project completion report: nepal: small towns water supply ... · 8 may 2000 19 may 2000 10 august...

Completion Report

Project Number: 31402 Loan Number: 1755 September 2010

Nepal: Small Towns Water Supply and Sanitation Sector Project

CURRENCY EQUIVALENTS

Currency Unit – Nepalese Rupee/s (NRe/NRs)

At Appraisal At Project Completion (16 August 2000) (30 November 2008)

NRe1.00 = $0.0138 $0.0135 $1.00 = NRs72.33 NRs74.00

ABBREVIATIONS

ADB – Asian Development Bank AIEC – average incremental economic cost AIFC – average incremental financial cost DWSS – Department of Water Supply and Sewerage EA – executing agency EIRR – economic internal rate of return FIRR – financial internal rate of return HHE – health and hygiene education lpcd – liters per capita per day MLD – Ministry of Local Development MOF – Ministry of Finance MPPW – Ministry of Physical Planning and Works NGO – nongovernment organization NPV – net present value O&M – operation and maintenance PCC – project coordination committee PMO – project management office RRP – report and recommendation of the President SARD – South Asia Regional Department TA – technical assistance TDF – Town Development Fund TPO – town project office UN-Habitat – United Nations Settlements Programme WSSDO – Water Supply and Sanitation Divisional Office WUA – water user association WUSC – water user and sanitation committee

NOTES

(i) The fiscal year (FY) of the government ends on 15 July. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2008 ends on 15 July 2008.

(ii) In this report, "$" refers to US dollars.

Vice-President X. Zhao, Operations 1 Director General S. H. Rahman, South Asia Regional Department (SARD) Director B. Hitchcock, Nepal Resident Mission, SARD Team leader L. Sharma, Project Officer, Nepal Resident Mission Team member R. Tuladhar, Assistant Project Analyst, Nepal Resident Mission

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

CONTENTS

Page

BASIC DATA i

I. PROJECT DESCRIPTION 1 II. EVALUATION OF DESIGN AND IMPLEMENTATION 2

A. Relevance of Design and Formulation 2 B. Project Outputs 3 C. Project Costs 6 D. Disbursements 6 E. Project Schedule 6 F. Implementation Arrangements 6 G. Conditions and Covenants 8 H. Consultant Recruitment and Procurement 8 I. Performance of Consultants, Contractors, and Suppliers 8 J. Performance of the Borrower and the Executing Agency 9 K. Performance of the Asian Development Bank 9

III. EVALUATION OF PERFORMANCE 9 A. Relevance 9 B. Effectiveness in Achieving Outcome 10 C. Efficiency in Achieving Outcome and Outputs 10 D. Preliminary Assessment of Sustainability 11 E. Impact 11

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS 12 A. Overall Assessment 12 B. Lessons 13 C. Recommendations 14

APPENDIXES 1. Project Framework 16 2. Project Outputs 19 3. Project Cost 24 4. Loan Disbursement 26 5. Project Implementation Schedule 29 6. Status of Compliance with Loan Covenants 31 7. Economic and Financial Analyses 39

SUPPLEMENTARY APPENDIXES A. Financial and Economic Analyses of Selected Small Towns Water Supply Projects B. Sailent Features of 29 Small Towns Water Supply Projects

BASIC DATA

A. Loan Identification 1. Country 2. Loan Number 3. Project Title 4. Borrower 5. Executing Agency 6. Amount of Loan

7. Project Completion Report Number

Nepal 1755-NEP(SF) Small Towns Water Supply and Sanitation Sector Project Government of Nepal Ministry of Physical Planning and Works SDR26,649,000 1178

B. Loan Data 1. Appraisal – Date Started – Date Completed 2. Loan Negotiations – Date Started – Date Completed 3. Date of Board Approval 4. Date of Loan Agreement 5. Date of Loan Effectiveness – In Loan Agreement – Actual – Number of Extensions 6. Closing Date – In Loan Agreement – Actual – Number of Extensions 7. Terms of Loan – Interest Rate – Maturity (number of years) – Grace Period (number of years) 8. Terms of Relending (if any) – Interest Rate – Maturity (number of years) – Grace Period (number of years) – Second-Step Borrower

8 May 2000 19 May 2000 10 August 2000 12 August 2000 12 September 2000 18 December 2000 18 March 2001 16 March 2001 None 31 December 2006 3 December 2009 2 1% per annum during the grace period and 1.5% per annum thereafter 32 8 5% per annum, which was reduced to 3.5% per annum 20 3 Town Development Fund

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9. Disbursements a. Dates Initial Disbursement

10 July 2001

Final Disbursement

25 November 2009

Time Interval

8 years and 4.5 months

Effective Date

16 March 2001

Original Closing Date

31 December 2006

Time Interval

5 years and 9.5 months

b. Amount (SDR '000) Category

Original

Allocation

Last Revised

Allocation

Amount

Canceled

Amount

Disbursed

Undisbursed

Balance Civil Works, Water Supply 18,455 15,600 2,855 15,303 297 Civil Works, Public Sanitation and Drainage 1,401 751 650 541 210 Equipment and Vehicles 696 626 70 571 55 Consulting Services and Training 3,609 2,898 711 2,665 233 NGO services 811 517 294 437 80 Incremental Administration Expenses 1,159 1,256 (97) 1,423 (167) Interest During Construction 518 518 0 363 155 Total (SDR ’000) 26,649 22,166 4,483 21,303 863 Total ($ ’000) 35,000 28,500 6,500 32,131 1,391 ( ) = negative, NGO = nongovernment organization.

10. Local Costs (Financed) - Amount ($ million) 0.8 - Percent of Local Costs 4.0 - Percent of Total Cost 1.6 C. Project Data

1. Project Cost ($ million) Cost Appraisal Estimate Actual

Foreign Exchange Cost 29.7 31.3 Local Currency Cost 24.2 19.7 Total 53.9 51.0

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2. Financing Plan ($ million) Cost Appraisal Estimate Actual Implementation Costs Borrower Financed 10.9 12.0 ADB Financed 34.3 31.5 Local Government and Water Users 8.0 6.9 Total 53.2 50.4 IDC Costs Borrower Financed 0.0 0.0 ADB Financed 0.7 0.6 Other External Financing 0.0 0.0 Total 53.9 51.0 ADB = Asian Development Bank, IDC = interest during construction.

3. Cost Breakdown by Project Component ($ million)

Component Appraisal Estimate Actual 1. Public Awareness Campaign and Health and

Hygiene Education 2.3 2.3 2. Water Supply and Sanitation Facilities 42.9 39.9 3. Technical Support 0.5 0.3 4. Project Implementation Assistance 7.5 7.9 5. Interest During Construction 0.7 0.6 Total 53.9 51.0 4. Project Schedule

Item Appraisal Estimate Actual Date of Contract with Consultants

Project Implementation Consultants December 2000 14 August 2001 Engineering Design and Supervision January 2001–June 2004 September 2001–

August 2005 Nongovernment organizations January 2001–June 2004 February 2002–

January 2007 Completion of Engineering Designs June 2005 15 September 2008 Civil Works Contract Date of Award January 2002 3 July 2003 Completion of Work December 2006 30 November 2008 Equipment and Supplies Dates First Procurement December 2001 2 January 2002 Last Procurement December 2006 30 November 2008 Start of Operations Completion of Tests and Commissioning April 2003-December 2006 March 2006–

December 2010 Other Milestones

Loan Reallocation 11 January 2008

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5. Project Performance Report Ratings

Ratings Implementation Period

Development Objectives

Implementation Progress

From 29 September 2000 to 31 December 2000 Satisfactory Satisfactory From 1 January 2001 to 31 December 2001 Satisfactory Satisfactory From 1 January 2002 to 31 December 2002 Satisfactory Satisfactory From 1 January 2003 to 31 December 2003 Satisfactory Satisfactory From 1 January 2004 to 31 December 2004 Satisfactory Satisfactory From 1 January 2005 to 31 December 2005 Satisfactory Satisfactory From 1 January 2006 to 31 December 2006 Satisfactory Satisfactory From 1 January 2007 to 31 December 2007 Satisfactory Satisfactory From 1 January 2008 to 30 November 2008 Satisfactory Satisfactory D. Data on Asian Development Bank Missions

Name of Mission

Date

No. of Persons

No. of Person-Days

Specialization of Membersa

Fact Finding 21 February–7 March 2000 Appraisal 8–19 May 2000 12 36 a, b, c Project inception 11–14 March 2001 2 8 a, b, f Project review 1 22 May–4 June 2002 2 26 e, f Project review 2 25 December –23 January

2003 3 45 e, f, g Project review 3 11–28 August 2003 2 34 E, h Project review 4 30 January–10 February

2004 2 20 I, h Project review 5 16–28 July 2004 3 48 i, h, g Midterm review 24 November–17

December 2004 3 60 i, h, j Project review 6 3–15 June 2005 3 28 i, h, k Project review 7 3–21 December 2005 3 40 i, f, g Project review 8 30 June–12 July 2006 2 24 i, f Project review 9 2–14 November 2006 2 24 I, g Project review 10 12–22 March 2007 4 40 l, I, g, j Project review 11 12–26 September 2007 2 28 L, g Project review 12 3–11 July 2008 2 18 L, h Project review 13 13–24 October 2008 3 24 l, g, j Project completion reviewb 22 December 2009–15

January 2010 2 24 l,g a a = senior financial analyst, b = urban development specialist, c = counsel, d = associate operations analyst, e =

project implementation officer, f = consultant (gender and development specialist), g = assistant project analyst, h = project administration unit head, i = senior project implementation officer, j = assistant disbursement analyst, k = country director, l = project officer.

b The project completion report was prepared by Laxmi Sharma, project officer and team leader, and Rajani Tuladhar, assistant project analyst.

I. PROJECT DESCRIPTION

1. The population of urban centers in Nepal along major national highways was growing rapidly in the late 1990s as a result of rural migration. Drinking water supplies in these urban centers were generally inadequate in terms of coverage, quantity, and quality. In recognition of the adverse impact of inadequate drinking water supply and poor sanitation conditions on human development, the Government of Nepal initiated the 15-year Plan for Small Towns Water Supply and Sanitation Development and requested Asian Development Bank (ADB) assistance in preparing a sector investment project to support the plan.1 In response to the government’s request, ADB approved technical assistance (TA) to prepare the Small Towns Water Supply and Sanitation Sector Project.2 2. ADB approved a loan of SDR26.7 million ($35 million equivalent) for the Small Towns Water Supply and Sanitation Sector Project on 12 September 2000. The project was designed to help the government cover the investment requirements of the initial years of the 15-year Plan for Small Town Water Supply and Sanitation Development. The project followed a sector lending modality. A subsidiary loan agreement was signed between the Ministry of Finance (MOF) and the Town Development Fund (TDF) on 5 March 2001 for $12 million at a 5% interest rate.3 3. The project was to provide water supply, limited drainage, and sanitation facilities in selected small towns following a demand-driven, interactive procedure to ensure the full participation of local water users and nongovernment organizations (NGOs) in town project design, preparation, implementation, operation, and maintenance. The objectives of the project were to (i) improve the health and quality of life of the people living in project towns by constructing water supply, drainage, and sanitation facilities and providing health and hygiene education; (ii) support community participation by developing the institutional capacity of community water users and sanitation committees (WUSCs)4 and requiring water users to make cash or in-kind contributions to cover some project costs; and (iii) promote community water quality monitoring. 4. The project had the following four components:

(i) Public awareness campaign and health and hygiene education (part A): This included (a) the delivery of a community health and hygiene awareness program, (b) community participation and town project ownership, and (c) the construction of on-premise sanitation facilities.

(ii) Water supply and sanitation facilities (part B): This constructed water supply schemes, basic storm water drainage, and sewerage systems with communal septic tanks and public latrines.

(iii) Technical support to WUSCs (part C): This included (a) technical and financial training for WUSC and water user association staff and (b) establishing technical support centers in each of the five regional offices under the Department of Water Supply and Sewerage (DWSS) to provide post-construction fee-based services to WUSCs.

1 The 15-year plan, approved by the government on 29 February 2000, has three phases: 2000–2004, 2005–2009,

and 2010–2014. 2 ADB. 1998. Technical Assistance to Nepal for Preparing Small Towns Water Supply and Sanitation Sector Project.

Manila. 3 The interest rate for the TDF was revised from 5.0% to 3.5% in 2005. 4 A WUSC is the executive body of a water user association.

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(iv) Project implementation assistance (part D): This included the provision of (a)

consulting services for project implementation support and such activities as town project feasibility studies, engineering designs, construction supervision, and training; (b) vehicles and office equipment; and (c) project incremental administrative expenses.

5. The Ministry of Physical Planning and Works (MPPW) was the project executing agency (EA) and the DWSS was the implementing agency. Thirty-three town projects were identified to serve a target population of 600,000. Four town projects were dropped after the completion of the feasibility study and detailed design. 5 The project was originally envisaged to be implemented over 6 years, with the loan closing date of 31 December 2006. At the request of the government, ADB extended the loan closing date by 23 months to 30 November 2008.

II. EVALUATION OF DESIGN AND IMPLEMENTATION

A. Relevance of Design and Formulation

6. The project's design was consistent with the government's strategy in the Ninth Five-Year Plan, 1997–2001, which emphasized mobilizing local resources for the supply of safe drinking water; making user groups and local authorities fully responsible for project formulation, implementation, operation, and maintenance; and ensuring equitable access to water supply and sanitation (WSS) services. The government’s Three-Year Interim Plan, 2008–2010 emphasizes improving water supply services. The project was formulated based on the institutional framework and strategy outlined in the 15-year plan, which was revised in 2009. It quantified the WSS needs of small towns, estimated the cost of providing improved services, and proposed an institutional framework. 7. The project was consistent with ADB’s country operational strategy, 1999–2002 for Nepal at the time of approval.6 The overall objective of the strategy was poverty reduction through broad-based, labor-absorbing economic growth. One of the strategic priorities of the ADB country strategy at the time of approval was to improve basic social services and infrastructure. Considering the emphasis of the ADB country strategy and program, 2005–20097 on improved health and hygiene practices, scaling up community-based and demand-driven approaches, public–private partnership, gender mainstreaming, and good governance, the project could be considered highly relevant to the ADB strategy at completion. However, eliciting the participation of the poor was challenging because of the strong emphasis in project design on the recovery of capital cost, as reflected in the requirement that beneficiaries contribute 50% of capital cost. 8. Overall, project preparation and formulation were adequate. The relevance of the project is adequately established by rapid population increase in urban centers along major national highways. The project scope and components were relevant to achieving the intended project outcome of improving water supply services and less relevant to improving sanitation. Wastewater management has only been partly included through the provision of basic storm water drainage in the core areas of project towns, and sanitation has been limited to the provision of subsidized toilets for the poorest and the construction of some public toilets. There

5 They were Nilkantha, Dhankuta, Lamhai, and Nijgadha. 6 ADB. 2000. Country Operational Strategy: Nepal, 1999–2002. Manila. 7 ADB. 2004. Country Strategy and Program: Nepal, 2005–-2009. Manila.

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is no provision for dealing with liquid effluent. Drainage is a major problem in towns on the Terai, as areas are low-lying with little gradient, but very limited scope for drainage was provisioned or undertaken. Project design did not consider investment to address solid and liquid waste management as part of improving sanitation. 9. The project covered 12 districts and 29 small towns in Nepal. The small towns were selected following a set of agreed criteria.8 The principle of cost sharing proposed by the project was accepted.9 However, the complexity of community participation and mobilization, and of covering scattered towns, constituted a challenge, and the envisaged outputs proved to be ambitious considering the duration of the project. Accordingly, the closing date was extended by 23 months from 31 December 2006 to 30 November 2008. The complexities and time required for community involvement were neither adequately foreseen nor incorporated in project design. 10. The project was prepared under ADB project preparatory TA (footnote 2). The implementation of project preparatory TA, the ADB fact-finding mission, and the appraisal mission were carried out in close collaboration with the staff of the DWSS and the MPPW. While formulating the project, project preparatory TA incorporated sector experiences and lessons. B. Project Outputs

11. The targeted outputs anticipated during appraisal were (i) the delivery of community health and hygiene awareness and education programs, (ii) increased community participation and ownership of town projects, (iii) water supply and public sanitation facilities constructed,10 (iv) enhanced capacity in WUSCs to manage the constructed WSS facilities; and (v) the establishment of regional technical support centers. Actual project outputs are in appendixes 1 and 2. 1. Public Awareness Campaigns and Health and Hygiene Education

12. Public awareness campaigns were conducted for 70,306 beneficiaries—51,181 female and 19,125 male—to create awareness among local people on the project modality, financing arrangements, roles of stakeholders,11 need for women's representation in decision making, significance of safe drinking water, and appropriate use and maintenance of on-premise latrines. The awareness campaigns were instrumental to the timely signing of community action plans by WUSCs in 30 project towns. This signified their understanding of and agreement with the terms and conditions of the project. 13. The health and hygiene education program was comprised of school hygiene education; community education; and focused training on latrine construction, solid waste management, and animal waste management. NGOs provided health and sanitation training 12 to 3,133 community stakeholders and leaders, of which 1,847 (58%) were women. The health and hygiene education awareness program was expected to generate increased demand for 8 These were the willingness of communities to share 50% of the capital cost for water supply facilities, the condition

and service level of existing water supply and sanitation facilities and services, and the willingness of local bodies to participate.

9 Beneficiary contribution of 50% of the total capital cost of constructing water supply systems. 10 The DWSS reduced the number of town subprojects from 40–50 to 33 because of the excessive time required to

mobilize communities’ contribution and increase in the number of beneficiaries. 11 WUSCs; local bodies; NGOs; and the DWSS, project management office, town project offices, TDF, consultants,

and contractors. 12 This included waste management training, school-led total sanitation, and training in formulating community action

plans.

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improved household sanitation. However, the program seems to have been less effective in some towns, as it was unable to strengthen water user association (WUA) commitment to and ownership of safe sanitation.13 Of 12,161 participating poor households, 10,022 constructed latrines through the provision of mechanism of partial subsidy and cost sharing. 2. Water Supply and Sanitation Facilities

14. The water supply systems in project towns are piped water supply with private yard and community tap connection. The construction of piped water supply was completed in 29 small towns, against the target of 40–50, installing 834 kilometers of water pipes. Town projects included intakes; the main transmission line; treatment facilities for sedimentation, filtration, and disinfection; surface reservoirs for gravity systems; tube wells for pumped systems; submersible pumps; electrical facilities; overhead tanks for tube well systems; house connections; pump houses; and guards’ quarters. Although the overall technical design for the 29 towns was generally satisfactory, some of the completed town projects do not function as designed for various reasons such as damage from natural calamities, the failure of groundwater wells, the malfunctioning of water treatment plants, and high electricity costs. The EA has expressed its commitment to carrying out remedial measures under the DWSS budget to make all 29 town projects function optimally, following the cost-sharing approach advocated by the project.14 15. The project service areas, 76% of houses connected with the system, against the target of 80%. The tap connection fee was in the range of $160–$250 per house in most of the project towns. The high tap connection fee and easy availability of groundwater, are main reasons for a small number of tap water connections in some of project towns. The remaining households get water either from 3,493 community taps or from their own sources, often wells that are contaminated and unsafe. As WUSCs and beneficiaries considered community tap connections to be inconvenient, many switched into private taps in many town projects. 16. During test operation, most of the town projects faced technical problems with water meters; pipe connections, particularly affecting larger-diameter pipes; and water treatment plants. About 15% of the meters distributed were damaged. Contractors used traditional methods of joining pipes rather than following the specifications in contracts. However, these problems were addressed by the contractor and WUSCs during the period of defect liability. Although WUSCs undertake the operation and maintenance of the water supply systems by hiring staff such as office managers, junior engineers, accountants, meter readers, and plumbers, they face challenges in operating the constructed facilities effectively, particularly water treatment plants, because their staffs have insufficient technical knowledge. 17. All WUAs have adopted monthly water tariffs in the range of NRs30–NRs320 per 10,000 liters. Project towns’ performance in repaying loans from the TDF has shown mixed results. The TDF has collected NRs75.8 million in repayment, which includes the loan principal and interest from 21 towns. However, the remaining 8 towns have yet to start repayment. Some WUAs have started to repay the sub-loans in accordance with the repayment schedule or even before the completion of the grace period of 3 years, while others have yet to make any principal and interest payments. This may indicate that the initial loan recovery trend is not satisfactory. On the other hand, the very fact that community institutions considered loans for local infrastructure

13 A WUA is an institution registered at District Water Resource Committee as per the Water Resource Act 2049,

1992 and the Water Supply Regulation 2055. 14 Cost sharing is between the government (50%) and WUAs (50%).

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is very encouraging. In Nepal, small towns have accepted taking loans from the government for the development of water supply facilities. 18. The low and delayed repayment of principal and interest installments for loans to WUAs is due mainly to low revenue resulting from the small number of tap connections and low water tariffs. Delays in constructing town projects, the slow rate of tap connections, low water tariffs, the low volume of water drawn from the developed wells, and damage to water transmission lines from landslides have placed a number of WUAs in difficult positions for increasing revenues and repaying principal and interest installments to the TDF on time. However, all WUSCs are committed to repaying the loans. The TDF needs to develop strategies for each town project to repay loans. 19. The project supported the construction of 56 public latrines and 16,779 meters of surface drainage in the core areas of the project towns. The operation and maintenance (O&M) of most of the public latrines have been outsourced. 3. Technical Support for Water User and Sanitation Committees

20. The project provided technical training to WUSC members and staff to develop their capacity for the O&M of town projects regarding meter reading, meter maintenance, plumbing, testing water quality, and operating pumps. WUSC members also received training from the TDF on financial management, which included water tariff planning, billing, and collection, as well as basic accounting. While training under the project was generally found to be effective and appreciated by WUSCs, some shortcomings were observed: (i) The training programs were not held in a timely manner. (ii) There were a limited number of trainings. (iii) The trainings were not frequent enough to have effective results. (iv) And the participants who received training did not remain in their posts. Similarly, the project had no monitoring mechanism to measure the effectiveness of training programs. The WUSCs shared with the project completion review mission the constraints they face and their inadequacy in performing some of their roles effectively. The absence of qualified technical staff in WUSCs was sorely felt by all. Division and subdivision offices of the DWSS were not involved in construction, which inhibit their provision of effective support in the post-construction phase. 21. As provisioned in report and recommendation of the president, a technical support center was established in each of the five regional offices of the DWSS to promote community-based monitoring of water quality and meter calibration, but this occurred late with the delayed procurement of water-testing and meter-calibrating equipment. Despite the government’s approval of staff positions, they were vacant in most labs because of the ambiguous procedure related to deputation of staff according to work stations. WUSCs were not sure that the labs would support them in monitoring water quality and meter calibration. 4. Project Implementation Assistance

22. Project implementation was supported through the provision of consulting services for project management and engineering design and supervision, vehicles and project administration equipment, and project incremental administrative expenses. The project management office (PMO) organized training, workshop, and interaction programs for DWSS central and field staff, WUSCs, town project offices (TPOs), NGOs, consultants, and MPPW staff to improve their understanding of the project. The project implementation support consultant assisted the PMO in identifying project performance indicators as per the project framework. During implementation, the project framework was reviewed, and additional

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monitoring indicators and targets were included in the project framework. Benefit monitoring and evaluation was undertaken twice during the project and yielded recommendations to improve project outputs, which the PMO implemented. C. Project Costs

23. The project cost estimate at appraisal was $53.9 million, including a foreign exchange component of $29.7 million and a local cost component of $24.2 million. The actual total project cost amounted to $51.0 million, including $0.6 million for interest during construction. ADB financed the entire foreign exchange cost of $31.3 million and part of the local currency cost of $0.8 million. ADB financed 63% of the total project cost, less than the appraisal estimate of 65%. The total loan cancelled was $7.9 million (24.5%). The appreciation of special drawing rights against the US dollar between the date of the loan agreement and loan closing and low bids for civil works contracts contributed to the cancellation. The project costs and financing arrangements at appraisal and project completion are in Appendix 3. D. Disbursements

24. Disbursement was slow during the first 3 years of project implementation (Appendix 4). Disbursement started to pick up in the fourth year of implementation. Although the loan closing date was 30 November 2008, the loan account remained open until December 2009 to process payment for construction works done in few towns late in the implementation period. The total loan disbursement was $32.1 million, including $0.6 million for interest during construction. 25. As per the loan agreement, the PMO established an imprest account in Nepal Rastra Bank. The initial imprest account ceiling of $0.5 million was later increased to $1.5 million. The total amount of replenishment was $19.9 million. The imprest account was fully liquidated before the loan closing date. The statement of expenditure procedure was used to disburse $16.4 million, or 51% of ADB disbursement. As individual disbursements were small, the imprest account and statement of expenditure procedure were found to be very useful for smooth project implementation. E. Project Schedule

26. The project was originally envisaged implemented over 6 years to the loan closing date of 31 December 2006. Appendix 5 shows the schedule at appraisal and the actual time frame. The project started slowly because of (i) the delayed recruitment of consultants and procurement of civil works, (ii) weak project management, and (iii) optimistic project design given the involvement of the WUSCs and the required up-front cash contribution. Feasibility studies of the second batch of town projects were delayed by 10 months. The first civil works contract was awarded 54 months after loan approval. However, project implementation was not affected by the conflict during 2001–2006 because of the communities' strong interest and participation in town project planning and development. At the request of the government, ADB extended the loan closing date by 23 months to 30 November 2008. F. Implementation Arrangements

27. Overall, the implementation arrangements at the center and in the project towns were reported to be satisfactory in delivering project outputs and achieving the project outcome. There were no major changes in implementation arrangements. The project envisaged the involvement of multiple stakeholders in implementation. The MPPW was the executing agency

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and responsible for coordinating the project. The PMO was established in the DWSS to manage project implementation and coordination. However, no role or responsibility was given to its WSS division or subdivision offices (WSSDO) regionally or in districts.15 28. A project coordination committee chaired by the secretary of the MPPW was established prior to the loan signing.16 There was also a provision to invite representatives of the WUSCs and local governments of project towns to discuss issues. Centrally, the project coordination committee ensured adequate interagency coordination and provided guidance in resolving project-related issues, but there was no similar mechanism in project towns. 29. In each project town, the WUA was registered at the District Water Resource Committee as per the Water Resource Act 2049, 1992 and Water Supply Regulation 2055. Each association formed a WUSC to implement all tasks on behalf of the WUA on matters related to WSS development within the town service area. The project envisaged establishing a TPO with qualified staff in each project town as a parallel office to the existing WSSDO. The limited availability of DWSS officials caused initial difficulties in establishing TPOs in eight project towns in the first batch. They were established only in January 2002, 15 months after loan approval. It further affected the coordination of field activities by design and supervision consultants, local governments, and WUSCs. As the WSSDO was not involved in town project implementation, it was reluctant to provide post-construction support to WUSCs. 30. Local governments, in the form of municipality, district, and village development committees, were responsible for ensuring the establishment of a WUA in each town project. Applications for project funding endorsed by local governments were submitted jointly by the local government and WUSC to the PMO for evaluation and selection. The TDF agreed to on-lend funds to WUAs against the local governments’ guarantee of repayment on behalf of their WUAs. Local governments were required to contribute at least 20% of the construction cost of public sanitation components, including surface drainage construction in project towns. 31. In each project town, the water supply system was financed as follows: 20% in cash or kind from the WUA but including a 5% cash contribution up front; 30% from the TDF, which was a sub-loan charged to the WUA; and 50% from the government. Public sanitation components, consisting of public toilets and drainage, were 20% financed by local governments and 80% by the government. Many towns collected high connection fees to assemble their contributions. 32. A subsidiary loan agreement between the MOF and the TDF was signed on 5 March 2001 for onlending a portion of loan, estimated to be $12 million at an interest rate of 5% per annum with no less than 15 years maturity, including a grace period of 3 years.17 The TDF onlent 30% of the capital cost of a water supply system to its WUA at an annual interest rate of 8% for 12–15 years. For the first 3 years of the project, the sub-loan to project towns was essentially unused because construction had not started. The TDF disbursed NRs876.5 million to the 29 project towns.18

15 WSSDOs are the 42 division offices, 28 subdivision offices, and 5 regional monitoring and supervision offices in 75

districts. 16 Members included the joint secretary of the MPPW; the director general of the DWSS; the executive director of the

TDF; and a senior official of the MOF; Ministry of Local Development; and Ministry of Law, Justice, and Parliamentary Affairs. The project manager acted as the committee's secretary.

17 The interest on the sub-loan to the TDF was revised from 5% per annum to 3.5% per annum in 2005. 18 The capitalized interest on the loan principal of NRs876.5 million was NRs59.6 million.

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G. Conditions and Covenants

33. Conditions for loan effectiveness were complied with on time, and the loan was declared effective 2.9 months after loan signing. 34. The major loan covenants were complied with, though with delays in establishing technical support units and the EA’s submission of the project completion report (Appendix 6). Although the PMO procured all equipment, completed the physical improvement of regional laboratories, and established technical support centers in five regions, their services had not started even by loan closing. The EA submitted the project completion report 8 months after loan closing. None of the major covenants was modified, suspended, or waived, as most covenants were relevant to project needs and realistic. ADB review missions conducted regular follow-up on compliance with covenants. H. Consultant Recruitment and Procurement

35. Consultants were recruited in accordance with ADB Guidelines on the Use of Consultants (2010, as amended from time to time), and procurement followed ADB Procurement Guidelines (2010, as amended from time to time). The PMO procured consulting services for feasibility studies, engineering designs, construction supervision, and project implementation support. Although advance contracting was allowed, the procurement of a project implementation support consultant was delayed by 8 months. Consulting services were provided by qualified domestic engineering firms with sufficient experience in and knowledge of the WSS sector. 36. All civil works and supply of materials (pipes, fittings, pumps, etc.) for each town project was packaged in one bid contract. Twenty-nine major civil work contracts were procured under the project, in accordance with ADB's Guidelines on Procurement. PMO procured one car, eight pick-ups, 35 motorbikes, and office equipment and machinery following international shopping and national competitive bidding procedures acceptable to ADB. The vehicles and equipment were used in the PMO and TPOs to facilitate the smooth implementation of the project. I. Performance of Consultants, Contractors, and Suppliers

37. The consultant's performance was rated satisfactory, as most of the consultants delivered their services to the expected standard as per the requirements of the project. However, the delay in finalizing and issuing technical engineering design and drawings, and design shortcomings due to the lack of proper predesign investigations, led to problems such as misunderstanding in defining the service area during construction, as well as numerous variation orders. Supervision lapses were seen in sporadic cases. The allocated input for the team leader in the contract for design and construction supervision was not enough to enable performance as per the terms of reference. The limited provision of team leader inputs constrained the timely delivery of technical advice to its team at town projects. With these exceptions, the quality of supervision can be considered satisfactory. The EA established the performance monitoring system for consultants, which made the consultant more responsive, and performance improved over time. Despite some delays in recruiting NGOs, which slightly affected the timely completion of social mobilization and the public awareness campaign, the performance of all NGOs was satisfactory in meeting the expected standard. However, most WUSCs did not realize the importance of NGO inputs.

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38. Contractors' performance in completing civil works is varied by town. Contractors generally did not understand work requirements, cash flow, or the water supply contract, which required coordination with WUSCs, end-users of water, and other stakeholders. Since there were no clear roles defined for WUSCs in the civil works contracts, the contractors had to bear the dual burden of instructions arising simultaneously from the engineers and the WUSCs. This adversely affected the progress of civil works. The contractors generally lacked resource planning capacity, and most of the contracts experienced time overruns, which averaged 56%. 39. The performance of suppliers of vehicles, equipment, and supplies was satisfactory because delivery was on time and the quality of the supplied items was as specified in the supply contracts. J. Performance of the Borrower and the Executing Agency

40. Overall, the performance of the borrower and the MPPW as the EA was satisfactory. The DWSS was responsible, on behalf of the MPPW, for project coordination and monitoring. The project received the "best project management team" award from ADB in 4 consecutive years. The assessment of the EA's capabilities at appraisal was reasonably accurate. The initial progress of project implementation, including establishing and staffing the PMO and TPOs, was satisfactory. Throughout project implementation, the government categorized the project as core to its program. This ensured adequate budgetary provisions for the project. However, the borrower submitted its project completion report 8 months late due to the late closing of the loan account. The project built the capacity of EA staff in contract management and bolstered their confidence to implement town projects with the involvement of a wide range of stakeholders. K. Performance of the Asian Development Bank

41. The performance of ADB was satisfactory. From project preparation to implementation, ADB provided significant staff and financial resources. Despite some shortcomings, such as an overoptimistic estimate of the number of town projects, the appraisal was complete. ADB fielded 15 missions, including one project inception mission, one midterm review mission, and one project completion review mission. ADB missions focused mostly on project inputs; the physical progress of the project, including contract awards and disbursements; and implementation delays. Each mission provided a time-bound action plan that could be readily monitored. ADB organized monthly meetings with the project management team to monitor contract awarding, disbursement, counterpart funding, and other project implementation issues, which improved project performance. ADB processed withdrawal claims on time.

III. EVALUATION OF PERFORMANCE

A. Relevance

42. At both appraisal and completion, the project was highly relevant to government and ADB policies and priorities to improve the quality of life of small towns by improving WSS services. The project’s design, rationale, and strategies were relevant, as the project contributed to improving the quality of life of people residing in small towns supported under the project. The project’s development planning approach and implementation strategies involved multiple stakeholders and were oriented to promote organized community participation. The participatory, demand-driven, community-based approach helped to ensure that the project was relevant to the aspirations of community members. Further improvements could have been made,

10

especially in the participation of the poor in accessing water supply services from the improved systems. The project design reflected lessons from the four ADB-funded rural WSS projects,19 as well as lessons reported in ADB’s Nepal: 1999 Country Synthesis of Evaluation Findings.20 B. Effectiveness in Achieving Outcome

43. The project was effective in improving WSS services for 95% of the target population of 600,000. In the project towns, piped water supply systems were reasonably effective in (i) increasing water supply per capita, (ii) achieving full coverage of the service areas, (iii) treating water to meet the drinking water standards of Nepal, and (iv) attracting most private water tap connections. Despite the appropriateness of project activities toward ensuring output and outcome linkage, the inclusion of the poor was not seriously addressed, and, in the initial stages of project implementation, emphasis was placed on ensuring cost recovery. However, a later recommendation was to introduce revolving funds to help the poor through a partnership with the United Nations Human Settlements Programme (UN-Habitat) and the TDF. While town project design took into account population growth in project town areas, in some towns this allowance was inadequate in view of the potential expansion of services beyond town project areas, the necessary land-use planning, and rapid population growth with migration into town project areas. This stressed town projects’ distribution capacity and necessitated their further upgrading. Project towns have received further support from WSSDOs since project completion, and WUSCs have maintained town project operations. C. Efficiency in Achieving Outcome and Outputs

44. The project is rated efficient in achieving its outcomes and outputs, based on financial and economic analyses using the same methodology as at appraisal (Appendix 7). The combined economic internal rate of return (EIRR) of the eight sample town projects is estimated at 11.7%, and their financial internal rate of return (FIRR) is estimated at 5.2%.21 This indicates that the project is justified from financial and economic perspectives. If the measured benefits included community institutional development and empowerment, the project would have a substantially higher EIRR than at appraisal. The financial analysis concluded that the proposed water tariffs at appraisal had yet to be fully applied in most the town projects. The economic analysis concluded that the economic benefits of the small town projects outweighed the associated economic costs. The weighted average EIRR for the sample subprojects is almost equal to the assumed economic cost of capital of 12%. 45. Some physical activities were delayed by hindrances to the preparation of detailed designs, tendering and bid evaluation, and awarding of contracts. These hindrances included inadequate feasibility assessments, limited community interest in understanding design details, and delayed approvals of contract awards. Moreover, taking into account the challenging task of coordinating with a multitude of stakeholders and problems associated with the continued political unrest in Nepal, the loan extensions totaling 23 months were justified. 19 ADB. 1984. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the

Government of Nepal for the Rural Water Supply Project. Manila; ADB. 1989. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Government of Nepal for the Second Water Supply Project. Manila; ADB. 1992. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Government of Nepal for the Third Water Supply and Sanitation Project. Manila; ADB. 1996. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Government of Nepal for Fourth Water Supply and Sanitation Sector Project. Manila.

20 ADB, 1999. Nepal: 1999 Country Synthesis of Evaluation Findings. Manila. 21 The EIRR is lower than appraisal estimate of 17.2%, but the FIRR is higher than the appraisal estimate of 2.8%.

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46. The sensitivity analysis considered a (i) 10% increase in operating cost, (ii) 10% decrease in incremental income, and (iii) both combined. Results showed the EIRR to be between 4.2% and 12.2%. This indicates that the town projects are sensitive to various types of unanticipated shocks that affect its revenue and cost. D. Preliminary Assessment of Sustainability

47. The project was assessed likely sustainable, provided that follow-up support strengthened the financial management of WUAs and post-construction support to WUSCs addressed technical problems. The empowerment of local communities and capacity building of WUSCs were integral to project design. There was evidence that the WUSCs took full responsibility for the O&M of installed town projects. Water users assumed ownership and expressed their commitment and willingness to pay higher tariffs for a reliable water supply system. All WUAs are registered as per the Water Resources Act, 1992, and they are likely to sustain themselves. The average efficiency of water tariff collection is 95%. Although WUSCs are aware that adequate tariffs need to be collected to cover O&M costs and debt servicing, tariffs currently adopted in most towns are still below what the TDF recommends. Most of the town projects need to increase their water tariffs and complete water connections as designed to improve their debt-serving capacity. There have been cases where water supply systems were expanded beyond their technical capacity, apparently in response to demand from end-users but to the detriment of the systems. E. Impact

48. Improved access to WSS facilities thanks to the project has significantly reduced hardship and saved time for small town residents, especially women and children, who earlier had to walk long distances to fetch water for household use. Household time saved by no longer needing to collect water ranges from 0.86 hours per day in Parsa to 4.0 hours per day in Khaireni and Lekhnath. Energy savings accrued from easier access to water, improving the nutrition and health of children and mothers. Women and children have more time to devote to more meaningful endeavors such as schooling, childrearing, household and personal hygiene, and earning income. Water supply was found to be instrumental in promoting kitchen gardening, livestock keeping, and the operation of hotels and trade.22 49. Improved water supply, the health and hygiene public awareness program, and the development of sanitation facilities under the project have, together, significantly reduced health risks in participating towns. In the eight towns in which the DWSS conducted benefit monitoring and evaluation in late 2008, a significant reduction in the incidence of water-borne diseases was reported, saving health-care costs. Hand-washing practices, the use of toilets, and bathing habits in town project areas were found to be improved after the project. The average consumption of water per household was found to have increased after the project.23 Four project towns have been declared free of open defecation, with an increased number of households using private latrines and new public toilets. The improvement in the WSS situation and positive health and hygiene impacts have paved the way for increased economic activity in 29 project towns.

22 Department of Water Supply and Sewerage. 2008. Benefit Monitoring and Evaluation. Kathmandu. 23 The average amount of water used for drinking and cooking is increased by 21%, from 299 liters per day per family

before the project to 363 liters per day per family after the project.

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50. The project successfully introduced a cost-sharing mechanism and the practice of community involvement in small town development for the first time in Nepal. The project achieved a beneficiary contribution of 50% of the total capital cost of constructing water supply systems. There is large demand in other towns for the EA to help improve their own WSS conditions. The project was both pioneering and innovative in demonstrating new and generally effective sector practices involving multiple stakeholders. The urban water supply and sanitation policy adopted by the government in 2009 was based on the approach adopted by the project. The project paved the way for subsequent small town water supply projects. 51. Beneficiaries received social and personal benefits by belonging to WUSCs and WUAs. Intense networking and support among members of WUSCs increased the self-confidence and involvement of community members. The project built social capital in all participating towns by facilitating active community participation in the project. All WUSCs formed under the project have developed strong ownership of their town projects and demonstrated strong commitment to sustaining project benefits. This was evident in WUSCs’ collection of water tariffs to sustain the O&M of town project facilities. The project actively promoted women’s empowerment, facilitating women’s strong representation in WUSCs, at 33% in line with government policy. Women’s wider and more active participation in WUSCs has enhanced their awareness and knowledge of sustainability in town projects, water quality issues, and the relevance to family health and hygiene. Land acquisition and subsequent resettlement issues were not very significant. In town projects where such issues were relevant, they were handled by WUSCs and local governments following ADB guidelines. 52. The project improved environmental sanitation conditions in all project towns by improving water supply and public and private sanitation facilities. Environmental compliance monitoring was satisfactory and done according to the environmental management plan.

IV. OVERALL ASSESSMENT AND RECOMMENDATIONS

A. Overall Assessment

53. Overall, the project was rated successful. It was designed in line with the strategic priorities of the government and ADB. It was implemented as conceived. It was able to improve WSS services in 29 project towns, meeting 95% of the outcome target of providing improved access to WSS services to 600,000 people. It supported local beneficiaries' participation in town project formulation, design, implementation, O&M, and cost sharing. Community ownership is quite strong. The project has successfully promoted good governance in terms of beneficiaries’ wider participation, transparency, and the accountability of all the stakeholders.24 The project was efficient and likely sustainable. There was a strong demand for project outputs, particularly for improved water supply facilities. The performance of WUAs was satisfactory. WUSCs played important roles, on behalf of WUAs, in project implementation, and members of WUSCs were very active, committed, and responsible. 24 ADB. 2008. Country Assistance Program Evaluation. Manila.

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B. Lessons

54. Project design should accommodate the complexity of community participation and the time it requires. Adequate attention should be paid to capacity development in communities to ensure the sustainability of WSS facilities. 55. Effective orientation programs on project approaches, implementation modalities, and the roles of stakeholders contribute to successful project implementation. Implementation partners should be well informed on the approaches and strategies of the project prior to implementation. 56. Community organizations require continued support during and after the transition to the post-construction period to ensure the sustainability of water supply facilities. Capacity development needs to cover not only the technical aspects of O&M but also financial management, water demand management through public awareness campaigns, and the protection of water sources including water conservation. The first year of operation can be assigned to the contractor to provide incentives to improve the quality of construction and achieve the early completion of works. Preparing the project management and operation manual before the inception of the project will address initial operation and sustainable issues. 57. In community-based projects, WUSCs can act as reliable facilitators between the project and beneficiaries. The participation of local communities during both design and implementation is crucial for project sustainability and effective project implementation. 58. Better linkage between health outcomes and WSS outputs should be promoted in WSS projects by including sanitation, hygiene, and health promotion activities in project design. 59. Extensive and thorough investigations of potential project sites need to be carried out to the extent possible during feasibility studies and detailed design to ensure that designs are appropriate. Experience shows that design shortcomings have caused significant implementation delays and numerous contract variations. 60. All components of projects should be treated as important and monitored from the early stages of project implementation. The difficulty of establishing technical support centers in five development regions of Nepal under the technical support components was mainly because the EA accorded them low priority and ADB did not follow up sufficiently. 61. A unit to provide technical support to WUSCs should be established in an early stage of the project, and the staff of WUSCs should be trained throughout the project implementation period, rather than just at the end. ADB should be more involved in ensuring that appropriate mechanisms for providing technical support are in place and that the unit’s capacity is strengthened. Five regional technical support centers were established very late in the project, and only one center was staffed by two people, who do not know how to operate some of the equipment. 62. Team leader inputs should be adequately provisioned in engineering and design consultant contracts to ensure timely technical support and advice for town projects to facilitate timely decisions. 63. A capacity-development program for beneficiaries needs to be well planned and implemented in accordance with the project implementation schedule and progress. A

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monitoring mechanism to measure the effectiveness of the capacity development programs needs to be established. C. Recommendations

1. Project Related

64. Future monitoring. The DWSS shall focus its future monitoring of the performance of town projects on sustaining benefits. This will require a detailed survey of project outputs and the identification of all problems on a regular basis. The DWSS should, through its division or subdivision offices, provide technical support and budget allocations to address problems identified in town projects for at least 3 years after the construction of a water supply system is completed. 65. Covenants. As the government has not fully complied with the covenants related to the establishment and operation of regional technical support centers, it must regularly report to ADB on progress toward this end. 66. Further action or follow up. Water tariffs should be sufficient to cover investment repayment and O&M costs. This is essential for the sustainability of town projects. The TDF needs to support all WUAs’ tariff adjustments to improve the financial sustainability of town projects. Regarding the participation of poor households, appropriate connection fees or other mechanisms should be considered based on the socioeconomic status of the towns and households. 67. The TDF needs to follow up with town projects to ensure appropriate revenue generation, the timely payment of interest and principal by WUAs, and town projects’ sustainability. While following up with the WUSCs, the TDF should consider an extension of its support to strengthen the capacity of WUSCs and WUAs through training on financial management and tariff setting.

2. General

68. The design and monitoring framework needs to be developed with clear outcome and output statements, as well as relevant, specific, and quantifiable performance indicators with which the outcome and outputs can be measured. 69. Implementation procedures and guidelines should be prepared before project effectiveness, particularly for projects that take new approaches and are implemented with multiple stakeholders. This will help ensure timely implementation and avoid start-up delays. 70. Technical audits should be carried out at least twice during project implementation to ensure the quality of construction, cost effectiveness, and timely completion. 71. A dedicated project coordination office must be established to facilitate implementation and coordination with various agencies, especially when the project involves multiple stakeholders and institutions over a vast geographic area and a new project approach. 72. A bottom-up, demand-driven approach to selecting subprojects should be followed in all community-based projects to ensure that there is both need and demand for project outputs and subsequent ownership.

15

73. Consultants and contractors involved in project implementation should be made fully accountable for the quality of their work and their effects on project outputs. The government should develop and implement a performance monitoring mechanism.

16 Appendix 1

PROJECT FRAMEWORK

Design Summary

Performance Indicators/Targets

Assessment/Recommendation

Improved health conditions 593,000 beneficiaries, against the target of 600,000, gained access to drinking water. Hand-washing, toilet, and bathing habits improved.a

Higher rate of school attendance by children

No data to assess the achievement.

I. Impact Enhance human development and reduce poverty through the sustainable improvement of water supply and sanitation conditions in small towns. Increased productive time

Time saved from fetching water as determined for each town in the quick community survey, ranged from 0.86 hours per day in Parsa to 4.0 hours per day in Khaireni and Lekhnath, with average savings of 2.1 hours, allowing more time for quality care of children, home, and self, including time for rest and socialization.b

II. Outcome Improve water supply and sanitation in selected small towns.

Improved water supply and sanitation in service areas in 40–50 small towns

From 33 small towns selected in batches, 4 were dropped, leaving 29 small towns to acquire improved water supply and sanitation facilities. Consumption of water increased as 86% of families gain access to drinking water that meets the water quality standard of Nepal.

Local ownership of the completed town projects

Communities contribute 50% of capital costs for water supply infrastructure, ensuring local ownership. Water user and sanitation committees (WUSCs) were highly commited. Water user associations (WUAs) became registered institutions. An annual general assembly is organized by each town project. Operation and maintenance is carried by the staff hired by WUAs and WUSCs, with WUSCs overseeing water supply systems as the executive committees of WUAs.

Improved town project management in terms of progress and quality

Each town project has an office to manage and operate water supply. Staff, including meter readers and accountants, were recruited. Water billing forms were prepared and used. Tariffs are collected to cover the cost of operating and maintaining systems and to partly cover capital costs. One of the town projects has outsourced tariff collection to a commercial bank. Women are 33% of participants in WUSCs.

Support the participation of local beneficiaries in all stages of the project.

Appendix 1 17

Design Summary



Higher tariff collection WUSCs introduced regular tariff collection systems in all 29 town projects. Although the new water tariff rate is higher than the tariff before the project, it is less than the design estimate. Monthly tariffs are in the range of NRs30–NRs300 per 10,000 liters. The TDF is to monitor the tariff and performance of the town projects.

Sustainability Demand for drinking water has increased. WUSCs are accountable for providing water supply services.

Improved technical, financial, and management capacity in WUSCs for sustainability

Training on accounting procedures was provided to 29 accountants and 44 members of WUSCs.

WUSCs able to monitor water quality

Training and equipment for water quality monitoring was provided. The staff of town projects are capable of monitoring turbidity and chlorination.

Capacity for operation and maintenance enhanced

Training was provided to staff of WUSCs on meter reading, pump operating, and masonry. Minor works are being done by the staff of WUSCs, and major works are outsourced to local contractors.

Build the capacity of WUSCs and promote community-based water quality monitoring.

Establishment of small businesses in meter repair and resale

Not established

III. Outputs Water Supply and Sanitation

Cover the service areas in the project towns 80% with house connections and 20% with community taps.

Coverage of 80% was achieved with 76% house connections and 4% community taps. Mass campaigning needs to be done at the town project level to accelerate house connections. Technical and financial support to WUAs is needed to rectify problems related to water treatment plants, low well discharge, poor water quality, and leakage.

Meeting World Health Organization drinking water standard

The water supply system was designed to meet the World Health Organization drinking water standard.

Surface drainage and public sanitation facilities in core areas with high population density

Constructed infrastructure included 16,450 meters of surface drainage and 54 public latrines.

18 Appendix 1

Design Summary



Public awareness campaigns and health and hygiene education

Transparency in town project design

Public awareness campaigns were conducted in each town.

Participation of local communities

Members of WUSCs in town projects are fully involved in town project design and the implementation of contracts.

Health and hygiene awareness

Health and hygiene education was provided to 3,152 users, including 1,683 women. Hand-washing, bathing, and latrine-use habits improved.

Assistance in providing private latrines to low-income groups on a cost-sharing basis

Financial support of 50% of the cost of latrine construction was provided to the poor.

Five regional technical support centers were established. Division and subdivision offices of the Department of Water Supply and Sewerage provide post-construction support. However, fee-based services have yet to be provided. The government has engaged a consultant under the Second Small Towns Water Supply and Sanitation Sector Project to assess the established units and recommend a modality for their operation. Discussions with the department are in progress. The Asian Development Bank will monitor this under the Second Small Towns Water Supply and Sanitation Sector Project. Orientation training provided to 489 members of WUSCs. Training on accounting procedures was provided to accountants and a member from each WUSC. A financial manual was prepared. Financial training was provided to 25 members of WUSCs.

Technical support for WUSCs

5 regional technical support centers established to provide fee-based services to WUSCs for engineering, water quality testing, meter calibration, and training

a Department of Water Supply and Sewerage. 2007. Benefit and Monitoring Report. Nepal. b Department of Water Supply and Sewerage. 2008. Benefit and Monitoring Report. Nepal. Sources: ADB.2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Small Towns Water Supply and Sanitation Sector Project. Manila; ADB. Project completion review mission. December 2009–January 2010, updated in June 2010.

Appendix 2 19

PROJECT OUTPUTS

Table A2.1: Summary of Project Outputs

Item

Unit

Actual

Remarks/Assessment

Water Supply and Sanitation Town water supply No. 29

Of 33 small towns, 4 (Dhankuta, Nilkantha, Lamahi, and Nijgadh) were dropped. Table A2.2 presents the functional and operational status of projects in 29 towns.

House connections % 76 House connection includes private taps as well as yard connections.

Community taps No. 3,493 Users preferred to have private water tap connections rather than community taps.

Institutional taps No. 2,115 Institutional taps were provided for hospitals, schools, and government offices.

On-premise latrines for ultra-poor No. 10,022 Government provided a 50% cost subsidy to construct on-premise latrines for the ultra poor.

Public latrines No. 54 Fee-based service is being provided to the public.

Surface drainage meter 16,450 Limited surface drainage, impact is insignificant.

Public Awareness Campaigns and Health and Hygiene Education Public awareness campaigns undertaken

No. 30 Beneficiaries became aware of the importance of safe defecation.

Users received health and hygiene education

No. 3,152 One project town dropped out during the first year of the civil works contract.

Women receive health and hygiene education

No. 1,683 Women’s education was effective, as significant change in their hygiene behavior was noted by the project completion review mission.

Community action plans adopted for each town

No. 30 WUSCs commitment for proceeding with the implementation of town projects was demonstrated.

Technical Support for WUSCs Regional technical support centers established

No. 5 The centers have not yet adopted procedures to provide its services to town projects for water quality testing and meter calibration.

Members of WUSCs orientated about water supply systems

No. 489 Members of WUSCs have less confidence in dealing with technical issues.

Number of staffers received training on accounting

No. 29 Training was limited, and the timing of the training was inappropriate.

Members of WUSCs received training on finance

No. 29 A member from each WUSC received training on finance.

No. = number, WUSC = water user and sanitation committee. Source(s): ADB. 2010.

20 Appendix 2

Table A2.2: Functional and Operational Status of 29 Town Projects (as of 30 June 2010)

Name of Town Project

Assessment

Parsa Small Town Water Supply and Sanitation Project

Water supply is available for 24 hours daily, and the system is managed well. There is demand for expanding the system.

Water quality is good and disinfection is done.

Part of the interest has been paid.

Fikkal Small Town Water Supply and Sanitation Project

Water supply is regular but interrupted due to landslides during rainy season, which washed away a portion of the transmission line. The problem was temporary fixed to supply water.

Water quality is good and disinfection is done.

An initial interest payment was made to the Town Development Fund (TDF)

Trijuga Small Town Water Supply and Sanitation Project

Adequate but intermittent water supply is achieved.

The water treatment plant functions but suboptimally. Water quality needs to be monitored.

No loan payment has been made to the TDF.

Attariya Small Town Water Supply and Sanitation Project

Within a year after commencement, both tube wells were heavily silted. The water user and sanitation committees (WUSCs) stopped operating the water supply system. The Department of Water Supply and Sewerage (DWSS) considered developing tube wells under the government’s deep tube well construction program.

Disinfection is provided.

An initial principal and interest repayment has been made to the TDF.

Bandipur Small Towns Water Supply and Sanitation Sector Project

The water supply is intermittent, as yield from the source diminishes and population growth accelerates. Water is acidic and probably contains iron. The internal diameter of galvanized iron pipes is decreasing with rust encrustation.

Water quality is good.

Principal and interest are regularly repaid.

Birendranagar Small Towns Water Supply and Sanitation Sector Project

Water supply is intermittent and interrupted by landslides, which have washed away a portion of water transmission line. The problem was temporarily fixed to supply water.

The water treatment plant functions.


Ratnanagar Small Towns Water Supply and Sanitation Project

Water supply is intermittent to save electricity.

Water quality is good with a disinfection unit.

Appendix 2 21


Assessment

Lekhnath Small Towns Water Supply Project

Interest is regularly repaid.

Water supply is regular as demand grows.

Water quality is good, but the pressure filter does not function during rainy season because of high turbidity.


Surunga Small Towns Water Supply Project

Water supply is regular.

Water quality is good with a disinfection unit.


Kairenitar Small Towns Water Supply Project


Water quality is good, but the treatment plant needs improvement.


Kohalpur Small Towns Water Supply Project

Water supply is irregular, with low yield from tube wells.

Water quality is good, but the water treatment plant is not in full operation.

Interest is partly repaid.

Prithvinarayan Small Towns Water Supply Project


The water treatment plant is not in full operation, and remedial measures are needed.


Beni Small Towns Water Supply Project

Water supply is irregular because a landslide washed away a portion of the transmission line.

Water quality is good, and the treatment plant functions.

Interest and principal are partly repaid.

Kusma Small Towns Water Supply Project


The treatment plant is functioning.


Kawasoti Small Towns Water Supply Project

Water supply is intermittent due to minor defects and damage from floods.

The treatment plant is functioning.

Interest and principal are partly repaid.

Bardibas Small Towns Water Supply Project

The functioning of the water supply system is being tested.

There is no treatment plant.

Interest is being repaid.

22 Appendix 2


Assessment

Bijuwar Small Towns Water Supply Project

Water supply is regular, but the source river is changing course, and the sump-well does not function optimally.


No repayment has been made.

Waling Small Towns Water Supply Project

Water supply from two subsystems is functioning, but another scheme has a dispute over the source.

The treatment plant is functional.

Mahendranagar Small Towns Water Supply Project

Water supply is irregular because of a problem of lime encrusting the distribution system.

The treatment plant is functional. Calcination is a major, worsening problem that requires mitigation.


Sunawal Small Towns Water Supply Project

Water supply is irregular due to low discharge from wells.

Water quality is good. The treatment plant needs minor improvement.


Tulsipur Small Towns Water Supply Project




Tribhuwannagar Small Towns Water Supply Project


Principal and interest are being repaid.

Bardaghat Small Towns Water Supply Project

Water supply is irregular because one of the wells failed.

No interest or principal is paid, and the water users association would like to use part of its revenue to develop the tube well. Once the water supply is regular, the association is willing to repay interest and principal.

Belbari Small Towns Water Supply Project

Water supply is regular, but the transmission line needs protection where it crosses a river.

The treatment plant functional.

No interest or principal is repaid.

Lamki Small Towns Water Supply Project


Water quality is good, but calcium is being deposited in pipelines, meters, and the filtration unit. The cost of operating the treatment plant is high.


Birtamod Small Towns Water Supply Project



Appendix 2 23


Assessment

Budhabare Small Towns Water Supply Project

Interest and principal are being repaid.



No interest or principal has been repaid.

Itahari Small Towns Water Supply Project



Repayment has not started.

Source: Department of Water Supply and Sewerage survey in June 2010 toward prioritizing the allocation of government funds to rectify problems.

24 Appendix 3

PROJECT COST

Table A3.1: Actual Project Cost

($'000)

Foreign Local Total Item Exchange Currency Cost A. Civil Works 1. Water supply 23,354 15,568 38,921 2. Public sanitation and drainage 820 205 1,024 3. Private latrines 1,660 1,660 Subtotal (A) 24,174 17,433 41,607 B. Equipment and Vehicles 391 527 918 C. Consulting Services and Training 3,872 430 4,4301 D. Nongovernment Organization Services 216 407 623 E. Incremental Administrative Expenses 2,088 895 2,983 C. Interest During Construction 555 555 Total 31,296 19,691 50,987

Source: Asian Development Bank estimates.

Appendix 4 25

Table A3.2: Financing Plan ($ '000)

Asian Development

Bank Government Local Governments Beneficiaries

Total Description Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Civil Works

Water supply 24,120 23,353 8,040 9,730 8,040 5,838 40,200 38,922 Public sanitation and drainage 1,830 820 458 205 2,288 1,025

Private latrines 550 830 550 830 1,100 1,660 Equipment and Vehicles 945 819 105 98 1,050 918 Consulting Services and Training 4,505 3,872 501 430 5,006 4,301 Nongovernment Organizations 1,061 623 118 1,179 623 Incremental Administrative Expenses 1,656 2,088 710 895 2,366 2,983 Interest During Construction 680 555 680 555 Total Cost 34,798 32,131 10,023 11,983 458 205 8,590 6,668 53,869 50,987

Source: Asian Development Bank estimates.

26 Appendix 4

LOAN DISBURSEMENT

Table A4.1: Yearly Loan Disbursement ($)

Description FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 Total

Civil Works, Water Supply 17,703

378,169

1,741,677

3,482,763

5,209,349

7,339,185

4,318,753

866,079

23,353,678 Civil Works, Public Sanitation and Drainage

82,160

121,543

204,625

189,440

209,859

12,362

819,989

Equipment and Vehicles

188,277

21,401

60,043

36,154

73,886

23,160

33,843

382,623

819,387 Consulting Services and

Training

423,858

372,793

194,947

401,634

677,017

629,094

375,074

772,640

24,643

3,871,700 Nongovernment Organization

Services

70,819

141,444

26,024

29,856

162,237

89,679

41,294

61,886

623,239 Incremental Administration

Expenses

99,169

192,390

130,302

445,142

280,590

424,949

317,367

198,235

2,088,144

Interest Charges

3,396

7,699

17,515

33,432

60,331

112,078

195,666

124,670

554,787

Total

785,519

753,430

807,000

2,770,055

4,858,367

6,692,934

8,491,869

6,068,666

903,084

32,130,924

FY = fiscal year. Source: Loan Financial Information System, Asian Development Bank.

Appendix 4 27

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010

Yearly Loan Disbursements

Dis

burs

emen

ts ($

)

FY = fiscal year. Source(s): Asian Development Bank

28 Appendix 4

Table A4.2: Quarterly Disbursements ($ million)

Cumulative

Year Quarter Actual

Disbursements Actual

Cumulative Percentage of Actual

Disbursements 2000 III 0.000 0.000 0.000 IV 0.000 0.000 0.000 2001 I 0.000 0.000 0.000 II 0.000 0.000 0.000 III 0.000 0.000 0.000 IV 0.500 0.500 1.556 2002 I 0.128 0.628 1.954 II 0.000 0.628 1.954 III 0.161 0.789 2.455 IV 0.267 0.156 3.286 2003 I 0.004 1.056 3.299 II 0.479 1.060 4.790 III 0.224 1.763 5.487 IV 0.000 1.763 5.487 2004 I 0.363 2.126 6.616 II 0.220 2.346 7.301 III 1.538 3.884 12.088 IV 0.407 4.291 13.354 2005 I 0.210 4.501 14.008 II 0.616 5.117 15.925 III 0.272 5.389 16.771 IV 2.427 7.816 24.325 2006 I 1.088 8.904 27.711 II 1.072 9.976 31.047 III 1.529 11.505 35.805 IV 1.625 13.130 40.863 2007 I 0.802 13.932 43.359 II 2.737 16.669 51.877 III 2.206 18.875 58.742 IV 2.089 20.964 65.243 2008 I 0.526 21.490 66.880 II 3.670 25.160 78.302 III 2.483 27.643 86.030 IV 2.112 29.755 92.602 2009 I 0.740 30.495 94.905 II 0.734 31.229 97.190 III 0.174 31.403 97.731 IV 0.729 32.132 100.000

ADB Source: Loan Financial Information Systems, Asian Development Bank.

Appendix 5 29

PROJECT IMPLEMENTATION SCHEDULE

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4A.

(iii)

(iv)

B. Public Awareness Campaigns and Health and Hygiene Education (i)

(ii)

(iii)

(iv)

C. Construction of Water Supply and Public Sanitation Facilities(i)

(ii)

(iii)

(iv)

(v) Commissioning and Follow-up

(i)

(ii)

Selection of Subproject Consultants

Feasibility Study

Detailed Engineering Design and Bidding

Civil Works Construction and Procurement of Equipment

Selection of NGOs

Public Awareness Campaigns (Preparation Phase)

Health and Hygiene Education and Focused Training (Implementation Phase)Promotion and Construction of Household Latrines (Implementation Phase)

Establishment of Implemetnation ProceduresEstablishment of Implementation ProceduresRecuritement of Project Implementation ConsultantsShortlisting of Engineering Consultants and NGOs

Project Planning Phase

2000 2001 2002Task Description

2007 20082003 2004 2005 2006

30 Appendix 5

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4D. Technical Support to WUSCs(i)

(ii)

(iii)

E. Capacity Buidling and Training(i)

(ii)

(iii)

: Planned : Actual

2006 2007 2008Task Description

2002 2003 2004 2005

Training and Orientation for Community and WUSC (Implementation Phase)

2000 2001

Setting up Water Quality Monitoring and Technical Support Center

Training in Water Quality Monitoring and Meter Caliberation

Training Needs Assessment and Development of Training Programs

Training and Orientation for DWSS and other Project Statkeholders

Setting up Water Quality Monitoring Mechanism and Schedule

DWSS=Department of Water Supply and Sewerage; NGOs=nongovernmental organization; WUSCs=Water User and Santiation Committees Legend : : Planned

Appendix 6 31

STATUS OF COMPLIANCE WITH LOAN COVENANTS

Covenants

Reference in Loan Agreement

Status of Compliance

1. The Borrower shall re-lend to TDF ADB funds under a Subsidiary Loan Agreement upon terms and conditions satisfactory to ADB and shall cause TDF to apply such proceeds to the financing of expenditures under Part B of the Project. The terms of re-lending shall include a repayment period of 20 years, including a grace period of 5 years and an interest rate of 5% per annum. The Borrower shall assume the foreign exchange risk. TDF shall on-lend the funds to WUSCs participating in the Project at an interest rate of 8% per annum with a maximum repayment period of 12 years to 15 years including a grace period of 3 years. These terms and conditions will be reviewed jointly and adjusted, if necessary, every 2 years from the date of Loan effectiveness, by ADB loan review mission, MOF, MPPW and TDF.

Section 4.05 (a) Complied with. In 2005, the interest on the sub-loan to the Town Development Fund (TDF) was revised from 5% per annum to 3.5% per annum.

2. The Borrower shall make arrangements satisfactory to the Bank for insurance of the Project facilities to such extent and against such risks and in such amounts as shall be consistent with sound practice.

Section 4.05 (a) Complied with

3. Without limiting the generality of the foregoing, the Borrower undertakes to insure, or cause to be insured, the goods to be imported for the Project and to be financed out of the proceeds of the Loan against hazards incident to the acquisition, transportation, and delivery thereof to the place of use or installation, and for such insurance any indemnity shall be payable in a currency freely usable to replace or repair such goods.

Section 5.05 (b) Complied with

4. The Borrower shall (i) maintain, or cause to be maintained, separate accounts for the Project, and each Town Project, and Project component; (ii) have such accounts and related financial statements audited annually, in accordance with appropriate auditing standards consistently applied, by independent auditors whose qualifications, experience, and terms of reference are acceptable to the Bank; (iii) furnish to the Bank as soon as available but in any event not later than twelve (12) months after the end of each related fiscal year, certified copies of such audited relating thereto (including the auditors’ opinion on the use of the procedures for imprest account and statement of expenditures, all in the English language); and (iv) furnish to the Bank such other information concerning such accounts and financial statements and the audit thereof as the Bank shall from time to time reasonably request.

Section 4.06 (b) Complied with

5. The Borrower shall furnish, or cause to be furnished, to the Bank, with one month after the four-month period under review, four-monthly reports on the carrying out of the Project and on the operation and management of the Project facilities. Such reports shall be submitted in such form and in

Section 4.07 (b)

Complied with

32 Appendix 6

Covenants



such detail and within, such a period as the Bank shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the period under review, steps taken or proposed to be taken to remedy these problems, and proposed programs of activities and expected progress during the following review period.

6. Promptly after physical completion of the Project, but in any event not later than three months thereafter or such later date as may be agreed for this purpose between the Borrower and the Bank, The Borrower shall prepare and furnish to the Bank a report, in such form and in such detail as the Bank shall reasonably request, on the execution and initial operation of the Project, including its cost, the performance by the Borrower of its obligations under this Loan Agreement and the accomplishment of the purposes of the Loan.

Section 4.07 (c) Complied with but delayed

7. For each Town Project undertaken in a Project town, the civil works and the related equipment and supplies shall be combined into one contract package and shall be referred to as a civil works contract.

Section 3, para. 4

Complied with

8. In each Project town, the PMO shall establish a Town Project Office (TPO) with appropriate qualified staff, including a minimum of the one female social worker, to coordinate the field activities of consultants, NGOs, local bodies, and WUSCs. The TPO shall also include two representatives from the local WUSC, at least one of whom is female. Where more than one WUSC is involved in the service area covered by a Town Project, an apex WUSC shall be establish by the relevant WUAs following procedures acceptable to the Bank. At each key milestone of the Town Project cycle as agreed with the Bank, PMO shall seek endorsement from WUSCs before taking further action.

Schedule 5, para. 4 Complied with

9. By 31 December 2000, the Borrower shall establish a Project Coordination Committee (PCC), comprising the Secretary (Chair) and Joint Secretary of MPPW, (Alternate Chair), Director General of DWSS, Executive Director of TDF, a senior official from each of the MOF, MLD, and Ministry of Law, Justice and Parliamentary Affairs respectively, and the Project Manager (Member Secretary). Provision shall be made for (i) the PCC chair to invite representatives of the relevant WUSCs and local bodies from the Project towns where issues relevant to the parties arise, as ad hoc members, and Bank staff, subject matter specialists, consultants, and NGO representatives as observers, and (ii) the PCC to meet at least four times per year or upon request by any of its members. The PCC shall be responsible for the overall coordination and liaison of Project activities with Project related departments and agencies.


Appendix 6 33

Covenants



10. An application in the prescribed form for participation in the Project of a proposed Project town shall be jointly submitted by the local bodies and WUSC, with endorsement of the concerned DDC, to PMO for evaluation.


11. Applications shall only be submitted in respect of a proposed Project town that meets the following criteria:

(a) the affected service area under the proposed Town Project has: (i) a population of a minimum of 3,000 if it is in the hills or 5,000 if located in the Terai, and a maximum of 40,000 persons; (ii) a population density of at least 40 person per hectare.

(b) the proposed Project town should: (i) be located

close to an all weather road along the east-west highway or the main north-south feeder roads; (ii) have access to grid electricity, basic telecommunication, banking service, an lower secondary school, and basic health services; (iii) meet at least two of the following indicators of hardship regarding water supply and sanitation facilities: (a) marginal or unacceptable low water quality (i.e. be below the basic WHO water quality standards, or national standards when in effect, in two or more important categories as determined by PMO); (b) water quantity available from the current system is less than 30 lpcd; available of water from taps is less than 2 hours per day; (d) 50% of the water users have to spend more than 30 minutes per day to collect water; and (e) 50% of the service area population have no private latrines.


12. The local bodies of each proposed Project town shall be responsible for providing to the relevant WUA the initial information required in order to submit a Project Town application and ensuring that the WUSC is established in the relevant Town Project service area. When lodging the application, the local body and the WUSC shall acknowledge to the PMO and agree in writing, that in the event that the application to participants is successful:

(a) the local bodies shall be responsible for contributing 20% of the construction cost of the public sanitation components in the Project town, and the Borrower through the PMO shall provide the balance as a grant;

(b) the WUSC shall be (i) responsible for contributing a minimum of 50% of the construction cost of the water supply scheme including a direct contribution of 20% by the Project town community , which shall be composed of labor, local materials and a minimum cash component of 5% of the construction cost; and (ii) (a) borrow from TDF, the required funds to meet


34 Appendix 6

Covenants



the additional 30% of the water supply scheme construction cost; (b) be responsible for reviewing, setting, and collecting water tariffs from the users to repay the TDF loan; (c) own the water supply schemes when constructed; and (d) be responsible for the operation and maintenance (O&M) of the systems; and

(c) the cost of construction of private latrines shall be met up to a maximum of 50% by the borrower through the PMO as a grant, with the balance to be met by the household. The borrower’s contribution shall not include local materials as defined by the PMO, and shall only apply to low income households as identified by the relevant WUSC and NGO.

13. By 31 December 2000, PMO shall, in consultation with TDF, finalize selection criteria for Project towns to participate in the Project by indicating the appropriate weights to be assigned to each of the criteria during the selection process and submit them to the Bank for approval.


14. Once a Project town has been selected for participation in the Project, each WUSC and the relevant local bodies shall confirm their willingness to participate in the Project by agreeing in writing, to a Community Action Plan which outlines the board terms and conditions of the proposed Town Project, the implementation arrangements, and responsibilities to be undertaken by all related parties.


15. The PMO shall then engage an NGO to conduct a public awareness campaign in the proposed Project town focusing on: (a) the roles and responsibilities of the WUSC, local bodies, TDF, and DWSS; (b) the need to share capital costs of the water supply systems, and financing arrangement; (c) the linkages between the desired level of services, the cost contribution and O&M expenditure, and water tariffs; (d) the availability of TDF loans and the obligation to pay back the borrowed funds; (e) representation of women in the decision making process; and (f) land acquisition and resettlement issues.


A feasibility study shall be conducted of various options for delivery of water supply which associates the service level required with the cost involved. The recommendations of the feasibility study shall be presented jointly by the consultants, PMO, and TDF to the relevant WUSC for confirmation of the critical design parameters and projected cost contribution for the proposed Town Project. Upon such confirmation by the relevant WUSC, detailed engineering design shall occur. Once the design is finalized, a Town project Agreement between the relevant WUSC, TDF, and PMO on behalf of the Borrower, shall be signed before tendering for the civil works commences based on the completed detailed design.


Appendix 6 35

Covenants



16. An evaluation committee, comprising representatives from the PMO, TDF, and the relevant WUSC shall review the bid evaluations prepared by PMO and determine the bid winner. Negotiations shall be undertaken and completed between PMO and the bid winner and copies of negotiated contracts shall be forwarded to the ADB for approval.


17. A Health and Hygiene Education Program (HHE) shall then be conducted. The NGO that is selected by PMO in consultation with the relevant WUSC, will coordinate other institutions and civil groups active in sanitation improvement, to develop an appropriate training program. The HHE will include (a) school hygiene education; (b) community education; (c) focused training including latrine construction, solid waste management, animal waste management, and training of community health workers; and (d) details for obtaining assistance under the Project of up to fifty percent of costs for participating households in constructing in-premise sanitation facilities.


18. The PMO shall ensure that the Project town committees are involved in the supervision and monitoring of the performance of contracts. WUSCs shall inform in a timely manner, the WUA and relevant stakeholders, of Town Project-related information through public briefings or by posting material on local bulletin boards.


19. TDF shall be responsible for assessing the financial sustainability of the proposed Town Project, including examining the proposed Town Project costs in connection with the debt servicing capabilities of the local bodies and the WUSC, and in the event that a Town Project is selected, for providing partial financing of the construction costs. TDF shall maintain its own financial sustainability by: (a) making adequate provisions for non-performing assets from fiscal year 2000/01; (b) maintaining a debt service coverage ratio of at least 1:1 times; and (c) exercising such other due diligence as required for a prudent financial institution.

Schedule 5,para.15 Complied with

20. Before 31 December 2000, TDF shall execute the Subsidiary Loan Agreement, and shall finalize the proforma Sub-loan Agreement based on feedback from ADB and MOF. Following selection of a Project town, the relevant WUSC and the TDF shall enter into a Sub-loan Agreement for partial construction funding. TDF shall recommend appropriate levels of water tariffs to the relevant WUSCs and shall ensure that the WUSCs take appropriate measures to effect proper collection of outstanding water bills and protect the water resources and facilities.


21. TDF shall develop a suitable tariff accounting framework for WUSCs and shall monitor water tariffs in the Project towns

Schedule 5, para 16 Complied with

36 Appendix 6

Covenants



to ensure that they cover at least the O&M and debt service payments, and are properly collected and recorded. TDF shall provide training to WUSCs for basic tariff planning and collection methods, bookkeeping and account. TDF shall disburse to, and collect loans from WUSCs to meet Town Project construction costs and ensure that the loan funds are used for the intended Town Projects. TDF shall participate in procurement activities related to each Town Project implementation. 22. Notwithstanding any provision of the Loan Agreement or Project Agreement, no withdrawals shall be made from the TDF Loan account for a Town Project until (a) relevant water users association (WUA) is established and authorized to act on behalf of the WUA; (b) a legally binding and operative Town Project Agreement has been executed on behalf of the Borrower and the WUSC concerned on terms and conditions acceptable to the Bank; (c) the Town Project is determined to be financially viable by TDF; and (d) the WUSC concerned has taken all necessary steps to (i) acquire the required land, rights in land and water, and rights-of-way to carry out expeditious implementation of the Town Project; and (ii) obtain all required permits in connection therewith. 23. O&M of the water supply systems installed under the Project shall be the responsibility of the relevant WUSCs. Depending on the complexities of the systems, WUSCs may choose to undertake the O&M using their own members, hiring qualified individuals, contracting out O&M to private operators, or obtaining fee-based services from DWSS district offices. (Loan Agreement,).

Schedule 5, para. 17 Schedule 5, para. 18

Complied with Complied with

15. Training for the O&M of installed systems shall be provided by the design consultants to the WUSCs representatives and shall include techniques for the WUSCs to monitor and supervise the performance of private operators. DWSS shall establish regional technical support centers to provide post-construction technical support to WUSCs for O&M.

Schedule 5, para. 18 Partly complied with

16. O&M of the public latrines, drainage and sewers with communal septic tanks shall be the responsibility of the relevant local bodies.

Schedule 5, para 18 Complied with. Sewers with communal septic tanks were not constructed.

17. The PMO shall select NGOs to assist in carrying out Project implementation activities using selection criteria including (i) experience relevant to the Project objectives; (ii) ties with the Town Project area; (iii) financial integrity; (iv) record of proven competence in group formation. The PMO shall continually evaluate performance and techniques employed by the NGOs and provide feedbacks to the NGOs.


Appendix 6 37

Covenants



18. Prior to the effective date, DWSS shall print out and distribute to the local bodies and WUSCs the procedures of Town Project formulation, implementation, O&M, and rights and responsibilities of each stakeholders, including capital cost sharing, and shall organize at least five regional workshops and with participants from local bodies and WUSCs to explain the design of the Project and to address concerns of the local representatives.


19. DWSS shall establish and maintain a web site to disclose all Project-related information, including relevant government policies and procurement guidelines, project town application, evaluation and selection procedures and criteria, Project progress such as procurement, contract awarding, and performance evaluation.


20. Land to be made available for the purpose of the Project shall be valued according to the rates specified by the District Land Revenue Office, and considered part of WUSC’s contribution to the Town Project cost in addition to their cash contribution. Local bodies shall be responsible for providing public land needed for constructing public latrines and communal septic tanks. Resettlement, if any, shall be arranged by WUSC in accordance with the ADB’s Guidelines on Involuntary Resettlement where construction for Project town requires significant resettlement, a resettlement plan shall be submitted by the PMO to the Bank for approval. A short resettlement plan shall be included in each Community Action Plan for the guidance of WUSCs and local bodies.


22. DWSS shall prepare and provide to ADB its concurrence, a time bound ten-year action plan with implementation arrangements to transfer responsibility for all water supply schemes currently under the immediate supervision, to the relevant local authorities.


23. WHO drinking water quality standards or national standards when in effect shall be applied in designing water systems in Project towns. DWSS shall provide water quality testing services to the WUSCs free of charge.

Schedule 5, para. 23 Partly complied with

23. PMO shall finalize Project performance indicators and establish baseline conditions in consultation with the WUSC and local bodies in each Project town for purposes of Project monitoring and evaluation (M&E). M&E indicators and procedures shall be tested for data availability and their constraints, revised if necessary, and institutionalized in WUSCs and DWSS. DWSS shall be ultimately responsible for maintaining the M&E systems. Indicative performance indicators have been agreed between the Borrower and ADB. The benefit monitoring and evaluation shall take due account of the approaches and guidance provided under the ADB’s


38 Appendix 6

Covenants



Benefit Monitoring and Evaluation: A Handbook for Bank Staff, Staff of the executing Agencies and Consultants. 24. Project activities and performance will be monitored by ADB through regular periodic reviews. Based on the evaluation conducted, the Borrower and ADB, shall after the comprehensive review, agree upon any necessary modifications and improvements, if necessary, including adjustments in Project scope and implementation arrangements. The Borrower shall ensure that remedial actions shall be undertaken as soon as possible to address the identified problems, if any.

Schedule 5, para. 25

Complied with

25. TDF shall furnish to ADB quarterly reports on the water supply schemes under the Project and on the O&M of those facilities. Such reports shall be submitted in such form and in such detail and within such a period as the Bank shall reasonably request, and shall indicate, among other things, progress made and problems encountered during the quarter under review, steps taken or proposed to be taken to remedy these problems, and proposed program of activities and expected progress during the following quarter.

Project Agreement, Section 2.07 (c)

Complied with

Source(s): ADB. Project completion review mission. December 2009–January 2010, updated in June 2010; Department of Water Supply and Sewerage.2009; ADB.2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to Nepal for Small Towns Water Supply and Sanitation Sector Project. Manila.

Appendix 7

39

ECONOMIC AND FINANCIAL ANALYSES A. Introduction 1. Consistent with the report and recommendation of the President (RRP) for the project, the economic and financial analyses of the eight sample town projects (Table A7.1) were carried out in accordance with Asian Development Bank (ADB) Guidelines for the Economic Analysis of Projects1 and Handbook of the Economic Analysis of Water Supply Projects.

Table A7.1: List of the Town Projects Selected for Economic and Financial Analysis

Beneficiaries Name of Town Project

District Municipality VDC

Contract Cost (NRs)

Actual Cost (NRs) Population Households

Mahendranagar Kanchanpur Mahendranagar 46,331,696.53 54,246,720.74 12,659 2,434 Attariya Kailali Geta and

Malakheti 37,282,828.00 47,286,316.44 9,353 1,799 Lekhnath Kaski Lekhnath 170,716,935.46 238,821,722.94 34,339 6,604 Bandipur Tanahu Bandipur 16,067,039.00 19,781,742.76 3,899 750 Ratnanagar Chitwan Ratnagar 76,212,751.46 106,328,028.20 32,087 6,171 Parsa Chitwan Parsa 25,665,582.00 40,055,433.00 14,995 2,884 Khairenitar Tanahu Khairenitar 18,024,476.00 20,324,588.00 4,635 891 Surunga Jhapa Surunga 45,064,156.26 57,628,029.46 10,236 1,968 NRs = rupees, VDC = village development committee Source: ADB. Project completion review mission, November 2009–January 2010. 2. To ensure comparability and forecast consistency with the RRP, the analyses included least-cost analyses of alternative water supply development options, where applicable; the calculation of the average incremental financial cost (AIFC) and the average incremental economic cost (AIEC) per cubic meter of water sold; a comparison of the AIFC and the AIEC with the proposed average tariff to assess subsidies; calculations of the economic internal rate of return (EIRR) and the financial internal rate of return (FIRR) for these town projects, as well as a combined EIRR and FIRR for them; a determination of a possible tariff structure based on affordability and willingness to pay; and financial projections to determine the financial sustainability of water user and sanitation committees (WUSCs). B. Assumptions 3. The assumptions in the financial and economic analysis are as follows.

(i) Capital and operation and maintenance (O&M) costs are based on the actual cost that has been incurred by WUSCs for town project implementation and a forecast for the planned project for 15 years.

(ii) A capital allowance equivalent to 10% of total capital cost is made every 10 years to cover the cost of replacing pumps and other equipment in addition to ordinary O&M expenditures.

(iii) The major O&M costs for each town project are based on water system characteristics and include operation, personnel, power, and maintenance.

(iv) The capital and operating cost streams in the financial analysis are those used in the economic analysis plus taxes and duties paid by the WUSC on capital inputs and operating costs.

(v) Financial benefit streams are revenues from water sales to domestic, commercial, and institutional customers. The calculation of revenue is based on the water tariff charged by the WUSC in each sample town and its plan to adjust the price in the future.

1 ADB. 1997. Guidelines for the Economic Analysis of Projects. Manila.

40 Appendix 7

(vi) As all sample town projects have been in operation for 2 years, projected water sales are based on actual amount of water sold by the WUSCs and projected growth in the number of tap connections, demand for water from users, and the existing capacity of the water storage tanks.

(vii) Water consumption by individual and community taps has been based on the actual amount of water consumed by these households. The number of water users in each tariff bracket has been estimated, and likely changes in composition have been forecasted.

(viii) An allowance of 5% for bad debts is assumed, for collection efficiency of 95%. (ix) In quantifying project costs for economic analysis, financial prices are

adjusted to economic prices, duties and taxes are removed, a standard conversion factor of 0.90 is applied to non-tradable inputs, and a shadow wage rate factor of 0.7 is applied for unskilled labor to adjust for prevailing underemployment.

(x) Foreign exchange costs are converted at NRs74.00 = $1.00. (xi) The quantifiable benefits of the town projects include both incremental and

non-incremental benefits. Non-incremental benefits arise from the resource cost saving of customers switching from other sources to the new water supply system, plus the non technical loss unaccounted for water available to users from the town projects

(xii) Incremental benefits from additional water consumption under the project will include the following: (i) additional consumption to meet previously suppressed and now increasing demand from existing customers; (ii) additional consumption by new domestic customers; (iii) suppressed demand and increased demand from commercial and institutional customers; and (iv) incremental non technical loss resulting from the project.

C. Demand Analysis 4. The demand analysis is based on a quick community assessment and the findings of the benefit monitoring and evaluation survey conducted during project implementation. The available information indicates that 48% of households did not have water connections and had to carry water from other sources. Consequently, consumption was very low at less than 70 liters per household per day, or roughly 12.5 liters per capita per day (lpcd). Only 15% of households with piped water connections had regular supply, most getting water for only a few hours per day. For most households, the unavailability of water in existing systems was the main reason for not having a house connection in the past, and the situation changed significantly after the implementation of the town project. Suppressed demand has been minimized, and there are cases in which hardship and health concerns have been significantly reduced with the improvement in water supply. This is one contribution of the project. 5. The financial and economic analyses were done based on the following projections, to be consistent with Department of Water Supply and Sewerage (DWSS) guidelines and the RRP: 100 lpcd for private indoor connections, 65 lpcd for private yard connections and boarding schools, 45 lpcd for community taps, 10 lpcd for day-student schools, 500 liters per bed per day for hospitals and clinics, and 750 liters per day for institutions. The annual population growth rate in town project areas—derived from district profiles, focus group discussions with key informants, and the observation of trends in in- and out-migration—ranges from 1.8% to 9.0%, with an average of 5.6%. It is difficult to determine the impact of the increased tariffs on future demand and consumption patterns, as there are very few WUSCs with experience in charging for water, and data for DWSS systems are based on existing tariff structures.

Appendix 7

41

D. Economic Benefits

6. Evidence exists that economic benefits arise from improved health and sanitation, improvement in the quality of life from reduced need to fetch water, and increased economic development opportunities resulting from infrastructure improvements in small towns. As economic development and health benefits are not readily quantifiable, the calculation of economic returns significantly understates the full value of the projects. The financial and economic overview of the small town projects covered in this study is provided in Table A7.2. 7. The quantifiable benefits of two sample projects include incremental water consumption arising from additional sales to meet suppressed and increasing demand from existing water users, new domestic demand, suppressed and new demand from commerce and industry in small towns, and consumption of unaccounted-for water from additional water supplies. They also include non-incremental water consumption as reflected in resource cost saving for customers who switched from unsafe sources before the project to the reliable water supply systems provided by the project.

8. The major resource cost saving was attributable to reduced time spent fetching water, as determined for each town in a quick community survey, ranging from 0.9 hours per day in Parsa to 4.0 hours per day in Khaireni and Lekhnath, with an average of 2.1 hours. This was quantified using an opportunity cost for unskilled labor assessed at an average of NRs100 per day, converted to economic prices at a shadow wage rate factor of 0.7 and actual use rate of 50%. While it is impossible to assume that all the time saved can be used for income generation, alternative productive benefits can be assumed, such as more opportunity to attend school, particularly for girls.2 No benefit was quantified for potential time saving in bathing, as low-income customers are likely to continue to use existing sources in the absence of water supply connections.

9. Incremental benefits were calculated for increased consumption from suppressed demand, estimated as the difference between current consumption and household demand with water supply connections, valued at levels of willingness to pay determined in the quick community assessment survey, which is a proxy indicator for the average demand price. The economic benefits of nonrevenue water consumed, but not paid for is estimated at 5% of total water requirements for each system, valued at a weighted average of incremental and non-incremental benefits. The value of contributions users are prepared to pay toward construction costs is another measure of quantified benefits, which constitutes part of their willingness to pay for an improved water system in addition to willingness to pay higher tariffs for a utility with improved service, including the convenience of house connections. 10. Unquantifiable benefits accrue from the economic development of towns fostered by improved infrastructure. They include increased real estate values, the improved likelihood of increased commerce and industry, and the development of institutions such as schools and hospitals that require secure water supplies. Although they cannot be measured, significant health benefits arose, particularly in conjunction with the project's complementary programs of health and hygiene education. The quick community assessment survey showed that households having to fetch water consumed on average 60.6–70.0 liters daily, or 10.7-12.5 lpcd in an average household of 5.6 members. The finding indicated direct relationships between levels of water consumptions, hygiene, morbidity, and mortality, which is consistent with other sector studies. The increased availability of a convenient water supply has, complemented by health and hygiene education, reduced health risks associated with such practices as washing dishes adjacent to unsanitary storm drains or in poorly drained outdoor areas.

2 The socioeconomic survey results indicate that 84% of the burden of fetching water is on females and that a

smaller proportion of girls than boys attend school.

42 Appendix 7

Table 7.2: Financial and Economic Assessment of the Small Town Water Supply and Sanitation Project

Item

Mahendranagar

Attariya

Lekhnath

Khairenitar

Bandipur

Ratnanagar

Parsa

Surunga

Average

Users (No.) 1,540 1,035 3,998 956 579 2,535 1,565 1,200 13,408 Low-income users (No.) 508 259 840 277 203 786 626 276 3,774 Investment Cost (NRs '000) Labor 7,482 6,522 32,941 2,803 2,728 14,666 5,525 7,949 80,616 Skilled labor 4,489 3,913 19,764 1,682 1,637 8,799 3,315 4,769 48,370 Unskilled labor 2,993 2,609 13,176 1,121 1,091 5,866 2,210 3,179 32,247 Materials 40,483 35,289 178,227 15,168 14,763 79,350 29,892 43,007 436,179 Local 18,955 16,523 83,450 7,102 6,912 37,153 13,996 20,137 204,228 Imported 21,528 18,766 94,778 8,066 7,850 42,197 15,896 22,870 231,951 Equipment 5,153 4,492 22,686 1,931 1,879 10,100 3,805 5,474 55,520 Others 1,128 984 4,968 423 411 2,212 833 1,199 12,158 Social mobilization cost 1,218 1,453 1,635 1,648 1,374 1,650 1,378 1,698 12,054 Technical support cost 6,188 5,271 6,292 3,388 3,388 4,700 4,700 5,373 39,299 Total Investment Cost 61,653 54,010 246,749 25,361 24,544 112,678 46,133 64,699 635,825 Total Financial Cost (NRs '000) 73,839 72,471 319,363 45,153 41,266 172,730 90,918 81,288 897,029 Total Water Production (NRs '000) 2,420,565 3,260,553 15,572,026 2,031,713 1,951,249 11,352,334 5,679,192 2,913,750 45,181,381 Water produced in 2009 (m3) 121,020 96,090 672,480 180,360 79,614 501,930 258,225 154,800 2,064,519 Total Economic Cost (NRs '000) 70,037 65,301 308,026 52,876 37,648 150,952 75,285 71,260 831,384 Total Tariff Collection (NRs '000)

1,409 1,267 6,675 1,251 1,067 4,806 2,718

1,591 20,786

Appendix 7

43

Item

Mahendranagar

Attariya

Lekhnath

Khairenitar

Bandipur

Ratnanagar

Parsa

Surunga

Average

Local Contribution (NRs '000)

3,168 9,457 47,764 4,065 3,956 21,266 8,011 11,526 109,213 Cash 2,712 2,364 12,022 1,016 572 5,316 2,003 2,881 28,887 In kind 456 7,093 35,742 3,049 3,384 15,949 6,008 8,644 80,326 Total financial cost net of user contribution (NRs '000) 70,671 63,014 271,599 41,088 37,310 151,465 82,907 69,763 787,816 Average Household income (NRs) 29,500 35,900 42,476 36560 38,650 41,590 39,690 37,490 38,952 Average income of low-income households (NRs) 16,490 19,193 25,580 20,140 21,510 25,160 26,140 21,123 23,415 Average Monthly Bill of Average Household (NRs) 76 102 139 109 154 158 145 111 129 Average monthly bill of low-income Households (NRs) 60 60 100 65 75 100 100 70 86

m3 = cubic meter, NRs = rupees. Source: Project completion review mission, November 2009–January 2010, updated in June 2010.

44 Appendix 7

11. Saving on household water storage cost is expenditure on supplementary water storage systems and pumping that has been reduced or eliminated by reliable piped supplies. Water resource conservation benefits were achieved by charging cost-based tariffs. Demand management reduces water wastage that is common when water is provided for free. Consistent with recent study findings, most water quality problems result from recontamination during and after distribution, instead of at the water source or point of treatment. It has been found that improved distribution networks, continuity of supply, and high numbers of house connections reduce the likelihood of recontamination from unclean containers that used for fetching and storing water and are necessitated by intermittent and unreliable water service. Unquantified health benefits also arise from improved sanitation through the construction of public sanitation facilities, private latrines, and drains. All these improve sanitation, particularly in the rainy season. E. Economic Evaluation of Sample Subprojects

1. Economic Evaluation and Sensitivity Analysis 12. The weighted average EIRR for the eight town projects is estimated at 11.7%, including related software costs for training and education. This well exceeds the opportunity cost of capital, assumed at 7%. A summary of the results, by town project, is shown in table A7.3. 13. The EIRRs for the sample town projects range from 8.0% in Bandipur to 16.4% in Parsa. The EIRRs would have been much higher if the unquantified health benefits of the town projects are considered. 14. A sensitivity analysis was conducted for a 10% increase in capital and operating costs, a 10% reduction in subproject benefits, and both combined. A summary is presented in Table A7.3. Even in the worst case scenario, which combines a 10% decrease in benefits and 10% increase in costs, two out of eight town projects are still viable, with EIRRs above 9%. The other town projects—Mahendranagar, Ateriya, Lekhnath, Khairenitar, Bandipur, and Surunga—are sensitive to this extreme situation, but two are robust and are economically viable even in the combined worst case scenario.

Table A7.3: Economic Evaluation and Sensitivity Analysis

EIRR (%) NPV (NRs '000) Town Project

AIEC (NRs/m3)

Base Case (%)

+10% of Cost (%)

–10% of Benefit

(%)

Combined Case (%)

Base Case

+10% of Cost

–10% of Benefit

Combined Case

Mahendra-nagar 28.9 10.1 8.1 7.9 6.0 3,855.3 (3,148.3) (3,533.9) (10,537.6) Attariya 20.0 12.0 10.3 10.1 8.5 12,209.0 5,678.9 4,458.0 (2,072.1) Lekhnath 19.8 11.0 9.4 9.3 7.8 40,325.7 9,523.1 5,490.6 (25,312.0) Khairenitar 26.0 9.9 8.2 8.0 6.3 2,786.8 (2,500.7) (2,779.4) (8,067.0) Bandipur 19.3 8.0 6.2 6.0 4.2 (1,884.4) (5,649.2) (5,460.7) (9,225.5) Ratnanagar 13.3 14.0 12.2 12.0 10.3 46,380.1 31,284.9 26,646.9 11,551.7 Parsa 13.3 16.4 14.4 14.2 12.2 32,476.2 24,947.6 21,700.0 14,171.5 Surunga 24.5 8.8 7.2 7.0 5.3 (749.2) (7,875.2) (7,800.2) (14,926.2) Average 18.4 11.7 10.0 9.8 8.1 135,399.5 52,261.2 38,721.2 (44,417.2)

45

( ) = negative, AIEC = average incremental economic cost, EIRR = economic internal rate of return, m3 = cubic meter, NPV = net present value, NRs = rupees. Source: Project completion review mission, November 2009–January 2010, updated in June 2010.

2. Average Incremental Financial and Economic Costs 15. The AIFCs and AIECs for the eight town projects were calculated to determine the subsidies needed to achieve full cost recovery, based on the prevailing tariff for each town project, as summarized in Table A7.4. AIFCs and AIECs were both based on a 9% rate of discount, applied to a 20-year projection of the costs and benefits, expressed in financial and economic prices, respectively.

Table A7.4: Average Incremental Costs and Subsidies (NRs/m3)

Item

Mahendra-nagar

Attariya

Lekh-nath

Khaireni-tar

Bandi-pur

Ratna- nagar

Parsa

Surunga

Combined Project

AIEC 28.9 20.0 19.8 26.0 19.3 13.3 13.3 24.5 18.4 AIFC 30.5 22.2 20.5 22.2 21.1 15.2 16.0 27.9 19.9 AIFC net of user contribu-tions 29.2 19.3 17.4 20.2 19.1 13.3 14.6 23.9 17.4 Average tariff 11.6 13.2 9.9 6.9 13.4 9.6 10.5 10.3 10.1 Economic subsidy 17.3 6.8 9.9 19.1 5.9 3.7 2.7 14.2 8.3 Financial subsidy 18.9 9.0 10.6 15.3 7.7 5.6 5.5 17.6 9.8 Financial subsidy net of user contribu-tions 17.6 6.1 7.5 13.3 5.7 3.8 4.1 13.7 7.4 AIEC = average incremental economic cost, AIFC = average incremental financial cost, m3 = cubic meter, NRs = rupees. Source: Project completion review mission, November 2009–January 2010, updated in June 2010. 16. The difference between the average incremental economic cost (AIEC) per cubic meter and the tariff provides a measure of subsidy to beneficiaries per cubic meter of water consumed. The average economic subsidy is NRs8.3/m3, or 83% of prevailing tariff, and the financial subsidy is NRs9.8/m3, or 97% of prevailing tariff. However, this does not account for users themselves contributing 34% of capital costs at the outset of the project. When the AIEC is adjusted for this, the actual financial subsidy is lower, averaging NRs7.4/m3 (bottom row in Table A7.4). Similarly, the true economic subsidy is significantly lower than indicated, which is justifiable, even without quantification of all economic benefits. The relatively high EIRRs for the projects demonstrate that total economic benefits far exceed economic costs.

3. Financial Evaluation of Town Projects 17. The FIRRs of the sample town projects and their sensitivity to adverse changes were calculated. The sensitivity analysis was conducted for a 10% increase in construction and operating costs, a 10% reduction in project benefits, and a combination of the two. The resultant FIRRs and sensitivity analysis, summarized in Table A7.5, indicate that the town projects are sensitive to any adverse shocks from the financial point of view and even more sensitive to a

46 Appendix 7

decline in water sale. The relatively high sensitivity of revenues highlights the need to ensure tariff collection.

Table A7.5: Financial Evaluation and Sensitivity Analysis

FIRR (%) Town Project

AIFC (NRs/m3) Base Case

+10% of Costs

–10% of Benefits Combined Cases 1+ 2

Mahendranagar 30.5 1.7 0.6 0.4 (1.4)

Attariya 22.2 5.3 4.3 4.1 2.6

Lekhnath 20.5 6.9 5.6 5.4 3.9

Khairenitar 22.2 6.2 6.2 6.0 3.8

Bandipur 21.1 4.7 4.5 4.3 2.6

Ratnanagar 15.2 4.3 3.1 2.9 1.2

Parsa 16.0 7.3 6.6 6.4 4.5

Surunga 27.9 0.7 (0.5) (0.7) (2.4)

Average 19.9 5.2 4.3 4.1 2.5 ( ) = negative, AIFC = average incremental financial cost, FIRR = financial internal rate of return, m3 = cubic meter, NRs = rupees. Source: Project completion review mission, November 2009–January 2010, updated in June 2010.

4. Financial Sustainability of WUSCs 18. The financial sustainability of WUSCs is premised on tariffs sufficient to maintain a positive cash flow while meeting all costs for O&M, debt servicing, capital expenditure for distribution system expansion within current design capacity and 15 years, and major scheduled capital replacements within a projection period. It has been assumed that WUSCs are not required to pay taxes on their activities. 19. Financial projections for each system demonstrated that the WUSCs are financially sustainable based on outlined criteria and cost and tariff assumptions. After paying operating and debt-service costs, there is an operating surplus in year 20 (Table A7.6).

Table A7.6: Financial Position of Water User and Sanitation Committees (NRs ‘000)

Items

Mahendra-

nagar

Attariya

Lekhnath

Khai-

renitar

Bandipur

Ratna-nagar

Parsa

Surunga Combined

Project Operating surplus in year 20 12,689 20,749 117,570 9,760 10,026 30,631 24,414 10,299 236,140 Cash in year 20 15,379 24,315 132,601 12,450 12,218 39,125 29,442 13,718 279,247 Machinery & equipment replace-ment 8,245 7,186.9 36,298 3,475 3,382 18,180 6,848.9 9,306 92,922 Meter replace-ment 2,230 1,870 6,287 1,290 889 4,768 2,920 1,771 22,028 Total replace- 10,475 9,057 42,585 4,765 4,272 22,948 9,770 11,077 114,950

47

Items

Mahendra-

nagar

Attariya

Lekhnath

Khai-

renitar

Bandipur

Ratna-nagar

Parsa

Surunga Combined

Project ment fund

% cash on hand 68.1 37.2 32.1 38.3 35.0 58.7 33.2 80.8 41.2 Times annual surplus 0.8 0.4 0.4 0.5 0.4 0.7 0.4 1.1 0.5

NRs = rupees. Source: Project completion review mission, November–December 2009.

20. Project construction costs were financed 50% by a government grant and 20% by up-front contributions from users, with the balance financed by funds onlent through the TDF at an annual interest rate of 8.0%, with repayments amortized over 15 years and a 3-year grace period. Revenue forecasts reveal that WUSCs can repay the loan through tariffs. The estimated cash contribution is presented in Table A7.7.

Table A7.7: Breakdown of User Contribution (NRs million)

Items

Mahend-ranagar

Atta-riya

Lekh-nath

Khair-enitar

Bandi-pur

Ratna-nagar

Parsa

Surun-ga

Combined Project

Users' contribution 3,168 9,457 47,764 4,066 3,956 21,266 8,011 11,526 109,213 In-kind contribution 456 7,093 35,742 30,489 3,384 15,949 6,008 8,644 80,326 Cash contribution 2,712 2,364 12,022 1,016 572 5,316 2,003 2,881 28,887 Cash % of total contribution 4.4 4.4 4.9 4.0 2.3 4.7 4.3 4.5 4.5 In-kind % of total contribution 0.7 13.1 14.5 12.0 13.8 14.2 13.0 13.4 12.6 Users' contribu-tion/household 2,057 9138 11,947 4,252 6,833 8,389 5,119 9,605 8,145 In kind 296 6,853 8,940 3,189 5,845 6,292 3,839 7,203 5,991 Cash 1,761 2,284 3,007 1,063 988 2,097 1,280 2,401 2,155 NRs = rupees. Source: Project completion review mission, November–December 2009.

F. Cost Recovery, Tariff Structure, and Affordability 21. The town projects agree to meet government guidelines2 on charging water tariffs.3In accordance with the guidelines, WUSCs are developing appropriate water tariff structures to recover the cost of production including for O&M, debt service, and a contribution to future capital development and the attainment of financial sustainability. 22. Table A7.8 summarizes the tariff structure and impacts of each project in terms of estimated monthly household cost and affordability, as measured by percentage of household income for average and low-income households. The rates range from a low of 3.8% income for low-income consumers in Ateriya to 4.8% for average users in Bandipur and low-income users 2 Government policy states that future programs for urban water supply systems "should incorporate adequate cost

recovery based in differential consumption which also provides a lifeline rate for low income households with low consumption and a penalty rate for excessive consumption."

3 Town Project Agreement Document.

48 Appendix 7

in Ratnanagar. Based on the affordability criterion of charges not exceeding 5% of income, the required tariffs are within both poor and average households' ability to pay.

Table A7.8: Breakdown of User Contributions

(NRs million)

Rates (NRs/m3) Item

Mahendra-nagar

Attariya

Lekh-nath

Khaireni-tar

Bandipur

Ratna-nagar Parsa

Surun-ga

Combined Project

Tariff Structures Bands (m3 per month) 0–10 m3 9.8 10.0 10.0 6.5 9.8 10.0 10.0 10.0 9.5 >10 m3 13.6 14.3 16.5 7.5 17.0 10.8 14.0 11.5 13.1 AIFC per m3 30.5 22.2 20.5 22.2 21.1 15.2 16.0 27.9 19.9 Average tariff per m3 11.6 13.2 9.9 6.9 13.4 9.6 10.5 10.3 10.1 Average Households

Monthly bill (NRs/month) 76.2 102.0 139.1 109.1 153.6 158.0 144.8 110.5 129.2 Affordability (% of household income) 3.1 3.4 3.9 3.6 4.8 4.6 4.4 3.5 4.0 Low-income Households Monthly bill (NRs/month) 60.0 60.0 100.0 65.0 75.0 100.0 100.0 70.0 85.8 Affordability (% of household income) 4.4 3.8 4.7 3.9 4.2 4.8 4.6 4.0 4.4 AIFC = average incremental financial cost, m3 = cubic meter, NRs = rupees. Source: Project completion review mission, November–December 2009.

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