Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 40698 - NP

PROJECT APPRAISAL DOCUMENT

O N A

PROPOSED GRANT

IN THE AMOUNT OF SDR 27.8 MILLION (US$42.6 MILLION EQUIVALENT)

TO

NEPAL

FOR A

ROAD SECTOR DEVELOPMENT PROJECT

November 6,2007

Sustainable Development Department South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Rank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS (Exchange Rate Effective August 3 1,2007)

Currency Unit = Nepalese Rupees NRs.65.80 = US$1

US$1.53 = S D R l

ADB AWPB

CAS CBO CDC CFAA

CIAA

CPAR CPIA CPN-M CRL DDCs DDG DFID DOLIDAR

DOR DTCO EMAP EMP ESMF

FAR FCB FCGO FMIS GAAP GESU

GON HDM HRDU ICB ICR IDA IEE

INT

P R

BOQ

FISCAL YEAR

ABBREVIATIONS AND ACRONYMS July 16 - July 15

Asian Development Bank IRR Internal Rate o f Return Annual Work Program and Budget JICA Japan International Cooperation Agency Bill o f Quantity LCF Local Consultative Forum Country Assistance Strategy M&E Monitoring and Evaluation Community Based Organisation M O F Ministry o f Finance Compensation Determination Commission M O L D Ministry o f Local Development Country Financial Accountability MOPPW Ministry o f Physical Planning and Works Assessment Commission for Investigation o f Abuse o f MTEF Medium-Term Expenditure Framework Authority Country Procurement Assessment Report N C B National Competitive Bidding Country Policy and Institutional Assessment NPC National Planning Commission Communist Party o f Nepal-Maoist NPV Net Present Value Central Road Laboratory OAG Office o f the Auditor General District Development Committees PAF Project Affected Families Deputy Director General PCT Project Coordination Team Department for International Development PDO Project Development Objective Department o f Local Infrastructure PEFA Public Expenditure Financial Development and Agricultural Roads Accountability Department o f Roads PFM Public Financial Management District Treasury Comptroller Offices PIP Priority Investment Plan Environment Management Action Plan P M U Project Management Uni t Environmental Management Plan PPMO Public Procurement Monitoring Office Environment and Social Management PRS Poverty Reduction Strategy Paper Frame work Financial Administration Regulations QAP Quality Assurance Plan Foreign Cooperation Branch R&R Rehabilitation and Resettlement Financial Comptroller General Office RAP Resettlement Action Plan Financial Management Information System RBN Roads Board Nepal Governance and Accountability Action Plan RDC Roads Development Component Geo-Environment and Social Unit RMDP Road Maintenance and Development

Government o f Nepal RPF Resettlement Policy Framework Highways Design and Maintenance Model RSDP Road Sector Development Project Human Resource Development Unit S A P Social Action Plan International Competitive Bidding SIL Sector Investment Lending Implementation Completion Report S R N Strategic Road Network International Development Association SWAP Sector Wide Approach Initial Environmental Examination USAID U.S. Agency for International

Department o f Institutional Integrity VCDF Vulnerable Community Development

Implementation Progress Report VDC Village Development Committee

Project

Development

Framework

Vice President: Praful C. Pate1 Country Director: Susan G. Goldmark

Sector Manager: Guang Zhe Chen Task Team Leader: Marianne Kilpatrick

FOR OFFICIAL USE ONLY NEPAL

ROAD SECTOR DEVELOPMENT PROJECT

PROJECT APPRAISAL DOCUMENT

SOUTH A S I A

SASDT

Date: November 8,2007 Country Director: Susan G. Goldmark Sector ManagerDirector: Guang Zhe Chen

Team Leader: Marianne Kilpatrick Sectors: Roads and highways (1 00 percent) Themes: Infrastructure services for private sector development (P);Trade facilitation and market access (S) Environmental screening category: Partial Project ID: PO95977 Assessment

Lendinn Instrument: SDecific Investment Loan "

[ ]Loan [ 3 Credit [XI Grant [ 3 Guarantee [ 3 Other:

For Loans/Credits/Others: Total Bank financing (US$m): 42.60 Proposed terms:

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

Responsible Agency: Department o f Roads Babar Mahal Nepal Tel: 977 14262675 Fax: 977 1 4262693

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

4nnual 1 0.0 I 4.26 I 8.52 I 10.65 I 19.18 I 0.00 I 0.00 I 0.00 I 0.00 Clumulativel 0.0 I 4.26 I 12.78 I 23.43 I 42.60 I Project implementation period: Start April 1,2008 End: June 6,2012 Expected effectiveness date: March 6,2008 Expected closing date: June 6,2012 Does the project depart from the CAS in content or other significant respects? Re$ PAD A.3 [ ]Yes [XINO

Does the project require any exceptions from Bank policies? Re$ PAD D. 7 Have these been approved by Bank management?

[ ]Yes [XINO [ ]Yes [XINO

I s approval for any pol icy exception sought from the Board? Does the project include any critical r isks rated “substantial” or “high”? Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Ref: PAD D. 7

[ ]Yes [XINO

[XIYes [ ] N o

[XIYes [ ] N o .z

Project development objective Re$ PAD B.2, Technical Annex 3 The PDO i s for the residents o f beneficiary districts to have all-season road access thereby reducing travel time. This wil l help improve access to economic centers and social services. The project targets five hill districts which currently lack all-season road access and wil l improve access to one other district. The achievement o f the project will be monitored by the following outcome indicators:

i.

11.

111.

iv.

6 percent increase in the number o f people with all-season road access in the project districts (20 minutes walking or 2 km); 35 percent decrease in travel time for target population to reach key economic centers and social services; DOR to provide effective road infrastructure services to users (measured through user satisfaction survey); Roads Board i s fully functional and provides effective and sustainable funding for road maintenance (undertaking at least 500 k m s o f periodic maintenance o f the S R N annually and over 1,000 km o f backlog periodic maintenance within the project period).

..

...

Project Description : The project wil l have two components: (a) Road Development Component (RDC) and (b) Institutional Strengthening and Policy Reform Component.

The Road Development Component comprises o f (a) Road Upgrading and Resettlement and Rehabilitation, (b) Periodic Maintenance and (c) Road Safety Physical Works. The Road Upgrading sub-component wil l comprise upgrading o f about 297 km o f existing dry-season roaddtracks to all-season standard with sealed gravel pavements selected from a pool o f more than 1000 km o f prioritized roads based on the feasibility studies under the Priority Investment Plan, (PIP) 2007. These roads wil l improve connectivity to six districts (Darchula, Baitadi, Kalikot, Dailekh, Surkhet and Bajhang). Under the Periodic Maintenance sub-component, the project wil l support about 450 km o f periodic maintenance o f Strategic Road Network (SRN)

prioritized in the PIP (from 5300 km o f black top surfaced highways and feeder roads). About 100 km o f the highway with high traffic wil l have premix asphalt overlay and 350 km will have surface seal coats. Road safety audits wil l be carried out to identify black spots in the strategic road network. Based on the findings and recommendations, the project wil l support necessary physical works to improve the black spots under Road Safety Physical Works sub-component.

Institutional Strengthening and Policy Reform Component will provide support to Department o f Roads (DOR), Roads Board Nepal (RBN), and Ministry o f Physical Planning and Works (MOPPW) to sustain and deepen previous institutional and pol icy development activities started in Road Maintenance Development Project (RMDP), as wel l as support new ones that have been identified by Government o f Nepal (GON). Based on the proposed plan, the project wil l provide assistance for (a) Human Resource Development (HRD), (b) Geo-technical, Environment and Social Development, (c) Information Technology (IT) and Management Information System (MIS) Development, (d) Road Asset Management, (e) Preparation o f a Road Safety Action Plan, (f) Effective Quality Assurance, (g) Mechanical Training Centre, (h) Strengthening o f Roads Board operations, (i) Technical Audit, (i) Equipment and Logistics, and (k) Preparation o f a fol low up project.

Which safeguard policies are triggered, if any? Re$ PAD D. 6, Technical Annex 10 0 Environmental Assessment (OP/BP 4.01) 0 Involuntary Resettlement (OP/BP 4.12) 0 Indigenous Peoples (OP/BP 4.10) 0 Forests (OP/BP 4.36)

Board presentation: December 6,2007 Loadcredit effectiveness: March 6,2008 Covenants applicable to project implementation: Continuity of Staff It has been agreed that the GON will ensure the retention and continuity o f core staff consisting o f the staff in the PCT that includes accounts staff and the Project Managers at least as governed by the C iv i l Service Rules.

Road Boards Nepal (RBN) Act Amendment: It has been agreed that by December 2008, GON will submit to the Parliamentary Secretariat the proposal for amendment to the Roads Board Nepal. A draft o f the amendment to the Roads Board Nepal Act, 2058 (2002), would include amongst others, the Roads Board structure, accounting system o n accrual basis, authority to collect and cause to collect Road User’s Charges, and specific authorities o f Chairman and Executive Director.

Maintenance Budget: Commitment to perform at least 500 k m s o f periodic maintenance on the strategic road network (SRN) annually and over 1000 km o f back-log periodic maintenance within the project implementation period. GON agrees to channel adequate resources to the RBN in terms o f both maintenance budget and operating costs. RBN will also develop and achieve annual spending targets.

RBN Human Resource Development: By the end o f FY 2007/08, G O N will cause RBN to make a decision which would allow the salary structure o f RBN to be competitive or similar to other autonomous boards in Nepal Within two years, the implementation o f a structured human

resource development plan including career development and training for staff will take place.

Consolidation of Road Maintenance funding through RBN: From FY2008/09, the government budgetary allocation for road maintenance for both local and strategic roads, will be channeled through the Roads Board Nepal.

NEPAL Road Sector Development Project

CONTENTS

Page

A . STRATEGIC CONTEXT AND RATIONALE .................................................................... 1 Country and Sector Issues ................................................................................................... 1 Rationale for Bank involvement ......................................................................................... 2

I . I1 . I11 . Higher level objectives to which the project contributes .................................................... 3

B . PROJECT DESCRIPTION .................................................................................................... 4 1 . 2 . 3 . 4 . 5 .

Lending instrument ............................................................................................................. 4 Project development objective (PDO) and key indicators .................................................. 4 Project components ............................................................................................................. 5

Alternatives considered and reasons for rejection .............................................................. 7 Lessons learned and reflected in the project design ............................................................ 6

C . IMPLEMENTATION ............................................................................................................. 7 1 . 2 . 3 .

Partnership arrangements (if applicable) ............................................................................ 7 Institutional and implementation arrangements .................................................................. 7 Monitoring and evaluation o f outcomeshesults .................................................................. 8

4 . Sustainability ....................................................................................................................... 9 Critical risks and possible controversial aspects ................................................................. 9 Granthredit conditions and covenants .............................................................................. 10

. . .

5 . 6 .

D . APPRAISAL SUMMARY .................................................................................................... 11

2 . Technical ........................................................................................................................... 13 3 . Fiduciary ........................................................................................................................... 14 4 . Social ................................................................................................................................. 15 5 . Environment ...................................................................................................................... 17

Safeguard policies ............................................................................................................. 18 Disclosure o f documentation ............................................................................................ 19 Policy Exceptions and Readiness ...................................................................................... 19

Annex 1: Country and Sector or Program Background ......................................................... 20

1 . Economic and financial analysis ....................................................................................... 11

6 . 7 . 8 .

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 24 Annex 3: Results Framework and Monitoring ........................................................................ 26 Annex 4: Detailed Project Description ...................................................................................... 30 Annex 5: Project Costs ............................................................................................................... 33 Annex 6: Implementation Arrangements ................................................................................. 36 Annex 6a: Governance and Accountability Arrangements .................................................... 38 Annex 7: Financial Management and Disbursement Arrangements ..................................... 46 Annex 8: Procurement Arrangements ...................................................................................... 54 Annex 9: Economic and Financial Analysis ............................................................................. 58 Annex 10: Safeguard Policy Issues ............................................................................................ 64 Annex 11: Project Preparation and Supervision ..................................................................... 72 Annex 12: Documents in the Project Fi le ................................................................................. 73 Annex 13: Statement of Loans and Credits .............................................................................. 75 Annex 14: Country at a Glance ................................................................................................. 76 Annex 15: Map IBRD 35712 ...................................................................................................... 78

A. STRATEGIC CONTEXT AND RATIONALE

I. Country and Sector Issues

1. Against the backdrop o f the conflict and security problems over the last decade, Nepal remains the poorest country in South Asia with average per capita Gross Domestic Product (GDP) o f US$270 (2005). I t i s also the slowest growing economy in the region, with growth estimates for FY05/06 around 2 percent, compared to the regional average o f 8 percent. The political transition in April 2006 has opened a new chapter in the history o f Nepal. The signing o f a comprehensive peace agreement between the Government o f Nepal (GON) and the Communist Party o f Nepal-Maoists (CPN-M) in November 2006 lays out a roadmap to a lasting peace and the construction o f a new governance structure. I t also has the possibility to create a better environment for investment and economic growth, as well as for the government to deliver services and development projects in remote and previously security-affected areas. Nevertheless, the road ahead for Nepal i s not without r isks and challenges’.

2. Access to transport services i s a key determinant o f development outcomes in Nepal, with various socioeconomic surveys showing people with inadequate access are more likely to be excluded from economic opportunities and social services, and hence have lower incomes and inferior human development indicators than people with better access. Nepal’s road density is wel l below those o f its neighbors in South Asia. Of the 75 districts o f Nepal, 12 are not yet connected by road and another 14 are linked with seasonal tracks or dirt roads. As a result, residents o f the hill districts in Nepal, excluding the Kathmandu Valley, would need to walk on average five hours to reach an all-season road, and residents o f the mountain districts would need to walk over fifteen hours. Access to all-season road i s a critical measure o f transport access in Nepal because monsoon rains make earthen roads impassable for many months at a time.

3. W h i l e Nepal’s road network expanded by about 7 percent a year in the 1990s, expansion has stalled in recent years, down to less than 1 percent a year since 2001, due to the impact o f the prevailing conflict and security problems. These not only had an adverse effect on the ability to undertake works but also created resource constraints (the allocation o f resources to the road sector declined from about 10 percent o f total G O N budget in the 1990s to 5 percent since 2001). Today, the main network consists o f about 17,280 km o f roads (5,273 km black top, 4,613 km gravel, and 7,394 km earthen), plus there are about 16,000 km village and agriculture roads (most o f which are fair weather tracks and non-operable), bringing the total road network in Nepal to 33,280 km. By regional comparisons and local development needs, Nepal’s total road stock, network density and quality are al l quite low: 55 percent o f network in operation i s classified as dry season fair weather tracks. Nepal’s road density is 0.1 km/sq. km, compared to India’s (0.9 km/sq. km) and Bangladesh’s (1.5 km/sq. km).

’ Following a failure to reach consensus on the electoral system, the government, on October 5 2007, announced a postponement o f the Constituent Assembly elections, planned for November 22 2007. Coming just over two weeks after the CPN-Maoist withdrew from the Council o f Ministers, these events illustrate the continuing fluid nature o f the political situation in Nepal. The ongoing special session o f the interim parliament i s expected to resolve the deadlock either through a political compromise or a vote. Announcement o f a new election date -- possibly before April 2008 -- i s also anticipated soon thereafter. Notwithstanding the current setback, al l sides appear keen to emphasize that they continue to honor the Comprehensive Peace Agreement which the UN i s mandated to monitor.

1

4. The proportion o f the Strategic Road Network (SRN2) in good and fair condition increased from less than 50 percent in 1992 to 90 percent in 2001, but a recent survey (2006) shows that i t has declined to 82 percent. This i s a substantial achievement in the sector in terms o f reducing Vehicle Operating Costs, periodic maintenance costs and rehabilitation costs. The init ial improvement in the condition o f the road network throughout the 1990s largely came because o f donor and government funded rehabilitation works on the network to overcome the effects o f inadequate and irregular maintenance. This primary focus on maintenance has also reduced capital investment for network expansion thereby reducing additional expenditure for maintenance. In recent years, however, as donor programs shifted towards new construction and rural access infrastructure, funding for maintenance has been significantly short o f requirements. GON has established a Roads Board with a view to linking road sector funding to road use and improving the level o f domestic funding for road maintenance and condition o f roads. The Roads Board has been instrumental in generating partial maintenance resources through road user charges, allocating timely resources to road agencies based on priority annual maintenance plans and monitoring effectiveness o f maintenance works carried out by the road agencies. I t i s estimated that NRs2 billion per year (US$30,000,000) is required to undertake maintenance for the enhanced network (as defined in the Priority Investment Plan (PIP-2007)) but current funding i s only about N R s 1 bi l l ion and there is st i l l an increasing backlog o f periodic maintenance required. Donor support i s s t i l l required to take care o f timely periodic maintenance o f S R N until the Roads Board is able to generate adequate f h d s for maintenance.

11. Rationale for Bank involvement

5. GON successfully completed implementation o f the World Bank-supported Road Maintenance and Development Project (RMDP, IDA Credit 3293- NEP) on June 30, 2007. RMDP and other donor-supported road sector projects were formulated based on the recommendations made in the Priority Investment Plan (PIP- 1997) for the transport sector also prepared with the assistance from the World Bank. An output o f RMDP is an updated PIP to cover the period 2007-2016. The updated PIP i s based on goals established by G O N for accessibility to the Strategic Road Network (SRN) to bring the population within two hours walk in the Terai and four hours walk in the Hill area, to an all-season road. I t has therefore identified S R N roads for investment on the basis o f their social and economic benefits and i s now essentially a road master plan that forms a basis for the selection o f road projects for the upcoming 11 th and 12th national plans. All donors are working together to ensure a consistent approach and reduce the potential for overlap by fol lowing the recommendations o f the PIP, and formulating their investment programs based on the PIP. Both the Asian Development Bank (ADB) and Japan International Cooperation Agency (JICA) are undertaking investments in the S R N while Department for International Development (DFID) continues to support activity in the rural roads sector (alongside the Bank’s supported Rural Access Improvement Decentralization Program (RAIDP) which supports District road upgrading).

6. The Bank and GON have developed a close working relationship through numerous transport sector projects and the Bank has good knowledge o f the sector’s priorities and needs. Building on this relationship Road Sector Development Project (RSDP) has been prepared o n a “fast track” basis in order to provide greater accessibility in a short period o f time. This would not be

Of the 17,280 km of the main road network 7,535 km i s SRN, which comprises of highways and feeder roads connecting districts.

2

possible without the solid groundwork completed in RMDP: through the development o f the PIP and frameworks such as the Environment and Social Management Framework (ESMF). The capacity o f DOR as an implementing agency has proven adequate in carrying out upgrading and maintenance activities in an effective manner. The RMDP experience shows that Department o f Roads (DOR) i s capable o f handling procurement matters efficiently. Furthermore, the Bank’s ongoing support in the sector i s essential for continued progress towards sustainable sector-wide approaches and policies, provision o f stable long-term capital for sector investment, and ensuring social and environmental risks and impacts are appropriately and fully addressed.

7. I t i s recognized that at this time the road sector is not yet ready for a Sector Wide Approach (SWAP) but that the building blocks are in place to continue to work towards such an objective. These include:

0

0

0

Sector Strategy for the Strategic Road Network (PIP-2007) agreed and approved by GON Environment and Social Management Framework (ESMF) in place (published on DOR website) by which al l road projects will be assessed Financial Management Information System in place within DOR which allows appropriate budgeting, resourcing and financial management

8. However, there are s t i l l a number o f areas which will need further development before a I SWAP can be utilized as a matter o f course. These are:

0

0

0

Further development o f DOR’s management capacity across financial management, and environment and social sectors Ownership o f a harmonized approach to S R N improvement by DOR including mobil izing buy-in from al l donors as to priori ty investments and funding commitments. Increasing effectiveness o f the Roads Board Nepal (RBN). Specifically, ratification o f the Act Amendment, increased commitment to maintenance budget from Ministry o f Finance (MOF) and consolidation o f maintenance finding through RBN.

9. Over the course o f this project, i t i s expected that DOR will start to formulate a strategy to tackle these issues so that a SWAP for road management will become more o f a reality.

111. Higher level objectives to which the project contributes

10. Nepal’s Poverty Reduction Strategy (PRS)/Tenth Plan (2002-2007) outlines a four-pillar strategy: (i) achieving broad-based economic growth (especially o f agriculture and the rural economy); (ii) accelerating human development through better delivery o f social services; (iii) ensuring social and economic inclusion o f the poor; and (iv) pursuing good governance. One o f the highest priorities o f the PRS is improving transport access and this priori ty i s recognized by the Bank and is consistent with one o f the key outcome indicators for IDA 14. I t has been highlighted in the Interim Strategy Note (ISN, February 2007) and proposes that the emerging development agenda should focus on public investments for the remoter areas in order to increase inclusion. The outcomes targeted include percentage o f main road network (SRN) in poor condition reduced to 10 percent and share o f population with close access to roads (i.e. % day walk) increased by 4 percent.

3

11. In the absence o f an Eleventh Plan, GON is preparing a three-year interim plan until an elected government is established. The recently approved a ten year sector wide PIP wil l be the basis for three year interim plan o f the GON for the sector. The RSDP will be a fast track operation to support the three year interim plan and ongoing peace process. The project wil l demonstrate real benefits to the most remote communities. Specifically, the RSDP wil l adopt the following proactive approaches to ensure that interventions under the proposed project directly contribute to the country’s goals as supported by the ISN:

0 The proposed project wil l provide all-season road access for five hill districts, thereby enhancing the ability o f the rural poor to participate in economic activities and access quality health care and education services; The proposed project wil l continue to provide support to DOR, Roads Board Nepal (RBN), and Ministry o f Physical Planning and Works (MOPPW), which will sustain and improve the good governance that Nepal i s pursuing, especially in the road sector; and The road maintenance and safety physical works wil l provide some local employment opportunities contributing to some localized poverty reduction.

0

B. PROJECT DESCRIPTION

1. Lending instrument

12. The lending instrument proposed i s a Sector Investment Lending (SIL). An adaptable Program Loan was considered, but rejected in order to maintain flexibility for the Bank’s exit if the security situation deteriorates. A Sector Wide Approach (SWAP) approach was also considered given the availability o f the PIP and good donor coordination, but was considered incompatible with the objectives o f a fast track operation because it will take time to harmonize the implementation fi-amework including consensus on design standards, safeguard policies and implementation guidelines. However, the project wil l provide the necessary building blocks to move towards a SWAP in the next operation if deemed appropriate.

2. Project development objective (PDO) and key indicators

13. The PDO i s for the residents o f beneficiary districts to have all-season road access thereby reducing travel time. This will help improve access to economic centers and social services. The project targets five hill districts which currently lack all-season road access and will improve access to one other district. The achievement o f the project wil l be monitored by the following outcome indicators:

6 percent increase in the number o f people with all-season road access in the project districts (20 minutes walking or 2 km); 35 percent decrease in travel time for target population to reach key economic centers and social services; DOR to provide effective road infrastructure services to users (measured through user satisfaction survey); The Roads Board is fully functional and provides effective and sustainable funding for road maintenance (undertaking at least 500kms o f periodic maintenance o f the S R N annually and over 1,000 km o f backlog periodic maintenance within the project period).

4

3. Project components

14. The project will have two components: (a) Road Development Component (RDC), and (b) Institutional Strengthening and Policy Reform Component. The breakdown o f costs and Bank contribution i s shown in Table 1.

15. The Road Development Component comprises o f (i) Road Upgrading, (ii) Periodic Maintenance and (iii) Road Safety Physical Works. The Road Upgrading sub-component wil l comprise upgrading o f about 297 km o f existing dry-season roaddtracks to all-season standard with l o w cost sealed gravel (Otta Seal) pavements selected from a pool o f more than 1000 km o f prioritized roads based on the feasibility studies under the Priority Investment Plan, (PIP) 2007. These roads wil l improve connectivity to six districts (Darchula, Baitadi, Kalikot, Dailekh, Surkhet and Bajhang).

16. DOR used the PIP to select these five roads to hill districts for the fol lowing reasons:

0 These roads to Darchula, Baitadi, Kalikot, Dailekh and Surkhet are a continuation o f WB support under RMDP. The original selection o f districts was on the basis o f their being remote, non-road served districts which suffer from extremely l o w levels o f development. The fifth road to Bajhang district has been selected as the district is located in the same area and i t i s one o f the most remote districts in the far western region.

0 There are 12 districts in Nepal yet to be connected by road and 14 districts yet to have earthen tracks upgraded to al l weather standard. In accordance with the PIP, G O N plans to develop about 3000 km o f S R N in the terai and hills over the next five years. India has committed to support the development o f about 1200 km o f roads, mostly in the terai. ADB would be supporting about 1000 km, Japan 32 km, China 26 km, DFID 92 km and WB about 300 km and some G O N own financing.

0 Further, under WB supported Rural Access Improvement and Decentralization Project (RAIDP) is covering 12 terai districts out o f 20 project districts to upgrade about 500 km o f rural roads to a l l weather standard.

17. Under the Periodic Maintenance sub-component, the project will support about 450km o f periodic maintenance o f S R N prioritized in the PIP (from 5,300 km o f black top surfaced highways and feeder roads). About 100 km o f the two lane highway with high traffic will have premix asphalt overlay and 350 km o f other single/two lane S R N wil l have surface seal coats. Road safety audits will be carried out to identify black spots in the strategic road network. Based on the findings and recommendations, the project will support necessary physical works to improve the black spots under Road Safety Physical Works sub-component.

18. A road safety audit of S R N based on accident prone sections wil l be carried out under the project. Based on the findings and recommendations o f the audit report physical works wil l be supported to improve the black spots.

5

19. Institutional Strengthening and Policy Reform Component will provide support to DORY RBN and MOPPW to sustain and deepen previous institutional and pol icy development activities started in RMDP, as well as support new ones that have been identified by GON. Based o n the proposed plan, the project wil l provide assistance for (a) Human Resource Development (HRD), (b) Geo-technical, Environment and Social Development, (c) IT and M I S Development, (d) Road Asset Management, (e) Preparation o f a Road Safety Action Plan, (f) Effective Quality Assurance, (8) Mechanical Training Centre, (h) Strengthening o f Roads Board operations, (i) Technical Audit, (j) Equipment and Logistics, and (k) Preparation o f a fol low up project.

59.90 1.20

22.60 1.20

13.00

0.20 98.00

Table 1: Projec

Component

Component I - Road Development Road Upgrading Resettlement and Rehabilitation Periodic Maintenance Road Safety

Component I1 - Institutional - goods, services

Incremental Operating Costs Total Project Costs (excl. PPF) PPF Refinancing Total Financing

and training

30.32 0.60 3.43 0.59 6.57

0.10 41.60

Componei

cost (US$ M)

42.93 30.32 0.60 1 1.42 0.59 6.57

0.10 49.60 1.00

50.60

S

total

84.80 34.93

2.00 1 ;ilo 100.00

Yo of Bank

Financing 82.00 71.20 1.40 8.00 1.40

15.40

0.20 97.70 2.30

100.00

4. Lessons learned and reflected in the project design

20. The project has been developed from lessons learned through implementation o f the recently closed RMDP. The lessons from RMDP include the following:

R isks o f external factors, which are outside the control o f government or implementing agencies, should be properly assessed during the project preparation. Such factors especially if they are prevailing during project preparation should be taken into consideration. This would enable the project team to set a realistic PDO and design the project more flexibly. This includes allowing for frequent supervision to monitor implementation within the context o f a changing environment. Engineering designs in countries with a difficult terrain should be prepared based on field surveys rather than computerized modeling. The computerized modeling approach should be accompanied by field surveys to take into consideration peculiarities o f geological conditions and should be more appropriate in a mountainous country l ike Nepal. Poor performance o f contractors and consultants may delay the project execution. Due diligence by the Borrower and Bank i s required to select qualified contractors and consultants. Supervision o f works and regular post-construction supervision i s vital to reduce the instances o f poorly constructed or reduced asset l i fe o f upgraded roads. Institutional strengthening within DOR and ongoing development o f appropriate contracting to ensure high standard contract delivery has been built into the project

6

0 Autonomy o f the Roads Board. The experience o f the RBN has demonstrated that the structure o f the Board is an important element in allowing the organization to function appropriately. The ratification o f the Amendment to the Roads Board Act wil l be an important step in creating a more effective institution. Close collaboration o f the Bank and Borrower’s team was a key success factor to respond pro-actively with the project adjustments to the changing environment and ensure achievement o f the project objectives. Upgrading o f roads i s more easily achieved than new road construction (where blasting might be required) when there are security issues and an unstable political environment.

0

0

5. Alternatives considered and reasons for rejection

21. The alternative i s to prepare a larger project based on selected roads from the PIP for new construction and upgrading works. This has been rejected in order to deliver “peace dividends” to previously security affected districts as quickly as possible.

22. The project could carry out new construction o n other prioritized roads. This was rejected because the r isk associated with new construction activities i s greater in less accessible and insecure areas. By conducting upgrading and periodic maintenance works in accessible areas, the focused nature o f this project wil l enable implementation early in 2008 with a short delivery timescale o f four years. This wil l provide valuable access to districts that have had poor connectivity to the SRN.

C. IMPLEMENTATION

1. Partnership arrangements (if applicable) Not applicable

2. Institutional and implementation arrangements

23. The DOR will be the implementing agency. The implementation o f the project wil l fo l low the existing institutional arrangements and wil l be coordinated and monitored by the Deputy Director General (DDG) o f the Foreign Cooperation Branch (FCB) as the Project Coordinator. A core Project Coordination Team (PCT) in F C B will be responsible for coordination o f the implementation and management o f project activities. Two Coordinators wil l be assigned for coordinating the upgrading/periodic maintenance and the institutional development components - one o f whom will also be designated as the Procurement Coordinator/Specialist for the Project. One Accounts Officer, two Accountants and one Computer Expert wil l also be appointed. The composition o f the core team i s adequate for the purpose o f project coordination and administration.

24. There will be Project Management Units (PMU) in three locations near construction sites. These wil l be headed by a Project in-Charge (Senior Divisional Engineer). Currently, a l l these positions are in place and staffed by qualified and skilled staff. They wil l have responsibility for project coordination with the PCT and day to day supervision and administration. The project offices wil l each be provided with one project vehicle and other logistics such as computers and

7

consumables. I t wil l be suggested that the Design and Supervision Consultant will establish a coordination office at Nepalgunj, once contract works start.

25. The Planning Branch o f DOR will be responsible for technical reviews and f ield monitoring o f project activities to comply with design standards, norms and safeguard requirements. The Planning Branch wil l also be responsible for the implementation o f the Institutional Strengthening Component under the project.

26. The Maintenance Branch o f DOR will be responsible for maintenance planning and contract monitoring, and Divisional Road Offices will be responsible for awarding periodic maintenance contracts and carrying out day to day supervision o f the works. However, bids wil l be submitted at the PCT for the application o f e-procurement.

27. RBN shall be responsible for implementing i t s sub-component for capacity building activities.

3. Monitoring and evaluation o f outcomes/results

28. A project-specific Results Monitoring Framework was developed to serve as the key project impact and performance monitoring tool. The Results Monitoring Framework i s shown in Annex 3

29. Baseline and Targets. Baseline data and targets have been set for most o f the indicators. Based on available GIS data, current accessibility indicators were established for participating districts. Environmental and social compliance monitoring wil l be undertaken by the Geo- Environment and Social Unit (GESU). Other monitoring wil l be undertaken in consultation with the implementing agencies. This includes financial monitoring and evaluation o f development o f RBN.

30. Implementation Monitoring: the PMUs are responsible for ensuring the compliance o f the contractor with the Quality Assurance Plans (QAPs) through daily supervision and monitoring o f works. PCT staff accompanied by adequate experts from various units o f DOR (GESU, Monitoring and Evaluation (M&E) and Central Road Laboratory (CRL)) wil l undertake f ield visits each quarter to monitor physical progress and compliance with Q A P s and safeguard requirements. The assessment o f progress, quality o f works and problems encountered at the sites wil l be compiled in f ield visit reports which wil l be used to complete the relevant form in the quarterly project reports to be submitted to IDA. The Ministry o f Physical Planning and Works (MOPPW) will carry out bi-annual monitoring o f project works and help solve project related issues. The MOPPW team will also assess pol icy change requirements for the effective implementation o f public works.

31. External Technical Review: Third party technical audit o f 20 percent o f the project works wil l be carried out each year and its report submitted to the MOPPW. MOPPW will review the reports o f non-compliance and take any follow-up action as required.

8

32. Quality of Road Infrastructure Provision: The Road Users Satisfaction Survey carried out once every two years by RBN will be used to monitor perceptions o f improvements in road quality and performance o f DOR in the delivery o f road services to users.

33. Socio-Economic Impact Assessment: A baseline survey o f the socio-economic indicators has been undertaken during the project preparation. Subsequent surveys wil l be undertaken to assess the magnitude and distribution o f the direct and indirect socio-economic benefits o f the project roads: once at the completion o f the c iv i l works and again two to three years after the project closing. The second survey becomes essential as the impact on these indicators cannot be visibly assessed within the short project time fi-ame o f four years. The first two surveys wil l be funded through RSDP as part o f project preparation and supervision and the post-project survey wil l have to be funded by the Government o f Nepal.

4. Sustainability

34. One o f the key issues for road sustainability is ensuring necessary maintenance. The DOR should carry out a minimum o f 500 km o f periodic maintenance on the SRN. Although DOR has been carrying out adequate routine and recurrent maintenance, there is a substantial backlog o f periodic maintenance o f over 1000 km. O f the 500 km o f annual periodic maintenance works on the SRN, the project will support about 150 km, ADB, 100 km and RBN 250km each year for the next three years. By providing periodic maintenance support and helping strengthen RBN, there wil l be enough budget (through fuel levy, direct Government support, etc.) for the maintenance o f the S R N and the upgraded all-season access roads under this project. Although the effective functioning o f RBN should help enhance the sustainability o f the Nepal SRN, adequate and sustainable fund allocation needs to be ensured by MOF/GON to finance the maintenance works.

35. The other key to sustainability i s ensuring high quality construction and good road asset management. Through the institutional strengthening and pol icy reform component, the management capacity o f DOR and RBN will be improved, so that these organizations can better carry out their responsibilities for budget management and delivery o f services.

5. Critical risks and possible controversial aspects

36. The greatest risk to the project i s the current political situation. There i s st i l l a considerable amount o f instability and a sustained peace can not be taken for granted. To mitigate these risks, the project will take a flexible approach with frequent assessment o f the operating environment. Close cooperation between client, contractor and Bank teams wil l determine optimum solutions

37. The table below outlines the critical risks to the project's components and measures that wil l be taken to mitigate them.

9

Table 2: Critical Risk M a t r i x

Risk factors Description of risk Rating Mitigation measures Rating of of risk residual

risk

Techcalldesign

Implementation capacity and sustainability

Financial management

Procurement

Appropriate design for S Monitoring during design phase M

Focus on project by S Provide support to DOR and RI3N for M

Continue dialogue with Government M

Contractor quality S Support to improve supervision and M

Budget provision for M Support to Roads Board Nepal to L

conditions

implementing agency continued institutional development and efficiency

officials to enable Roads Board Amendment Act to be passed.

monitoring by P M U

maintenance develop greater delivery capacity especially to assist Districts in preparing maintenance plans

Accounting M Application o f FMIS L Controls M Segregation o f duties and monitoring o f L

procedures Governance and accountability procedures (see Annex 6a)

deadlines are met Auditing M Coordination through PCT to ensure L

Staffing continuity M Assurance from GON to retain staff in L

I Corruption I M I Adoption o f disclosure policy and

I I I I I

Risk Rating-H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible) and L (Low Risk), S M (Overall)

L

6. Grandcredit conditions and covenants

Social and environmental safeguards Other

38. Effectiveness. Standard effectiveness conditions only apply. The Effectiveness Deadline i s ninety ( 9 0 ) days after the date o f the signing o f the Financing Agreement.

. .

complaint addressal mechanisms. Collusion among the M Supporting and facilitating e- L

Compliance with M L

Conflict in project S Keep project design flexible M

bidders procurement as agreed

EMP and RAP

areas disrupts project

Monitoring by GESU/DOlUConsultant

39. Continuity of Staff It has been agreed that the GON will ensure the retention and continuity o f core staff consisting o f the staff in the PCT that includes accounts staff and the Project Managers at least as governed by the C iv i l Service Rules

I OVERALLRISK

10

I s 1 M

40. Road Boards Nepal (RBN) Act Amendment: I t has been agreed that by December 2008, GON will submit to the Parliamentary Secretariat the proposal for amendment to the Roads Board Nepal. A draft o f the amendment to the Roads Board Nepal Act, 2058 (2002), would include amongst others, the Roads Board structure, accounting system on accrual basis, authority to collect and cause to collect Road User’s Charges, and specific authorities o f Chairman and Executive Director.

41. Maintenance Budget: Commitment to perform at least 500kms o f periodic maintenance on the strategic road network (SRN) annually and over 1000 km o f back-log periodic maintenance within the project implementation period. GON agrees to channel adequate resources to the RBN in terms o f both maintenance budget and operating costs. RBN will also develop and achieve annual spending targets.

42. RBN Human Resource Development: By the end o f FY 2007/08, GON will cause RBN to make a decision which would allow the salary structure o f RBN to be competitive or similar to other autonomous boards in Nepal. Within two years, the implementation o f a structured human resource development plan including career development and training for staff wil l take place.

43. Consolidation of Road Maintenance funding through RBN: From FY2008/09, the government budgetary allocation for road maintenance for both local and strategic roads, will be channeled through the Roads Board Nepal.

D. APPRAISAL SUMMARY

1. Economic and financial analysis

44. Nepal’s transport sector is heavily dominated by road based transport, which accounts for almost al l domestic passenger and freight movements. Roads are a pre-requisite o f most economic activity throughout the country. In the past, economic development has been concentrated in readily accessible areas o f the terai and around the main urban areas. The development o f the road networks in these areas has enabled and encouraged this growth. The expansion o f the network into the hi l ls can now provide similar benefits and opportunities to these presently remote communities.

45. Nepal plans to maintain and upgrade the 7,920 km Strategic Road Network (SRN) by 2010. To assist the prioritization o f the expansion o f the SRN, a screening process using a compound ranking, or multi-criteria analysis (MCA) was undertaken to select the candidate roads from the long-list. The roads for RSDP have been selected primarily based on this prioritization process.

46. The roads were analyzed using the conventional approach to project evaluation by comparing the situation related to the base alternative with project options. However, a standard road

1 upgrading evaluation methodology such as HDM-4 was not used because the present condition o f the roads greatly suppresses the traffic f low compared with the traffic potential. A standard traffic-based approach was therefore deemed inappropriate. Also, a producer surplus approach by analyzing benefits based on the value o f increased production in the area served was also not suitable because there is very l i t t le evidence that such benefits are obtained from road upgrading in the hill areas o f Nepal where basic road access already exists.

11

47. Therefore, a spreadsheet evaluation model was used to reflect the current and expected use o f the roads as realistically as possible. The project’s benefits include increased traffic flows after road upgrade, saved travel time and increased number o f trips by the population in the project area, etc. The costs o f the project include capital cost and maintenance cost.

2008 Length Forecast Cost per km

S.N. Road (km) Traffic (NRs. Min.) (ADT)

1 Khopde -Kalinga Bridge 62 128 7.03 2 Satbanjh- Gokuleshwor 54 96 7.66

48. The summary o f the economic analysis o f the five roads for upgrading component i s as follows. All five roads selected for upgrading have an Internal Rate o f Return (IRR) in excess o f 12 percent, thus are economically feasible. The details o f the economic and financial analysis are provided in Annex 9.

IRR NPV

153.90 15.90 297.60 21.60

Total

I 3 I Satbanjh- Tripurasundari* I 25 I 76 I 6.72 I 3.80 I 12.20 I

297 2,955.30 29.36

1 4 I Surkhet-Khidkijhyula(Ka1ikot) I 128 I 270 I 3.62 I 2,378.20 I 59.60 I

SN

I 5 I Tallo Dhungeswor- Dailekh I 28 I 113 I 7.84 I 121.80 I 20.00 I

Estimated NPV in

Million Million

Cost per Road

(km) Million Road Length kmNRS in CostNRSin NRS IRR NPV

1 2 3 4

5

49. As per the Roads Board Nepal (RBN) directive, the priorities o f routine and recurrent maintenance activities that are to be invested on the candidate (maintainable) roads are on the basis o f a priority matrix o f traffic volume, road condition, and cross slope terrain. But for major type maintenance intervention l ike periodic and rehabilitation the plan must be justified economically Le. with a positive N e t Present Value (NPV). DOR has prepared the periodic maintenance plan based on the roads proposed in PIP-2007 and ranking index in Annual Road Maintenance Plan (ARMP). The details o f the roads proposed for periodic maintenance for the f i rst year are as in the table below. The roads for the periodic maintenance for the subsequent years wil l be selected on the basis o f PIP- 2007 and the engagement o f other donors at that time.

Hetauda-Pathalaiya 10.00 5.00 50.00 324.42 80.10 8.65 Birgung-Kalaiya 11.00 1 .oo 11 .oo 55.54 57.90 6.47 Pipalbot-Naubise-Simale 25.00 5.00 125.00 1506.37 110.10 14.81 Nagarjun-Tadi (Kakani) 16.00 1 .oo 16.00 67.73 51.45 5.29

Kurintar-Ambukhaireni 13.00 1 .oo 38.00 97.03 33.50 5.80

Table 4: Proposed Periodic Maintenance for First Year

12

S N Road

6 Butwal-Kothi River Rani-Itahari-Dharan (Base Camp)

8 Kakadbhitta-Mawa

Estimated NPV in

Million Million

Cost per Road

(km) Million 26.00 1 .oo 26.00 241.53 58.40 8.16 51.00 1 .oo 51.00 637.73 44.34 8.14 20.00 1 .oo 20.00 92.04 31.20 4.60

IRR NPV ( ”/)

Length kmNRS in CostNRSin N R S

2. Technical

I Total/ Average I 172.00 I

50. Proposed Works. The c iv i l works component o f the project involves upgrading, l o w cost sealing o f gravel surfaces and maintaining the existing SRN. The upgrading works include improving geometry, strengthening pavement with hard shoulders and improving drainage works for an enhanced level o f transport services to the remote district heads in the Mid and Far Western regions o f the country. The project wil l adopt l o w cost sealing o f gravel surface pavement, which has proven successhl in RMDP trials in terms o f cost-effectiveness, durability and reduced maintenance requirement. The maintenance activity focuses on periodic maintenance o f the S R N comprising different types o f surface seals and bituminous overlays. The periodic maintenance works should not include any major structure works. Cost effective road safety options as lane markings, gabions and proper signage wil l be adopted wherever required.

I 57.76 I 7.44 1

5 1. Design Standards. The project wil l adopt existing cost effective DOR design standards for the engineering design o f road sections and structures. The design o f the road geometry and structures should be based on hazard spot mapping o f the road alignment, and in conformity to acceptable national and/or international standards. The candidate roads for upgrading works are single lane roads with a formation width o f 4.5 m. Bio-engineering techniques wil l be applied for slope stability measures wherever possible, even if not shown on the original drawings. The types o f longitudinal drain will be selected in accordance with the estimated discharge based on the catchment area and the hydrological characteristics o f the area.

52. The cost estimates and bil l o f quantities (BOQ) comprise the schedules o f earth works where required, pavements, structures and other measures such as those for slope stability, and borrow and disposal areas, with chainage details. Cost items for implementing the Environment Management Plans (EMPs), including labor campsites and labor safety requirements, wil l also be included in the cost estimates and the BOQ.

53. Quality Assurance (QA). QA requirements during construction are included in the Technical Specifications and accounted for in the BOQ. In addition, the QAPs, which are part o f the detail project reports for each road, cover various surveys, investigations, design works and other social, economic and environmental aspects. The Q A P s also comprise short hand information on means o f verification, sampling methods, and test requirements (including frequency o f tests and responsible agents at different levels o f monitoring).

13

3. Fiduciary

54. Procurement: All procurement wi l l be handled at the PCT except for periodic maintenance contracts which will be procured by the respective divisional offices with oversight from PCT and bids will be submitted at PCT. The arrangements for procurement are satisfactory assuming that (i) procurement arrangements will remain similar to recently completed RMDP and one o f the incumbent senior divisional engineers in the PCT is designated as the procurement specialist for the project, in addition to creating the procurement unit in the department in accordance with the recently enacted Procurement Act; (ii) formal and on the job training o f new inductees o f the DOR divisions, responsible for periodic maintenance, i s provided on a regular basis; (iii) the procurement plan for f i rs t 18 months o f the project i s finalized and made public; and (iv) In order to avoid the probable collusion among the bidders, the project will pi lot to support and facilitate e-procurement as agreed. Measures to enhance governance and transparency are in Annex 6a.

55. Funds Flow and Disbursement Arrangements: D O R will prepare its Annual Work Program and Budget (AWPB) for the Project. Fol lowing the approval o f the AWPB by the National Planning Commission (N’F’C), the Ministry o f Finance (MOF) wil l release the budget. The approved project budget wil l have to be indicated in the public sector Estimates o f Expenditures (Red Book) under a separate budget heading. The IDA Grant wil l f low through the Designated Account for DOR. Disbursements wil l be made for: (i) civ i l works; (ii) various goods, including computers and vehicles; (iii) consulting services; (iv) various training, workshops, and study tours; and (v) incremental operating cost for project coordination.

56. Financial Management (’FM): Overall, the FM arrangements that are in place are considered to be adequate. FM arrangements wil l be harmonized with the government’s planning, budgeting, accounting, reporting and auditing system. DOR has already begun to implement the FM Information System (FMIS), and transactions under the proposed project will use the FMIS. Through the project, expansion o f FMIS will continue to cover other cost centers, and training o n use o f FMIS wil l be part o f the capacity building program. Overall, there wil l be strong efforts to build capacity both in technical areas as well as overall project management which includes procurement and FM. Arrangements for ex-post review by the Bank from the second year o f implementation wil l provide the needed comfort for timely remedy o f any deficiencies in the system and will reduce the possible risks. The decision to align with the government’s systems and procedures for implementing the project will contribute to enhancing institutional capacity. The overall fiduciary risk associated with the project i s rated as “modest” for FM, and the proposed r isk mitigation action plans are deemed to be adequate (see Annex 7 for details).

57. Asset Registers: DOR and i t s Divisions shall establish asset registers for each asset worth more than N R s . 1,000,000. The asset register wil l include a br ie f description o f the asset (road, buildings, vehicles, heavy equipment, lab equipment and computers, etc.), its present value based depreciation and additional capital cost invested o n the asset in each year. The asset register wil l be updated annually before the end o f the calendar year. A standard wil l be developed for the yearly depreciation and salvage value o f the asset.

58. Business Plan of A l l Units with Adequate Budget: Each unit within DOR will prepare a business and resource plan with deliverables. The plans should outline the requirements o f each

14

unit for the next three years and the areas in which they require support. Particular thought should be given to how the organization wishes to deliver services within the current structure and what changes might be made to create more ownership o f the PIP process within DOR.

59. Contractor’s and Consultant’s Performance Evaluations: DOR agrees to carry out performance evaluations o f project consultants and contractors each year or when desirable as per Public Works Directives (PWD) and Procurement Act and Rules. DOR will submit a consolidated performance such report covering action taken against the poor performers to IDA each year within the first quarter o f the succeeding year.

4. Social

60. The Init ial Environmental Examination (IEE) studies for the proposed road upgrading have assessed potential impacts on people and communities at various stages o f project cycle, i.e. before construction, during construction and after construction. The upgrading works in these roads could cause limited adverse impacts to the people especially in terms o f loss o f lands, crops, structures and other community infrastructure and resources. Most o f the road projects under RSDP will involve acquisition o f limited amounts o f land and other properties including a few residential structures in certain narrow sections. The possibility o f avoiding these losses appears to be minimal through design changes. As a result o f these potential losses, the Involuntary Resettlement Policy o f the Bank (OP/ BP 4.12) i s triggered requiring the project authority to mitigate the adverse impacts as specified in the ESMF.

61. Land Loss and Acquisition: The total land to be acquired i s estimated at about 2 hectares under RSDP ranging from 0.28 hectares to 0.92 hectares for different road sections (as shown in Annex 10). These lands constitute different categories in terms o f their use and their acquisition would slightly affect the food production. The acquisition o f these lands wil l be based on the procedures specified in the ESMF which requires fair and transparent compensation at replacement value. The affected families and their lands will be recorded systematically and the losses wil l be valued in consultation with affected people.

62. The land for widening existing roads may be provided voluntarily by the local population. However, there i s no practice o f recording such lands and transfemng the ownership to the project so that the owners are exempted from paying land taxes o f such lands once ownership gets transferred. Therefore, the project would need to provide full information about land and other property acquisition as well as involuntary and voluntary acquisition so that they have choices not to make donation. However, if land i s acquired through donation, the acquisition i s complete only when the donation form i s f i l led out and signed by the donating parties.

63. Displacement: The acquisition o f land for upgrading works wil l cause displacement o f some families. The IEE reports indicate that about 21 households (hhs) wil l be displaced in four roads (Satbanjh-Gokuleshowr: 6 hhs, Satbanjh-Tripurasundari: 5 hhs, Tallo Dhungeshwor- 5 hh and Khodpe-Kalinga Bridge: 5 hh). The assessment during survey will also provide more information about the affected families along with the types o f losses, their eligibility and entitlements. The displaced families wil l be provided with resettlement and rehabilitation assistances in addition to compensation at replacement values so that their livelihoods and income earning capacity wil l be fully restored.

15

64. There are no issues o f land or other property acquisition and/or displacement under the periodic maintenance component.

65. Resettlement Policy Framework (RPF): The sector wide ESMF for the road sector makes provision under a Resettlement Policy Framework (RPF) that the project will adopt to address the issues o f compensation, resettlement and rehabilitation o f affected families. All the affected families regardless o f the loss type wil l be treated according to the entitlement provisions made in the ESMF ensuring that the conditions would be at least the same or better than the pre-project situation. Similarly, a framework to prepare the Resettlement Action Plan (RAP) i s also provided in ESMF which outlines i t s preparation and implementation o f in compliance with Nepal as well as World Bank policies.

66. The RPF specifies that the representatives o f affected families wil l also participate in the compensation fixation committee to be headed by the Chief District Officer in each project district. Formal and informal consultations wil l be held to ensure that the compensation rates are fair at replacement value.

67. The resettlement schedules for each road will be coordinated with the construction schedule, with compensation and resettlement being completed before construction begins. Grievance Redress Committees will be formed for al l subproject roads in order to address the complaints and grievances o f affected families.

68. Restoring Community Losses and Infrastructure: The IEE reports have indicated the possibility o f community losses for items such as minor loss o f irrigation, drinking water and other public properties during upgrading. These losses would be identified well in advance and included in bidding documents so that they are renovated by contractors or compensated in other forms in consultation with the affected communities.

69. Vulnerable Community Development Framework (VCDF): The presence o f indigenous people including ethnic minorities, vulnerable groups and Dalits (occupational caste groups) in project affected areas require the preparation o f subproject Vulnerable Community Development Plans consistent with the IDA’S Indigenous People Development Policy (OPBP 4.10), and government policies and strategies aimed at addressing rural poverty. The VCDF provided in the ESMF clearly spells out i t s objectives, process, scope and implementation arrangements in subproject areas wherever applicable. The pol icy ensures that the ethnic communities / tribal groups affected adversely by the project wil l be provided with different forms o f technical assistance and rehabilitation support directly by the project and also through networking and linkage development with other stakeholders working in the area.

70. HIV/AIDS Awareness: For the first time in Nepal, an IDA project in the sector i s to include H I V / A D S awareness activities in the project. The project will support HIV/ADs prevention through awareness and education. DOR will recruit NGOs with track record o f working in H I V / A D S awareness and education areas in the respective districts. The selected NGOs will follow the national guidelines prepared by National A D S and Sexually Transmitted Infections (STIs) Centre (NCASC) for the targeted activities including periodic screening for STIs. NGOs

16

will work closely with local public health centers and district health offices to deliver i t s services to construction workers, tea shop owners and transport workers through out the construction periods.

5. Environment

71. The ESMF requires that each funding request/proposal be subject to environmental screening for potential environmental impacts to determine the level o f environmental investigation that may be required. Accordingly, DOR has undertaken IEEs o f the RSDP roads as part o f PIP. DOR has updated and revised the IEEs o f the first years’ works and continues to update the remaining roads proposed for upgrading to make the IEEs and Environmental Management Plan (EMP) roadsite specific and relevant. The ESMF also recognizes the need for stronger and independent monitoring o f environmental compliance in the field. As such, institutional strengthening support would also cover building environmental capacity within GESU.

72.Key Environmental Issues. The proposed roads to be upgraded are located in Nepal’s hill/mountain terrain. Hilly terrain in Nepal in general i s fragile and vulnerable to slope failures and instability risks. The type and magnitude o f environmental impacts that would result from road works involve slope stability, erosion and landslides in mountainous terrain caused by improper alignment, inadequate drainage control, and inappropriate road construction practices such as disposal o f waste material and destruction of vegetation. Other environmental issues that may arise are disruption o f natural drainage areas; reduction o f water quality; air and noise pollution during construction; encroachment on culturally sensitive areas; and cutting o f trees for road widening and fue l wood by the construction workers. The project wil l need to ensure the proper management o f the health and safety o f the construction workers and their labor camps.

73. Works related to periodic maintenance and improving road safety are unlikely to have major and significant adverse environmental impacts, and institutional strengthening would contribute to enhancing the environmental management capacities o f the involved institutions.

74. Although some widening may be necessary, most o f the road improvinghpgrading works under RSDP are relatively small-scale and likely to be confined to the existing fair-weather road right o f way. Therefore, the extent and severity o f impacts due to upgrading would be lesser than the impacts o f new road construction, known better as the road exist, and can be easily mitigated through simple site specific mitigation measures.

17

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP 4.01) [XI [I Natural Habitats (OPBP 4.04) [I [X 1 Pest Management (OP 4.09) [I [X 1 Physical Cultural Resources (OPIBP 4.1 1) [I [X 1 Involuntary Resettlement (OPBP 4.12) [XI [I Indigenous Peoples (OP/BP 4.10) [XI [I Forests (OPBP 4.36) [XI [I Safety o f Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OP/BP 7.60)* [I [XI Projects on International Waterways (OP/BP 7.50) [I [X 1

75. As the envisaged activities are related to upgrading o f existing unsealed fair-weather roads to sealed gravel standard all-weather condition, RSDP is classified as Environmental Category B, requiring an IEE for each road upgrading.

76. Environmental Assessment (OP/BP 4.0I). The sector wide ESMF has been prepared and approved by the government. Disclosed locally by DOR on September 7, 2007 and available at InfoShop since September 12, 2007, the ESMF i s the major guiding document for planning and implementation o f strategic road projects in Nepal. For each project road an IEE has been prepared and contains an EMP which summarizes recommended mitigation measures, and clearly states what needs to be done where, when i t should be done and who should be responsible for doing it. Mitigation measures recommended in roads EMP will be fed into the detailed plan and design o f road upgrading, and reflected in the quantity/ cost estimates, BOQ, as well as in contract documents.

77. Involuntary Resettlement (OP/BP 4.12). As a result o f potential losses identified in the project the Involuntary Resettlement Policy (OP/ BP 4.12) i s triggered requiring the project to comply with mitigation measures to fully restore income earning opportunities and livelihood o f the people. From planning to implementation the roads upgraded/improved under the project will be subject to a systematic process involving detailed social assessment ensuring that the affected families and impacts are identified well in advance and that adequate mitigation measures are applied to address the potential impacts. Persons affected by land acquisition and relocation and/or rehabilitation o f structuredassets (businesses, houses, etc.) will be entitled to a combination o f compensation measures and resettlement assistance. This will depend on the nature o f ownership r ights o f lost assets and scope o f the impact, including social and economic vulnerability o f the affected persons. Thus, affected persons wil l be entitled to various types o f compensation and assistance that wil l help in the restoration o f their livelihoods, at least, to the pre-proj ect standards.

' By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

18

People Policy (OP/ BP 4.10) o f IDA and other government policies and programs aimed at poverty reduction o f rural people, especially the Dalits, indigenous people and the ultra poor.

79. Forests (OP/BP 4.36). Some indirect impacts may result from requiring firewood for cooking meals for labourers and for project activities such as heating bitumen, hunting o f wildlife, and harvesting non-timber forest products (NTFPs) by workers. When a road becomes operational, easy and improved access to forest areas could lead to illegal cutting o f tress, hunting and harvesting o f forest resources. The EMPs wil l identify these r isks and mitigation thereof in particular, ensuring responsible collection o f firewood during construction. Monitoring o f post construction impacts wil l be undertaken by GESU.

7. Disclosure of documentation

80. The Bank has received ESMF and Indigenous Peoples Plan on July 9, 2007. Same has been submitted to InfoShop on September 12, 2007. In country disclosure o f these documents has taken place on September 7,2007.

81. D O R has also submitted to the Bank a draft Resettlement Action Plan and a draft Environmental Management Plan for the f i rst year works o n September 18,2007. These are to be disclosed prior to project effectiveness.

8. Policy Exceptions and Readiness

82. The project does not require exceptions f rom Bank policy. The project has met al l regional guidelines for implementation readiness. First year programs have been screened for their technical and economic viability as well as social and environmental aspects. A procurement plan for c iv i l works, consultancies and goods has been developed and agreed. The Borrower Bidding documents for the f i rst year work program have been prepared.

83. The GON shall be responsible for completing the compensation o f lost assets to the Project Affected Families (PAFs) before the starting o f any c iv i l works. However, the project may support other rehabilitation and resettlement (R&R) costs in accordance with the agreed RAP under the IDA financing.

19

Annex 1: Country and Sector or Program Background NEPAL: Road Sector Development Project

Country Context

1. Dijjficult Ini t ial Conditions and Challenges. Nepal had a late start in development and faces ‘formidable challenges, including a difficult geography. The landlocked country has a difficult terrain that rises steeply from the plains o f the Terai in the South to the middle hills and the Himalayan range in the North. Transport costs are very high, hindering the development o f commerce and markets, and access to essential services, and contributing to regional disparities in economic and human development.

2. Poverty in Nepal is Widespread and Inextricably Linked to Accessibility. The Nepal Living Standards Survey (NLSS) found that in 2003/04, 32.0 percent o f the population f e l l below a nutritional-based poverty line, with those that living in more remote areas more likely to be the poorest o f the poor. Whereas the urban population poverty figure reduced substantially to 19.9 percent with better access to economic opportunities and services. Various socioeconomic surveys also indicate that children in remote districts are more likely to be malnourished, die before they reach five years o f age, and less l ikely to attend school than children living in more accessible districts. Similarly, per capita incomes are 50 to 65 percent lower in the more remote districts than more accessible ones. Hence, fostering social and economic development in Nepal wil l require improving rural accessibility.

3. Reforms in the 1990s Helped to Improve Economic and Human Development. Nepal began a round o f economic reforms in 1985 that started to change the direction o f economic policy. A second round o f reforms was undertaken in early 1990s. Due to these reforms and a boom in tourism, annual economic growth averaged about 5 percent although has slowed to 2 percent more recently. The 2003-2004 NLSS suggests that faster agricultural growth combined with a significant increase in remittances had led to a marked fal l in consumption poverty. In addition, surveys reveal a perceptible improvement in the related human development indicators. Thus, recent trends show an improvement in rural welfare although some regions and ethnic groups have been le f t behind.

4. The Cost of Conflict. A more than decade long insurgency that claimed more than 11,000 lives disrupted but did not stop development in most o f Nepal. The conflict is continuing to impose high costs in terms o f foregone growth and poverty reduction, through several channels: (i) dampened private sector investment and confidence; (ii) lower sales o f private f i r m s to rural markets; (iii) direct costs to infrastructure; (iv) increased transportation costs and time; (v) extortion o f rents and informal taxes by insurgents; (vi) human and capital flight away from conflict affected areas; and (vii) disruptions in service delivery due to the dismantling o f elected local bodies and disruption o f specific services.

5. Nepal’s Development Strategy. The Tenth Five Year Plan (2002-2007), whose summary i s Nepal’s Poverty Reduction Strategy (PRS), makes the achievement o f broad-based economic growth a key pillar especially in the rural economy. The PRS lays out a coherent four-pillar strategy consisting of: (i) broad based growth with special emphasis on agriculture; (ii) accelerating human development through renewed emphasis on effective delivery o f basic social

20

services and economic infrastructure; (iii) ensuring social and economic inclusion o f the poor, marginalized groups and backward regions; and (iv) vigorously pursuing good governance both as a means o f delivering better development results and to ensure social and economic inclusion. The PRS i s wel l anchored in a Medium-Term Expenditure Framework (MTEF) that focuses resources on human development and physical infrastructure.

Sector Background

6. Road Network. While Nepal’s road network expanded by about 7 percent a year in the 1990s, expansion has stalled in recent years, down to less than 1 percent a year since 2001, due to the impact o f the prevailing conflict and security problems. These not only had an adverse effect o n the ability to undertake works but also created resource constraints (the allocation o f resources to the road sector declined from about 10 percent o f total GON budget in the 1990s to 5 percent since 2001). Today, the main network consists o f about 17,280 km o f roads (5,273 km black top, 4,613 km gravel, and 7,394 km earthen), plus there are about 16,000 km village and agriculture roads (most o f which are fair weather tracks and non-operable), bringing the total road network in Nepal to 33,280 km. By regional comparisons and local development needs, Nepal’s total road stock, network density and quality are al l quite low: 55 percent o f network in operation is classified as dry season fair weather tracks. Nepal’s functional road density i s about 0.1 km/sq. km, compared to India (0.9 W s q . km) and Bangladesh (1.5 W s q . km).

7. Road Condition. The proportion o f the Strategic Rural Network (SRN) in good and fair condition increased from less than 50 percent in 1992 to 90 percent in 2001, but a recent survey (2006) shows that i t has declined to 82 percent. The initial improvement in the condition o f the road network largely came because o f donor and government funded rehabilitation works o n the network to overcome the effects o f inadequate and irregular maintenance. In recent years, however, as donor programs shifted towards new construction and rural access infrastructure, funding for maintenance has been significantly short o f requirements. An autonomous Roads Board has been established with a view to linking road sector funding to road use and improving the level o f domestic funding for road maintenance.

8. Accessibility. A GIs-based profile o f the country estimates that 57 percent o f Nepal’s 24 mi l l ion people l ive more than a 20 minutes walk from the nearest all-season road. The lack o f access is more severe in hill districts and those without an S R N connection. 85 percent o f the hill population and 35 percent o f Terai population l ive more than a twenty minute walk f rom the nearest all-season road.

9. Road Sector Finances. Public sector spending on the roads during the 1990s was impressive, accounting for 10 percent o f total expenditure, o f which 60 percent went for maintenance and rehabilitation. The strategy o f prioritizing maintenance has paid o f f as Nepal now has a well- maintained SRN, although this came at the expense o f network expansion and rural road development. Nepal currently spends about US$l05 mi l l ion annually on the road sector (Table 1). O f this, about US$28 mi l l ion i s allocated to central-government sponsored rural roads/infrastructure schemes. In addition, DDCs and VDCs spend an estimated US$19 mi l l ion from their own revenues and centrally-financed block grants o n rural roads/infrastructure. Although these are sizeable investments, given the road sector’s initial conditions and the objective o f providing all-season road access to the population, the current level o f investment to

21

expand and maintain the road network i s inadequate. Some estimates suggest that the current annual allocation will need to be doubled for Nepal to achieve the goal o f bringing the entire population within two hours walk from an al l season road.

Highways I 20.62 1 10

Table 1: Road Sector Allocation in FY2007/08 (US$ Million)

GON Foreign YO Foreign 5.16 15.46 75

Rehabilitation and Maintenance Recurrent Expenditure Urban Roads

Feeder Roads I 41.43 I 21 I 18.52 I 22.92 I 55 I 46.11 23 18.84 27.27 59 4.62 2 4.62 0.00 0 5.67 3 5.67 0.00 0

Bridges Misc. Projects Rural Roads/Infkastructure

11.72 6 11.72 0.00 0 1.72 1 1.72 0.00 0

66.46 34 26.96 39.50 59 Total Road Sector Expenditure I 198.36 I 100 I 93.21 I 105.15 I 53

10. Road Sector Revenues. Revenue for the road sector i s characterized by weak domestic mobilization and heavy dependence on foreign sources. For the current budget allocation o f US$198.36 mi l l ion for the road sector, 53 percent o f the revenue comes from the foreign sources (grant and loan). For the revenue from the GON (domestic revenue), the sector was expected to generate NRs.22.89 bi l l ion (US$34 million) in FY07/08 in transport related taxes and fees. Although there has been considerable increase in the allocation for the road sector expenditure f rom the previous years, the total transport sector revenue covers only about 17 percent o f the current road sector expenditure allocation. The total maintenance budget requirement as per the Integrated Annual Road Maintenance Plan for FY 2007/08 i s US$46.5 mi l l ion o f which only US$19.1 mi l l ion has been allocated. O f this allocation, only US$11.3 mi l l ion has been channeled through Roads Board Nepal (RBN). Although the RBN has been in operation for the past four years, i t has not been able to improve the level o f domestic funding for road maintenance as expected. Ongoing pol icy commitment and support are required to ensure that the fuel levies and other revenues generated by the sector are fully and efficiently transferred and that al l road maintenance allocations are channeled through RBN. RBN in turn needs to improve its organizational capacity to ensure that i t manages i t s funds efficiently, allocates resources in an effective manner, monitors the outcomes from disbursements and maintains an objective advocacy for the resource needs o f the sector.

1 1. Road Sector Institutions. The road sector responsibilities are shared between five entities, with overall coordination and oversight for planning in the country exercised by the National Planning Commission (NPC). The entities responsible are the Ministry o f Physical Planning and Works (MOPPW), along with its Department o f Roads (DOR), the Ministry o f Local Development (MOLD), Department o f Local Infrastructure Development and Agriculture Roads (DOLIDAR), individual District Development Committees (DDCs) and Municipalities. The former two entities are nominally responsible for the whole o f Nepal’s main road network, and D O R has particular responsibility for the SRN. The latter four entities share various

22

responsibilities in the development and maintenance o f district-level and urban roads and have some interest in the planning and development o f feeder roads, although such feeder roads are primarily DOR's concern. While al l o f these entities responsible for rural and urban roads are hampered operationally by the cumulative consequences o f the ongoing conflict and security problems, they are also affected by weak capacity as we l l as structural and organizational constraints.

12. Sector Management. The public sector retains a monopoly o f control and management o f the road network, although private stakeholder groups have representation o n RBN. There are no private to l l roads in Nepal or management o f roads by the private sector. Recently, a Build, Operate and Transfer (BOT) Act has been promulgated to promote private sector participation in the sector. Despite its retention o f ownership and management, the public sector i s playing a diminishing role in the execution o f road works, specifically with the private sector being increasingly contracted to carry out road construction and major maintenance o f works.

13. Overall, responsibilities for the road network are changing. The creation o f the RBN in 2002 and the increasing involvement o f DOLIDAR and DDCs in the management o f rural roads has introduced new players outside the traditional public sector into the decision making process. Previously, the DOR was responsible for the entire classified network: developing the work programs, determining th