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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 Nepal
2. Loan Number 1755-NEP(SF)
3. Project Title Small Towns Water Supply and Sanitation Sector
Project
4. Borrower Government of Nepal
5. Executing Agency Ministry of Physical Planning and Works
6. Amount of Loan SDR26,649,000
7. Project Completion Report 1178
Number

B. Loan Data
1. Appraisal
– Date Started 8 May 2000
– Date Completed 19 May 2000

2. Loan Negotiations
– Date Started 10 August 2000
– Date Completed 12 August 2000

3. Date of Board Approval 12 September 2000

4. Date of Loan Agreement 18 December 2000

5. Date of Loan Effectiveness


– In Loan Agreement 18 March 2001
– Actual 16 March 2001
– Number of Extensions None

6. Closing Date
– In Loan Agreement 31 December 2006
– Actual 3 December 2009
– Number of Extensions 2

7. Terms of Loan
– Interest Rate 1% per annum during the grace period and 1.5%
per annum thereafter
– Maturity (number of years) 32
– Grace Period (number of years) 8

8. Terms of Relending (if any)


– Interest Rate 5% per annum, which was reduced to 3.5% per
annum
– Maturity (number of years) 20
– Grace Period (number of years) 3
– Second-Step Borrower Town Development Fund
ii

9. Disbursements
a. Dates
Initial Disbursement Final Disbursement Time Interval

10 July 2001 25 November 2009 8 years and 4.5 months

Effective Date Original Closing Date Time Interval

16 March 2001 31 December 2006 5 years and 9.5 months

b. Amount (SDR '000)


Last
Original Revised Amount Amount Undisbursed
Category Allocation Allocation Canceled Disbursed 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
iii

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
iv

5. Project Performance Report Ratings


Ratings
Development Implementation
Implementation Period Objectives 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


No. of No. of Specialization
Name of Mission Date Persons Person-Days 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.
2

(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.
3

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.
4

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%).
5

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
6

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
7

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.
8

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.
9

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%.
11

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.
12

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.
13

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
14

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

Performance Assessment/Recommendation
Design Summary Indicators/Targets
I. Impact Improved health conditions 593,000 beneficiaries, against the target of
600,000, gained access to drinking water.
Enhance human Hand-washing, toilet, and bathing habits
development and reduce improved.a
poverty through the
sustainable improvement Higher rate of school No data to assess the achievement.
of water supply and attendance by children
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 Improved water supply and From 33 small towns selected in batches, 4
sanitation in service areas were dropped, leaving 29 small towns to
Improve water supply and in 40–50 small towns acquire improved water supply and
sanitation in selected small sanitation facilities. Consumption of water
towns. increased as 86% of families gain access to
drinking water that meets the water quality
standard of Nepal.

Support the participation of Local ownership of the Communities contribute 50% of capital
local beneficiaries in all completed town projects costs for water supply infrastructure,
stages of the project. 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 Each town project has an office to manage


management in terms of and operate water supply. Staff, including
progress and quality 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.
Appendix 1 17

Performance Assessment/Recommendation
Design Summary Indicators/Targets
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.

Build the capacity of Improved technical, Training on accounting procedures was


WUSCs and promote financial, and management provided to 29 accountants and 44
community-based water capacity in WUSCs for members of WUSCs.
quality monitoring. sustainability

WUSCs able to monitor Training and equipment for water quality


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

Capacity for operation and Training was provided to staff of WUSCs on


maintenance enhanced meter reading, pump operating, and
masonry. Minor works are being done by
the staff of WUSCs, and major works are
outsourced to local contractors.

Establishment of small Not established


businesses in meter repair
and resale
III. Outputs Cover the service areas in Coverage of 80% was achieved with 76%
the project towns 80% with house connections and 4% community taps.
Water Supply and house connections and Mass campaigning needs to be done at the
Sanitation 20% with community taps. 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 The water supply system was designed to


Organization drinking water meet the World Health Organization
standard drinking water standard.

Surface drainage and Constructed infrastructure included 16,450


public sanitation facilities in meters of surface drainage and 54 public
core areas with high latrines.
population density
18 Appendix 1

Performance Assessment/Recommendation
Design Summary Indicators/Targets
Public awareness Transparency in town Public awareness campaigns were
campaigns and health and project design conducted in each town.
hygiene education

Participation of local Members of WUSCs in town projects are


communities fully involved in town project design and the
implementation of contracts.

Health and hygiene Health and hygiene education was provided


awareness to 3,152 users, including 1,683 women.
Hand-washing, bathing, and latrine-use
habits improved.

Assistance in providing Financial support of 50% of the cost of


private latrines to low- latrine construction was provided to the
income groups on a cost- poor.
sharing basis

Technical support for 5 regional technical support Five regional technical support centers were
WUSCs centers established to established. Division and subdivision offices
provide fee-based services of the Department of Water Supply and
to WUSCs for engineering, Sewerage provide post-construction
water quality testing, meter support. However, fee-based services have
calibration, and training 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.
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 No. 30 Beneficiaries became aware of the
undertaken importance of safe defecation.
Users received health and hygiene No. 3,152 One project town dropped out during the first
education year of the civil works contract.
Women receive health and hygiene No. 1,683 Women’s education was effective, as
education significant change in their hygiene behavior
was noted by the project completion review
mission.
Community action plans adopted for No. 30 WUSCs commitment for proceeding with the
each town implementation of town projects was
demonstrated.
Technical Support for WUSCs
Regional technical support centers No. 5 The centers have not yet adopted procedures
established to provide its services to town projects for
water quality testing and meter calibration.
Members of WUSCs orientated No. 489 Members of WUSCs have less confidence in
about water supply systems dealing with technical issues.
Number of staffers received training No. 29 Training was limited, and the timing of the
on accounting training was inappropriate.
Members of WUSCs received No. 29 A member from each WUSC received training
training on finance 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 Water supply is available for 24 hours daily, and the system is managed
Supply and Sanitation well. There is demand for expanding the system.
Project
Water quality is good and disinfection is done.
Part of the interest has been paid.
Fikkal Small Town Water Water supply is regular but interrupted due to landslides during rainy
Supply and Sanitation season, which washed away a portion of the transmission line. The
Project 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 Adequate but intermittent water supply is achieved.
Supply and Sanitation
Project 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 Within a year after commencement, both tube wells were heavily silted.
Water Supply and The water user and sanitation committees (WUSCs) stopped operating
Sanitation Project 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 The water supply is intermittent, as yield from the source diminishes and
Water Supply and population growth accelerates. Water is acidic and probably contains
Sanitation Sector Project 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 Water supply is intermittent and interrupted by landslides, which have
Towns Water Supply and washed away a portion of water transmission line. The problem was
Sanitation Sector Project temporarily fixed to supply water.
The water treatment plant functions.
Principal and interest are regularly repaid.
Ratnanagar Small Towns Water supply is intermittent to save electricity.
Water Supply and
Sanitation Project Water quality is good with a disinfection unit.
Appendix 2 21

Name of Town Project Assessment


Interest is regularly repaid.
Lekhnath Small Towns
Water Supply Project 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.
Principal and interest are regularly repaid.
Surunga Small Towns Water supply is regular.
Water Supply Project
Water quality is good with a disinfection unit.
Principal and interest are regularly repaid.
Kairenitar Small Towns Water supply is regular.
Water Supply Project
Water quality is good, but the treatment plant needs improvement.
Principal and interest are regularly repaid.
Kohalpur Small Towns Water supply is irregular, with low yield from tube wells.
Water Supply Project
Water quality is good, but the water treatment plant is not in full
operation.
Interest is partly repaid.
Prithvinarayan Small Water supply is intermittent to save electricity.
Towns Water Supply
Project The water treatment plant is not in full operation, and remedial measures
are needed.
Interest is partly repaid.
Beni Small Towns Water Water supply is irregular because a landslide washed away a portion of
Supply Project the transmission line.
Water quality is good, and the treatment plant functions.
Interest and principal are partly repaid.
Kusma Small Towns Water supply is regular.
Water Supply Project
The treatment plant is functioning.
Principal and interest are regularly repaid.
Kawasoti Small Towns Water supply is intermittent due to minor defects and damage from
Water Supply Project floods.
The treatment plant is functioning.
Interest and principal are partly repaid.
Bardibas Small Towns The functioning of the water supply system is being tested.
Water Supply Project
There is no treatment plant.
Interest is being repaid.
22 Appendix 2

Name of Town Project Assessment


Bijuwar Small Towns Water supply is regular, but the source river is changing course, and the
Water Supply Project sump-well does not function optimally.
There is no treatment plant.
No repayment has been made.
Waling Small Towns Water supply from two subsystems is functioning, but another scheme
Water Supply Project has a dispute over the source.
The treatment plant is functional.
Mahendranagar Small Water supply is irregular because of a problem of lime encrusting the
Towns Water Supply distribution system.
Project
The treatment plant is functional. Calcination is a major, worsening
problem that requires mitigation.
Interest is being repaid.
Sunawal Small Towns Water supply is irregular due to low discharge from wells.
Water Supply Project
Water quality is good. The treatment plant needs minor improvement.
Interest is partly repaid.
Tulsipur Small Towns Water supply is regular.
Water Supply Project
There is no treatment plant.
Interest is being repaid.
Tribhuwannagar Small Water supply is regular.
Towns Water Supply
Project Principal and interest are being repaid.
Bardaghat Small Towns Water supply is irregular because one of the wells failed.
Water Supply Project
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 is regular, but the transmission line needs protection where
Water Supply Project it crosses a river.
The treatment plant functional.
No interest or principal is repaid.
Lamki Small Towns Water Water supply is regular.
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.
Interest is partly repaid.
Birtamod Small Towns Water supply is intermittent to save electricity.
Water Supply Project
The treatment plant is functional.
Appendix 2 23

Name of Town Project Assessment


Interest and principal are being repaid.

Budhabare Small Towns Water supply is intermittent to save electricity.


Water Supply Project The treatment plant is functional.
No interest or principal has been repaid.
Itahari Small Towns Water Water supply is regular.
Supply Project
The treatment plant is functional.
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

Yearly Loan Disbursements


9,000,000

8,000,000

7,000,000
Disbursements ($)

6,000,000

5,000,000

4,000,000

3,000,000

2,000,000

1,000,000

-
FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010

FY = fiscal year.
Source(s): Asian Development Bank
28 Appendix 4

Table A4.2: Quarterly Disbursements


($ million)
Cumulative
Actual Actual Percentage of Actual
Year Quarter Disbursements Cumulative 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

2000 2001 2002 2003 2004 2005 2006 2007 2008


Task Description 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 Q4
A. Project Planning Phase
(i) Establishment of Implemetnation
Procedures
(ii) Establishment of Implementation
Procedures
(iii) Recuritement of Project
Implementation Consultants
(iv) Shortlisting of Engineering Consultants
and NGOs
B. Public Awareness Campaigns and Health and Hygiene Education
(i) Selection of NGOs

(ii) Public Awareness Campaigns


(Preparation Phase)

(iii) Health and Hygiene Education and


Focused Training (Implementation
Phase)
(iv) Promotion and Construction of
Household Latrines (Implementation
Phase)
C. Construction of Water Supply and Public Sanitation Facilities
(i) Selection of Subproject Consultants

(ii) Feasibility Study

(iii) Detailed Engineering Design and


Bidding

(iv) Civil Works Construction and


Procurement of Equipment

(v) Commissioning and Follow-up


30 Appendix 5

2000 2001 2002 2003 2004 2005 2006 2007 2008


Task Description 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 Q4
D. Technical Support to WUSCs
(i) Setting up Water Quality Monitoring
Mechanism and Schedule

(ii) Setting up Water Quality Monitoring


and Technical Support Center

(iii) Training in Water Quality Monitoring


and Meter Caliberation

E. Capacity Buidling and Training


(i) Training Needs Assessment and
Development of Training Programs

(ii) Training and Orientation for DWSS and


other Project Statkeholders

(iii) Training and Orientation for Community


and WUSC (Implementation Phase)

: Planned : Actual
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

Reference in Loan Status of


Covenants Agreement Compliance
1. The Borrower shall re-lend to TDF ADB funds under a Section 4.05 (a) Complied with. In
Subsidiary Loan Agreement upon terms and conditions 2005, the interest
satisfactory to ADB and shall cause TDF to apply such on the sub-loan
proceeds to the financing of expenditures under Part B of the to the Town
Project. The terms of re-lending shall include a repayment Development
period of 20 years, including a grace period of 5 years and an Fund (TDF) was
interest rate of 5% per annum. The Borrower shall assume revised from 5%
the foreign exchange risk. TDF shall on-lend the funds to per annum to
WUSCs participating in the Project at an interest rate of 8% 3.5% per annum.
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.

2. The Borrower shall make arrangements satisfactory to Section 4.05 (a) Complied with
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.

3. Without limiting the generality of the foregoing, the Section 5.05 (b) Complied with
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.

4. The Borrower shall (i) maintain, or cause to be Section 4.06 (b) Complied with
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.

5. The Borrower shall furnish, or cause to be furnished, to Section 4.07 (b) Complied with
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
32 Appendix 6

Reference in Loan Status of


Covenants Agreement Compliance
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 Section 4.07 (c) Complied with
any event not later than three months thereafter or such later but delayed
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.

7. For each Town Project undertaken in a Project town, the


civil works and the related equipment and supplies shall be Section 3, para. 4 Complied with
combined into one contract package and shall be referred to
as a civil works contract.

8. In each Project town, the PMO shall establish a Town Schedule 5, para. 4 Complied with
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.

9. By 31 December 2000, the Borrower shall establish a Schedule 5, para. 4 Complied with
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

Reference in Loan Status of


Covenants Agreement Compliance
10. An application in the prescribed form for participation in Schedule 5, para. 5 Complied with
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 Schedule 5, para. 6 Complied with
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 Schedule 5, para. 7 Complied with
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

Reference in Loan Status of


Covenants Agreement Compliance
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 Schedule 5, para. 8 Complied 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 Schedule 5, para. 9 Complied with
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 Schedule 5, para. 10 Complied with
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 Schedule 5, para. 11 Complied with
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

Reference in Loan Status of


Covenants Agreement Compliance
16. An evaluation committee, comprising representatives Schedule 5, para. 12 Complied with
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 Schedule 5, para. 13 Complied with
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 Schedule 5, para. 14 Complied with
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 Schedule 5,para.15 Complied with
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.

20. Before 31 December 2000, TDF shall execute the Schedule 5, para. 16 Complied with
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 Schedule 5, para 16 Complied with
for WUSCs and shall monitor water tariffs in the Project towns
36 Appendix 6

Reference in Loan Status of


Covenants Agreement Compliance
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 Schedule 5, para. 17 Complied with
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 Schedule 5, para. 18 Complied with
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,).

15. Training for the O&M of installed systems shall be Schedule 5, para. 18 Partly complied
provided by the design consultants to the WUSCs with
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.

16. O&M of the public latrines, drainage and sewers with Schedule 5, para 18 Complied with.
communal septic tanks shall be the responsibility of the Sewers with
relevant local bodies. communal septic
tanks were not
constructed.
17. The PMO shall select NGOs to assist in carrying out Schedule 5, para. 19 Complied with
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

Reference in Loan Status of


Covenants Agreement Compliance
18. Prior to the effective date, DWSS shall print out and Schedule 5, para. 20 Complied with
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 Schedule 5, para. 20 Complied with
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 Schedule 5, para. 21 Complied with
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, Schedule 5, para. 22 Complied with
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 Schedule 5, para. 23 Partly complied
standards when in effect shall be applied in designing water with
systems in Project towns. DWSS shall provide water quality
testing services to the WUSCs free of charge.

23. PMO shall finalize Project performance indicators and Schedule 5, para. 24 Complied with
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

Reference in Loan Status of


Covenants Agreement Compliance
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 Schedule 5, para. 25 Complied with
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.

25. TDF shall furnish to ADB quarterly reports on the water Project Agreement, Complied with
supply schemes under the Project and on the O&M of those Section 2.07 (c)
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.
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.
39 Appendix 7

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
Name of Town District Municipality Contract Cost Actual Cost Beneficiaries
Project VDC (NRs) (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.
41 Appendix 7

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
3
in 2009 (m ) 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
43 Appendix 7

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
3
m = 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)

Base +10% of –10% of Combined


Town AIEC Case Cost Benefit Case Base +10% of –10% of Combined
Project (NRs/m3) (%) (%) (%) (%) Case Cost Benefit 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)
Mahendra- Lekh- Khaireni- Bandi- Ratna- Combined
Item nagar Attariya nath tar pur nagar Parsa Surunga 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 (%)
AIFC
+10% of –10% of
Town Project (NRs/m3)
Base Case Costs 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)
Mahendra- Khai- Ratna- Combined
Items nagar Attariya Lekhnath renitar Bandipur nagar Parsa Surunga 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

Mahendra- Khai- Ratna- Combined


Items nagar Attariya Lekhnath renitar Bandipur nagar Parsa Surunga 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)
Mahend- Atta- Lekh- Khair- Bandi- Ratna- Surun- Combined
Items ranagar riya nath enitar pur nagar Parsa ga 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)
3
Rates (NRs/m )
Mahendra- Lekh- Khaireni- Ratna- Surun- Combined
Item nagar Attariya nath tar Bandipur nagar Parsa ga 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
3
tariff per m 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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