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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. iv 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. v 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
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