World Bank Document

Document of The World Bank

FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No: 41317 - NP

PROJECT APPRAISAL DOCUMENT

Public Disclosure Authorized ON A

PROPOSED GRANT

IN THE AMOUNT OF SDR65.24 MILLION (US$100 MILLION EQUIVALENT)

TO NEPAL

FOR A

Public Disclosure Authorized POVERTY ALLEVIATION FUND PROJECT II

November 6, 2007

Sustainable Development Department Agriculture and Rural Development Unit South Asia Region

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

CURRENCY EQUIVALENTS

(Exchange Rate Effective September, 2007) Currency Unit = NPR NPR65.8 = US$1 US$1 = SDR 1.53

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank CDD Community-Driven Development CFAA Country Financial Accountability Assessment CPAR Country Procurement Assessment Report CPIA Country Policy and Institutional Assessment CO Community Organization DDC District Development Committee DFID United Kingdom Department for International Development EIA Environmental Impact Assessment EMF Environmental Management Framework ERR Economic Rate of Return FM Financial Management FMIS Financial Management Information System GDP Gross Domestic Product GoN Government of Nepal HCP Hard core poor HDI Human Development Index IGAs Income Generating Activities IDA International Development Association IEG Independent Evaluation Group (formerly OED, Operations Evaluation Department) IFAD International Fund for Agricultural Development JICA Japan International Cooperation Agency M&E Monitoring and Evaluation MIS Management Information System NGO Non-governmental Organization NLSS National Living Standards Survey OA Operating Account OM Operational Manual O&M Operations and Maintenance OP/BP Operational Policy/Bank Procedure PAF Poverty Alleviation Fund of Nepal PDO Project Development Objective PEFA Public Expenditure Financial Accountability Guidelines PFM Public Finance Management PO Partner Organization PRS Poverty Reduction Strategy RBB Rastriya Banijya Bank SA Special Account SDC Swiss Agency for Development and Cooperation SO Service Organization UNDP United Nations Development Program USAID United States Agency for International Development VDC Village Development Committee VCDP Vulnerable Communities Development Plan

Vice President: Praful Patel Country Manager/Director: Susan Goldmark Sector Manager: Adolfo Brizzi Task Team Leader: Geeta Sethi NEPAL

Poverty Alleviation Fund Project II

CONTENTS

Page

Project Paper Data Sheet

A. STRATEGIC CONTEXT AND RATIONALE ...... 1 1. Country and sector issues...... 1 2. Rationale for IDA involvement ...... 4 3. Higher level objectives to which the project contributes...... 5

B. PROJECT DESCRIPTION ...... 5 1. Lending instrument...... 5 2. Project development objective and key indicators...... 5 3. Project components...... 6 4. Lessons learned and reflected in the project design...... 8 5. Alternatives considered and reasons for rejection ...... 10

C. IMPLEMENTATION ...... 11 1. Partnership arrangements...... 11 2. Institutional and implementation arrangements...... 11 3. Monitoring and evaluation of outcomes/results...... 14 4. Sustainability...... 15 5. Critical risks and possible controversial aspects...... 16 6. Grant conditions and covenants...... 17

D. APPRAISAL SUMMARY ...... 17 1. Economic and financial analyses...... 17 2. Technical...... 18 3. Fiduciary ...... 18 4. Social...... 18 5. Environment...... 20 6. Safeguard Policies...... 21 7. Policy Exceptions and Readiness...... 23 Annex 1: Major Related Projects Financed by the IDA and/or other Agencies...... 24

Annex 2: Results Framework and Monitoring ...... 26

Annex 3: Detailed Project Description...... 34

Annex4: Project Costs ...... 39

Annex 5: Implementation Arrangements ...... 40

Annex 6: Financial Management and Disbursement Arrangements...... 42

Annex 7: Procurement Arrangements...... 55

Annex 8: PAF I Results and Economic Analysis ...... 62

Annex 9: Safeguard Policy Issues...... 67

Annex 10: Project Preparation and Supervision ...... 75

Annex 11: Documents in the Project File ...... 76

Annex 13: Statement of Loans and Credits...... 77

Annex 14: Country at a Glance ...... 78

Map...... 80

NEPAL

POVERTY ALLEVIATION FUND PROJECT II PROJECT APPRAISAL DOCUMENT SOUTH ASIA

SASDA

Date: November 6, 2007 Team Leader: Geeta Sethi Country Director: Susan G. Goldmark Sectors: Irrigation (25%), Animal product Sector Director/Manager: Constance (25%), Other social services (25%), Water Bernard/Adolfo Brizzi supply (25%) Project ID: P105860 Environmental screening category: Category B Lending Instrument: Specific Investment Loan

Project Financing Data [ ] Loan [ ] Credit [X] Grant [ ] Guarantee [ ] Other:

For Loans/Credits/Others: Total Bank financing (US$m.): 100.00 Proposed terms: Standard Financing Plan (US$m) Source Local Foreign Total BORROWER/RECIPIENT 1 1 IDA Grant 100 100 Communities 8 8 Total: 109 109

Borrower: Government of Nepal Ministry of Finance Singh Durbar Kathmandu Nepal Tel: 977-1-425-9820 Fax: 977-1-425-7854 http://www.mof.gov.np/

Responsible Agency: POVERTY ALLEVIATION FUND BOARD Address: Chakupat, Lalitpur, Kathmandu, Nepal Contact Person: Dr. Ram Prakash Yadav, Vice Chairman Tel: 011-977-1-5549445 Fax: 011-977-1- 5553674

Estimated disbursements (Bank FY/US$m) FY 2008 2009 2010 2011 2012 0 0 0 0 Annual 10 25 40 23 2 0.00 0.00 0.00 0.00 Cumulative 10 35 75 98 100 Project implementation period: Start April 1, 2008 End: March 30, 2012 Expected effectiveness date: March 28, 2008 Expected closing date: September 30, 2012

Does the project depart from the CAS in content or other significant respects? [ ]Yes [X] No Ref. PAD A.13 Does the project require any exceptions from Bank policies? Ref. PAD D.6 [ ]Yes [X] No Have these been approved by Bank management? [ ]Yes [] No Is approval for any policy exception sought from the Board? [ ]Yes [] No Does the project include any critical risks rated “substantial” or “high”? [ ]Yes [X] No Ref. PAD C.4 Does the project meet the Regional criteria for readiness for implementation? [X]Yes [ ] No Ref. PAD D.6

Project development objective Ref. PAD B.2, Technical Annex 3 The proposed second phase repeater project would assist Government of Nepal (GoN) in implementing a significant scaling up of the PAF program. The Project Development Objective (PDO) is to improve living conditions, livelihoods and empowerment among the rural poor, with particular attention to groups that have traditionally been excluded by reasons of gender, ethnicity, caste and location. This is to be achieved through: (a) investing in community selected and managed sub-projects that create access to basic socioeconomic infrastructure and services, increase assets, generate employment and expand income-generating opportunities in poor villages; (b) enhancing the capacity of local bodies, particularly the Village Development Committees (VDCs), to provide better services for poor and socially excluded groups (currently, there are no elected local bodies in Nepal); and (c) improving government efforts to better coordinate support targeted towards poor and excluded groups. The expected development outcomes would be: (a) improvements in access to small-scale social and economic infrastructure and services, as prioritized by the beneficiary communities; (b) generation of incremental employment at the village level, including both short-term participation in the implementation of sub-projects and longer-term jobs resulting from economic activities facilitated by PAF; (c) increase in capital assets and/or incomes of beneficiary households; and (d) an increase in citizen participation and voice in community decision making. PAF II would target about a million households in 75 districts by the end of the four year project period. Project Description : Given the rapid and successful implementation under the original PAF project, PAF II would maintain the existing design features, activities and inputs, under the following five components:

Committee (DDC) and/or VDC are prepared to provide matching grants. Key selection criteria would include the number of target households that would benefit and the expected employment impact. In addition, infrastructure sub-projects would require communities to prepare and commit to a realistic Operations and Maintenance (O&M) plan. Partner organizations (POs) would also be used to facilitate the process of community organization and capacity building in advance of the preparation of sub-project proposals. Community contributions would average 10%, with adjustments made for very remote and difficult areas. In the sectors where policies are in place that require a higher community contribution (e.g., 20% in rural water, with possible adjustments for very remote or poor communities), such rates would be applied to ensure consistency. Examples of sub-projects implemented to date under PAF include link roads, culverts, footbridges, micro-hydro, micro-irrigation, water supply and sanitation schemes, community meeting halls, schools, health facilities and other small-scale infrastructure.

(b) Income Generating Sub-projects: Matching grants would be provided to self-selected groups of poor and excluded people for income-generation activities, based on objective criteria including ethnicity, caste, gender and poverty levels. Beneficiaries would contribute about 10% of the sub-project cost in cash. A proportion of the grants would be reserved for technical assistance to be contracted by communities themselves in areas where they felt such need. Under PAF I, communities have had discretion as to how to manage the funds received, with a number of them choosing to revolve the funds within their group. Under PAF II, any groups choosing to manage resources in this way would receive training in community-managed finance – under the capacity building component – with a view to strengthen them to eventually have access to broader financial services for livelihoods initiatives. As with other sub-projects, POs would be contracted by the PAF to work with all communities, including through locally selected community facilitators, to assist in participatory processes, group formation, and development of sound sub-project proposals. Particular attention will be paid to the commercial/economic viability of income-generating sub-projects to avoid the risk of supply or NGO driven proposals which are not sufficiently well linked with markets. Common examples to date under PAF have included micro-irrigation, micro enterprises/service sector activities, artisanal/crafts, land productivity investments, trading and animal husbandry. Analysis of a representative sample of these investments shows income increases for beneficiary households of 10-15%.

(c) Innovation and Special Programs: An innovations window would continue to support proposals meriting special consideration owing to exceptional needs in a given context, or demonstrating innovative ways to improve livelihoods development and reach targeted groups. These proposals can be national or regional in coverage and may be sponsored by organizations representing or working with the target groups, target groups themselves and/or local bodies. Examples under the first phase PAF have included innovations such as arsenic filters, forest- based cardamom cultivation, evaporative cooling technology for food preservation and women’s health projects.

(d) Capacity Building: This would include five sub-components:

(i) Social Mobilization of Community Groups: This sub-component would support training/skills development for POs themselves and for capacity building of community

iii

groups. POs would be selected to work in target areas to disseminate information about the project, mobilize community groups, work with them in developing sub-project proposals and develop their skills in project management, financial management (FM), procurement, monitoring and evaluation etc. Where local governments are functioning, POs would also liaise with them to ensure that the proposed sub-projects are consistent with VDC plans and priorities. In addition to mobilization of communities, capacity of POs themselves would be built under this sub-component, such that they are sensitive to key social, environmental and livelihoods-related issues such as gender, caste, disability, sustainability, accountability and local governance, natural resource management, and market linkages, etc.

(ii) Capacity Building for Local Bodies: The extent of decentralization in Nepal is limited, particularly given the continued absence of elected local bodies, dissolved during the conflict period. With a view to supporting intermediary delivery channels that lay the foundation for strengthened local government, this sub-component would focus on building capacity of functioning and interested local bodies (VDCs, DDCs) in pro-poor planning and monitoring, and other relevant topics to promote inclusive planning and service delivery for local development, as well as on the rules of operation of the PAF in order to enable local bodies to assist groups and communities to access PAF resources.

(iii) Capacity Building for Target Groups Engaged in Income-Generating Activities. All sub-projects will include some provision for technical assistance as needed, but groups engaged in income-generating activities may require more support to help prepare for the activity or to help implement it successfully. Therefore, this sub-component would focus on developing skills such as marketing, transport logistics, financing, and quality control. A capacity building agency would be contracted by PAF to work with community groups to identify needs, develop capacity-building plans and procure relevant technical assistance.

(iv) Support to Rural and Community Finance: There is ample evidence that the vast majority of PAF beneficiaries do not have access to rural financial services, including microfinance lending. With a view to the longer-term sustainability and growth of the community Income Generating Activities (IGAs) and enterprises, PAF II will support training in community-managed finance in order to strengthen institutions and encourage eventual access to broader financial services for livelihood support. To achieve this objective, this sub-component would finance mapping and monitoring of those emergent groups revolving their PAF grant funds and mobilizing savings; provide training and capacity building support to strengthen these activities; explore linkages to financial institutions and relevant partners; and support PAF’s articulation of a longer term vision or ‘graduation strategy’ for viable community institutions and enterprises.

(v) Information, Monitoring and Evaluation: This sub-component would include: (a) dissemination of information about the project and other public sector programs; (b) support for PAF’s management information system (MIS), which will need to be expanded to accommodate the scaled-up program; (c) structured monitoring activities, including field visits to assess progress; (d) regular beneficiary assessments, including

qualitative field work; and (e) follow-on impact assessment surveys to refine and monitor against the project baseline.

(e) Administration of PAF II: Project would continue to finance the operating costs of the PAF, including staff costs and other operating expenses. As PAF is becoming a major public sector instrument for poverty reduction, the government has begun mainstreaming its support by picking up 20% of the operating costs of PAF as counterpart funding. Which safeguard policies are triggered, if any? Ref. PAD D.6, Technical Annex 10 • Environmental Assessment (OP/BP 4.01) • Indigenous Peoples (OP/BP 4.10) • Natural Habitat (OP/BP 4.04) Board presentation: December 6, 2007 Loan/credit effectiveness: March 28, 2008 Covenants applicable to project implementation: The full covenants applying to PAF II are set forth in the legal documents, including those relating to Partner Organizations and block grants. Key covenants are noted here. Subsidiary Financing Agreement (a) Government of Nepal (GON) to ensure that PAF shall (i) perform all its obligations under the Subsidiary Financing Agreement (SFA) and shall not amend or waive the SFA or any of its provisions without IDA concurrence; (ii) provide to IDA progress on performance and other matters relating to implementation under the SFA; (iii) promptly inform IDA of any condition threatening Project progress or performance. Institutional Arrangements (b) PAF shall: (i) ensure that a Board of Directors of PAF is maintained, which shall have general oversight over the Project and met on a quarterly basis; (ii) ensure that the Board of Directors promptly takes all decisions necessary for effective Project implementation and otherwise promptly performs its duties so as not to prevent or interfere with efficient implementation of the Project; and (iii) keep IDA promptly informed of any changes in membership of the Board of Directors or the Executive Director. (c) PAF shall, by October 31, 2008, complete appointment of and maintain an adequate number of key professional staff with skills qualifications, experience and terms of reference satisfactory to IDA, including: (i) an Executive Director; (ii) two Accounts Officers; (iii) three Accountants) (iv) one Procurement Specialist; (v) one Environmental Specialist; (vi) one social Inclusion Specialist; (vii) one Civil Engineer; (viii) one MIS Assistant ; and (ix) one Portfolio Manager in each project district. Operational Manual (OM) and Financial Management Manual (FMM) (d) PAF shall (i) implement the project in accordance with the principles, procedures and practices set forth in the OM and FMM, as agreed with IDA; (ii) take all measures to ensure that activities of beneficiaries and POs under the project are carried out in conformity with the OM and FMM; and (iii) not amend or waive any provision of OM or FMM without IDA concurrence. Social and Environmental Safeguards (e) PAF shall (i) ensure that the Vulnerable Community Development Plan (VCDP) is implemented in accordance with the provisions therein to ensure that project activities fully benefit vulnerable people; (ii) ensure that all sub-projects are carried out in accordance with the agreed Environmental Management Framework (EMF) and the VCDP; and (iii) not

amend or waive the EMF and VCDP or any provisions thereof without IDA concurrence. (f) PAF shall ensure that carrying out any sub-project does not involve (a) involuntary land acquisition resulting in (i) relocation/loss of shelter; (ii) loss of assets or access to assets; or (iii) loss of income sources or means of livelihood; or (b) any involuntary restriction of access to legally designated parks and protected areas resulting in adverse livelihood impacts. Human Resource Development Plan (g) PAF shall: (i) by March 31, 2008, submit to IDA a human resource development plan for PAF to meet its increased HR demands under the project, satisfactory to the Association and including staff development and training plan; and (ii) thereafter implement such a plan in a manner satisfactory to the Association.

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

1. With average GDP per capita of US$270 in 2005, Nepal remains the poorest country in South Asia and the twelfth poorest in the world. Political turbulence and a Maoist insurgency have dogged its recent history (1996-2006), imposing high costs in terms of foregone growth and poverty reduction. Nevertheless, Nepal has made important progress in bringing its overall poverty rate down from 42 to 31 % over the last ten years, although the gains in urban areas have been greater than those in rural areas. This reduction reflects efforts to pursue macroeconomic stability and selected internal reforms, resulting in higher wages and urbanization, in addition to substantial remittances from Nepalese abroad. 1

2. Nepal’s geographic, political and social conditions help to explain contemporary poverty patterns. The poverty rate in rural areas is much higher (35%) than in urban centers (10%), and evidence suggests that inequality and regional disparities are increasing.2 Inequality is partly due to a bias in public expenditures in the past which privileged ruling elites and urban centers; it also relates to longstanding patterns of gender, ethnic and caste-based exclusion, and to the above-mentioned conflict. Economic and social outcomes are particularly poor in remote regions, such as the Mid-west and Far-west, and in mountain districts generally. The Maoist insurgency started in the Mid-west hills in 1996, where lack of economic opportunity and extreme inequality had fueled grievances against the government. Over the years, it has imposed the heaviest toll in terms of human lives in the areas with the highest poverty and worst development indicators,3 where conflict has: (i) dampened private investment and confidence in doing business, especially in rural areas; (ii) weakened infrastructure, increasing transportation costs and time; (iii) led to extortion of rents and informal taxes by insurgents; (iv) caused human and capital flight towards less-affected areas; and (v) disrupted service delivery due to the dismantling of elected local bodies and tensions resulting in frequent bandhs, or strikes.

3. Everywhere in the country, ethnic minorities, lower caste communities and women (especially female headed households) lag seriously behind in terms of incomes, assets and most human development indicators.4 Nepalese society is diverse on many dimensions, with 103 social groups identified in the 2001 Census, based on caste, ethnicity, religion, and language. Social discrimination on the basis of these identity markers continues and is reflected economically in poverty rates which are highest amongst the janajati indigenous peoples and dalit lowest caste groups (44 and 46% respectively), determined by both differences in the amount of human and physical assets they own (three-fourths of the total difference in 2003-04) and the differential returns to

1 The increase in remittances is responsible for one-third to one-half of the overall reduction in the headcount poverty rate between 1995-96 and 2003-04 (Resilience Amidst Conflict, Central Bureau of Statistics/World Bank/DFID/ADB, 2006.) 2 The Gini co-efficient measure of inequality has risen from 34.2 to 41.1. 3 Findings in the recent paper Poverty, Social Divisions and Conflict in Nepal (World Bank Policy Research Working Paper 4228, May 2007) support the correlation between intensity of conflict and poverty/low economic development rates. 4 Unequal Citizens: Gender, Caste and Ethnic Exclusion in Nepal, DFID/World Bank 2006.

these assets (one-fourth of the difference). Reaching these marginalized groups5 and improving their access to resources, assets and income, in addition to their voice and participation in mainstream development and livelihoods opportunities, is therefore critical to a more stable, inclusive and sustainable development path for Nepal.

4. Nepal’s Poverty Reduction Strategy (PRS), document no. IDA/SecM2003-0542 addresses the issue of inequality head on and explicitly identifies social exclusion as a fundamental development challenge. The PRS is based on the Tenth Five-Year Plan 2002-076 and sets reduction of the overall poverty ratio as its main objective. While broad improvement in all public services is essential for Nepal’s long-term development, the need for more direct targeted interventions to assist janajatis, dalits and women is also recognized, sending a clear signal that exclusionary practices of the past are no longer acceptable. Stressing decentralization, rationalization of central government functions, and transparency, the PRSP is designed around four pillars: (i) broad-based economic growth, (ii) social sector development, (iii) social inclusion, and (iv) good governance. In June 2006, the third Tenth Plan/PRSP Progress Report was released and a Joint Staff Advisory Note (JSAN) was prepared in November 2006. The JSAN commended the progress in poverty reduction and in some social indicators, such as the net school enrollment rate, but also noted gaps between plans and achievements on the ground.

5. The conflict and political paralysis during the Tenth Plan/PRSP period clearly contributed to this under-achievement of results. However, the signing of a comprehensive peace agreement in November 2006, the establishment of an interim multi-party government and plans for Constituent Assembly elections in November 20077 provided some grounds for cautious optimism. Broad support exists for a ‘New Nepal’, while at the same time there is skepticism about the effectiveness of the democratic process. Recent actions, including the withdrawal of the Communist Party from the coalition government and protests by the Madheshi8 in the southern plains region underscore the extreme fragility and insecurity of the political situation. Looking to the future, a central challenge will therefore be to establish the credibility and effectiveness of the state, by delivering clear and decisive results on the ground in terms of improving social and economic conditions for those that up to now have been left out of development efforts.

5 The Interim Constitution of Nepal defines marginalized and excluded group of people to include dalits, janajatis, women and madheshi people. PAFII will also target the madheshis as one of the beneficiary groups. 6 Nepal’s PRSP is the Executive Summary of the Tenth Plan, 2002-2007. 7 Following a failure to reach consensus on the electoral system, the government, on October 5 2007, announced a postponement of the Constituent Assembly elections, planned for November 22, 2007. Coming just over two weeks after the CPN-Maoist withdrew from the Council of Ministers, these events illustrate the continuing fluid nature of the political situation in Nepal. The ongoing special session of the interim parliament is expected to resolve the deadlock either through a political compromise or a vote. Announcement of a new election date -- possibly before April 2008 -- is also anticipated soon thereafter. Notwithstanding the current setback, all sides appear keen to emphasize that they continue to honor the Comprehensive Peace Agreement which the UN is mandated to monitor. 8 The Madheshi peoples of the southern plains or Terai region make up 33-45% of Nepal’s population of 27 million. The Madheshi movement is demanding the end to discrimination, greater autonomy, and greater representation in Parliament.

6. In 2002, the Poverty Alleviation Fund (PAF) was launched as a community-driven development (CDD) instrument for addressing the related problems of rural poverty and social exclusion. In April 2004, IDA provided a US$15 million grant to the Poverty Alleviation Fund Project (Document No. IDA/R2004-0100/1). PAF I was designed as a pilot, operating in six districts that were chosen on the basis of the Human Development Index (HDI), geographic location (hills, mountains and Terai), and incidence of conflict. After an initial organizational phase, the implementation pace of PAF began to accelerate rapidly in response to faster than anticipated – and constantly growing – demand from rural communities. By mid-2006, 80% of project resources had been committed, and IDA therefore approved an Additional Financing (AF) grant of US$25 million in November 2006, to enable PAF to extend its target area from 6 to 25 districts.9 At this time, 85% of the AF funds are already committed.

7. After some three years of implementation, the PAF I project has achieved notable results on the ground. It has entered into 5,424 community agreements, and 166,474 households of about 915,607 people are benefiting from the program. PAF is proving to be especially effective in targeting the extreme poor, including traditionally marginalized and excluded groups. According to evaluation data, the share of PAF beneficiaries who are classified as hard core (extreme) poor is 70%, while the proportion of hard core poor (HCP) in the project area is 13%. Support for the PAF program is strong and growing, largely owing to its success in reaching the poor and excluded, its demand-driven nature, and the emphasis it places on local priority setting and decision-making. To date, PAF has supported both small-scale community infrastructure sub-projects (micro-irrigation, link roads, culverts/bridges, micro-hydro, water supply, sanitation, schools and health posts) and income generation activities (agriculture, livestock, cottage industries, trade and services).

8. Preliminary evaluations indicate good rates of return on these investments, ranging from 20-25%. Annual per capita incomes for beneficiary families have increased by 10-15%. Some of PAF I’s main achievements have included increases in beneficiaries’ animal husbandry assets; provision of road access for the first time for about 15,605 households; other kinds of infrastructure including water supply, bridges and sanitation for some 32,100 households; and rural electrification for about 1,500 households. More than 4,700 households have benefited from improved social services through demand driven investments in schools and health facilities. Further, training for skills development and leadership has been provided for about 100,000 people from the beneficiary households. Implementation arrangements are working well and, while it is premature to draw definitive conclusions, the prospects for sustainability appear good given the extent of beneficiary ownership and commitment and the fact that most of the investments are on a scale which is suitable for local maintenance.

9 Presently, PAF is implementing its program in 45 districts. Initially, the six districts selected for program implementation were Darchula, Mugu, Pyuthan, Kapilbastu, Ramechhap and Siraha. From FY2005/06, 19 additional districts were selected as PAF target districts (Achham, Baitadi, Bajhang, Bajura, Dadeldhura, Dailekh, Dolpa, Doti, Humla, Jajarkot, Jumla, Kalikot, Mahottari, Rasuwa, Rautahat, Rolpa, Rukum, Sarlahi and Sindhuli). Besides working in these target districts, PAF is implementing innovation programs in 20 other districts as well, under a special innovation window program to capture replicable initiatives to reach to the poor.

9. Reflecting agreements reached in the peace process, the Nepal FY07/08 budget includes a distinct shift in allocations towards ‘pro-poor’ spending (i.e., primary education, primary health care, rural access, etc.). A set of community-based programs has been made the centerpiece of an effort to rapidly extend developmental reach to the poorer remote areas of Nepal. Among these programs, the PAF is seen as especially important because of its success to date in effectively targeting poor communities and the marginalized within them, improving access to basic services and increasing incomes. Given the lessons and successes under PAF I and the associated Additional Financing, the increased pressure for these demand-driven activities outside the 25 districts, and the current commitment to the peace process, the authorities believe this is the right time to scale up to the national level through a PAF II project that would cover all 75 districts, and be accessible to 30% of the rural population. This is the first time in Nepal that such a systematic approach has been followed to roll out a targeted poverty program, beginning with a pilot effort under PAF I, scaling up cautiously with Additional Financing, and now scaling up more significantly under PAF II. PAF II will use the same targeting mechanisms and the same beneficiary profiles as PAF I, but will extend its scope nationally in a phased manner, increasing by 15 districts each year. The PAF Secretariat is actively preparing for this expansion.

2. Rationale for IDA involvement

10. Through PAF project interventions, both tangible (i.e. physical and financial) and intangible (i.e. social and institutional) assets are being built that enhance peoples’ well- being and incomes, thereby addressing both income and non-income dimensions of poverty. The World Bank Group’s increasing global experience in the design and implementation of cross-sectoral, community-driven programs makes it well placed to assist PAF in scaling up its achievements to date. Several IDA-financed CDD operations in the South Asia region provide valuable lessons for Nepal10, including those based in other conflict-affected countries, such as Afghanistan and Sri Lanka. Apart from contributing to poverty reduction, per se, such CDD projects also help to lay the foundations for greater transparency in the use of public resources and strengthen local and national governance, by building voice and participation skills at the level of citizens, communities and local institutions.

11. IDA has been PAF’s sole external partner since 2004 and, given the positive results of the first phase project and associated AF, Government of Nepal (GoN) and PAF would like to see IDA continue to play a leading role in expanding coverage. Providing IDA financing for PAF II will not only allow expansion of a successful program, but will also signal support for the larger effort by the authorities to emphasize inclusive development and sustainable poverty reduction.

10 Projects are currently under implementation in Sri Lanka, Nepal, Pakistan, Bangladesh, Afghanistan and five Indian states (Andhra Pradesh, Rajasthan, Madhya Pradesh, Chhattisgarh and Tamil Nadu), with a combined portfolio investment of U$1.6 billion.

3. Higher level objectives to which the project contributes

12. IDA’s November 2003 Country Assistance Strategy for Nepal (CAS) document no. IDA/R2003-0191/1, which was aligned with Nepal's PRSP and Tenth Five-Year Plan (2002-2007), identified PAF as a promising instrument for targeted support to achieve rural poverty reduction and social inclusion objectives. The Interim Strategy Note (ISN) of January 2007 provides an update of the progress made under the CAS and lays out IDA’s assistance strategy for the coming 12-18 months.

13. Recognizing that the origins of the insurgency and political strife have been political and social, as well as economic, the ISN prioritizes the inter-related goals of inclusion, state building and growth. Expansion of successful community-based programs is identified as a high priority for IDA support, given the success demonstrated in harnessing the strength of communities to address their own development needs, the resilience of such initiatives in times of conflict and the role of such programs in mobilizing the typically marginalized, thereby reducing social tensions. The PAF is flagged for special attention by IDA and PAF II is included in the indicative lending program described in the ISN. The PAF II repeater project would affirm IDA’s endorsement of Nepal’s broad development objectives, especially of the need to better target interventions towards poor, marginalized and excluded groups, and to engage these beneficiaries directly both in priority-setting and implementation of investments intended to serve them. Processing PAF II has been important to help ensure that rising demand can be met without a break in funding. Continuity in funding is especially important at a time when Nepal is facing a political transition, and there are high expectations among the populace to see “peace benefits” on the ground.

B. PROJECT DESCRIPTION 1. Lending instrument

14. The four year project would be financed by an IDA Grant in the amount of US$100 million.

2. Project development objective and key indicators

15. The proposed second phase repeater project would assist Nepal in implementing a significant scaling up of the PAF program. The Project Development Objective (PDO) is to improve living conditions, livelihoods and empowerment among the rural poor, with particular attention to groups that have traditionally been excluded by reasons of gender, ethnicity, caste and location. This is to be achieved through: (a) investing in community selected and managed sub-projects that create access to basic socioeconomic infrastructure and services, increase assets, generate employment and expand income- generating opportunities in poor villages; (b) enhancing the capacity of local bodies, particularly the Village Development Committees (VDCs), to provide better services for poor and socially excluded groups; and (c) improving efforts to better coordinate support targeted towards poor and excluded groups. The expected development outcomes would be: (a) improvements in access to small-scale social and economic infrastructure and

services, as prioritized by the beneficiary communities; (b) increase in capital assets and/or incomes of beneficiary households; (c) increase in citizen participation and voice in local level and community decision-making and management of local resources, and (d) generation of incremental employment at the village level.11 PAF II would target about a million households in 75 districts by the end of the five year project period. A Project Results Framework which links the PDO, expected outcomes, project components and measurement indicators is provided in Annex 2.

3. Project components

16. Given the rapid and successful implementation under the original PAF project, PAF II would maintain the existing design features, activities and inputs, under the following five components:

(a) Small-Scale Village and Community Infrastructure: Given the extreme remoteness of many communities and the virtual non-existence of public infrastructure services, small investments in infrastructure and services can make an important difference to poor communities. As demonstrated in the original PAF, the communities are often very clear on what they need, and are willing to contribute to sub-projects within their means. Consideration would be given to sub-projects already included in VDC plans and/or where the District Development Committee (DDC) and/or VDC are prepared to provide matching grants. Key selection criteria would include the number of target households that would benefit and the expected employment impact. In addition, infrastructure sub-projects would require communities to prepare and commit to a realistic Operations and Maintenance (O&M) plan. Partner organizations (POs) would also be used to facilitate the process of community organization and capacity building in advance of the preparation of sub-project proposals. Community contributions would average 10%, with adjustments made for very remote and difficult areas. In the sectors where policies are in place that require a higher community contribution (e.g., 20% in rural water, with possible adjustments for very remote or poor communities), such rates would be applied to ensure consistency. Examples of sub-projects implemented to date under PAF include link roads, culverts, footbridges, micro-hydro, micro-irrigation, water supply and sanitation schemes, community meeting halls, schools, health facilities and other small-scale infrastructure.

11 Including both short-term participation in the implementation of sub-projects and longer-term jobs resulting from economic activities facilitated by PAF.

selected community facilitators, to assist in participatory processes, group formation, and development of sound sub-project proposals. Particular attention will be paid to the commercial/economic viability of income-generating sub-projects to avoid the risk of supply or NGO driven proposals which are not sufficiently well linked with markets. Common examples to date under PAF have included micro-irrigation, micro enterprises/service sector activities, artisanal/crafts, land productivity investments, trading and animal husbandry. Analysis of a representative sample of these investments shows income increases for beneficiary households of 10-15%.

(d) Capacity Building: This would include five sub-components:

(i) Social Mobilization of Community Groups: This sub-component would support training/skills development for POs themselves and for capacity building of community groups. POs would be selected to work in target areas to disseminate information about the project, mobilize community groups, work with them in developing sub-project proposals and develop their skills in project management, financial management (FM), procurement, monitoring and evaluation etc. Where local governments are functioning, POs would also liaise with them to ensure that the proposed sub-projects are consistent with VDC plans and priorities. In addition to mobilization of communities, capacity of POs themselves would be built under this sub-component, such that they are sensitive to key social, environmental and livelihoods-related issues such as gender, caste, disability, sustainability, accountability and local governance, natural resource management, and market linkages, etc.

focus on developing skills such as marketing, transport logistics, financing, and quality control. A capacity building agency would be contracted by PAF to work with community groups to identify needs, develop capacity-building plans and procure relevant technical assistance.

(iv) Support to Rural and Community Finance: There is ample evidence that the vast majority of PAF beneficiaries do not have access to rural financial services, including microfinance lending.12 With a view to the longer-term sustainability and growth of the community Income Generating Activities (IGAs) and enterprises, PAF II will support training in community-managed finance in order to strengthen institutions and encourage eventual access to broader financial services for livelihood support. To achieve this objective, this sub-component would finance mapping and monitoring of those emergent groups revolving their PAF grant funds and mobilizing savings; provide training and capacity building support to strengthen these activities; explore linkages to financial institutions and relevant partners; and support PAF’s articulation of a longer term vision or ‘graduation strategy’ for viable community institutions and enterprises.

4. Lessons learned and reflected in the project design

17. Given that PAF I was intended as a pilot operation, many lessons have been learned in its implementation in the six original districts. PAF I had drawn on international and regional experience in the design and implementation of rural CDD programs and lessons from rural development projects in Nepal itself (e.g., rural drinking water). The CDD approach adopted by the project focuses on building village level institutions and transferring decision-making responsibilities and resources to communities. The focus on livelihoods is aimed at facilitating access to productive assets and improving people’s income. Global experience suggests that sustainable community development is a long- term process, with the need for consistent inputs and support over time in order to build capacity and leave behind workable ‘capital’ (human, social, financial) at the local level. The World Bank’s Operations Evaluations Department (OED, now re-named Independent Evaluation Group or IEG) report on the Effectiveness of World Bank

12 A recent review by a Bank microfinance specialist confirmed that PAF beneficiary communities tend not to have such access, confirming the picture documented in the recently completed World Bank study: Access to Financial Services in Nepal (2007).

Support for Community-Based and Driven Development (2005) found that Bank supported projects have been more successful when they have provided consistent long- term capacity building support, and supported indigenously-matured initiatives.

18. PAF II is using the same design with no changes to the project components or implementation arrangements, which are working well. All components have been implemented satisfactorily with the exception of the capacity building for local governments. This sub-component did not become operational owing to the turbulent environment and dissolution of local bodies during the period of implementation. However in the current program, as Nepal moves towards a new federal structure, significant capacity building initiatives would likely be required for the envisaged, new local bodies.

19. The OED/IEG evaluation as well as both studies (e.g., Kecamatan Development Project studies in Indonesia) and results from ongoing projects13 show that participatory models of infrastructure and service delivery centered on community organizations and/or local government institutions, often partnered with the private sector, perform better in terms of cost-efficiency, quality, sustainability and targeting of benefits, than the traditional ‘top-down’ model in which line ministries and central agencies plan, finance and execute local public investments. This is largely the product of greater local ownership of project outputs, greater transparency and accountability in use of funds, more realistic scope and size of projects, and the use of more appropriate technologies. Key lessons reflected in the design of PAF II components, activities and institutional arrangements are that:

(i) rural peoples’ priority needs are the entry point for building both their social and economic empowerment: it is not enough to mobilize communities for social action, they also need economic opportunities; (ii) communities need to be in the driver's seat through control over funds and investment decisions in order to achieve efficiency and ownership, and ensure accountability and sustainability; (iii) at the same time, communities themselves are socially and economically stratified and it is important that project design and implementation strategies create space for meaningful participation by those typically marginalized; (iv) communities can usually contribute toward investment and operating costs if there are benefits including measurable improvements in service delivery; (v) streamlined and transparent procurement and FM rules, user-friendly operational manuals, and clear service standards for partners and project staff are all essential for effective implementation, in addition to competitive employment conditions to attract and retain competent and motivated staff; and, (vi) a strong monitoring, learning and evaluation framework, including a robust MIS, is needed to track relevant inputs, outputs, processes and results at each tier of implementation, from the community upwards.

13 Sri Lanka’s Gemi Dirya project, the India District Poverty Initiative projects, Community Empowerment projects in Timor- Leste, Community Development projects in West Bank and Gaza, Magdalena Medico Learning and Innovation Loan in Colombia, Northeast Rural Poverty Reduction Program in Brazil, National Solidarity Program in Afghanistan, and the Community Reintegration and Development projects in Rwanda, among others.

20. In enhancing the livelihoods of the poor, projects in the region have been concerned with investing in their institutions, assets and capabilities, to provide people more opportunities to access natural resources, public services and markets. It has been learnt that, while critical, access to credit alone may not be sufficient for poverty reduction, nor is it always the appropriate starting point for reaching the very poorest and for those in situations of extreme need. Matching grants are often the first best instruments for asset creation and investment capital amongst the poor, particularly for common assets or as seed capital to the poorest of the poor. However, as community assets grow and extreme poverty is addressed, savings and access to credit mechanisms become important. Recent projects in India and Sri Lanka have demonstrated that it is important to focus on building broader systems for capital development in the rural areas, expanding access to financial services for livelihoods enhancement that include savings mobilization and credit through community-based finance and with effective linkages to banks and microfinance institutions. This is something which PAF II will explore by supporting capacity building for community groups in this area and outreach activities to rural and microfinance intermediaries.

5. Alternatives considered and reasons for rejection

21. As a repeater operation, PAF II will maintain the same components and implementing arrangements tested successfully under PAF I. The following alternative models were considered:

22. Sector specific projects using conventional central or local government institutions for delivery. While there is a role for projects focused on specific sectors and strengthening of core public institutions, there is also a pressing need in Nepal to harness the capacity of the rural poor and traditionally excluded groups to participate more actively in decision-making and implementation of small-scale investments intended to improve their own well-being and livelihoods. For this purpose, a CDD strategy and delivery mechanisms were judged appropriate. With respect to local governments, the extent of decentralization in post-conflict Nepal is limited, with constrained mandate and capacity, in addition to the continued absence of elected bodies.14 The PAF has proven a valuable tool for delivering urgently needed community infrastructure in this transitional period, paving the way for eventual devolution to the local bodies, once reinstated, and as their mandates and capacities increase. In addition, the project’s focus on access to resources and income generating opportunities lends itself to working with and through a multitude of local partners, including the private and non-governmental sector.

23. A focus on the micro-finance sector: Access to financial services remains limited for most people in Nepal. A recent study suggests that the country’s framework for microfinance is ‘convoluted and confusing’ and the government has yet to articulate a clear vision for the sector.15 Developing such a vision and appropriate legal and regulatory framework will require considerable technical assistance, capacity building and

14 The reinstatement of elected local bodies is unlikely to occur before 2008/9. 15 Access to Financial Services in Nepal (World Bank, 2007).

institutional and legal reform. Given the scope of PAF, it was decided that ‘over- programming’ should be avoided and that PAF itself would not be the right channel for a large-scale effort to reenergize the microfinance industry. However, the income generation activities supported under PAF will allow communities to develop a track record in productive projects that can pave the way for their eventual linkages to financial institutions. PAF can play a role in supporting linkages with microfinance programs existing at the grassroots level.

C. IMPLEMENTATION 1. Partnership arrangements

24. Discussions have been held with various bilateral and multilateral agencies, including IFAD and DFID, regarding potential collaboration. IFAD has committed to contribute and DFID has also indicated its interest in supporting PAF II. Under PAF II, partnerships with a range of domestic support organizations and NGOs would be continued and expanded for implementation and technical assistance on the ground.

2. Institutional and implementation arrangements

25. The same institutional and implementation arrangements which are in place for the first phase PAF project and associated Additional Financing would be maintained for the PAF II operation, with some minor adjustments including increasing the staffing of the PAF unit to reflect lessons learned and the increased demands of a much scaled-up program. These arrangements are summarized below.

26. At the national level, overall project management responsibility would continue to be with the PAF Board, chaired by the Prime Minister. The Vice Chairman functions as a full time executive of PAF, and the Board includes ten other Members. The Executive Director of PAF serves as the Secretary of the Board. The ex-officio members are the Secretary of the National Planning Commission, the Chairpersons of the Federation of District Development Committee, the Village Development Committee, the National Women’s Commission and National Dalit Commission. Other appointed members are five prominent professional persons, including a woman, who have contributed to poverty alleviation in Nepal. PAF has a lean structure with a limited number of staff who have been recruited on fixed term contracts on a competitive basis, and a number of consultants and/or NGOs who are retained to support operations as needed. Under the recent scaling-up, additional Portfolio Managers have already been hired. A review of staffing needs and recruitment of additional staff in administration, finance and monitoring for PAF II is underway, and a PAF Human Resource Strategy (training, competitive salaries, performance based incentives, etc.) is being prepared to maintain the commitment, motivation and professionalism of PAF staff. Details are in Annex 5.

27. At the regional level, PAF establishes offices in those locations where the volume of work requires a presence, but keeps its own staff to a minimum. PAF works through POs which it recruits competitively, for purposes of social mobilization and capacity building at the community level. These POs disseminate information about the project, mobilize

community groups, work with them and build their capacity to develop and manage sub- project proposals, and monitor the quality of participation. POs can be NGOs, community based organizations, or VDCs/DDCs, provided they meet PAF eligibility criteria. POs are required to appoint community facilitators in each target village, who must be trusted by and selected in consultation with the communities, with attention to PAF’s aim of reaching excluded groups. POs also liaise with local bodies to ensure that proposed infrastructure sub-projects are consistent with VDC/DDC plans and priorities. While POs may be entrusted by community groups to submit final sub-project proposals to PAF, once approved, grant funds flow directly to communities and not through POs.

28. At the community level, PAF supports two types of sub-projects: (i) small-scale village infrastructure and services, and (ii) income generation. The same basic rules apply: sub- project proposals are identified by groups of poor people (which could include members of a village or several villages) who come together as community groups/organizations (COs); decisions regarding sub-projects are participatory and inclusive, and this is carefully monitored; the community groups make cash contributions; there are ceilings on the investment per household and on the size of each sub-project; and funds for implementation of sub-projects and technical assistance are deposited in community bank accounts.

29. The village-level project cycle comprises: (a) community mobilization; (b) sub-project preparation including development of an operations and maintenance plan; (c) appraisal; (d) approval by the PAF Technical Appraisal Committee and (e) implementation. Where local governments are operational, the DDCs and the VDCs also need to endorse infrastructure sub-projects. Final sub-project proposals are appraised by PAF staff and approved by the Board, although approval authority can be delegated to Portfolio Managers for smaller and standard sub-projects and once experience is gained. Under the PAF I and Additional Financing implementation, the average time from mobilization to sub-project approval was 71 days, and the average time from approval to fund disbursal was 70 days. There is room for improvement and it is expected that with more personnel under PAF II and a focus on performance and agreed service standards, the time taken from mobilization to disbursal will go down from 140 days to about half this time by the second year of the four year project period.16

Links with Local Governments

30. Local governments are not presently elected and are not operational in many parts of Nepal today. Instead, administrative staff representing line ministries participate at the DDC. At the VDC, the secretary, an employee of Ministry of Local Development, is supposed to manage day-to-day affairs. PAF’s institutional arrangements at the local level link with government local bodies in the following way: (i) there is a dedicated component on capacity building for local bodies (such a capacity building module was included in PAF I, but could not be implemented due to the political situation; it is expected that this will change during the PAF II implementation period); (ii) VDCs can be POs; (iii) all infrastructure sub-projects that are going to be financed through PAF

16 PAF Process Timings Report, April 2007 draft, Sunita Shakya, MIS division , PAF.

have to be a part of the VDC and the DDC annual plans; and (iv) for larger infrastructure demands from communities, VDCs and DDCs can co-finance any investment as long as PAF rules and criteria are observed.

Financing Arrangements and Financial Management

31. The IDA grant estimated at US$100 million would finance 91% of total project costs. The balance would be financed by GoN (about 1%) and community members (about 8%) in cash and/or in-kind contributions). This brings the total project cost to about US$109 million.

32. Financial Management: Overall, FM arrangements currently in place are considered to be adequate, and the FM risk for the project is rated “modest”. FM arrangements will be harmonized with the government’s/PAF’s planning, budgeting, accounting, reporting and auditing systems. PAF has already begun to implement a new Financial Management Information System (FMIS), and transactions under PAF II will use the FMIS. Expansion of FMIS will continue, and ongoing training on use of FMIS will be part of the ongoing capacity building program. There will be strong efforts to build capacity both in technical areas as well as overall project management, including FM. On staffing, the PAF Board has approved all additional positions agreed in the Action Plan in connection with Additional Financing (to the first phase project); the recruitment process has already begun, and the recruits are expected to be fully on board by PAF II negotiations. These staffing plans would be adequate to cover PAF’s expansion to 18 districts for FY2007/08. For further expansion beyond FY2008/09, PAF has commissioned an organizational study through a competent firm to assess the organizational and human resource needs of such scaling up. PAF is committed to add more FM resources as per the recommendations of this study. On internal controls, PAF has recently updated the Operations and Financial Management Manuals to support the scaling up of activities. Based on these new updated manuals, PAF has completed training programs in 18 districts and the training will continue on an ongoing basis in other districts. PAF has also implemented the MIS and Contract Monitoring System. Internal auditors have been appointed and reports are submitted to the Board on a trimester basis. To address certain gaps that have been identified during the assessment, a risk mitigation Action Plan has been agreed, and the risks will be reduced as the Action Plan is implemented. Social audits, financial audits and performance audits are other means of ensuring better financial accountability and improved governance in PAF. Further, PAF already has a transparent system for disclosure of PAF information.

33. Fund Flow and Disbursement Arrangements: High priority is placed on the PAF program which is subject to close monitoring. To expedite this program, from FY2007/08, the process of providing authorization and fund flow to PAF has been simplified by curtailing a requirement to channel decisions through the Prime Minister’s Office. Similarly, approval of work programs by the National Planning Commission would not be required, and the PAF Board is fully empowered to approve its work program. This is a major improvement over previous arrangements and will contribute to enhance program implementation. Grants for sub-projects are disbursed based upon

signed financing agreements between COs and PAF. Contractual agreements between PAF, COs and POs are used to implement the projects. Community budgets are based upon the total project funds committed by PAF. PAF has adopted an innovative approach whereby funds are made available directly to the community groups, bypassing intermediaries. PAF has used the services of a national commercial bank, the Rastriya Banijya Bank (RBB), that has branches in almost all districts, to transfer funds to the community groups (where RBB branches are not available, RBB has made an arrangement to operate through another commercial bank, Nepal Bank Limited which also has a large network in the country). The fund transfer mechanism established between PAF and the RBB is working well. Disbursements of funds to COs are made against specific outputs. PAF’s approved budget is indicated in the public sector Estimates of Expenditures (Red Book) under a separate budget heading, and this practice should be continued. The IDA Grant will flow through the Designated Account for PAF. Disbursements will be made for: (a) block grants; (b) various goods, including computers and vehicles; (c) consulting services; (d) various training, workshops, and study tours; and (e) incremental operating expenditures for PAF.

3. Monitoring and evaluation of outcomes/results

34. There are two core components to the existing PAF monitoring and evaluation system: (a) immediate inputs, outputs and process monitoring by an MIS system and (b) end of project impact evaluations.

35. PAF has demonstrated an ability to maintain a high value MIS system on the operational front, thereby providing a crucial source of information for management decisions and for assessment of progress by IDA. This MIS system is fully operational and produces high quality data on administrative processes, fiscal flows, and targeting and program performance. Data is entered by individual Portfolio Managers upon their return from the field and is accessible from staff terminals. All staff, including the Vice Chairman and Executive Director, have direct access to this data from their computers and can see the performance of their organization in real time. Pre-designed reports present information on status, coverage and disbursement. PAF has also extended the MIS to time internal processes such as CO approval and fund disbursement. These timing reports are used by management to monitor organizational performance. The MIS system is connected to the internet through the website, and some project specific data are available to the general public. Disbursement information is updated periodically, and can be queried by any member of the general public through the PAF website. Under PAF II, in order to further optimize the system, two-way integration of financial and operational data is planned, in addition to incorporation of intermediate project performance indicators under the MIS and, in the interests of transparency, further opening up of the system to the public via the internet.

36. Regarding measurement of project results, an impact evaluation for the first PAF project and associated Additional Financing is currently underway, with high quality baseline data already available for the first six districts. This baseline indicates the starting point before PAF interventions and will be refined for PAF II project. While the data used for

impact evaluation is generated specifically for PAF through a third party data collection firm, and does not rely on official statistics, it has been designed to interface with existing statistics, namely the National Living Standards Survey (NLSS), a, large scale, nation- wide survey conducted by the Central Bureau of Statistics.

37. As PAF scales up under the second phase, the project will support several capacity- building activities to strengthen monitoring and evaluation. PAF will retain a MIS assistant with the adequate technical knowledge and initiative, and this person will be trained as an apprentice in the MIS system to support the existing officer. As the MIS system has proven itself to be thorough and sustainable, it will be important to strengthen arrangements for systematic reporting and use of the information for managerial decision-making. Learning programs will be conducted for technical and managerial staff, including knowledge-sharing with similar projects in other parts of the world.

4. Sustainability

38. The PAF program enjoys strong Borrower commitment, as demonstrated by the request for a significant scaling up under PAF II, as well as the intensive efforts made at all levels to prepare the project in an adequate and timely manner. The current national budget gives greater priority to pro-poor expenditures. PAF is an expenditure priority within this budget, with US$27 million already earmarked for it in 2007/2008 budget year.

39. PAF has been able to operate effectively even in the difficult conflict situation in Nepal, in part because its CDD strategy resonates well with the desire of rural and traditionally marginalized groups to play a more central role in determining their own priorities and helping to manage investments intended to benefit them. It also reflects an increasingly widespread perception of PAF as an objective, transparent, rules-based institution, and these factors augur well for long-term ownership and commitment at both the national and local levels.

40. At the sub-project level, prospects for sustainability are also strengthened because communities need to contribute (on average 10%) to the costs, manage the resources during implementation and develop specific plans for O&M of the investments. For income generating activities, careful attention to financial feasibility and linkages to markets, as well as adequate technical assistance, are important. The productive sub- projects which PAF has supported to date have thus far proven profitable. Finally, as a CDD program, PAF is also expected to have important social capital impacts and to help build capacity and provide opportunities for bottom-up participation by the rural poor in village decision-making. The practices of inclusion, transparency and accountability which PAF II will help to further institutionalize hold important promise for strengthening local governance and for the longer-term sustainability of PAF investments and local level institutions.

5. Critical risks and possible controversial aspects

Risks Risk Mitigating Measures Rating with Risk Mitigation

PAF could experience political This risk is mitigated by the fact that (a) PAF is Low interference at national/local managed at the national level by an independent level by actors wishing to utilize and credible Board which includes beneficiary it for political gain representation; (b) its operations are governed by Operational and Financial Management System manuals which provide simple, clear guidelines for all stages of community mobilization and sub-project selection and implementation, and these manuals are widely disseminated; (c) the project has a strong MIS, and the data it generates will also be widely disseminated, which will facilitate social auditing of PAF activities, and (d) adequate arrangements are in place for both internal and external financial auditing.

Civil conflict and disruption Although conflict resumption is a real risk in Moderate could negatively impact PAF Nepal and civil disruptions (e.g., bandhs) operations continue, the risk that such developments would affect the project is mitigated by the fact that it supports the scaling up of a program which has already been successfully implemented in districts where conflict exists. Continued emphasis on equity, participation, inclusion and transparency will be critical. IDA will continue to closely monitor adherence to these principles and related project design features.

Scaling up quickly to the national The risk will be mitigated by (a) PAF’s Moderate level may be a difficult challenge preparation of their Long Term Vision Plan for the existing PAF team and (2007-2025) and a completed internal systems and may therefore dilute assessment of in-house organizational and the quality of implementation human resources development needs; (b) the processes and results engagement of the South Asian Institute of Management to carry out a detailed Study on Organizational Design and Restructuring of PAF, and a commitment by PAF’s Board to review and implement recommendations; (c) ongoing recruitment to augment the existing staff by 35 (program managers; FM, procurement and technical staff); (d) IDA’s commitment to an intense implementation support/supervision strategy during the first years of operation of PAF II.

Overall risk rating: Moderate

6. Grant conditions and covenants

(1) Effectiveness Conditions: Standard (2) Covenants: The full covenants applying to PAF II are set forth in the legal documents. These apply to areas including project management, staffing and reporting arrangements, implementation requirements for particular components and safeguard compliance. For full details, please refer to the Legal Agreements.

D. APPRAISAL SUMMARY 1. Economic and financial analyses

41. The project focuses on the rural poor by: (a) targeting disadvantaged and marginalized groups; (b) operationalizing the commitment to reach poor and excluded groups as articulated in the PRSP; (c) improving coordination of poverty programs; (d) increasing employment and income opportunities through community-driven sub-projects; and (e) building the capacity of various stakeholders, including beneficiary groups and local bodies. Hence, economic opportunities from sub-projects are but one of the project's outcomes. Due to its demand-driven character, the project does not lend itself easily to detailed ex-ante cost-benefit analysis and rate of return calculations. It will be the beneficiaries who ultimately determine the scope and mix of investments. Because beneficiaries will need to contribute at least 10% of project costs, they will have strong incentives to invest in activities that sustainably contribute to their livelihood and empowerment. Given PAF’s demand-driven strategy and the open menu approach, it is not possible to predict with exactness the kinds of sub-projects that communities will select. Experience in CDD-type projects suggests that investments chosen by poor communities are often not those that would appear to have the most immediate economic payoffs, such as increasing productivity of assets. Instead they often choose first investments that help reduce migration in the household, improve the conditions for children to attend school and enhance their food security. The initial impact assessment of the ongoing PAF I and associated Additional Financing show important results in terms of equity, efficiency, and empowerment.

42. The results from PAF I also provide an indication that the project’s approach leads to substantial income benefits for the target population. The latest NLSS and PAF MIS data have been used to estimate the return to livestock purchases – by far the most common income generation sub-project type selected by communities, representing about one- quarter of all PAF sub-projects. The results estimate a sustained increase in income to these households of about 10%-12%, which translates to about a 20%-25% rate of return. If there were no PAF, the only finance available to these households would be through informal credit markets charging interest rates close to 30%-40%, as reported in the latest Poverty Assessment for Nepal.17 PAF has helped poor people who are blocked from

17 Resilience Amidst Conflict: An Assessment of Poverty in Nepal,1995-96 and 2003-04, Nepal Central Bureau of tatistics/World Bank/DFID/ADB, June 2006

undertaking highly productive investments through limited access to rural finance. Furthermore, the sub-projects were chosen by the communities and therefore correspond better to local priorities than many nationally designed projects, a dimension of efficiency rarely captured in standard “analyses” even though it is an elementary property of returns to either public or private goods.

2. Technical

43. While PAF sub-projects are fully demand-driven, and are formulated and implemented by communities themselves, POs do assist in a number of aspects, including social mobilization, and technical preparation and submission of proposals to PAF. For more complex sub-projects involving engineering inputs, communities procure technical assistance from the non-governmental or private sector. Experience to date indicates that such arrangements are working well and technical capacities exist to cover the kinds of sub-projects that PAF supports.

3. Fiduciary

44. The decision to align the government’s and PAF’s systems and procedures for implementing the project will contribute to enhanced institutional capacity. The overall fiduciary risk associated with the project is rated as “modest” for FM, and the proposed risk mitigation Action Plan is deemed to be adequate (see Annex 6 for details). Both the ongoing and PAF II projects are placing significant emphasis on capacity building in project coordination and implementation, including financial management.

45. Procurement Issues: Almost all the procurement involved in the project will be carried out at the Community level for sub-projects that will require procurement of works, goods and services costing less than US$50,000 equivalent. These sub-projects will be implemented by the communities, through direct contracting or community procurement procedures. Looking to the different procurement needs, the following provisions have been made under the project. PAF will have a trained procurement officer conversant with IDA’s procurement procedures, especially those related to small community-based investments. S/he will also standardize technical details for the community works to be used as an aid to preparation and review of the sub-project proposals. Given that the formation of groups of beneficiaries and hiring of POs would be a continuous process spread over the entire project period, workshops and seminars on procurement issues will be organized at regular intervals to ensure good understanding of procurement procedures amongst PAF staff and POs. A sample review of community procurement be carried out once ever two years utilizing the services of an independent consultant.

4. Social

46. The main social development outcome that the project seeks is to begin to reverse the exclusionary pattern of Nepal's previous development approaches. There is no question that Nepal is a country of diversity on many dimensions. The 2001 census in Nepal identified 103 social groups based on caste, ethnicity, religion, and language. Caste

groups accounted for 57.5% of the population, ethnic groups or janajatis18 for 37.2%, religious minorities for 4.3%, and other groups for the remaining 1%. With the majority of the population Hindu, there are deep caste divisions in Nepalese society, with associated discrimination and abuses of lower-castes, such as the dalits.19 There is also linguistic diversity with only about 60% of the people speaking Nepali. Low economic development, landlessness and poverty are widespread, particularly in remote rural areas, and recent studies have highlighted the correlation between indicators of deprivation and the conflict.20

47. Nepal is a highly stratified society with acknowledged exclusion of certain social groups, namely women, dalits and certain janajati groups, and association between these social markers and wide economic disparities.21 These groups are much more likely to have low incomes and assets, low human development indicators and to be largely absent from decision-making at the community, local (VDC/DDC) and national levels.

48. Before initiating activities and selecting target VDCs in each district, the PAF carries out a district-level social assessment to evaluate and map markers of exclusion and poverty. At the village level, POs work with communities using participatory methods to identify and involve the poor and socially disadvantaged. In addition, PAF uses targets and incentives to encourage community organizations to include women, dalits and janajatis as members, office bearers and beneficiaries. Results have been successful: in 2005-06, 66% of household members of COs were women, 43% dalits and 29% janajatis. 55% of decision-making positions were occupied by women, with 50% dalit and 26% janajati representation. The same approach would be used under PAF II. This focus on participation is replicated from the grassroots up to Board level, with representatives of excluded groups steering the PAF. Criteria for sub-project and PO selection are also designed to ensure that benefits flow to dalits, janajati groups and women in the target communities. The baseline and M&E system have been designed to collect qualitative and disaggregated quantitative data to assess the degree to which the project is meeting its objective of improving the lives of rural people whose poverty, location, caste, ethnicity or gender have excluded them from development benefits. In addition to more tangible benefits, PAF II also seeks to change the way decisions are made in participating communities and local bodies, so that in the longer term, women, dalits and janajatis will have more say in defining their needs and influencing decisions that affect them.

49. Direct beneficiaries under PAF include a very high proportion (over-representation) of the poorest and most vulnerable communities in Nepal. For janajatis, the success in targeting is due to the geographic distribution of the chosen project districts. More remarkable has been the degree to which dalits have become members of COs. The difficulty in reaching dalits is that they do not live geographically separate from other

18 Indigenous peoples of Nepal. More than 50 different indigenous groups are known across the Himalayan, Hill and Terai regions. 19 The term dalit – meaning the oppressed – has been adopted by former ‘untouchable’ caste groups, the lowest of the social caste order. Although caste-based discrimination was outlawed in Nepal in 1963 it is still present in Nepalese society. 20 Poverty, Social Divisions and Conflict in Nepal (World Bank Policy Research Working Paper 4228, May 2007) 21 e.g., the incidence of poverty amongst dalits as a whole is nearly 50% higher than the national average (Unequal Citizens: Gender, Caste and Ethnic Exclusion in Nepal, DFID/World Bank 2006)

castes. Therefore, to reach them it is necessary for the communities themselves to identify the lowest caste members as well as the poorest. The social mobilization feature of the PAF has been particularly successful in achieving this. In the PAF initial six districts, to date, 94% of PAF beneficiaries are classified as poor, as determined by the well-being ranking assessed by the communities themselves. Thus far, 43% of beneficiaries are dalits and 35% are janajatis; although these two groups account for only 15% and 23% respectively, of the actual population in the six original PAF districts. Furthermore, a review by IDA of a sample of approximately one-fourth of all PAF COs and their settlements found that while 53% of the settlement populations were “hard core poor,” 66% of the CO members in those same settlements were “hard core poor”. Within the same communities, over 76% of the hard core poor were in fact covered by the program. This evidence suggests that the PAF has been quite successful in avoiding the risks of elite capture.

50. There is evidence from PAF I that the project has been successful in addressing some of the biggest social challenges. Although more difficult to measure, there are indications that PAF is also having an impact on empowerment, in terms of the ability and opportunity for poor people to participate in, negotiate with, influence and control the institutions that affect their lives and livelihoods. As indicated above, partial data collected by PAF shows that excluded groups (dalits and janajatis) are strongly represented in the leadership structure of COs. The same is true of women, who account for over one-third of Chairpersons, 43% of Secretaries, and 60% of Treasurers (the latter’s signature is required to open a CO bank account).

5. Environment

51. PAF II has been classified as a Category B project for environmental assessment purposes. The project will deliver environmental benefits through enhanced capacity for environmental management, community investment in natural resources management, and investments that protect the health of the poor from environmental health risks.

52. PAF has developed an Environmental Management Framework (EMF) which it uses in the preparation of sub-projects. The effectiveness and efficiency of this EMF was reviewed in preparation for PAF II and it was agreed that the framework should be revised to (i) simplify the screening of community projects, (ii) provide more directly relevant advice for the mitigation of environmental impacts, and (iii) allow PAF to expand operations into protected areas. In order to provide POs and COs with more directly relevant advice for the mitigation of environmental impacts associated with PAF- supported projects, simple environmental guidelines have been prepared for the second phase of PAF operations, covering twenty-nine of the most common forms of project. These guidelines will be provided to POs in the form of a ring-binder so that additions and updates may be easily inserted.

53. Capacity for environmental management will be further strengthened not only in PAF, but also in the POs with which it works. In turn, POs raise CO awareness of environmental concerns through the application of the EMF during the sub-project

preparation and appraisal cycle. PAF’s approach is to consider the impact of the community as a whole on the sustainability of the resource base on which it depends. Finally, investments in infrastructure form a growing part of PAF’s portfolio, and to date some 40% of PAF investments in social infrastructure has been for water supply and sanitation, helping reduce the exposure of beneficiaries to environmental health risks.

6. Safeguard Policies

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [ X] [ ] Natural Habitats (OP/BP 4.04) [ X] [ ] Pest Management (OP 4.09) [ ] [X] Physical Cultural Resources (OP/BP 4.11) [ ] [X] Involuntary Resettlement (OP/BP 4.12) [ ] [X ] Indigenous Peoples (OP/BP 4.10) [ X] [ ] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP 7.60) [ ] [X] Projects on International Waterways (OP/BP 7.50) [ ] [X ] Piloting the Use of Borrower Systems to Address Environmental and Social Safeguard Issues in Bank- [ ] [X] Supported Projects (OP/BP 4.00)

Key Safeguard Policy Issues

54. The environmental impacts of PAF sub-projects are limited by the small maximum size of the investments. To date, the main potential environmental impacts of the sub-projects relate to the grazing, fodder, water and waste impacts of goat and buffalo raising. However, as COs move on to the second round of sub-projects, infrastructure investments will become more important, for which the principal impacts are (a) the temporary disruption and nuisances caused during the construction phase, and (b) permanent resource impacts resulting from land acquisition, alterations to water flows and drainage, removal of vegetation, and changes in slope stability.

55. An additional safeguard issue is raised by the proposed support for PAF activities within protected areas, specifically sub-projects in ten districts with VDCs located within the Langtang National Park, Rara National Park, Shey Phoksundo National Park, Kapatad National Park and Dhorpatan Hunting Reserve. Experience thus far indicates that PAF activities do not lead to the significant conversion or degradation of natural habitats, however specific measures have been adopted to mitigate potential minor environmental impacts within protected areas. In order for PAF to operate in these areas, it has been agreed that PAF-supported COs would be registered as functional groups of the local User Committees set up under the Department of National Parks and Wildlife Conservation (DNPWC) Buffer Zone Management program. This will ensure PAF- supported activities are covered by the environmental investigations prepared for the Buffer Zone Management Plans, and will also enable PAF community organizations to

access the park revenues provided through this program. These arrangements will be confirmed in a Memorandum of Understanding to be signed between PAF and DNPWC. The only protected area proposed for PAF operations that is not covered by a Buffer Zone Management Plan is Dhorpatan Hunting Reserve, and it has been agreed that IDA will explore options to support the development of such a plan. Furthermore, potential for a partnership between PAF and World Conservation Union (IUCN-Nepal) exists to promote poor people’s access to natural resources, particularly forest resources in and around protected areas, especially those areas in which IUCN is already working. PAF and IUCN will explore the possible modalities of such a partnership, with a view to signing a Memorandum of Understanding (see Annex 9).

Safeguard Policy Related Studies

56. PAF’s Operational Manual is supported by an EMF consisting of an Environmental Screening Procedure, Sectoral Environmental Guidelines, and a negative list of sub- projects that the program will not support. During preparation of PAF II, the effectiveness of the EMF was reviewed. It was concluded that while a number of good environmental practices have been adopted by COs and POs, the Environmental Screening Procedure and Guidelines should be revised to better institutionalize sound environmental management. As a result, PAF’s environmental review process has been simplified and strengthened to provide communities with more directly useful guidance, as explained further in Annex 9.

Safeguard Capacity

57. To date, environmental management in PAF operations has been the responsibility of the Division Chief for Community Infrastructure Development, supported by a team of consultants providing training to POs and monitoring implementation of the EMF. To ensure that environmental considerations are adequately addressed as PAF scales up, a full-time Environmental Specialist position has been approved and is in the process of recruitment, with responsibility for over-seeing environmental management in both income-generating and infrastructure projects. PAF will also continue to engage consultant support for EMF training and monitoring.

Consultations Related to Safeguard Issues

58. During preparation of the first phase of support for PAF, several stakeholder workshops were held between December 2003 and February 2004 to develop the EMF. Government and community representatives, NGOs, PAF Board members and IDA staff discussed the roles of stakeholders, the operational rules of PAF implementation and identified the environmental guidelines for the project. These discussions led to the adoption of an EMF containing clear operational guidelines for environmental assessment including checklists, a negative list, mitigation measures and guidelines for monitoring.

59. As PAF initiates activities in each new district, consultations are held with concerned stakeholders, including project management staff, NGOs, COs, and potential

beneficiaries, with the objective of sharing information, including on EMF requirements. During the preparation of sub-projects, the CO is directly involved in the identification and mitigation of potential environmental impacts, and other potentially affected local groups are consulted.

Social Safeguard Issues

60. As already noted, Nepal is a country of remarkable social diversity, including more than 50 indigenous ethnic populations. Given that the objective of the project is to target these groups for inclusion and poverty alleviation, the project is not expected to have any negative impacts on these groups, rather, it is anticipated that they would receive both direct and indirect benefits under the program. The Vulnerable Communities Development Plan in the Operational Manual (OM/VCDP) is consistent with OP/BP 4.10. This is the same as for PAF I.

61. The OM/VCDP includes mechanisms to ensure appropriate targeting of beneficiaries and also highlights the process so that it is well defined, understood, implemented and monitored. The PAF implementation and its successful approach for reaching vulnerable groups, including indigenous and ethnic minorities, is itself the key provision to ensure that the project benefits indigenous groups. The project focuses on the rural poor by targeting disadvantaged and marginalized groups, operationalizing Nepal’s commitment as articulated in the PRSP, improving coordination of poverty programs, increasing employment and income opportunities through community-driven sub-projects, and building the capacity of various stakeholders, including beneficiary groups and local bodies and specifically targeting women, Dalits and Janajatis.

7. Policy Exceptions and Readiness

62. The project requires no policy exceptions. It is a repeater operation which builds on a successful first phase project and related Additional Financing. Adequate institutional arrangements are in place, the necessary budget has been allocated for the first year of execution, and it is therefore fully ready for implementation.

Annex 1: Major Related Projects Financed by the IDA and/or other Agencies NEPAL: POVERTY ALLEVIATION FUND PROJECT II

Sector Issue Project Implementation Development Progress Objectives Irrigation sector improve- Nepal Irrigation Sector S S ment and institutional Project development Reforms to restore economic Nepal First Poverty S S growth, improve service Reduction Support delivery, promote social Credit inclusion and improve governance. Rural services and Sunsari Morang Head S S infrastructure works Project

Rural Infrastructure LIL Rural Water Rural Water Supply S S and Sanitation Projects (I and II) Education Community School S S Support Project Communications Telecommunications S S Sector Reform Project Rural Access Rural Access S S Improvement and Decentralization Project Power Sector Power Development - S S Micro-hydro for village electrification component Health Nepal Health Sector S S Program Poverty Alleviation Poverty Alleviation S S Fund Project I

Other Development Agencies

Donor Sector Issue Project Agency ADB Rehabilitation and improvement of small Second Irrigation Sector and medium scale irrigation using a farmer Project participation approach ADB/USAID • Improvement of irrigation system Irrigation Management performance to enhance agricultural Transfer Project (IMTP) production, farm income, and rural employment. • Reduction of public expenditure on irrigation system O&M. ADB • Performance improvement in FMIS. Community Managed Irrigated • Improving irrigation water distribution. Agriculture Project • Community institutions building ADB • Improvement of agricultural Community Groundwater productivity and incomes of small Irrigation Sector farmers using participatory measures. • Demand driven group shallow tube wells development, and capacity development of water users groups. SDC • Improvement of livelihoods of poor Promotion of Vegetable Seed and disadvantaged farmers through Production for Poverty vegetable seed production. Reduction in Remote Areas of • Marketing and income generation. Nepal (PVSPR) JICA • Adoption of improved farming Agriculture Training and technology by the farmers to increase Extension Improvement the service delivery that will be Project (ATEIP) responsive to farmer's needs. • Practical training to extension workers, farmers' needs extension services. ADB/SDC • Achieve sustainable increased access to Decentralized Rural economic and social services. Infrastructure and Livelihood • Enhance social and financial capital for Project people in the project area particularly poor and disadvantaged groups in conflict areas. • Community development and rural livelihood restoration • Capacity building and decentralized governance. • Rural transport infrastructure and project management services UNDP • Achieve sustainable increased access to Decentralized Local economic and social services. Governance Support Program • Capacity building and decentralized governance

Annex 2: Results Framework and Monitoring NEPAL: POVERTY ALLEVIATION FUND PROJECT II

Project Results Framework

PDO Project Outcome Indicators Use of Project Outcome Information Improved living conditions, (1) No. of households At project Mid-term, the livelihoods and empowerment benefiting from increased indicative results and among the rural poor, with access to community implementation progress will particular attention to those infrastructure be reviewed and decisions groups that have traditionally taken, if necessary, on any been excluded by reasons of (2) 25% of beneficiary design adjustments to improve location, poverty, gender, households have increased outcomes and project ethnicity and caste. their incomes by at least 15% effectiveness against the base year, by end of project (EOP)

(3) 30% of beneficiary groups members coming from target groups.

(4) 30% of decision-making positions in community groups occupied by target groups.

Intermediate Outcomes Intermediate Outcome Use of Intermediate Indicators Outcome Monitoring (i) Component One: 1. Small scale village and (i) Population benefiting from For all components, lower- community infrastructure new rural infrastructure than-expected results as (ii) No. of sub-projects by demonstrated by MIS and category process monitoring (e.g. slow (iii) O&M measures are in take-up of sub-projects; place on completion of sub- exclusion of target groups; projects low numbers of trainings (iv) Evidence of cost- delivered; poor returns on effectiveness of PAF delivery investments) will indicate mechanism/ Economic rates of need to review quality of PO return (ERRs) of sub-projects activities and efficacy of PAF >15 % capacity building mechanisms; and determine any other contributing factors to be addressed by design and implementation adjustments.

(ii) Component Two: 2. Income generation projects (i) 30% of beneficiary targeted to poorest and group members come from excluded groups targeted female-headed, hard core poor, dalit or janajati households (ii) No. of income generating sub-projects by categories (iii) Percentage increase in household income over baseline value

(iii) Component Three: 3. Innovations Window and (i) No. of Innovative/Special Special Programs sub-projects approved (ii) Percentage of beneficiaries coming from target groups

(iv) Component Four: 4. Capacity building (i) No. of groups a) Mobilization of formed/registered community groups (ii) Percentage of group members coming from targeted groups (iii) Percentage of POs and COs received training/capacity building assistance (or no. of trainings delivered?) (iii) Information about PAF disseminated to at least 80% of intended target households by EOP

b) Capacity building for No. of VDCs received local bodies capacity building/training by topic/theme

c) Capacity building for No. of beneficiaries received target groups engaged in capacity building/training in IGAs entrepreneurial skills

d) Support to community No. of groups that have and rural finance received training

Component Five: 5. Administration of the PAF (i) Project operational manual Failure to implement project – the project is well managed is utilized and regularly as stated in OM/VCDP and in and coordinated at national reviewed and updated to accordance with IDA and regional levels reflect any changes in the field procedures may flag need for PAF secretariat capacity (ii) Effective monitoring, building learning and evaluation system in place

(iii) Human resources strategy updated and necessary staffing structure and positions in place

Arrangements for Results Monitoring22

S. Project Outcome Baseline Data Collection and Reporting No. Indicators YR1 YR2 YR3 YR4 Frequency and Data Responsibi (related to PDO) Reports Collection lity for Instruments Data Collection 1. No. of households 0 5,000 10,000 15,000 Trimester, and MIS PAF benefiting from annual Impact Secretariat increased access evaluation23 External to community infrastructure 2. 25% of 0% n/a 15% 25% Mid-term and Impact External beneficiary EOP evaluation households have increased their incomes by at least 15% against the base year, by EOP 3. 30% of HCP: HCP: HCP: HCP: beneficiary groups 40% 40% 40% 40% members coming women: women: women: women: from target groups 50% 50% 50% 50% (women; janajati; dalit: dalit: dalit: dalit: dalit; hard core 20% 20% 20% 20% poor (HCP)) janajati: janajati: janajati: janajati: 20% 20% 20% 20% 4. 30% of decision- HCP: HCP: HCP: HCP: Trimester and MIS PAF making positions 40% 40% 40% 40% annual Impact Secretariat in community women: women: women: women: evaluation External groups occupied 50% 50% 50% 50% Process by target groups dalit: dalit: dalit: dalit: monitoring

22 The results will also monitor benefits to madheshi people when the program is operating in districts with local madheshi populations. 23 To include mixed methods including HH survey and PRA/Qualitative beneficiary assessment

S. Project Outcome Baseline Data Collection and Reporting No. Indicators YR1 YR2 YR3 YR4 Frequency and Data Responsibi (related to PDO) Reports Collection lity for Instruments Data Collection (women; janajati; 20% 20% 20% 20% 24 dalit; hard core janajati: janajati: janajati: janajati: poor) 20% 20% 20% 20% Intermediate Outcome Indicators 1. (i) Total population 50,000 150,000 300,000 500,000 Trimester MIS PAF benefiting from annual Impact Secretariat new rural evaluation External infrastructure (and by target group %- wise) (ii) No. of sub- 250 750 1,500 2,250 Trimester MIS PAF projects (total and annual Secretariat by category)

(iii) Evidence that 60% 70% 75% 80% Trimester MIS PAF O&M measures annual Impact Secretariat are in place on evaluation External completion of Process agency sub-projects monitoring (iv) Economic rates of n/a n/a n/a >15% Mid-term and MIS External return (ERRs) of EOP Impact agency sub-projects >15 evaluation %

2. (i) 30% of HCP: HCP: HCP: HCP: Trimester MIS

24 This includes IDA supervision and the contracting of an external agency to handle independent process monitoring of PAF II implementation

S. Project Outcome Baseline Data Collection and Reporting No. Indicators YR1 YR2 YR3 YR4 Frequency and Data Responsibi (related to PDO) Reports Collection lity for Instruments Data Collection beneficiary 40% 40% 40% 40% annual Impact group members women: women: women: women: evaluation come from 50% 50% 50% 50% targeted female- dalit: dalit: dalit: dalit: headed, hard core 20% 20% 20% 20% poor, Dalit or janajati: janajati: janajati: janajati: Janajati 20% 20% 20% 20% households

(ii) No. of income 500 1,500 2,500 4,000 Trimester MIS generating sub- annual projects (total and by category)

(iii) 25% of IGA n/a n/a n/a 25% Mid-term and Impact beneficiary EOP evaluation households have increased their incomes by at least 15% against the base year, by EOP 3. (i) No. of 50 100 150 200 Trimester MIS Innovative/Special annual sub-projects approved

(ii) Percentage of HCP: HCP: HCP: HCP: Monthly MIS beneficiaries 40% 40% 40% 40% annual Impact coming from women: women: women: women: evaluation

S. Project Outcome Baseline Data Collection and Reporting No. Indicators YR1 YR2 YR3 YR4 Frequency and Data Responsibi (related to PDO) Reports Collection lity for Instruments Data Collection target groups 50% 50% 50% 50% Process (women, hard core dalit: dalit: dalit: dalit: monitoring poor, Dalit or 20% 20% 20% 20% Janajati) janajati: janajati: janajati: janajati: 20% 20% 20% 20% 4 (a) (i) No. of groups 750 2,250 4,000 6,250 Trimester MIS formed annual

(ii) % of POs and 0 30 50 80 Trimester MIS community groups annual Impact received evaluation training/capacity building assistance (iii) Information about 0 30 60 80 Trimester MIS PAF disseminated annual Impact to at least 80% of evaluation households in Process target areas by monitoring EOP

4 (b) (i) Nos. of VDCs 0 n/a n/a 200 500 Trimester MIS received capacity annual building/training by topic/theme

4 (c) (i) Percentage of 0 20% 40% 60% Trimester MIS

S. Project Outcome Baseline Data Collection and Reporting No. Indicators YR1 YR2 YR3 YR4 Frequency and Data Responsibi (related to PDO) Reports Collection lity for Instruments Data Collection IGA beneficiary annual Impact groups received Evaluation capacity Process building/training monitoring in entrepreneurial skills 4 (d) No. of groups that 100 250 250 500 MIS have received training 5. (i) Project n/a Annual Annual Annual Annual Periodic Supervision operational annual field visits manual is utilized Process and regularly monitoring reviewed and annually updated to reflect any changes in the field (ii) Effective Baseline MIS Periodic Process monitoring, completed linked annual monitoring learning and Upgraded to evaluation system MIS in internet in place place

(iii) HR strategy Periodic Process updated and annual monitoring necessary staffing structure and positions in place

Annex 3: Detailed Project Description NEPAL: POVERTY ALLEVIATION FUND PROJECT II

1. The Nepal PAF is an autonomous and flexible organization with a small number of professional staff working alongside local level governments and community organizations to co-finance investments in local infrastructure, services, livelihoods activities and social mobilization for the benefit of the most excluded people in Nepalese society, namely women, dalits, indigenous people and other very poor. PAF II will finance the scaling up of activities from the existing 25 districts to a nation-wide program, with a phased approach adding 15 new districts every year to cover the country within four years. Under PAF II, neither the original project objectives nor the components will change. The implementation arrangements will also be the same as for the ongoing project, and are working well. Overall project management will continue to be the responsibility of the PAF Board. The only major change is the expansion of geographic coverage.

Project Component 1 – US$34.6 million

2. Small Scale Village and Community Infrastructure: Given the extreme remoteness of many communities and the virtual non-existence of public infrastructure services, small investments in infrastructure and services can make an important difference to poor communities. As demonstrated in the original PAF, the communities are often very clear on what they need, and are willing to contribute to sub-projects within their means. Consideration would be given to sub-projects already included in Village Development Committee (VDC) plans and/or where the District Development Committee (DDC) and/or VDC are prepared to provide matching grants. Key selection criteria would include the number of target households that would benefit and the expected employment impact. In addition, infrastructure sub-projects would require communities to prepare and commit to a realistic O&M plan. Partner organizations (POs) would also be used to facilitate the process of community organization and build community capacity in preparation of sub-project proposals. Community contributions would average 10%, with adjustments to be made for very remote and difficult areas. In the sectors where policies require higher community contributions (e.g., 20% in rural water, with possible adjustments for very remote or poor communities), such rates would be applied to ensure consistency. Examples of sub-projects implemented to date under PAF have included footbridges, water supply schemes, community meeting halls, schools, health facilities and other small-scale infrastructure.

Project Component 2 – US$40.3 million

3. Income generation projects targeted to the poorest and excluded groups: Matching grants would be provided to self-selected groups of poor and excluded people for income-generation activities, based on objective criteria including ethnicity, caste, gender and poverty levels. Beneficiaries would contribute about 10% of the sub-project cost in cash. A proportion of the grants would be reserved for technical assistance to be

contracted by communities themselves in areas where they felt such need. Under PAF, communities have had discretion as to how to manage the funds received, with a number of them choosing to revolve the funds within their group. Under PAF II, any groups choosing to manage resources in this way would receive training in community-managed finance – under the capacity building component – with a view to strengthening them to eventually have access to broader financial services for livelihoods initiatives. As with other sub-projects, POs would be contracted by the PAF to work with all communities, including through locally selected community facilitators, to assist in participatory processes, group formation, and development of sound sub-project proposals. Particular attention will be paid to the commercial/economic viability of income-generating sub- projects, to avoid the risk of supply or NGO driven proposals which are not sufficiently well linked with markets. Common examples to date under PAF have included micro- irrigation, micro enterprises/service sector activities, artisanal/crafts, land productivity investments, trading and animal husbandry. Analysis of a representative sample of these investments shows incomes for beneficiary households of 10-15%.

Sub-project Cycle for Components 1 and 2:

4. District Targeting. As PAF is now scaling up to be a national program, all districts are expected to be covered. The first phase of PAF II will include 15 new districts covering the bottom ranking districts on the composite Human Development Index (HDI).

5. District Assessments. The first task in each district will be to carry out a district-level social and poverty assessment (district assessment). The district assessment will recommend target VDCs based on poverty and exclusion parameters and, if necessary, security considerations. For the target areas, it will: assess the conditions of target groups and participatory processes; map the existence and activities of potential local POs and community organizations; map other development programs in the area; assess any security risks and how these might affect implementation and supervision. The district assessment will be discussed at a stakeholder‘s meeting at the DDC level.

6. Selection of Partner Organizations. By advertising in local media and through direct contacts with potential POs, the PAF Board will invite prospective POs to submit proposals on how they would facilitate community mobilization and sub-project preparation for one or more VDCs. POs would be selected by the PAF based on the merit of the proposals and experience and performance of POs, in particular in their ability to interact with target groups effectively.

7. Social Mobilization. POs would carry out village meetings to inform about the "rules of the game" of PAF and assist communities in evaluating needs and problems, identifying interventions, and organizing themselves into groups or organizations to act on those problems. These could be newly formed groups or existing bodies, as long as they genuinely represent target groups. Group members should be free to self-select. POs would also report back to the PAF any concerns with "PAF rules" or any grievances arising from the operation of the PAF.

8. Sub-project Preparation. Sub-project preparation would be the responsibility of community groups. 10% of sub-project costs would be ear-marked for technical assistance to be procured by the groups themselves. Communities would need to provide contributions in cash, kind or labor before all PAF funds are released to them and POs could also assist communities to pull together their contributions (e.g., by embarking on a savings process, or applying to micro-credit). POs would also be available to assist communities with preparation of sub-project proposals for submission to the PAF, and would work closely with VDCs to ensure that those proposals, where relevant, are consistent with VDC plans or are a VDC priority. Where applicable, sub-project proposals would need to include a credible O&M plan and sub-projects would also need to identify implementation milestones, such as when community contributions will be put together. POs would monitor the quality of the participatory decision-making process at the group and community levels, community contributions, and sub-project implementation and O&M. Community groups would submit their proposals to the PAF directly or by channeling them through POs.

9. Full investment costs, including materials, labor and equipment, as well as operation and maintenance during a sub-project's critical start-up phase, are all eligible for inclusion in PAF project budgets. The project would, however, not finance sub-projects falling in the following negative list: individual projects; consumption activities; religious buildings; resettlement or construction on private lands unless there is a consensus among all; land acquisition; sub-projects not screened for environmental impacts; activities likely to cause damage to wildlife, to a sanctuary by setting fire, injuring wildlife, or involving indiscriminate felling of trees or removal of plant, animal, mineral produce from a sanctuary; activities located within a national park; construction rehabilitation of a dam (old or new) of 10 meters or more height; activity that could damage cultural property.

10. Sub-project Appraisal and Approval. Sub-project appraisal would be carried out by the PAF. Initially all sub-projects would be appraised by the PAF. The PAF, however, could delegate approval of simpler standardized sub-projects to POs. PAF Portfolio Officers would spend about half of their time in the district and would be able to appraise and approve (if delegated by the PAF Board) simpler projects during their visits. This procedure is already underway in PAF I implementation and is working satisfactorily.

11. Fund Flow. Upon approval of the sub-project proposal, PAF will disburse funds for the sub-project to bank accounts in the name of the community group. Community groups would select among themselves those responsible for managing the bank account, for bookkeeping, procurement, and so on. Disbursements to the community group accounts will be made in one tranche. Communities will be able to access funds from their bank accounts in two tranches, with the second tranche to be released once the agreed milestones as described in the sub-project proposal are met.

12. Implementation. Sub-project implementation would be the full responsibility of community groups. They would be in charge of procuring materials, labor and technical assistance if needed. They would also be responsible for putting in place the O&M arrangements that they choose. Efforts would be made, as appropriate, to involve

relevant local bodies and administrative officials in committing to support O&M of relevant public infrastructures.

13. Monitoring. Several actors would be in charge of monitoring, including communities themselves who conduct self-monitoring. Through the process of peer review and exploration of social accountability tools, such as the community score card, they could be called upon to review activities of office bearers, service providers and other community groups as well. POs, VDCs and DDCs would play a critical role in monitoring the quality and process of decision-making at the community level and their ability to pull together contributions. VDCs and DDCs would also monitor technical aspects of sub-projects. PAF staff would visit community groups and project sites regularly to develop hands on experience of the performance of community groups and POs, and address any issues that could arise.

Project Component 3 - US$ 9.6 million

14. Innovations and Special Programs. An innovations window would support proposals meriting special consideration owing to exceptional needs in a given context, or demonstrating innovative ways to improve livelihoods development and reach targeted groups. These proposals can be national or regional in coverage and may be sponsored by organizations representing or working with the target groups, target groups themselves and/or local bodies. Examples under PAF I have included innovations such as arsenic filters, forest-based cardamom cultivation, evaporative cooling technology for food preservation and women’s health projects.

Project Component 4 - US$19.18 million

15. Capacity Building. This will include five sub-components. (i) Social Mobilization of Community Groups. This sub-component would support both training/skills development of POs themselves and their capacity building of community groups. POs would be selected to work in target areas to disseminate information about the project, mobilize community groups, work with them in developing sub-project proposals and develop their skills in project management, financial management (FM), procurement, etc. Where local governments are functioning, POs would also liaise with them to ensure that the proposed sub- projects are consistent with VDC plans and priorities. In addition to mobilization of communities, capacity of POs themselves would be built under this sub-component, such that they are sensitive to key social, environmental and livelihoods-related issues such as gender, caste, disability, sustainability, accountability and local governance, natural resource management, and market linkages, etc

(ii) Capacity Building for Local Bodies. The extent of decentralization in Nepal is limited, particularly given the continued absence of elected local bodies, dissolved during the conflict period. With a view to supporting intermediary delivery channels that lay the foundation for strengthened local government, this sub-component would focus on building capacity of functioning and interested local bodies (VDCs, DDCs) in financial management, participatory budgeting, social issues, and other relevant topics to promote inclusive planning and service

delivery for local development, as well as on the rules of operation of the PAF in order to enable local governments to assist groups and communities to access PAF resources.

(iii) Capacity Building of Target Groups Engaged in Income Generating Activities would focus on organizing special training and related activities to enhance the skills of target beneficiaries on their chosen areas of activity. Examples of areas for skills development would include training of village health workers, veterinary skills, crafts skills, introduction of improved varieties of agricultural produce, marketing, entrepreneurship, bookkeeping, functional literacy, and so on. The Capacity Building Agency would be responsible for procuring technical assistance and organizing capacity building programs for the target population.

(iv) Support to Rural and Community Finance: There is ample evidence that the vast majority of PAF beneficiaries do not have access to rural financial services, including microfinance lending.25 With a view to the longer-term sustainability and growth of the community IGAs and enterprises, PAF II will support training in community-managed finance with a view to their institutional strengthening and eventual access to broader financial services for livelihood. To achieve this objective, this sub-component would finance mapping and monitoring of those emergent groups revolving their PAF grant funds and mobilizing savings; provision of training and capacity building support to strengthen these activities; exploration of linkages to microfinance institutions and relevant partners; and support to PAF’s articulation of a longer term vision or ‘graduation strategy’ for viable community institutions and enterprises.

(v) Information, Monitoring and Evaluation System: The system would include monitoring for supervision, monitoring for impact and monitoring for self-learning. Monitoring for supervision would focus on processes and outputs, such as how many groups are being formed, which sub- projects are being financed, what is the time lag between group formation and sub-project formation, and so on. This would be performed by the project MIS system. Monitoring for evaluation would be based on the base-line study, and a subsequent follow-on impact study tracking the evolution of the project indicators over time and comparing them with control villages outside the project. This final study would also consist of a broader social assessment to provide more complementary qualitative information about project processes and results, and in addition to the baseline, would develop detailed case studies of PAF’s impacts in empowering and improving the livelihood of beneficiaries, as well as any obstacles that prevented outputs or outcomes from being achieved. Monitoring for self learning would consist of structured peer reviews and use of social accountability tools such as score cards on self performance and performance of project agencies, local bodies, selected office bearers and service providers.

Project Component 5 - US$5.04 million 16. Administration of PAF II. The project would continue to finance PAF staff and agency operating expenses, including financial, procurement and environmental management and audits. As PAF is becoming a major government instrument for poverty reduction, the Government has begun mainstreaming its support by picking up 20% of the operating costs of PAF as counterpart financing.

25 A recent review by a Bank microfinance specialist sent to assess the present situation confirmed that PAF beneficiary communities tend not to have such access, confirming the picture documented in the recently completed World Bank study: Access to Financial Services in Nepal (World Bank, 2007).

Annex4: Project Costs NEPAL: POVERTY ALLEVIATION FUND PROJECT II Project Costs

Project Component Local Foreign Total Infrastructure 34,550,000 34,550,000 Income Generation 40,310,000 40,310,000 Innovation and Special Programs 9,610,000 9,610,000 Capacity Building 19,180,000 19,180,000 Administration of the PAF 5,039,000 5,039,000 Total Project Costs 108,700,000 108,700,000

IDA Financing

Local Foreign Total Category 1 Sub-projects/Block Grants 76,800,000 76,800,000 2 Program Support Costs 15,166,462 15,166,462 3 Incremental Operating Costs 4,033,538 4,033,538 4 Unallocated 4,000,000 4,000,000 Total 100,000,000 0 100,000,000

Annex 5: Implementation Arrangements NEPAL : POVERTY ALLEVIATION FUND PROJECT II

1. Poverty Alleviation Fund Nepal (PAF, Nepal) was established in 2002 under the PAF Ordinance, 2002 (and subsequently PAF Act, 2006) as an autonomous organization with inalienable authority. The same institutional and implementation arrangements which are in place for the first phase PAF project and associated Additional Financing would be maintained for the PAF II operation, with some minor adjustments to reflect lessons learned and the increased demands of a much scaled up program. These arrangements are summarized below.

2. At the national level, overall project management responsibility would continue to be with the PAF Board, chaired by the Prime Minister. The PAF Board constitutes the Vice Chairman, who also functions as a full time executive of PAF, and representation from ten other Members. The Executive Director of PAF, Nepal serves as the Secretary of the Board. The ex-officio members are the Secretary of the National Planning Commission, the Chairpersons of the Federation of District Development Committee, the Village Development Committee, the National Women’s Commission and National Dalit Commission. Other appointed members are five prominent professional persons including a woman who have contributed to poverty alleviation in the country. PAF has a lean, but strong structure with a limited number of staff who have been recruited on fixed term contracts with competitive salaries, and a number of consultants and/or NGOs who are retained to support operations as needed.

3. In view of the expansion of its program, PAF has prepared a Long Term Vision Plan covering 2007-2025. In this context, the Human Resource Division of PAF carried out a survey to review its organizational management capacity and assess the organizational and human resource needs, preparing an internal report in February 2007. The internal report has recommended a need for scaling up the PAF structure and its staffing to cope with increasing demands and scaling up under PAF II. To further develop the recommendations of this in-house study, PAF has engaged the South Asian Institute of Management to carry out a detailed ‘Study on Organizational Design and Restructuring of PAF’. Various possible models are being explored including decentralization of PAF to regional offices. The PAF Board is committed to review and gradually implement the recommendations of this study in order to manage the scaled-up program. Any additional human resources that may be required will be incrementally implemented. In a recent PAF Board meeting, an additional ten positions have been sanctioned to manage the program in 40 districts during FY2007/08 and this includes one Accounts Officer, two Accountants, one Procurement Specialist, one Environmentalist and one Civil Engineer. Recruitment for positions will commence soon. Approved positions for accountants are part of the Action Plan agreed for additional financing. Additional 25 Portfolio Manager positions have also been approved.

4. At the regional level, PAF currently establishes offices in those locations where the volume of work requires a presence, but keeps its own staff to a minimum. PAF works through partner organizations which it recruits competitively, for purposes of social

mobilization and capacity building at community level. These POs disseminate information about the project, mobilize community groups, work with them and build their capacity to develop and manage sub-project proposals, and monitor the quality of participation. POs can be NGOs, community based organizations, or VDCs/DDCs, provided they meet PAF eligibility criteria. POs are required to appoint community facilitators in each target village, who must be trusted by and selected in consultation with the communities, with attention to PAF’s aim of reaching excluded groups. POs also liaise with local bodies to ensure that proposed infrastructure sub-projects are consistent with VDC/DDC plans and priorities. While POs may be entrusted by community groups to submit final sub-project proposals to PAF, once approved, grant funds flow directly to communities and not through POs.

5. At the community level, PAF supports two types of sub-projects: (i) small-scale village infrastructure and services, and (ii) income generation. The same basic rules apply: sub- project proposals are identified by groups of poor people (which could include members of a village or several villages); decisions regarding sub-projects are participatory and inclusive, and this is carefully monitored; the community groups make cash contributions; there are ceilings on the investment per household and on the size of each sub-project; and funds for implementation of sub-projects and technical assistance are deposited in community bank accounts;

6. The village-level project cycle comprises: (i) community mobilization; (ii) project preparation including development of an operations and maintenance plan; (iii) appraisal; (iv) approval by PAF Technical Appraisal Committee; and (v) implementation. Where local governments are operational, they also need to endorse infrastructure sub-projects. Final sub-project appraisals are appraised by PAF staff and approved by the Board, although approval authority can be delegated to Portfolio Managers for smaller and standard sub-projects and once experience is gained.

Annex 6: Financial Management and Disbursement Arrangements NEPAL: POVERTY ALLEVIATION FUND PROJECT II

Summary Project Description

1. The proposed Poverty Alleviation Fund (PAF) Project II aims to assist Nepal in implementing a significant scaling up of the PAF program to address both income and non-income dimensions of rural poverty throughout the country, with special attention to groups which have traditionally been excluded by reasons of gender, ethnicity and caste. The expected development outcomes would be: (i) improvements in access to small-scale social and economic infrastructure and services, as prioritized by the beneficiary communities; (ii) generation of incremental employment at the village level, including both short-term participation in the implementation of sub-projects and longer-term jobs resulting from economic activities facilitated by PAF; (iii) increases in incomes of beneficiary households; and (iv) an increase in citizen participation and voice in community decision making.

2. The proposed project follows the first phase PAF (IDA Grant H0910-NEP) of US$15 million, which piloted PAF activities in six districts and later was expanded to 19 districts with Additional Financing from IDA of US$25 million. Allocated funds under the first phase and additional financing have been fully committed and would not be sufficient to cover the community demands in FY2007/08 onwards. PAF is reaching out to the poor, specifically targeting poor women, dalit and janajati who implement demand-driven community based sub-projects through their own Community Organizations (COs). Non-governmental organizations (NGOs), local government institutions (District Development Committees (DDCs) and Village Development Committees (VDCs)) and private/non-governmental sector Partner Organizations (POs) are providing facilitation and support to the communities. PAF is already working with 5,424 COs with assistance from 225 POs. In order to meet increasing demand from COs and in view of successful implementation of the first phase program, the second phase program has been prepared as a fast track repeater operation. It will affirm IDA’s endorsement of the new government’s broad development objectives and especially of the need to better target interventions towards poor, marginalized and excluded groups, and to engage these beneficiaries directly both in priority-setting and implementation of investments intended to serve them.

3. The PAF model has been successful in generating demand and expectations in additional communities in the districts and in increasing government’s credibility in effectively reaching very poor and excluded groups. PAF targets to expand by 15 districts to 40 districts in FY2007/08, 55 districts in FY2008/09 and thereafter to cover the remaining 20 districts in a “pocket” approach. PAF II would maintain the main design features, activities and five components of the first phase project: (a) Small-Scale Village and Community Infrastructure, (b) Income Generating Sub-projects, (c) Innovative and Special Program, (d) Capacity Building, including social mobilization of COs, capacity building for local governments and targeted groups engaged in income-generating

activities, support to community and rural finance, information system, monitoring and evaluation, and (e) Support to administration of PAF II.

Country Financial Management Environment

4. The Nepal Country Financial Accountability Assessment (CFAA) that was conducted jointly by the Government of Nepal (GoN) and IDA in 2002 and subsequently updated in 2005 concluded that the failure to comply with the country’s impressive legal and regulatory fiduciary framework makes the fiduciary risk in Nepal “High”, but the risk is similar to that in many other developing countries. The situation has not significantly changed since that time. The draft Public Financial Management (PFM) Review (May 2007) has reaffirmed that the PFM system in Nepal is well designed but unevenly implemented. The GoN, however, is committed to improving the overall financial accountability framework. This has been demonstrated by its recently promulgating the Public Procurement Act and also leading the self-assessment of various PFM Indicators as per Public Expenditure Financial Accountability (PEFA) Guidelines. Further work on PFM, including setting up the PFM benchmarks as per the PEFA Guidelines and subsequent implementation of actions that need to be agreed with GoN will help to mitigate the inherent country risk.

Implementing Entity

5. Poverty Alleviation Fund Nepal (PAF, Nepal) was established by the PAF Ordinance, 2002 (and subsequently PAF Act, 2006 was issued) as an autonomous organization with inalienable authority. The first PAF Board which initially oversaw the program ceased to exist in January 2007 owing to the change of government. While PAF continued to discharge its responsibilities quite well on the ground during this inter-regnum, it was essential to get a new Board in place as soon as possible given the rising demand and planned rapid expansion of the program, and IDA placed significant emphasis on this in its dialogue. In June 2007, a new Board was appointed, bringing PAF into full compliance with the PAF Act, 2006. PAF has a strong team of staff who are committed to accelerating implementation and who have in-depth experience and skills in project management. With a track record of several years, PAF has demonstrated its competence in implementing investments benefiting mostly poor and disadvantaged rural households following a bottom-up approach.

6. The second phase program will continue to be managed by the PAF Board. To guide this expansion, PAF has prepared a Long Term Vision Plan covering 2007-2025. In this context, in February 2007, the Human Resource Division of PAF carried out a survey to review and make recommendations on the entity’s organizational management capacity and human resource needs. The draft report has recommended a scaling-up of the PAF structure and its staffing to cope with increasing demands and investment activities. In order to further develop these in-house recommendations, PAF has engaged the South Asian Institute of Management. Various models are being explored, including decentralization of some responsibilities to regional offices. The PAF Board is committed to review the recommendations of this study and gradually implement a

phased program of institutional strengthening to manage the scaled-up investment program. Any additional human resources that may be required will be incrementally implemented. Meanwhile, in a recent PAF Board meeting, ten new key positions have been sanctioned to support the program in 40 districts during FY2007/08, and these include one Accounts Officer, two Accountants, one Procurement Specialist, one Environmentalist and one Civil Engineer. The process for recruiting these positions will soon begin. The accounting positions are part of the Action Plan agreed for additional financing. Finally, 25 additional Portfolio Manager positions have also been approved.

7. Financial Management of the first phase PAF has been rated “Moderately Satisfactory” over the last year. This is mainly due to delays in recruitment of the accounting positions agreed in the Action Plan for Additional Financing (as indicated above, one Accounts Officer and two Accountants, to bring PAF’s complement to a total of two Accounts Officers and three Accountants). All of these positions are filled with individuals who are already working on a temporary basis, and they are likely to be confirmed soon. Through an institutional strengthening program supported by the first phase project, PAF has developed a Financial Management Information System (FMIS) which is now in full operation. In addition, PAF has also developed a contract monitoring system which can track all contracts with communities, thereby facilitating payment monitoring. In a short period of time, PAF has established a credible financial management system with processes and procedures detailed in its Operations and Financial Management Manuals. Capacity building efforts will be further enhanced under PAF II. Except for formal recruitment of the accounts staff, there are no major financial management issues in the ongoing first phase. There are no outstanding Implementation Progress Reports or audit reports. Implementation Progress Reports and audit reports are submitted reasonably on time. Submission time of audit reports is generally within seven months.

8. Building on its strengths, PAF is now ready to implement reports-based disbursements during the second phase project. There are, however, a few areas to which PAF needs to give priority: (1) appointment of accounts staff; (2) implementation of recommendations on its organizational set up and staffing needs resulting from the ongoing study; (3) continued improvement in monitoring of contracts under its contract monitoring system to reconcile financial information with accounting records; and (4) continued prioritization of sound financial management. Once decisions are taken on organizational and staffing changes to strengthen PAF, IDA would conduct a follow-up fiduciary risk assessment.

Adequacy of Financial Management Arrangements

9. Overall, FM arrangements for the second phase PAF are considered to be adequate. FM arrangements will be harmonized with the government’s/PAF’s planning, budgeting, accounting, reporting and auditing system. PAF has already begun to implement the FMIS. Recruitment of accounts staff as part of the earlier Action Plan is now in an advanced stage and will be concluded soon. With support from the capacity building components of the ongoing and future PAF projects, the FMIS will continue to be able to generate various financial monitoring reports, and ongoing training on use of FMIS will be continued. PAF has recently revised its Operations and Financial Management

Manuals in the context of scaling up for additional financing, and these are adequate to cover further expansion under PAF II. Audit reports and reviews during IDA implementation support missions attest to their effectiveness, and these arrangements will be continued.

Risk Analysis

10. From the FM perspective, the overall risk of PAF II is “modest”. The Attachment provides the FM Risk Rating Summary. PAF has a strong dedicated team to implement the project. The current PAF Board is a highly motivated team of competent and respected individuals who are committed to deliver services to the poor and disadvantaged groups. Recent approval by the PAF Board of modifications in human resource policies related to improved incentives and revised salary structure has further motivated the PAF team. The ongoing organizational study will determine any reorganization needs of PAF including expansion in human resources. The PAF Board is committed to implement the recommendations incrementally to meet the increasing demands. During the vacuum of the PAF Board under phase one, PAF had to delay several key decisions, including formal recruitment of some financial management and other staff. The uncertain political situation in the country, while relatively stable at this time, could be a source of risk. Further, PAF’s possible reorganization and move towards regional decentralization, while bringing the institution closer to its clients, may pose new challenges. IDA would carry out a fiduciary assessment update in the event of any major organizational changes including the aforementioned possible decentralization of some responsibilities to PAF’s regional offices. The effectiveness of PAF’s organizational set- up would also be reviewed during the mid-term review of the project. PAF handles hundreds of contracts with POs and COs, and monitoring of contracts related with payments used to be an area for improvements. Recently, PAF has put in place the computer-based Contract Monitoring System discussed above, which has enabled PAF to do a much better job of monitoring the payments. Since the system is relatively new, it needs to be closely monitored and tested from time to time to confirm its reliability.

11. Overall, there will be strong efforts in capacity building both in technical areas as well as overall project management which includes financial management. To address certain gaps that have been identified during the assessment, a risk mitigation Action Plan has been agreed, and the risks will be reduced as the action plan get implemented.

Strengths

12. The PAF operation has many FM strengths. They include: (i) high commitment by the government to implement poverty alleviation investments, as reflected in FY2007/08 budget (about US$27 million has been allocated – and this includes expected resources from PAF II of about US$15 million, with resources under first phase PAF fully committed), (ii) high commitment by the government and PAF Board to continually strengthen PAF performance; (iii) solid organizational structure, scope, and procedures; (iv) a competent team of Board members who are setting very high standards of independence and professionalism; (v) a competent and effective Executive Director who has proven experience and track record working on community based programs, (vi) a

competent team of experienced and qualified staff in the PAF Secretariat exposed to best practices from similar operations in other countries and elsewhere in Nepal; (vii) an innovative demand-led community-based approach which is generating a strong positive response from rural communities and local authorities; (viii) well established operational procedures and internal control framework; (ix) harmonized approach to the country system for financial management and procurement management; and (x) openness to transparency and enhanced governance and accountability as mandated by the Right to Information Act 2007.

Weaknesses and Resolutions

13. Some of the weaknesses identified during the earlier fiduciary assessment for the Additional Financing have now been rectified. There have been substantial improvements in complying with the requirements for timely submission of financial reports. Trimester Implementation Progress Report (includes Financial Management Reports) are now timely received. PAF is also committed to timely submission of the audit reports. The three-month delay in submission of the first external audit report (for the first phase project) has now been substantially reduced to not more than a one month delay. PAF has improved its system in monitoring two of the key issues raised in the last audit report that pertain to: (i) the adequacy of controls to reduce excessive advances, and (ii) incorrect expensing of equipment and vehicles. PAF has applied procedural controls to reduce advances; and no new advances will now be provided until the previous ones are cleared. Contract management has been improved and is regularly monitored through a computerized monitoring system. Internal Auditors have now been appointed, and internal audits are now completed on time. Achieving the required six months’ goal might still be a challenge for external audit reports due to systemic considerations, but the PAF Secretariat will make every effort to reduce the delays.

14. Initially, program implementation was adversely affected due to delays in sending authorization by the Ministry of Finance to release funds, but this has been corrected during last fiscal year. In FY2007/08, GoN has made further improvements by curtailing one bureaucratic layer in the process – authorization and fund release now is transmitted directly to PAF without going through the Prime Minister’s Office. This is a welcome step, and is expected to substantially improve the funds flow mechanism. With timely authorization and timely release, PAF will be able to approve sub-projects on time which would eventually better meet the seasonal rural investment opportunities. Improved planning and timely monitoring would help to ensure proper implementation of these changes.

15. For the purpose of Implementation Progress Reports, PAF will improve its current reporting format, in consultation and agreement with IDA. The system once agreed will be integrated with the FMIS to enable it to generate the reports through the system.

Project Budgeting and Funds Flow

At the PAF Secretariat Level 16. GoN has placed a high priority on the PAF program which is subject to close monitoring. To expedite implementation from FY2007/08, GoN has simplified the process of providing authorization and funds flow to PAF by curtaining a requirement to channel through the Prime Minister’s Office. Similarly, GoN has also decided that approvals by the National Planning Commission would not be required and that PAF Board is fully empowered to approve its work program. This is a major improvement over previous arrangements and will contribute to enhanced program implementation. Fund release delays observed in previous years will also be addressed by this reform.

At the Community Level 17. Grants to sub-projects are disbursed based upon signed financing agreements submitted by the COs and approved by PAF. Contractual agreements between PAF, COs and POs are used to implement the projects. CO budgets are based upon the total sub-project funds committed by PAF. Disbursements of funds to COs are made against specific outputs.

Fund Flow Arrangements

At the Central Level 18. GoN releases the budget as block grants (both for IDA part and counterpart funds) to the PAF in three tranches as per the GoN’s fund release procedure. The approved budget is indicated in the government’s budget (Red Book) under a separate budget head in the name of the PAF Board. IDA resources flow through a Designated Account that has facilitated quick payments in the form of reimbursements to the Treasury on account of actual IDA eligible expenditures made to the communities, and for making direct payments to suppliers and consultants. The fund flow process at the central level is working well.

At the Community Level 19. Unlike the normal public system, PAF has adopted an innovative approach whereby funds are made available directly to the COs bypassing intermediaries. PAF has used the services of a national commercial bank -- the Rastriya Banijya Bank (RBB) that has branches in almost all districts, to transfer funds to the communities (where RBB branches are not available, RBB has made an arrangement to operate through another commercial bank, Nepal Bank Limited which also has a large network in the country). The fund transfer mechanism established between PAF and the RBB is working well.

20. In the name of each community receiving sub-project grants, two accounts are opened in the RBB branch: (i) the Non-operating Account, where amounts committed for the year are deposited as an advance; and (ii)the Operating Account where amounts are transferred only after the payments are due after PAF tranche release criteria have been met. Some modifications for improving the operations are now being implemented and the same mechanism will continue in expanded districts under PAF II.

Financial Accounting and Reconciliation of Accounts

21. PAF will maintain books of accounts and prepare accounts on a cash basis. Accounting information will be maintained in the Financial Management Information System (FMIS) which has been recently developed. PAF will maintain Main Grant Ledger, Subsidiary Grant Ledger, Withdrawal Monitoring Register, Special Designated Accounts Ledger and other ledgers. Activity-based subsidiary record for monitoring the detail accounts/key indicators will also be maintained. The accounting systems contain the following features: (i) application of consistent cash accounting principles for documenting, recording, and reporting its financial transactions; (ii) a well-defined chart of accounts that allows meaningful summarization of financial transactions for financial reporting purposes; (iii) maintenance of withdrawal monitoring register and Designated Accounts register; (iv) the asset register; (v) monthly closing and reconciliation of accounts and statements; and (vi) the production of annual financial statements.

22. PAF reconciles their accounts with the balances released to Non-operating Accounts on a monthly basis. Only amounts that are paid to communities after the delivery of specified outputs required for tranche release are eligible for IDA financing. Because the GoN is pre-financing all community-based expenses, only amounts that are transferred to operating accounts are claimed from designated account after verifying and ascertaining the eligibility of expenditures. Funds released to Operating Accounts and total funds transferred from the Designated Account to GoN’s Treasury are also periodically reconciled. There is minimal risk to IDA funds because the GoN is pre-financing all expenditures by the communities. There is no risk for GoN to pre-finance as the two trimester program advances are provided to the Designated Accounts maintained in US Dollars at the Central Bank.

Financial Management Staffing

23. PAF Accounts and Administration Unit is currently staffed with one Unit Chief who is supported by one temporary Accounts Officer and three temporary Assistants. In the context of scaling up through additional financing, it was part of the Action Plan that PAF would have a total of two Accounts Officers and three Accountants. Due to the recent lapse in existence of the PAF Board, PAF was unable to take decisions on new recruitments. Now that the PAF Board is in place and has approved all additional positions, the recruitment process has already begun and they are expected to be fully on board by negotiations. These numbers would be adequate to cover the expansion to 40 districts for FY2007/08. For further expansion beyond FY2008/09, PAF is commissioning an organizational study through a competent firm to assess the needs for organization scaling up including human resources. Based on the findings of this study, PAF is committed to add more FM resources as per the recommendation.

Internal Control and Audit

24. To strengthen the internal control framework, PAF has already applied new procedural controls to improve management of advances and transaction documentation. PAF has recently updated the Operations and Financial Management Manuals to support the scaled up activities. Based on these new updated Manuals, PAF has completed training programs in 18 districts and the training will continue on an ongoing basis in other districts. These training programs were targeted to the POs and COs. PAF has also implemented the Management Information System (MIS) and Contract Monitoring System. Internal auditors have been appointed, their terms of references have been reviewed by IDA, and reports are submitted to the Board on a trimester basis. PAF will ensure that internal audits are completed on time, the financial statements are timely prepared, and that the external auditors are invited on time. Some of the observations based on recent internal audit reports are the need to improve documentation as per the Financial Management Manual, to improve the asset management to ensure timely physical verification, and the need to develop guidelines/checklist for Portfolio Managers to ensure uniformity in filing and documentation. PAF has committed to act on these observations.

Project Implementation Progress Reports (IPRs)

25. Total project costs for PAF II are estimated around US$109 million of which IDA contribution is US$100.0 million and government counterpart contribution for incremental operating costs is US$1.0 million. IDA will finance 100% of eligible expenditures for conditional Block Grants to COs and POs and for program support costs for PAF, and 80% for incremental operating costs, which will be reflected in the Financing Agreement.

26. The interim Financial Reports of the Project Implementation Progress Reports will report total investments inclusive of IDA contribution and government contribution to be separated by specific activity so that total investments as envisaged can be tracked and monitored. PAF will produce from the outset project implementation progress reports, showing the sources and uses of funds, output monitoring report, procurement management report and narrative progress report in formats to be agreed upon during negotiations. To match the public sector planning and reporting cycle, the IPRs will be produced on a trimester basis and submitted within 45 days from the end of the preceding trimester.

External Audit

27. The following summarizes the audit requirements under the Project:

Annual consolidated project financial statements and Designated Accounts will be audited by OAG under the same TOR already agreed for phase one, which is considered acceptable by IDA for this purpose, and submitted to IDA within six months after the end of the fiscal year – January 15.

This audit report would be monitored in the Audit Report Compliance system (ARCS): Implementing Audit Auditors Audit Due Date Agency PAF Project Consolidated OAG 6 months after the Financial Statements end of fiscal year and PAF Board Entity (January 15th) Financial Statements

Social audits of the CO accounts take place in the form of displays in the Board or summaries in community meetings. Final audits of CO activities to be carried out by local registered auditors are required after the completion of sub-projects. POs are also required to submit their audit reports, and they are one of the selection criteria for organizations to be included in the project. These reports are being regularly submitted.

Performance Audit

28. There is an arrangement for periodic performance audits to measure actual performance against expected outputs and outcomes. As mandated by the Interim Constitution of Nepal, the Office of the Auditor General will carry out the Performance Audit periodically. OAG is carrying out the first performance audit of PAF this fiscal year, with the report expected in 2008. GoN commits to provide sufficient resources to OAG for carrying out these performance audits. This money will be in addition to countepart financing.

Financial Management Action Plan

29. An action plan to further strengthen the financial management capacity of PAF was agreed between the Recipient and IDA and is summarized below:

Financial Management Action Plan

Action Responsibility Completion Date 1. Initiate the process of recruitment of other approved PAF March 31, 2008 positions (that include Portfolio Managers, Environmental Specialist, Procurement Specialist, Civil Engineer, MIS Assistant etc.) and have them on board as early as possible. 2. Submit the Plan for PAF Reorganization and Scaling PAF March 31, 2008 up including additional human resources based on the recommendations of the Study being commissioned by PAF for IDA’s review.

Disclosure of Information and Corporate Governance (i) The recent promulgation of the Rights to Information Act, 2007 should facilitate compliance by PAF with project disclosure requirements. PAF has already established its own website: http://www.pafnepal.org.np, which includes the operational guidelines, format for proposals, and other key information about the program. PAF has posted the list of all approved sub-projects with details of sub-project descriptions and approved amounts in the website. In addition, PAF has established a mechanism for Display Boards at community level to publicly disseminate the information on community sub-projects. PAF publishes its Annual Report, which is posted on the website and widely disseminated. PAF also runs a Radio program on a weekly basis, and a Television program on a fortnight basis to disseminate its programs widely. PAF will continue all these initiatives and has agreed to the following disclosures on its website: (1) agreed Procurement Plan; (2) Procurement Complaints Mechanism; (3) Trimester Implementation Progress Reports (approved versions); (4) all Expressions of Interest, Bid Documents, Requests for Proposals, Minutes of Pre-bid Conferences, contract award details; and (5) Annual Audited Financial Statements.

Supervision Plan 30. Project implementation progress will be closely monitored by PAF and IDA. This will include supervision by IDA of financial management aspects of fiduciary arrangements. In the early stages, FM supervision activities will focus on the adequacy of Action Plan items designed to support the scaling up under PAF II. As the implementation moves forward, desk reviews of internal, external, social and performance audit reports will be conducted. PAF will report on project implementation progress through a trimester report, the IPRs. Key FM fiduciary work will include: (i) review of compliance with all FM covenants, (ii) review of compliance with PAF’s Operations and Financial Management Manuals, (iii) review of PAF’s Contract Management System, (iv) review of implementation progress reports and audit reports and preparing summaries of such reports; and (v) participation in site visits as needed to review internal control procedures and practices. Full FM supervision will take place twice a year to be aligned with the main PAF II supervision missions. The following actions will be closely monitored during supervision: Financial Management Actions Action Responsibility Completion Date 1. Review the re-organizational plan and provide IDA April 30, 2008 comments; carry out the fiduciary risk assessment of the proposed scale-up before the plan is implemented. 2. Customize the existing Financial Management PAF December 31, Information System (FMIS) to generate Financial 2007 Monitoring Reports as required under IPR. 3. Update and maintain asset register and complete PAF December 31, verification of assets through internal auditor, and 2007 develop guidelines for Portfolio Managers for ensuring consistent documentation. 4. Provide orientation and training to core PAF and IDA During Project implementation team. Launch

Disbursement

Allocation of grant proceeds (Table C)

31. Disbursement under proposed Grant will be made as indicated in Table C below. It is expected that IDA funds will be disbursed over a period of four years. The fiscal year disbursement estimate is provided in the project datasheet of the PAD. The Closing Date of the Grant is September 30, 2012.

Table C: Allocation of Grant Proceeds

Expenditure Category Amount in US$ Million Financing Percentage

1. Block Grants 77.0 100% (Community Organization and Partner Organizations)

2. Program Support Costs 15.0 100% to PAF (services, goods, training) 3. Incremental operating 4.0 80% costs of PAF 4. Unallocated 4.0 Total 100.0

Disbursement Arrangements

32. Disbursements by IDA will be report-based from the beginning of the Project. To facilitate disbursements, a special Designated Account will be established.

Designated Account

33. A Designated Account in US Dollars will be established at the Nepal Rastra Bank for utilization of IDA’s share of project expenditures, on terms and conditions satisfactory to IDA. The authorized ceiling for the Designated Account will be equivalent to two trimesters’ worth of cash requirements as per approved annual work programs and budgets. Actual expenditures will be accounted in each trimester report, and then adjusted against the next trimester’s cash requirement, to determine the need for further advance deducting the actual expenditures reported during the trimester, or recovery of expenditures, if there are enough cash balances in the accounts, on a trimester basis that is, three times a year.

34. The Designated Account will be operated under joint signatures of the Executive Director and the Chief of Administration and Finance Division.

35. PAF will ensure that the bank/cash books are reconciled with bank statements every month. They will separately submit replenishment applications for their Designated Account on a trimester basis, and replenishment applications will be accompanied by reconciled statements from the bank in which the account is maintained, showing Designated Account transactions. Supporting documentation will be maintained by the respective cost centers for at least one fiscal year after the year in which the last disbursement from the grant took place, and will be available for review by IDA staff and independent auditors.

Attachment

Financial Management Risk Rating Summary Risk Previous Residual Assessment Risk Risk Mitigating Measures Risk H S ML Assessment

INHERENT RISKS

Country level X H M - Quality of PFM institutions (see Implementation of CFAA, CPAR PEFA-PMF,CFAA, CPAR, CPIA and action plan; PFM sector work and other diagnostics), standard of financial implementation of actions; country accounting, reporting and auditing, dialogue quality of FM profession. Entity level X M IDA to closely monitor M - Independence of entity’s management, implementation of recommendations appropriateness of the organizational of the Organizational Review for structure, impact of civil service rules scaling up, including human resource aspects.. Project level X M L - Relative size of the Bank loan/grant, Full recruitment of essential staff and type of lending instrument, complexity of implementation of organizational and the project (e.g. sectors involved, number human resource recommendations of of implementing and sub-implementing the Organizational Review. entities, multi-donor etc.) OVERALL INHERENT RISK X M Implementation L of Action Plan

CONTROL RISKS

(i) Budget X M L (ii) Accounting X M Application of FMIS and L customization of FMIS to produce Financial Monitoring Reports Internal Controls X M Segregation of duties and monitoring L of procedures; improvements in asset management and physical verification; improvements in documentation and compliance with PAF FM Manual. Funds flow X M L (iii) Financial Reporting X M L (iv) Auditing X M Better coordination and proactive L action for meeting the audit deadline within 6 months after the end of fiscal year. L OVERALL CONTROL RISK

1 0 7 2 M MODEST RESIDUAL RISK RATING

H – High S – Substantial M – Modest L – Low

Annex 7: Procurement Arrangements NEPAL : POVERTY ALLEVIATION FUND PROJECT II

1. Procurement for the proposed project would be carried out in accordance with the Guidelines: Procurement Under IBRD Loans and IDA Credits dated May 2004 (Revised October 2006); and Guidelines: Selection and Employment of Consultants by World Bank Borrowers dated May 2004 (Revised October 2006), and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Grant, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. Since this is a community demand driven project for which most procurement will be done under sub-projects executed by the communities, the Procurement Plan includes only information on the central level procurement to be carried out by the PAF Board over the next three years. This plan will be updated at least annually, or as required to reflect the actual project implementation status and needs, as well as improvements in institutional capacity.

Procurement Arrangements

1. At the community level:

2. The grant would finance small value sub-projects under the two main project components of Income Generation Activities (which include construction of micro-irrigation schemes; setting up of animal husbandry services or micro-enterprises etc.) and Community Infrastructure (such as construction of engineered foot trails and footbridges, small works in the community school or sub-health post etc.) In light of the small values of the sub- projects, discussed in the next para. below, procurement of works and goods shall be done through direct contracting or shopping procedures detailed in the instructions, standard forms and contract formats contained in the updated Operational Manual which are based on the procedures in the latest version of the Nepal Public Procurement Law and related Regulations. The Manual will be agreed with IDA and, to make it user friendly, all instructions forms etc. will be made simple and easily understandable, and if required, translated into the applicable local languages.

3. Grants for Community Sub-projects (US$ 77 million): The project will finance grants for small sub-projects proposed by groups of poor rural people, such as village approaches or link roads, community halls, watershed development, strengthening of health care centers, improving animal health and upgrading breeding facilities, drains, minor irrigation works, wells, drinking water arrangements, and so on. The average value of the sub-projects would be about US$8,000 and the maximum would not exceed US$50,000 equivalent. In all, PAF II would finance about 7,000 sub-projects. Procurement would be in accordance with para 3.15 of the Guidelines, which deals with Community Procurement, and the following:

4. Works: (a) direct contracting with registered NGOs or local community organizations; (b) lump-sum fixed-price unit rate contracts with qualified contractors awarded on the basis of quotations obtained from at least three qualified local contractors in response to a written invitation; or (c) communities carrying out the works themselves and obtaining technical/managerial assistance from government agencies or NGOs or hiring services of individual experts.

5. Goods: The goods estimated to cost less than US$2,500 per contract may be procured through Direct Contracting procedures. Goods estimated to cost less than US$ 25,000 per contract shall be procured under Shopping procedures by inviting at least three quotations using the forms and formats provided in the Community Manual.

6. Services: The sub-projects may also include the hiring of services for training of community members, where these would be managed by the communities themselves. Such services may be procured on a sole-source basis through negotiations with local NGOs/POs at prevailing rates.

2. At the central PAF level

7. Works: The project will not support any civil works construction at this level.

8. Goods, Equipment, Furniture and Supplies (US$1 million): These shall include office equipment such as computers, printers, furniture and furnishings, vehicles, and so on.

9. International Competitive Bidding (ICB): All ICB procurement related to project activities to be financed under the Grant would be procured in accordance with the procedures in the Guidelines for Procurement under IBRD Loans and IDA Credits (May 2004, revised October 2006) using the Bank’s Standard Bid documents. Each contract for Goods with an estimated value that exceeds US$ 200,000 equivalent shall be procured through ICB.

10. National Competitive Bidding (NCB): Goods estimated to cost less than the equivalent of US $200,000 per contract (e.g., furniture, computers and peripherals, office equipment, training equipment etc.) may be procured following NCB procedures in accordance with national procedures as defined by the Public Procurement Law and its related Regulations, and using bid documents reviewed by and agreed with IDA.

11. International or National Shopping : Goods (including vehicles) estimated to cost less than US$25,000 per contract (e.g., small items of equipment, urgent requirements of computers, audio-visual equipment, furniture, etc.) may be procured by the PAF in small lots through Shopping procedures as prescribed in the Public Procurement Law and its related Regulations.

12. Direct Contracts: Proprietary items, urgent requirements etc. may be procured through direct contract procedures with prior review and clearance by IDA.

13. Training and Consultancies (US$ 13 million): In addition to hiring the services of NGOs or firms for conducting workshops and/or training activities, this will include hiring firms and individuals for technical assistance, media consultancy, studies, monitoring, quality supervisors for community works, NGOs and Partner Organizations. Other than assignments requiring international consultants, consultants may be hired using procedures as defined by the Public Procurement Law and its related Regulations, using documents agreed with IDA. International consultants shall be hired using procedures which are in accordance with IDA Guidelines for the use of Consultants (Guidelines for Selection and Employment of Consultants (May 2004, revised October 2006).

14. Procurement of local consultants shall be as per the following selection methods following procedures defined in the Public Procurement Act and related Regulations using documents approved by IDA.

15. Technical assistance, media consultancy services would be mainly procured using Quality- and Cost-based Selection (QCBS) procedures.

16. For contracts with consulting firms/institutions valued below US$100,000 equivalent per contract, the methods of selection may either be QCBS, consultant’s qualifications or Single Source Selection based on the appropriateness of the procedures relevant to the requirements.

17. For contracts with COs and POs estimated to cost less than the equivalent of US$100,000 per contract, the selection methods may be either Consultants Qualifications or Single Source Selection. For Individual consultants, no contract shall exceed US$50,000 equivalent per contract.

18. For consultancies estimated to cost US$200,000 or less, the shortlist can comprise entirely national consultants.

19. Operating Costs: Incremental operating costs, such as rentals and utility costs, salaries of contract staff, office consumables, vehicle rentals etc. would be financed by the project and procured using the implementing agency’s administrative procedures (which are as mandated by the Procurement Act and related regulations) and which have been were reviewed and found acceptable to IDA.

Institutional Capacity and Procurement Risks

20. PAF is an autonomous agency which has developed experience with procurement under IDA-financed projects because it has been the implementing agency for the earlier PAF Project and associated Additional Financing. However, procurement by PAF itself will account for only a small portion of total PAF II expenditures – with the majority being allocated for small sub-project grants at community level. This being a community-driven project, the bulk of the procurement, comprising over 95% of the project cost, will be undertaken at the community level by eligible beneficiary groups - comprised of

poor/marginalized people – who will be responsible for the implementation of their sub- projects. As discussed above, these will involve primarily small works, very small value goods and, to a small extent, services. The project design requires beneficiaries to contribute 10% of the total estimated cost of the sub-project, and this provides a strong incentive for beneficiaries to be prudent when carrying out procurement relating to their sub-project. Nevertheless, as beneficiaries do not have experience of or knowledge of the requirements for community procurement, there is a potential risk given the large volume of contracting at the community level.

21. Therefore, the project needs a two fold strategy to ensure that community procurement is carried out efficiently and transparently. For this it is necessary to build up the procurement capacity of the target beneficiaries and POs, and to institute strong monitoring mechanisms. This shall be achieved through:

(i) Updating of the project Operational Manual so that it contains simple instructions on how beneficiaries shall carry out their procurement, simple forms etc. (e.g. for quotations) to be used by the beneficiaries, and simple reporting formats;

(ii) Implementation of a sustained information and education campaign: PAF will employ firms/NGOs to develop and conduct a regular series of workshops, seminars and interaction programs for all entities involved in the implementation of the project;

(iii) Hiring of a Procurement Officer the central PAF level: This officer shall be well versed in the national procurement procedures as prescribed in the Public Procurement Act and its related Regulations, be conversant with IDA funded procurement as well as with community procurement in CDD projects. The Procurement Officer will be responsible for hiring consultants/NGOs to update the project Community Manual which will also be translated into Nepali or the relevant local language. This manual, and the information it contains, will be disseminated to all project participants (communities, local bodies, NGOs, and concerned PAF staff) through regular workshops and seminars to ensure that all stakeholders have a good understanding of their roles and responsibilities, including those regarding applicable procurement procedures; and

(iv) Incorporating into the project strong monitoring mechanisms, including social audits. This mechanism of social audit is all the more vital for the initial beneficiary procurement in new districts during the first 18 months of this four-year project to ensure that communities are properly oriented from the start, lessening the risk for misuse of funds.

22. Project design incorporates the above and also provides a detailed mechanism for procurement orientation and training of beneficiaries by NGOs, and for continuous monitoring and evaluation of project progress and status to ensure efficient completion of the project and achievement of its objectives through the use of a monitoring agency. The Terms of Reference for the agency conducting this monitoring will specifically include responsibility for regular reporting and physical verification of the assets created by

groups and the existence of effective O&M arrangements for the completed community sub-projects.

23. Procurement Risk: Based on the experience of past performance under PAF I and with the implementation of the measures recommended above, the overall procurement risk is rated as Moderate.

24. Procurement Planning. Since this is a community-driven project, the Plan does not attempt to list or pre-identify the sub-projects and provides only details of procurement activities to be carried out at the central PAF level, together with their estimated costs and procurement methods. However, the PAF Board has prepared, on September 26 2007, an overall Procurement Plan for is own procurement. A summary of the contracts to be procured by PAF (central level) over the next three years is given in the tables in the following pages.

Review requirements

(i) Goods: All ICB contracts, each contract for goods or works estimated to cost US$100,000 equivalent and above, and all single source/direct contracts estimated at US$5,000 equivalent and above shall be subject to prior review.

(ii) Consultants: Each contract for consulting services with firms following QCBS, QBS or other competitive selection estimated at US$150,000 equivalent and above; all contracts procured using CQ or single source selection methods that are estimated at US$50,000 equivalent and above, and all contracts with individuals valued at US$15,000 equivalent and above shall be subject to IDA’s prior review.

(iii) Post review of sub-projects: During the second and fourth years of the project, an independent agency shall be hired by PAF to carry out post review of Procurement carried out by the recipient beneficiaries on a sample basis – the sample size being 10% of the sub-projects being implemented.

Frequency of procurement supervision missions proposed: i) By IDA: Once every 4 months during the first year of the project, and once every 6 months thereafter; ii) Special procurement supervision for post-review/audits by independent review firms: during the second and fourth years of the project.

Procurement methods (Table A) A.1 Procurement Packages with Methods and Time Schedule: Goods 1 2 3 4 5 6 7 8

S. Contract Estimated Procure Prequalif Domestic Review Expected No. Description Cost ment ication Preference by Bank Bid- (US$) Method (yes/no) (yes/no) (Prior / Opening Post) Date 1 Office Equipment: 2007/08 45,563 NCB N N Post Dec 07 2008/09 118,281 NCB N N Prior Nov 08 2009/10 47,969 NCB N N Post Nov 09 2010/2011 23,359 NS N N Post Nov 10 2 Generator 23,500 NS N N Post Jan 08 3 Internal Communication System 2008/09 6,250 NS N N Post Jan 08 2009/10 3,125 NS N N Post Nov 09 2010/2011 3,125 NS N N Post Aug 10 4 Other Equipment (projector, photocopier, scanner etc.) 2007/08 7,813 NS N N Post Jan 08 2008/09 15,938 NS N N Post Sep 09 2009/2010 7,800 NS N N Post Aug 10 5 Four Wheel Drive 2007/08 281,250 ICB N N Prior Feb 08 2008/09 281,250 ICB N N Prior Aug 09 6 Motor Cycle 2008/09 4,000 NS N N Post Jan 08 2009/10 2,000 NS N N Post Sep 09 2010/11 20,500 NS N N Post Sep 09 7 Bicycle 2008/09 400 NS N N Post Sep 08 2009/10 800 NS N N Post Sep 08 2010/2011 150 NS N N Post Sep 08 8 Furniture Nov 08 2008/09 22,000 NS N N Post Nov 08 2009/10 3,000 NS N N Post Sep 09 9 Miscellaneous small items 2008/09 24,200 NS N N Post 2009/10 101,000 NCB N N Prior 2009/10 41,000 NCB N N Post 2010/2011 18,000 NS N N Post

A.2 Consultancy Assignments with Selection Methods and Review Requirements [PAF II will cover all the 75 districts of Nepal. Since local consultants do not have the capacity to take on any assignment that covers all these 75 districts, and many assignments need to be repeated annually, the table below identifies only the type and number of expected contracts over the project duration, and review requirements.]

Expected Total Average Review Procurement Total No. Est. Cost Assignment Description cost of Requirements Method of contract Contracts USD CO PO Training and Material QCBS/CQ First two contracts 1 development 48 1,538,462 32,000 each year Capacity Building Support to QCBS/CQ First contract each 2 Local Bodies 12 230,769 19,000 year Capacity Building Support to MFIs QBS/CQ No 3 3 76,923 26,000 QCBS/CQ/Sole First contract each Source/Individual year, and all Baseline and Impact Evaluation contracts over 4 10 769,231 77,000 $ 100,000 QCBS/CQ/Individual First contract each Technical Appraisal, Monitoring year, and all and Support contracts over 5 8 715,769 90,000 $ 100,000 QCBS All contracts 6 Environmental Assessment 3 603,769 201,000 QCBS/CQ/Individual All contracts 7 Monitoring and Evaluation 9 1,980,569 200,000 QCBS/CQ/Individual First contract each Studies and Research year, and all contracts over 8 15 1,206,153 80,000 $ 100,000 QCBS/CQ/Sole First contract each Communication, Publication and Source/Individual year, and all Dissemination contracts over 9 6 605,308 100,000 $ 100,000 GIS/ MIS Development QCBS/CQ/Sole 10 Source/Individual 6 769,231 125,000 All contracts Manual Development Update QBS/Sole First contract each 11 Source/CQ 9 327,692 39,000 year QCBS 12 Audit 9 906,154 100,000 All contracts CQ/Least cost/ Sole Legal Support Source/Individual 13 3 76,923 26,000 None CQ/Least cost/ Sole Divisional Support Source/Individual 14 6 76,923 12,600 None

Annex 8: PAF I Results and Economic Analysis NEPAL: POVERTY ALLEVIATION FUND PROJECT II

1. After nearly three years of implementation, PAF has achieved notable results on the ground. It has entered into 5,424 community agreements and 166,474 households26 with about 915,607 people are benefiting from the program. PAF is proving to be especially effective in targeting the extreme poor, including traditionally marginalized and excluded groups. According to available evaluation data, the share of PAF beneficiaries who are classified as hardcore (extreme) poor is 70%, while the proportion of hardcore poor (HCP) in the project area is 13%.

2. Support for the PAF program is strong and growing, largely owing to its success in reaching the poor and excluded, its demand-driven nature, and the emphasis it places on local priority setting and decision making. To date, PAF has supported both small-scale community infrastructure sub-projects (micro-irrigation, link roads, culverts/bridges, micro-hydro, water supply, sanitation, schools and health posts) and income generation activities (agriculture, livestock, cottage industries, trade and services). Preliminary evaluations indicate good rates of return on these investments, ranging from 20-25%. Annual per capital incomes for beneficiary families have increased by 10-15 %. More details on these achievements are as follows:

Infrastructure Activities • More than 23,800 households, or about 130,900 people, have benefited from productive community infrastructure projects including road access for 15,605 households, irrigation schemes for 7,544 households (hhs) and other small-scale productive infrastructure such as rice mills, milk chilling centers, etc. • More than 32,100 households or about 178,550 people, have benefited from other community infrastructure projects including water supply for 8,407 households; culverts for 6,819 hhs; toilets for 3,367 hhs; bridges for 2,989 hhs; micro-hydro schemes for 2,178 hhs, electricity lines for 1,404 hhs and diverse investments in activities such as solar energy systems, hume pipes, waste disposal sites, etc. Income Generating Activities • Opportunities for enhanced income generation have been provided for 13,400 households working in agriculture-related activities, more than 84,300 hhs working with livestock, more than 40,400 hhs working in manufacturing, and 12,200 hhs engaging in trading and more than 4,300 in skills-based services. • More than 100,000 beneficiaries have received skills development training related to their IGA/enterprise and in leadership • 30,000 beneficiaries have received capacity building in areas of accounts keeping/FM, savings and credit mobilization and other technical areas relating to sub-project planning and implementation

26 One household = 5.5 people

Social Service Activities • More than 4,700 hhs are benefiting from PAF investment in social sector services such as school furniture and maintenance, improved stoves, and improved health and sanitation facilities, education scholarships, disability assistance, etc. 3. PAF focuses on the rural poor by targeting disadvantaged and marginalized groups, operationalizing a commitment to reach poor and excluded groups as articulated in the PRSP, increasing employment and income opportunities through community-driven sub- projects, and building the capacity of various stakeholders, including beneficiary groups and local bodies. Economic opportunities from sub-projects are but one of the project's outcomes. Due to its demand-driven character, the project does not lend itself easily to detailed ex-ante cost-benefit analysis and rate of return calculations. Moreover, experience in CDD-type projects suggests that investments chosen by poor communities are often not those that would appear to have the most immediate economic payoffs, such as increasing productivity of assets. Instead they often choose first investments that help reduce migration of household members, improve the conditions for children to attend school and enhance their food security.

4. A range of different income generation and infrastructure sub-projects are proposed and implemented by the communities. Income generation activities have included agriculture, livestock, cottage industries, trade and services. Infrastructure activities have included micro-irrigation, link road, culvert/bridges, micro-hydro, water supply, sanitation, school and health post buildings. Although a final impact evaluation has not yet been done for PAF I, some indications of what may be expected in terms of results can be discerned by looking at comparable projects elsewhere in the South Asia region. The recently completed impact assessment for the Madhya Pradesh District Poverty Initiative in India has recently shown, using panel data, that the average income increase of beneficiary households has been 29% higher than those of the control group. Such panel data is not yet available for PAF, but effectiveness of the project to date can be assessed in terms of equity, efficiency, and empowerment:

5. Equity: PAF’s targeting has been successful. PAF has been able to identify, include and benefit the poorest of the poor. Direct beneficiaries of the project include a very high proportion (over-representation) of the poorest and most vulnerable communities in Nepal – dalits (former low caste groups), janajatis (a range of ethnic minorities) and women. For janajatis, the success in targeting is due to the geographic distribution of the chosen project districts. More remarkable has been the degree to which dalits have become members of community organizations. The difficulty in reaching dalits is that they do not live geographically separate from other castes. Therefore, to reach them it is necessary for the communities themselves to identify the lowest caste members as well as the poorest. The social mobilization feature of the PAF has been particularly successful in achieving this. To date, 94% of PAF beneficiaries are classified as poor, as determined by the well-being ranking assessed by the communities themselves. Thus far, 43% of beneficiaries are dalits and 35% are janajatis; although these two groups account for only 15% and 23% respectively, of the actual population in the six PAF districts.

Furthermore, a review by IDA of a sample of approximately one-fourth of all PAF Community Organizations (COs) and their settlements found that while 53% of the settlement populations were “hard core poor,” 66% of the CO members in those same settlements were “hard core poor”. Within the same communities, over 76% of the hard core poor were covered by PAF. This evidence suggests that PAF has been quite successful in avoiding the risks of elite capture.

6. Evidence is provided by the baseline data from the formal impact evaluation of the program as a whole. PAF categorizes people into four groups: hard core poor (those with less than three months of food security – either via own production or other dependable sources of income); medium poor (3 to 6 months of food security); poor (6 to 11 months of food security) and non-poor (12 or more months of food security). Routine monitoring data from the project show that 70% of CO members are among the hard core poor – category Ka. The baseline survey data shows that only 13% of the people in the original six districts fall into this category. In other words, although only about one in ten Nepalese are hard core poor, nearly seven out of ten PAF beneficiaries are hard core poor (Figure I).

Figure I PAF's Targeting Efficiency (over 70% of PAF participants are hardcore poor; only 13% of people in PAF districts are hardcore poor. Source: PAF Baseline) 80

30 Percentage of population 20

0 Hardcore Poor (less than 3 months Medium Poor (3 to 6 months of food Poor (6 to 12 months of food Non-Poor of food sucfficiency) sufficiency) sufficiency)

PAF districts Were you asked about development projects?

7. Further, these districts are, themselves, among the poorest in the country so that the nation-wide figure of hard core poor is lower than the 13%. This underscores the effectiveness of PAF targeting.

8. Efficiency: Given that PAF has only started to reach the beneficiaries in the last couple of years, it is difficult to measure its economic impact very precisely. The latest Nepal Living Standard Survey (NLSS) and current PAF Management Information System (MIS) data have been used to estimate the return to livestock purchases – by far the most

common income generation sub-project selected by COs, representing about one quarter of all PAF sub-projects. The results indicate a sustained increase in income to these households of about 10%-12%, which translates to about a 20%-25% rate of return. If there were no PAF, the only finance available to these households would be through informal credit markets charging interest rates close to 30%-40%, as reported in the 2006 joint World Bank/DFID/ADB Poverty Assessment for Nepal. So, PAF has helped poor people who are blocked from undertaking highly productive investments through limited access to rural finance. Furthermore, the sub-projects were chosen by the communities and therefore are likely correspond better to local priorities than many nationally designed projects, a dimension of efficiency rarely captured in standard “analyses” even though it is an elementary property of returns to either public or private goods.

(ii) Empowerment: Although more difficult to measure than efficiency and equity, there are indications that PAF is also having an impact on empowerment. As indicated above, partial data collected by PAF shows that excluded groups (dalits and janajatis) are strongly represented in the leadership structure of COs. The same is true of women, who account for over one-third of Chairpersons, 43% of Secretaries, and 60% of Treasurers (the latter’s signature is required to open a CO bank account).

9. Further, PAF is giving voice to the poorest, using a well defined measure of empowerment. The baseline survey illustrates success in achieving this. One question of the baseline survey was: “For any development project in your area, was your advice ever sought?” For people with twelve months of food security, the proportion of “yes” answers was over 40%. For people in the hard core poor category, it was less than 8% (Figure II). Since the Community Organizations decide on the projects themselves, their “advice” is always sought in PAF projects – the decisions lie entirely with them. The project is dramatically different from previous government programs in its performance on this well defined measure of “empowerment”. The figure shows that PAF successfully involves the poor who rarely had a voice in development.

Figure II PAF Empowerment (PAF empowers the bottom 70% who are rarely consulted in development projects) Source: PAF Baseline 80

30 Percentage of Population of Percentage 20

0 Hardcore Poor (less than 3 months Medium Poor (3 to 6 months of food Poor (6 to 12 months of food Non-Poor of food sucfficiency) sufficiency) sufficiency)

PAF district participants Consulted on development projects

10. Target populations continue to benefit. There are few, if any, examples of programs world-wide that come close to this standard of targeting.

Annex 9: Safeguard Policy Issues NEPAL: POVERTY ALLEVIATION FUND PROJECT II

1. Safeguard Assessment Process

1. In addition to the Operational Manual, PAF follows an Environmental Management Framework (EMF) consisting of an Environmental Screening Procedure, Sectoral Environmental Guidelines, and a Negative List of sub-projects that are not supported. During preparation of PAF II, an Environmental Assessment was undertaken, consisting of a review of the effectiveness and efficiency of the design and implementation of the EMF prepared for the first PAF project, subsequent revisions to the EMF, and enhancement of EMF procedures to support PAF’s operations in protected areas. The Environmental Assessment also reviewed the capacity within PAF for effective implementation of the EMF, and arrangements for the independent audit of environmental management in PAF operations.

2. Based on this review, it was agreed that the EMF should be revised to (i) simplify the screening of community projects, (ii) provide more directly relevant advice for the mitigation of environmental impacts, and (iii) allow PAF to expand operations into protected areas.

3. The simplification of the screening process was achieved by replacing the previous screening matrix, because experience during the first phase of PAF operations indicated that the capacity of partner and community organizations to consider the environmental impacts of proposed sub-projects and environmental sensitivity of proposed locations had been over-estimated. Consequently the matrix was replaced with the following questions and instructions in the standard community organization project concept document:

• Is the proposed activity included in the list of activities in the PAF environmental guidelines for which an IEE or EIA is required under national legislation? • If so, please contact the PAF Portfolio Manager or Environmental Specialist for assistance. • Is a PAF environmental guideline available for the proposed type of activity? • If so, which of the recommended mitigation measures have been incorporated into the design of the proposed project? • If not, please contact the PAF Portfolio Manager of Environmental Specialist for guidance.

4. In order to provide partner and community organizations with more directly relevant advice for the mitigation of environmental impacts associated with PAF-supported projects, simple environmental guidelines have been prepared for the second phase of PAF operations, covering 30 of the most common sub-project types. The key feature of the revised system is a set of environmental guidelines specific to the types of project being demanded through PAF, which provide guidance on environmental risks and mitigation measures in a form understandable to COs. The emphasis of the revised guidelines will be on the provision of information, rather than requesting information

from COs. For infrastructure projects, the environmental guidelines refer to the relevant technical guidelines adopted by PAF (see Attachment 1). These guidelines will be provided to partner organizations in the form of a ring-binder so that additions and updates may be easily inserted.

2. Safeguards-Related Risks and Mitigation Measures

The list of projects supported by PAF to the end of February, 2007, indicates the following distribution among project categories by value:

• Animal husbandry – 48% • Social infrastructure – 16% • Trading – 9.5% • Income-generating infrastructure – 7.7% • Agriculture – 6.4% • Manufacturing – 1.1%

Of these categories, animal husbandry and infrastructure are the most likely to generate environmental impacts. Within these, the most common activities have been the following: • Animal husbandry – goats (45%), buffaloes (32%); • Social infrastructure – water supply and sanitation (17.3%), road improvement (15.7%), micro-hydel (13%), toilets (10%), hand pumps (10%); • Income-generating infrastructure – road improvement (30.5%), irrigation (25.8%), culverts (15.8%).

5. This distribution of activities indicates that the most common forms of environmental impact are those associated with animal husbandry, in particular the grazing, fodder, water and waste impacts of goat- and buffalo-raising. It is worth noting that to-date PAF has financed the purchase of some 58,000 goats, under-scoring the need to consider the cumulative impacts of multiple animal husbandry projects.

6. While the first round of projects has focused on income generation, and in particular animal husbandry, CO plans and initial submissions for second round projects show a greater emphasis on infrastructure. Infrastructure projects are larger in value, and a review of the list of projects to July 2006 shows that the largest projects in the principal infrastructure categories have been of the following approximate values:

• Micro-hydro – $50,000; • Irrigation - $43,000; • Rural road improvement - $43,000.

7. The main environmental impacts associated with such infrastructure are (i) the temporary disruption and nuisances caused during the construction phase, and (ii) permanent resource impacts resulting from land acquisition, alterations to water flows and drainage, removal of vegetation, and changes in slope stability.

8. Mitigation measures designed to address the local and cumulative environmental impacts of PAF investments in income-generating and infrastructure sub-projects are set out in the PAF Environmental Guidelines. The application of these Guidelines is the principal objective of the EMF.

9. PAF I excluded activities within protected areas. The proposed scaling-up in PAF II includes expansion to communities in and around at least five protected areas in the mountain districts of Nepal (see below), for which specific operational procedures will be necessary.

Protected Areas Located in PAF II Project Area

N. Protected area District Village Development Committee 1. Lantang National Park Rasuwa Bhorle, Daibung, Yarsa, Laharepouwa, Ramche, Syanbrubesi, Dhunche, Chileme, Bridhim, Saramthali, Langtang 2. Rara National Park Mugu Shreenagar, Karkiwada, pina, Rara, Seri Jumla Malikabota 3. Shey Phoksundo National Park Dolpa Pahada, Phoksundo, Raha, Tripurakot Mugu Dolphu 4. Khaptad National Park Bajhang Dhangaji, Parakatne, Kotbhairav, Koiralakot, Pawagadhi, Lamatola,Majhigaon, Kalukheti, Patadevi Bajura Kanda, Jaya Bageswori, Dogadi Doti Gairagaun, Kadamandu, Daud, Toleni, Waglekh Achham Khaptad, Devisthan 5. Dhorpatan Hunting Reserve Rukum Ranmakot, Kankari, Takshara

Legislative and Institutional Context

10. The National Park and Wildlife Protection Act (NPWPA) and its Rules, particularly the Buffer Zone Management Rules (BZMR), and the Environmental Protection Act (EPA) and Environmental Protection Rules (EPR) are the basic legal instruments that are pertinent for PAF operations in and around the protected areas in Nepal.

11. Relevant Provisions of EPA/EPR: EPR Schedule-II Clause K (3) requires an Environmental Impact Assessment (EIA) for any proposal to be implemented in a National Park, Wildlife Sanctuary and Conservation Area. However, according to the EPR Schedule –I Clause A (12), an Initial Environmental Examination (IEE) would be sufficient in the case of “preparation of management plans of National Parks, Wildlife Sanctuary, Conservation Areas, and their buffer zones, or launching of development and construction activities specified in such plans”.

12. EIA is a long and costly process for the type of small-scale activities supported by PAF. Any EIA Report has to be cleared by the Ministry of Environment, Science and Technology (MoEST) following defined review and disclosure procedures. EPA/R authorizes the concerned ministry to approve IEE reports of the sector, and the Ministry

of Forest and Soil Conservation (MoFSC) is the concerned ministry for protected areas. Therefore, MoFSC is responsible for approving the IEEs of Management Plans of Protected Areas as well as their buffer zones. The MoFSC has delegated this authority to the Department of National Park and Wildlife Conservation (DNPWR) in the case of IEEs related to protected areas and their buffer zones management plans.

13. Relevant provisions of NPWPA, Wildlife Protection Rules and BZMR: NPWRA Clause 5, Wildlife Protection Rules Clause 6, and BZMR Clause 17 prohibit the following activities in the National Park or Wildlife Reserve including their buffer zones unless written permit has been obtained from the competent authority to do so. a. Hunting wildlife b. Construction of house, shed, shelter etc of any material and or shape or using them c. Occupation of land, cleaning, clearing, cultivation, growing crops or harvesting d. Grazing or watering domestic animals or birds e. Cutting, felling, removing, obstructing trees, bushes, plants or other forest resources, or activity that results in dying of forest resources or setting fire or any other damaging activities f. Quarrying, stone extraction, or removal of minerals, gravels, soil or similar materials g. Damage to forest products or wildlife, birds or land h. Bringing or use of weapons, explosives, or poison i. Taking domestic or other animals or animal products into the area except by the authorized person j. Damming or diverting river, stream or other water sources, or using weapon or explosive in these water sources. k. Camping or spending night or use of fire

14. Buffer Zone and Buffer Zone Management: The NPWPA and BZMR empower the Government of Nepal (GoN) to declare a buffer zone with defined boundary around a national park or wildlife reserve. A special feature of Nepal’s protected areas in the mountains27 is that there are settlements within their outer boundaries. Territories of these settlements are usually also declared buffer zones of that protected area. PAF expansion in the second phase will support communities in the buffer zones of the protected areas listed in Table 1.

15. Activities in a buffer zone are guided and controlled by the Buffer Zone Management Plan (BZMP) of the protected area. The Plan usually consists of four components: i) conservation, ii) income generation, iii) community development (including small scale infrastructure such as micro-irrigation, trails, suspension bridges etc), and iv) awareness. The Plan is prepared considering the environmental sensitivity as well as needs of the communities living in the buffer zone; and the buffer zone communities are actively involved in the Plan preparation process. A Buffer Zone Management Plan is revised every five years.

27 There is no settlement within the protected area in the Tarai (plain area).

16. Institutional Arrangements for Buffer Zone Management: the Buffer Zone of a protected area is divided into a number of units considering topography/ natural features, extent of area, settlements, and suggestions of local bodies and people living in the zones. A Users Committee (UC) is formed in each of the units. A Buffer Zone Development Council/ Committee (BZDC) is formed consisting of the chairs of the UC, and members of the BZDC chose a chairperson from among themselves. The warden of the protected area acts as its member-secretary. A UC may constitute a sub-committee or “functional group”, if necessary, in order to implement some specific activity.

17. A UC in its territory within the buffer zone is authorized, under the approved Management Plan, to issue permits such as grazing and access to Non-Timber Forest Products (NTFPs etc) and associated revenue collection, as well as implementation of community development activities. In the case of the core area of the protected areas, however, only the protected area authority is authorized to issue permits for grazing in or for access to forest products (collection of NTFPs, fodder, etc).

18. The legislation requires that 30 to 50 % of the revenue earned from the protected area be invested in community development in the area: distribution of this amount to different UCs is decided by BZDC (NPWPA Clause 25A and BZMR 26).

Procedures for PAF Operations in Protected Areas

19. In protected areas, as far as possible PAF will work within the system and institutional structure of the Buffer Zone Management program. PAF community organizations will be formed as sub-committees (or functional groups) of the UC as provided for in the BZMR. Besides harmonizing with BZMR and the protected area’s management plan, this will also ensure the group’s access to financial resources allocated to the UCs as per the legislation.

20. PAF will sign a Memorandum of Understanding (MoU) with the Department of National Parks and Wildlife Protection in order to implement PAF in the buffer zones of the protected areas. This will simplify the administrative procedures, avoiding the need for the Department’s approval for each activity in the buffer zone and also avoiding the need for separate environmental investigations for those PAF activities which are already included in the approved Protected Area Management Plans, for which IEEs are prepared as a regulatory requirement. At present, Management Plans of four of the protected areas listed in Table 1 (except Dhorpatan Hunting Reserve) are at different stages of review and approval, and their IEEs are also under review. In the case that PAF activities fall outside the approved management plan, PAF will consult with the protected area authority and DNPWP in order to determine the level and type environmental investigation required.

Dhorpatan Hunting Reserve – Support for Management Plan

21. A Management Plan for Dhorpatan Hunting Reserve has not yet been established. DNPWP already has experience in preparing such plans in other protected areas, and is

seeking funding to prepare one for Dhorpatan. Such a plan would be important for PAF operations in the area as this provides an accepted environmental framework in which to support poor communities in and around the reserve, and greatly simplifies the process of obtaining the necessary approvals for such operations. It is, therefore, in the interest of PAF to encourage and support DNPWP in accessing such resources, which would also strengthen the working relationship between PAF and DNPWP. At the request of PAF and DNPWP, IDA has agreed to explore the possibility of including in PAF II support for the development of a Dhorpatan Hunting Reserve Management Plan.

3. Stakeholder Consultations

22. During preparation of PAF I, several stakeholder workshops were held between December 2003 and February 2004 to develop the EMF. Government and community representatives, NGOs, PAF Board members and IDA staff discussed the roles of stakeholders, the operational rules of PAF implementation and identified the environmental guidelines for the project. These discussions led to the adoption of an EMF containing clear operational guidelines for environmental assessment, including checklists, a negative list, mitigation measures and guidelines for monitoring.

23. As PAF initiates activities in each new district, consultations are held with concerned stakeholders, including project management staff, NGOs, CBOs, and potential beneficiaries, with the objective of sharing information, including on EMF requirements. During the preparation of sub-projects, the CO is directly involved in the identification and mitigation of potential environmental impacts, and other potentially affected local groups are consulted.

24. PAF management has also consulted with DNPWP and IUCN-Nepal regarding the extension of PAF activities into protected areas.

4. Safeguard Capacity Assessment

25. To date, responsibility for environmental management in PAF operations has been held by the Division Chief for Community Infrastructure Development, supported by a team of consultants providing training to POs and monitoring implementation of the EMF. As PAF activities continue to expand, it has been agreed that it is necessary to appoint a full- time Environmental Specialist responsible for over-seeing environmental management in both income-generating and infrastructure projects. The PAF Board has approved the creation of this post and it is anticipated that an appropriately qualified candidate will be selected within the next few months, whose responsibilities will include oversight of:

• Training of Portfolio Managers and partner organizations in the application of the revised PAF EMF; • Monitoring the implementation and effectiveness of the revised EMF; • Any IEEs or EIAs necessary for PAF-supported projects; • Updates and revisions to the PAF Environmental Guidelines; and,

• Strategic guidance to PAF for the promotion of environmentally sustainable development.

26. During the first phase of PAF operations, consultants were retained as an Environmental Agency to lead the training and monitoring required for implementation of the EMF, as well as to conduct any IEEs or EIAs necessary for PAF-supported projects. As PAF expands, a new contract will be advertised for the continuation and expansion of these services, and consideration will be given to the possibility of retaining more than one Environmental Agency, with responsibilities for separate regions of PAF operations.

27. In the near term, the existing EA continues to train PAF Portfolio Managers in the use of the EMF in project design and implementation. This training is also used as an opportunity to seek the Portfolio Managers’ input in updating the environmental guidelines. Subsequently, the Portfolio Managers are responsible for training the POs within their districts in the application of the environmental guidelines, and the use of the new environment section in the project proposal format.

5. Funding of the EMF

• Master Plan for Dhorpatan Hunting Reserve - $100,000 • Environment Agency/ies - $300,000 • Environment Audit - $50,000 • Environmental Training - $50,000

6. Legal References to EMF

28. The Grant Agreement for the Project requires adherence to the PAF Operational Manual, of which the revised EMF forms an integral part.

7. Monitoring the Implementation of the EMF

29. The Environment Agency contracted by PAF will train POs in the application of the EMF, and will monitor their performance in this regard. The PAF Environmental Specialist will supervise the activities of the Environment Agency, will review the Environment Agency’s monitoring reports, and will provide summaries to IDA. These summaries will include a section that separately identifies the types, scale, and value of investments in protected areas.

Attachment

Technical Guidelines Applied by PAF

S. No. Name of Guideline Published by

1 Guidelines for ground water supply system, Survey, design and estimate. RWSSFDB, 2004

2 Guidelines for gravity water supply system, Survey, design and estimate. ,,

3 Technical options standard drawings and bill of quantities for rural water ,, supply system.

4 Engineering design of water supply and sanitation scheme. ,,

5 Quantity, cost estimate, specifications ,quality control and supervision for rural ,, water supply system.

6 Guidelines for household latrine construction. ,,

7 Guidelines for detailed feasibility studies of micro-hydro. AEPC, 2004

8 Guideline for Technical Design and Cost Estimation of Micro Hydro Project AEPC, 2000

9 Peltric Standards AEPC, 2000

10 Work norms for labor-based construction works of agricultural and rural roads DOLIDAR, 2002

11 Technical specification for labor-based construction Works of agricultural and ,, rural road

12 Technical guidelines on planning, design and construction of rural roads DOLIDAR 2005

13 Design Manuals for Irrigation Projects in Nepal (M.2 Survey and Mapping DOI, 1990 Manual)

14 Design Manuals for Irrigation Projects in Nepal (M.3 Hydrology and Agro- DOI, 1990 Meteorology Manual)

15 Design Manuals for Irrigation Projects in Nepal (M.8 Distribution System, DOI 1990 Canals and Canal Structures Manual, Part 2 Canal Structures Volume 1)

16 Design Manuals for Irrigation Projects in Nepal (M.10 Engineering Cost DOI 1990 Estimating and Economics Manual)

17 Rate Analysis Norms DOI 2002

Annex 10: Project Preparation and Supervision NEPAL: POVERTY ALLEVIATION FUND PROJECT II

Planned Actual PCN review April 2007 February, 2007 Initial PID to PIC May 2007 September, 2007 Initial ISDS to PIC May 2007 September 2007 Appraisal October 2007 September 2007 Negotiations November 2007 September 2007 Board/RVP approval December 2007 Planned date of effectiveness March 2008 Planned date of mid-term review September 2010 Planned closing date September 2012

Key institution responsible for preparation of the project: PAF

IDA staff and consultants who worked on the project included:

Name Title Unit Geeta Sethi Lead Economist SASSD Ian Bannon Sector Manager AFR Bigyan Pradhan Sr. FM/Operations Specialist SARFM Kiran Ranjan Baral Sr. Procurement Specialist SARPS Luis Coirolo CDD Specialist Consultant Jeffrey Hammer Institutional Specialist SASSD Paul Jonathan Martin Environmental Specialist AFR Natasha Hayward Rural Development Specialist SASSD Kiran Gautam Executive Assistant SASSD Yoshiko Masuyama Program Assistant SASSD

Annex 11: Documents in the Project File NEPAL: POVERTY ALLEVIATION FUND PROJECT II

Project Implementation Plan Environmental Assessments Vulnerable Communities Development Plan Financial Management Manual

Bank Staff Assessments Interim Strategy Note, Report No 38119-NEP, January 2007 Country Assistance Strategy, Report No 26509- NEP, November 2003

Poverty, Social Divisions and Conflict in Nepal, World Bank Policy Research Working Paper 4228, May 2007 Access to Financial Services in Nepal, Report No 39976, March 2007 Joint Staff Assessment Report, Report No 26674-NEP, November 2006 Resilience Amidst Conflict: An Assessment of Poverty in Nepal,1995-96 and 2003-04, Report No 34834, Central Bureau of Statistics/World Bank/DFID/ADB, June 2006 Unequal Citizens: Gender, Caste and Ethnic Exclusion in Nepal’, DFID/World Bank, 2006 Towards A Sustainable Approach for Poverty Reduction and Decentralization: A Note on Nepal’s Proposed Poverty Alleviation Fund, Report No 25019-NEP, November 2002 Social Funds: Assessing Effectiveness, Report No 24615, OED, May 2002 Review of Overall Project Outcomes and Impacts, Part 11: Comparative Studies of Work Performances between Road User Groups and Local Contractors, June 2002 Delivery of Rural Development Service: A Comparative Assessment of Alternative Institutional Arrangements with A Focus on Teri, October 2000

C. Other Poverty Reduction Strategy Paper (Executive Summary of Tenth Plan Five-Year Plan, 2002-2007), Government of Nepal, May 2003 PAF Process Timings Report, April 2007 draft, Sunita Shakya, MIS division , PAF

*Including electronic files.

Annex 13: Statement of Loans and Credits NEPAL: Poverty Alleviation Fund Project II

Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d P100342 2007 Avian Flu 0.00 18.20 0.00 0.00 0.00 16.34 0.08 0.00 P090967 2007 Second Higher Education Project 0.00 0.00 0.00 0.00 0.00 62.65 -1.70 0.00 P040613 2005 Nepal Health Sector Program Project 0.00 10.00 0.00 0.00 0.00 17.33 -5.16 0.00 P093294 2005 Economic Reform TA 0.00 0.00 0.00 0.00 0.00 1.66 0.52 0.00 P074633 2005 Education for All Project 0.00 50.00 0.00 0.00 0.00 11.24 -11.44 0.00 P083923 2005 Rural Access Improve. & Decentralization 0.00 0.00 0.00 0.00 0.00 27.86 4.11 0.00 P084219 2004 Fin Sector Restructuring (Phase II) 0.00 68.50 0.00 0.00 0.00 20.50 17.36 0.00 P081968 2004 Poverty Alleviation Fund 0.00 0.00 0.00 0.00 0.00 20.69 -9.66 -1.33 P071285 2004 Rural Water Supply & Sanitation Project 0.00 25.30 0.00 0.00 0.00 8.71 -2.11 0.00 P082646 2003 Community School Support Project 0.00 5.00 0.00 0.00 0.00 0.62 0.33 0.27 P071291 2003 Financial Sector Technical Assistance 0.00 16.00 0.00 0.00 0.00 7.93 5.48 0.00 P043311 2003 POWER DEVELOPMENT PROJECT 0.00 50.40 0.00 0.00 0.76 68.47 46.42 42.37 P050671 2002 NP: Telecommunications Sector Reform 0.00 22.56 0.00 0.00 2.18 8.62 6.97 6.97 Total: 0.00 265.96 0.00 0.00 2.94 272.62 51.20 48.28

NEPAL STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions of US Dollars

Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1996 Bhote Koshi 13.21 2.95 0.00 17.41 13.21 2.95 0.00 17.41 1998 Bhote Koshi 1.64 0.00 0.00 0.00 1.64 0.00 0.00 0.00 1994 Himal Power 18.17 0.00 2.54 0.00 18.17 0.00 2.25 0.00 2001 ILFC - Nepal 0.00 0.10 0.00 0.00 0.00 0.10 0.00 0.00 1998 Jomsom Resort 4.00 0.00 0.00 0.00 4.00 0.00 0.00 0.00 Total portfolio: 37.02 3.05 2.54 17.41 37.02 3.05 2.25 17.41

Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

Annex 14: Country at a Glance NEPAL: Poverty Alleviation Fund Project II

POVERTY and SOCIAL South Low- Development diamond* Nepal Asia income 2006 Population, mid-year (millions) 27.7 1,493 2,403 Life expectancy GNI per capita (Atlas method, US$) 290 766 650 GNI (Atlas method, US$ billions) 8.0 1,143 1,562

Average annual growth, 2000-06 Population (%) 2.1 1.7 1.9 GNI Gross Labor force (%) 2.8 2.1 2.3 per primary M ost recent estimate (latest year available, 2000-06) capita enrollment Poverty (% of population below national poverty line) 31 .. .. Urban population (% of total population) 16 29 30 Life expectancy at birth (years) 63 64 59 Infant mortality (per 1,000 live births) 56 62 75 Child malnutrition (% of children under 5) 45 .. .. Access to improved water source Access to an improved water source (% of population) 90 84 75 Literacy (% of population age 15+) 49 58 61 Gross primary enrollment (% of school-age population) 12 6 110 10 2 Nepal M a l e 12 9 115 10 8 Low-income group Female 123 105 96

KEY ECONOM IC RATIOS and LONG-TERM TRENDS 1986 1996 2005 2006 Economic ratios* GDP (US$ billions) 2.9 4.5 7.4 8.1 Gross capital formation/GDP 19.0 27.2 28.9 30.3 Trade Exports of goods and services/GDP 11.7 22.3 16.1 18.6 Gross domestic savings/GDP 10.4 13.7 12.4 11.1 Gross national savings/GDP 14.4 21.2 32.7 34.9

Current account balance/GDP -4.4 -5.4 2.2 2.4 Domestic Capital Interest payments/GDP 0.4 0.7 0.4 .. savings formation Total debt/GDP 26.5 53.7 44.4 .. Total debt service/exports 8.4 6.6 5.3 .. Present value of debt/GDP .. .. 30.4 .. Present value of debt/exports .. .. 101.8 .. Indebtedness 1986-96 1996-06 2005 2006 2006-10 (average annual growth) GDP 5.1 3.6 2.7 1.9 4.4 Nepal GDP per capita 2.6 1.3 0.7 -0.1 3.0 Low-income group Exports of goods and services ......

STRUCTURE of the ECONOMY

1986 1996 2005 2006 Growth of capital and GDP (%) (% of GDP) Agriculture 51.5 40.5 38.2 39.5 8 Industry 15.9 22.3 21.0 21.1 6 M anufacturing 6.2 9.4 7.7 7.7 4 Services 32.7 37.2 40.8 39.5 2 0 Household final consumption expenditure 80.5 77.0 77.4 78.7 -2 01 02 03 04 05 06 General gov't final consumption expenditure 9.1 9.2 10.2 10.2 Imports of goods and services 20.3 35.8 32.6 37.7 GCF GDP

1986-96 1996-06 2005 2006 Growth of exports and imports (%) (average annual growth) Agriculture 2.9 3.3 3.0 1.7 2 Industry 7.9 3.1 1.5 3.5 M anufacturing 10.0 1.9 2.6 2.2 1 Services 6.3 3.5 2.4 -5.9

Household final consumption expenditure ...... 0 General gov't final consumption expenditure ...... 01 02 03 04 05 06 Gross capital formation ...... Exports Imports Imports of goods and services ......

Note: 2006 data are preliminary estimates. This table was produced from the Development Economics LDB database. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.

Nepal

PRICES and GOVERNMENT FINANCE 1986 1996 2005 2006 Inflation (%) Domestic prices (% change) 8 Consumer prices 19.0 9.2 6.8 .. 6 Implicit GDP deflator 14.4 7.8 4.6 7.2 4 Government finance 2 (% of GDP, includes current grants) 0 Current revenue 8.3 11.2 15.6 14.4 01 02 03 04 05 06 Current budget balance -1.6 0.7 4.0 2.0 GDP deflator CPI Overall surplus/deficit -9.2 -6.3 -0.8 -1.7

TRADE 1986 1996 2005 2006 Export and import levels (US$ mill.) (US$ millions)

Total exports (fob) 156 602 832 865 2,500 Food and live animals .. 35 90 94 Animal and vegetable oils .. 4 68 71 2,000 M anufactures .. 294 579 602 1, 5 0 0 Total imports (cif) 472 1,350 2,022 2,011 1, 0 0 0 Food 60 111 72 71 Fuel and energy 54 102 370 475 500 Capital goods 108 277 250 248 0 00 01 02 03 04 05 06 Export price index (2000=100) ...... Import price index (2000=100) ...... Export s Imports Terms of trade (2000=100) ......

Map NEPAL: POVERTY ALLEVIATION FUND PROJECT II

IBRD no. 35679

80 IBRD 35679

80° 82° 84° 86° 88°

NEPAL POVERTY ALLEVIATION FUND II PROJECT MID FAR WESTERN 30° 30° WESTERN INITIAL 6 PROGRAM DISTRICTS (FY 2004/05) 1 PROTECTED AREAS HUMLA DARCHULA ADDITIONAL 19 PROGRAM DISTRICTS (FY 2005/06) PRIMARY ALL-WEATHER HIGHWAYS

Darchula ADDITIONAL 15 PROGRAM DISTRICTS: GRAVELLED/EARTHEN ROADS BAJHANG PAF II, PHASE I (FY 2007/08) INTERNATIONAL AIRPORTS ADDITIONAL 15 PROGRAM DISTRICTS: Chainpur DOMESTIC (PAVED) AIRPORTS MUGU PAF II, PHASE II (FY 2008/09) Saifaidi 4 NA I H C ADDITIONAL 20 POVERTY POCKET PROGRAM SELECTED TOWNS AND VILLAGES 3 BAJURA BAITADI DISTRICTS: PAF II, PHASE II (FY 2008/09) 5 MUNICIPALITIES

KARNALI NATIONAL CAPITAL Dadeldhura Dipayal Jumla DOLPA JUMLA DISTRICT BOUNDARIES ACHHAM KALIKOT DADELDHURA DOTI ZONE BOUNDARIES Achham Mahendranagar DEVELOPMENT REGION BOUNDARIES SETI MAHAKALI MUSTANG WESTERN INTERNATIONAL BOUNDARIES KANCHANPUR Ataria KAILALI DAILEKH JAJARKOT 7

Dhangadhi Jajarkot RUKUM 1 SURKHET MANANG Kailali 6 2 Birendranagar ALAGIRI W 8 SALYAN MYAGDI Salyan CENTRAL BARDIYA DHA GANDAKI Chisapani Libang KASKI RAPTI BAGLUNG LAMJUNG GORKHA BHERI ROLPA Baglung Kohalpur Pokhara Besishahar Gulariya T RASUWA GULMI Tulsipur PYUTHAN Dhunche 9 EASTERN ARBA B A G M A Nepalganj BANKE Tribhuuvannagar Pyuthan Tamghas P Mt. Everest 28° 28° SYANGJA Gorkha Sandikharka 10 DHADING NUWAKOT T I Kodari TANAHU Bidur SINDHUPALCHWAK Mugling PROTECTED AREAS: ARGHAKHANCHI PALPA Tansen DOLAKHA DANGDEUKHURI 15 Barhabise LUMBINI KATHMANDU 12 1. Royal Suklaphanta Wildlife Reserve Lamosangu 11 Koilabas KAPILBASTU Naubise BHAKTAPUR SOLUKHUMBU Butwal Bharatpur Jiri 2. Royal Bardia National Park NAWALPARASI Lalitpur SANKHUWASABHA TAPLEJUNG Dhulikhel THA RUPANDEHI Banepa I H C E M 3. Khapted National Park CHITWAN Bhimphedi Bhaktapur Taulihawa Bhairahawa N A R A Parasi LALITPUR I H S O K 4. Rara National Park MAKWANPUR KAVRE RAMECHHAP Num 5. Shey Poksumdo National Park (Restricted Area) Hetauda Bhikhathori Y Taplejung A N I Ramechhap INDIA 6. Dhorpatan Hunting Reserve OKHALDHUNGA 13 BHOJPUR 7. Annapurna Conservatioin Area (Restricted Areas-Mustang) INDIA 14 SINDHULI KHOTANG Bhojpur 8. Manasulu Conservation Area (Restricted Area) PARSA Sindhulimadi Phidim BARA Bhaduare 9. Langtang National Park To Ghazipur TERHATHUM Kalaiya JANAKPUR 10. Sagarmatha National Park Dhankuta PANCHTHAR To Gangtok SARLAHI Dholkebar DHANKUTA Ilam Raxaul RAUTAHAT UDAYPUR 11. Makalu Barun National Park Malangwa DHANUSHA MAHOTTARI ILAM 12. Kangchenjunga Conservation Area (Restricted Area) SIRAHA Gaighat Dharan Gaur Siliguri Janakpur Lahan SUNSARI 13. Royal Chitwan National Park SAGARMA Damak NEPAL 16 Inaruwa 14. Parsa Wildlife Reserve Jaleswar Siraha To Muzaffarpur MORANG Chandragadhi 15. Shivapuri National Park SAPTARI Jaynagar JHAPA Rajbiraj 16. Koshi Tappu Wildlife Reserve Bhadrapur BANGLADESH Biratnagar Jogbani 0 25 50 75 100 Kilometers

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information 0 25 50 Miles shown on this map do not imply, on the part of The World Bank To To Group, any judgment on the legal status of any territory, or any Dinajpur endorsement or acceptance of such boundaries. Purnia 26° 80° 82° 84° 86° 88° 26 SEPTEMBER 2007