at ward 4 in Hetauda; low-lying land on the Narayani River in Bharatpur; and an old settlement area in Dhura bazaar and sports ground in Kamalamai. Recent damages as a result of heavy flooding include loss of land along Karra River in Hetauda, limited use of low-lying land in Bharatpur, and loss of land and crop at sports ground in Kamalamai. 12. River training is the least-cost approach and is primarily based on the rates of gabion works available from the UN Park Development Project in Kathmandu. The length of the protective embankment is 1.50 kilometers (km) for Bharatpur, 0.75 km for Hetauda, and 0.29 km for Kamalamai. Two gabion boxes 3.5 meters (m) wide x 1.0 m long x 0.30 m high will be placed adjacent to each other to cover the riverbed 7.0-meter-wide. The embankment is 2.27 m high. 56 Appendix 14

The inclined side of the embankment is 3.79 m and consists of earth filling at the base, 0.30 m dry stone pitching in the middle layer, and reinforced concrete rib as the top layer. c. Road Upgrading Subprojects 13. Road upgrading involves blacktopping the earthen road in Banepa, Dhulikhel, and Ratnanagar, based on the priority lists provided by the towns. The coverage varies. In Banepa, the six roads to be covered are 1.6 km along Sahidmarg road, 1.4 km along Bhakteshwormarg road, 1.0 km along Rajdasmarg road, 1.0 km along Bhimsenmarg road, 0.25 km along Laxchcheshwarmarg road, and 0.25 km along Shreekhandamarga road. In Dhulikhel, the two roads to be covered are 3.0 km along Shreekhandapur and 1.0 km along Charandada. In Ratnanagar, the road to be covered is 4.0 km along Bagmara Souharar. The existing gravel roads cause slow flow of traffic. 14. The cost of road upgrading is based on the least-cost approach and the unit costs of roads are based on cost per km of recent Department of Roads projects. In Banepa, the width of the six roads is uniform at 4.5 m. In Dhulikhel, one road is 8.0 m wide and another road is 4.5 m wide. In Ratnanagar, the road is 8.0 m wide. The scarified, leveled, and compacted existing surface will be covered with a 0.15 m subbase course of gravel packing, 0.20 m base course of gravel packing, and 0.05 m dense graded asphalt concrete topping. C. Distribution and Poverty Impact Analysis 15. Poverty impact analysis was carried out at these three stages: analysis of subproject beneficiaries, analysis of the distribution of benefits, and poverty impact analysis. 1. Analysis of Subproject Beneficiaries 16. Benefits from the water supply subproject will be the lower cost of water and the expected increase in consumption valued in financial prices/tariffs. The consumers will also benefit from the economic value of nonphysical losses avoided. Where the financial cost of labor exceeds its opportunity cost, the difference accrues as a gain to the laborers (unskilled labor), in both construction and operation phases of the subproject. 17. The economy loses where economic costs exceed financial costs and economic costs include cost of the sewerage subproject. There is a loss to the utility because not all of the full financial costs, including capital costs, are recovered where financial tariffs/revenues are less than economic benefits. 2. Distribution Analysis of Benefits 18. Distribution analysis is used to identify more closely those who gain from the project benefits and to serve as a basis for the poverty impact analysis. For the purpose of distribution analysis, both financial and economic costs are discounted at the economic opportunity cost of capital of 12%. The main participants are the government, the utility, the consumers, and labor. 3. Poverty Impact Analysis 19. Having allocated economic benefits to different groups in the economy, it is time to estimate the proportion of benefits accruing to the poor. It is necessary to assess the proportion of Government expenditure reaching the poor, defined as those living below the poverty line. An assessment of government expenditure assumes that, on average, around 14.75% of all Government's expenditure reaches the poor. (Refer to ADB's draft poverty handbook calculation for Nepal.) 20. Losses to the Government/economy reduce available Government funds, thereby decreasing Government expenditures directly targeted to the needs of the poor. Appendix 14 57

21. It is necessary to estimate the proportion of unskilled labor for a subproject that could be supplied by the poor in each respective town. It is estimated that the poor will provide 70% of unskilled labor in the construction and operational phases. 22. It is necessary to estimate that proportion of the poor that would become customers of the utility. Because the project covers urban areas where there is presently no water supply and is targeted to these poorer urban sections of the towns, it is assumed that there will be more poor customers among those representing the number of new connections. Therefore, for the purposes of the analysis, it is estimated that the proportion of poor people receiving supply is 20% greater than the average level of poor people in the municipality. 4. Poverty Impact Ratio 23. Table A13.4 shows the results of poverty impact analysis for the five project towns with a water supply subproject. The poor benefit as consumers and as labor providers, but will face part of the costs of the Project through the costs borne by government. A poverty impact ratio (PIR), expressing the proportion of net economic benefits accruing to the poor, is calculated by comparing the net economic benefits to the poor with the net economic benefits to the economy as a whole. The poverty impact ratio for all but two towns is greater than the share of the poor in the overall gross domestic product (GDP) of 14.75%.

Table A14.4: Net Benefit Accruing to the Poor through Consumption, Government, and Labor and the Poverty Impact Ratio for the Towns Labor Town Consumers Government (in NRs million) PIR Banepa 192 -1.0 6.0 0.29 Dhulikhel 163 -4.0 8.0 0.28 Panauti 123 -2.0 0.5 0.28 Bhatatpur 139 -39.0 0.0 0.14 Hetauda 141 -11.0 1.0 0.10 D. Financial Analysis 24. Basic assumptions used in computing the FIRRs include the following: (i) all revenues and costs are expressed in constant September 2002 prices on an incremental basis; (ii) project investment costs were derived from estimated costs, less price contingencies and interest during construction; and (iii) capital expenditures are recorded at the time they are incurred, while interest and depreciation are excluded. 1. Water Supply 25. The purpose of the financial cost-benefit analysis is to assess the financial viability of the proposed subproject. It focuses on the additional financial benefits (usually in terms of additional revenues, and capital and operating cost savings or reductions) attributable to the subproject for the prospective operating entities, rather than the economy as a whole. The resulting FIRR indicates the profitability of the subproject (Table A13.5), and should exceed the weighted average cost of capital (WACC) to be financially viable. The WACC of the water supply components is estimated to be 4.6%. 58 Appendix 14

Table A14.5: Average Incremental Financial Costs

Town Banepa Panauti Dhulikhel Bharatpur Hetauda EIRR (%) 28.9 25.1 22.3 22.6 23.0 FIRR (%) 7.3 7.2 6.5 9.0 7.0 AIEC (NRs/m3) 31.8 28.5 51.4 17.1 20.7 AIFC (NRs/m 3) 33.5 30.2 54.1 14.0 19.3 Average Tariff (NRs/m 3) 22.0 19.3 33.1 11.0 12.8 Economic Subsidy (NRs/m3) 9.8 9.2 18.3 6.1 7.9 Financial Subsidy (NRs/m 3) 11.5 10.9 11.0 3.0 6.5 EIRR = economic internal rate of return, FIRR = financial internal rate of return, AIEC = average incremental economic cost, AIFC = average incremental financial cost. 26. The capital and operating cost streams are those used in the economic analysis with the inclusion of duties and taxes that would be incurred on capital and operating costs. The benefit streams are the revenues derived from water sales to domestic and nondomestic customers based on the tariffs for five project towns as discussed at the stakeholders meeting on 27 July 2001 and 4 September 2002 and revised to recover costs. Average tariffs per cubic meter are set to cover O&M costs, repayment of 30% of initial capital costs, plus capital replacement costs. 27. Revenues are derived from water sales from private taps, assuming full plumbing (100 litres per capita per day [lcd]) and yard taps (60-65 lcd), and public taps and commercial sales. In the case of public taps, households are assumed to pay the basic rate. Nondomestic customers are assumed to pay the upper rate. Institutional customers are treated as domestic customers. An allowance of 2.5% for bad debts is assumed on the small systems for Banepa, Panauti, and Dhulikhel, and 10% for the larger systems of Hetauda, and Bharatpur. 28. The capital costs include the cost of connections and meters. Customers are expected to bear these costs through their 20% contribution to system development costs. As a minimum, customers are assumed to meet the cost of connection of NRs2,400 per household. 29. Table A13.6 shows FIRRs ranging from 6.5% for Dhulikhel to 9.0% for Bharatpur. The water supply subprojects for the five towns were found to be financially viable with base case FIRRs exceeding the calculated WACC of 4.6%. The sensitivity analysis showed that even in the worst case scenario, the FIRRs for all five Project towns met the minimum WACC of 4.6%. Table A14.6: Summary of the FIRRs (%) for Water Supply Town Base Case Capital O&M Cost Capital and Benefits Cost +10% + 10% O&M Cost - 10% +10% (1) (2) (1) + (2) Banepa 7.3 6.5 7.1 6.3 6.2 5.3 Panauti 7.2 6.5 7.0 6.2 6.1 5.2 Dhulikhel 6.5 5.8 6.4 5.7 5.6 4.7 Bharatpur 9.0 8.1 8.7 7.8 7.6 6.4 Hetauda 7.0 6.1 6.7 5.9 5.8 4.7 O&M = operation and maintenance. 2. Tariff Structures, Average Monthly Water Bills, and Affordability a. Tariff Structures 30. Table A13.7 summarizes the tariff structure, average monthly water bills, and affordability. Tariffs have been set with affordability in mind and on the assumption that the water utility must maintain a positive cash flow from operations throughout the forecast period. This essentially means that average tariffs set for the forecast period must generate sufficient Appendix 14 59 funds to cover operating costs and debt service as well as to meet the costs of meter replacement or rehabilitation (commencing in year 7 and estimated at NRs1,350 per connection) and replacement of mechanical and electric equipment (estimated at 10% of initial capital costs in year 10). Table A13.7 sets out the average tariff to be paid by a consumer consuming 100 lcd for the average income household and 60-65 lcd for the low income household. Table A14.7: Tariff Structure, Monthly Water Bills, and Affordability Banepa Panauti Dhulikhel Bharatpur Hetauda Proposed Water Tariff Increase (NRs/m3) 0 - 10 m3 5.0à15.5 5.0à16.0 5.0à16.0 5.0à10.0 5.0à11.0 > 10 m3 11.9à30.0 11.9à30.0 6.0à45.0 11.9à15.0 11.9à18.0 Average 22.0 19.0 33.0 11.0 13.0 Water Consumption (m3/mo) Average HH 27.0 22.0 22.0 22.0 18.0 Low Income HH 9.0 10.0 10.0 13.0 12.0 Water Bill (NRs/HH/mo) Average HH 665.0 520.0 700.0 280.0 254.0 Low-Income HH 139.5 160.0 160.0 145.0 146.0 Affordability (%HH Income) Average HH 9.6 6.5 8.7 2.6 3.1 Low-Income HH 5.0 4.9 4.9 5.0 4.2 HH = household, m3 = cubic meter.

b. Affordability 31. For an average-income household in Banepa, the monthly payment of NRs665 represents 9.6% of household income. In Bharatpur, NRs280 per month represents 2.6% of household income. In low-income households, the income spent on water bills of NRs146 and NRs140 represents 4.2% in Hetauda and 5.0% in Banepa. The large household size in Bharatpur means that a low-income household’s water bill for 13 m3 would represent 5% of household income. The results are within the accepted guidelines of affordability where monthly charges are regarded as affordable up to 5% - 6% of monthly household income for low-income households.

E. Financial Capability of Implementing Agencies 32. A financial capability analysis was carried out for the proposed implementing agencies of the Project. Financial projections for the towns were prepared for the period FY2003 - FY2022. The financial projections include proposals for improved revenue generation from, in particular, the land and property tax as part of municipal institutional strengthening. For the five project towns that have water supply subprojects, the financial projections for the water supply subprojects were carried out separately. 33. The projections assume increases in tax rates, increases in collection efficiency, and some modest increase in levels of housing stock into higher value brackets over the forecast period. The integrated property tax increases from NRs200 per year in 2003 to NRs400 per year in 2004 and NRs500 per year in 2005 for properties valued at less than NRs 1 million. Rates for rural households are assumed at 20% of urban rates and reflect a lower level of municipal services provided, but the rate will increase from NRs40 per year in 2003 to Rs80 per year in 2004 and NRs100 per year in 2007. Collection efficiency is expected to improve over the 60 Appendix 14 projection period. By 2010, it is assumed that all project towns collect 90% of potential/gross revenues. With institutional strengthening and capacity building leading to increased revenue generation through introduction of property-based taxes and more efficient collection, the financial projections show that financing for the Project, especially debt servicing, is within the capacity of each project town. 34. The local development tax is assumed to continue at present levels and to remain as the major source of revenues over the projection period. Professional or business taxes are assumed to represent a major future source of revenue with improved collection and higher tax rates. Through the increased effort to formulate, bill, and collect business taxes to support municipal activities, the professional or business taxes are expected to increase by six-fold over and above the expected GDP growth, assumed at 5% per annum over the next 5 years. 35. Other existing municipal taxes and fees are assumed to increase in real terms, in line with GDP growth at 5% per annum. 36. It is assumed that households connected to the wastewater system would pay a monthly charge of NRs20 in eight municipalities and NRs10 in Dhadingbesi in line with the willingness to pay. Commercial customers would also be connected and hotels would be charged on people equivalents on the basis of average occupancy. For the neighborhood road, drainage, and water supply development subprojects, the funds for loan repayment would be provided through sales of reserve plots. 37. On the basis of the preceding assumptions, revenues rise faster than operating costs, providing surplus funds to contribute to capital expenditures and debt repayment. By 2010, it is assumed that all participating project towns are levying property taxes at the proposed levels and achieving a collection efficiency of 90%. With current population growth rates and higher property values, all project towns are expected to have surplus cash on hand by FY2020.