Evaluation Study

Reference Number: CAP:NEP2009-19 Country Assistance Program Evaluation: 26194 June 2009

Nepal: Delivering Assistance in a Challenging Environment

Independent Evaluation Department

CURRENCY EQUIVALENTS (as of 30 April 2009) Currency Unit NRe1.00 $1.00 = = Nepalese rupee/s (NRe/NRs) $0.0125 NRs80.0560

ABBREVIATIONS ADB ADBL ADF ANR CAPE CPS CSO CSP DFID DWSS EFA EIRR FY GDP GRP GSP GTZ IAP IED IEM km LEMPP MDG MfDR MOPAN MTEF NEA NGO NRB NRM OPEC PCR PPP PRSP PSMP RBN REDTP RFI RFSDCP Asian Development Bank Agricultural Development Bank Limited Asian Development Fund agriculture and natural resources county assistance program evaluation country partnership strategy civil society organization country strategy and program Department for International Development of the United Kingdom Department of Water Supply and Sewerage education for all economic internal rate of return fiscal year gross domestic product Governance Reform Program Governance Support Program Subprogram I Deutsche Gesellschaft fr Technische Zusammenarbeit immediate action plan Independent Evaluation Department independent evaluation mission kilometer law, economic management, and public policy Millennium Development Goal Managing for Development Results Multilateral Organizations Performance Assessment Network medium-term expenditure framework Nepal Electricity Authority nongovernment organization Nepal Rastra Bank Nepal Resident Mission Organization of the Petroleum Exporting Countries Fund for International Development project completion report public-private partnership Poverty Reduction Strategy Program Public Sector Management Program Road Board Nepal Rural Electrification, Distribution, and Transmission Project rural finance institution Rural Finance Sector Development Cluster Program

RIDP RMDC RMP RRR SARD SASEC SRN SSR STWSSP SWAp TA TDF TEVT TYIP WSS WUSC

Rural Infrastructure Development Project Rural Microfinance Development Center Limited Rural Microfinance Project Rural Reconstruction and Rehabilitation Sector Development Program South Asia Department South Asia Subregional Economic Cooperation strategic road network school sector reform Small Towns Water Supply and Sanitation Sector Project sector-wide approach technical assistance Town Development Fund technical education and vocational training Three-Year Interim Plan water supply and sanitation water users and sanitation committee NOTES

(i)

The fiscal year (FY) of the Government and its agencies ends on 15 July. FY before a calendar year denotes the year in which the fiscal year ends, e.g., FY2009 ends on 15 July 2009. In this report, "$" refers to US dollars.

(ii)

KEYWORDS adb; agriculture; asian development bank; capacity development; conflict situation; country partnership strategy; country strategy and program; donor coordination; education; energy; finance; gender and development; governance; inclusive growth; independent evaluation department; infrastructure; millennium development goal; nepal; partnership; poverty reduction; private sector development; regional cooperation; results-based framework; sector assessment; transport; urban sector; water supply, sanitation and waste management

Director General Director Team leader Team members

H. S. Rao, Independent Evaluation Department (IED) R. B. Adhikari, Independent Evaluation Division 1, IED K. Hardjanti, Principal Evaluation Specialist, IED A. Anabo, Senior Evaluation Officer, IED S. Labayen, Senior Operations Evaluation Assistant, IED Independent Evaluation Department, CE-19

In preparing any evaluation report, or by making any designation of or reference to a particular territory or geographic area in this document, the Independent Evaluation Department does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page EXECUTIVE SUMMARY MAP I. INTRODUCTION A. Objective and Scope B. Methodology and Approach C. Key Findings of the 2004 Country Assistance Program Evaluation D. Trends in Performance Ratings DEVELOPMENT CHALLENGES AND GOVERNMENT PRIORITIES A. Challenging Political, Social, and Economic Setting B. Governments Development Priorities and Strategies ADBS COUNTRY STRATEGY AND PROGRAM A. Evolution of ADBs Country Strategy B. Results-Based Country Strategy and Program C. Incorporation of 2004 Country Assistance Program Evaluation Recommendations D. Trends in Lending, Grants, and Technical Assistance Program E. Delivery of Country Strategy and Program 20052009 F. Relevance and Strategic Positioning of ADB Assistance G. Institutional Performance H. Contribution to Development Results and Value Addition I. Overall TopDown Assessment PROGRAM RESULTS ACHIEVED AND PERFORMANCE ASSESSMENTS A. Performance Assessment of ADB Assistance to Key Sectors B. Overall BottomUp Assessment i viii 1 1 1 1 2 3 3 5 6 6 7 9 9 10 11 13 17 22 23 23 39

II.

III.

IV.

V.

OVERALL ASSESSMENT, KEY FINDINGS, LESSONS, AND RECOMMENDATIONS 39 A. Overall Assessment 39 B. Key Findings 39 C. Lessons 41 D. Key Recommendations 43

The guidelines formally adopted by the Independent Evaluation Department (IED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. Marian Bond, Kishore Kumar Jha, Prithvi Raj Ligal, Jyoti Prasad Lohani, and Grace Agnes Sevilla were the consultants. To the knowledge of the management of IED, there were no conflicts of interest of the persons preparing, reviewing, or approving this report.

APPENDIXES 1. Evaluation Approach and Methodology 2. Evaluation Results for Sovereign Operations in Nepal 3. Socioeconomic Indicators 4. Features of ADBs Country Strategies in Nepal, 20022010 5. ADBs Lending and Nonlending Assistance to Nepal, 20042008 6. Partnering and Donor Coordination Activities and Programs 7. ADB Assistance Programs and Performance, 20042008 8. Stakeholders Perceptions Survey 9. Contribution of ADB's Assistance by Thematic Area 10. Performance Assessment of ADB's Assistance by Key Sectors SUPPLEMENTARY APPENDIX A. Stakeholders' Perceptions SurveySummary of Responses

45 50 52 56 62 69 73 95 101 107

Attachments:

Management Response DEC Chair Summary

EXECUTIVE SUMMARY Introduction This is the second country assistance program evaluation (CAPE) for Nepal. The first CAPE was completed in 2004 and covered 19882003. As before, the main objective of the CAPE is to assess the performance of Asian Development Bank (ADB) assistance to Nepal to identify lessons and provide directional recommendations for the formulation of future assistance strategy and the implementation of operations. The CAPE therefore (i) assesses projects and programs of the previous country strategy and program (CSP) not covered by the CAPE 2004; (ii) examines how the lessons and recommendations of the CAPE 2004 were incorporated in the CSP 20052009; (iii) assesses the performance of the CSP 20052009 as of 31 December 2008; and (iv) provides findings and forward-looking lessons to assist in the preparation of the next country partnership strategy (CPS). This includes how ADB assistance responded to the needs of a developing member country in political turmoil for the past decade and what the experience of a results-based CSP has been. Cumulative lending, grants, and technical assistance (TA) to the country from 1968 to December 2008 was $2.3 billion to finance 111 sovereign loans; $390.6 million for 17 grant projects; and $132.1 million for 279 TA projects. ADB also provided nonsovereign loans and equity investments, funded by ordinary capital resources, amounting to $58.6 million from 1989 to 1996. During 20042008, ADB approved $574.7 million in assistance to Nepal from Asian Development Fund resources, of which 61.8% was grant, 34.1% lending, and 4.1% TA. The project success rate, based on the proportion of successful ratings in a total of 74 projects, is 56.8%. Infrastructure and education projects show higher performance ratings. ADB's country performance assessment ratings for Nepal are close to the average for all Asian Development Fund recipient countries with slightly lower ratings for portfolio, social inclusion and equity, and governance. ADB faced a challenging social, political and economic environment in Nepal during the CAPE period of 20042008. At the start of it, the political situation was extremely unstable, armed conflict was at its peak, life was severely disrupted, and development activities were constrained by violence and frequent strikes. The preoccupation of the Government of Nepal (the Government) with fighting the insurgency affected its implementation ability and limited its capacity to make policy decisions or formulate and implement development programs and projects. The absence of locally elected bodies and weak local capacity were additional key constraints on development in Nepal. Sustaining peace, formulating and adopting a new constitution, conducting elections, and building the economy are some of the main challenges being faced by Nepal. Nepal has opportunities and incentives to expand hydropower, tourism and services, and export-oriented industries, but civil conflict, political instability, poor governance, and weak structural reforms continue to hinder economic growth. Political instability (including governance issues), infrastructure deficits, and labor market disruptions have created an unfavorable investment climate and are binding constraints on market-led growth. Large external and internal migrations have taken place. The external migration has created large incoming remittances, which have financed Nepals growing balance of payments deficits and helped to reduce poverty, particularly in urban areas.

ii Overall Assessment and Rating The topdown assessment, based on an assessment of ADB's performance in terms of strategic positioning, institutional performance and contribution to development results, shows that ADB assistance for the evaluation period was "successful" but on the borderline, indicating that areas for improvement exist. The bottomup assessment was based on the actual and expected performance of ADB operations with regard to completed and continuing projects in key sectors, following the standard evaluation criteria of relevance, efficiency, effectiveness, sustainability, and impact. This assessment reveals the performance of ADB assistance to be "partly successful." As many of the projects in the sector portfolio are active, the rating on sector performance may change over time. Implementation efficiency, the timely completion of projects, and the sustainability of project and program outcomes were identified as key weaknesses. Combined, the topdown and bottomup assessments point to a "partly successful" performance rating for ADB assistance to Nepal. Key Findings The evaluation determined that ADBs country strategy and operational plans for Nepal were appropriate to the conditions prevailing in the country, very responsive to the conflict, and supportive of the Governments development priorities. They also incorporated, for the most part, ADBs strategic priorities, which evolved during the study period. In particular, the CSP 2004 was formulated in the context of ADB's Enhanced Poverty Reduction Strategy 2004 and Long-Term Strategic Framework 20012015. ADB delivered its assistance in a very difficult operating environment by adopting a conflict-sensitive approach. ADB was able to continue implementing its program assistance during periods of conflict and political instability because of strong local community support and because the programs and projects were highly relevant and well aligned with the Government's strategy. ADB's strategic direction was to help the Government address the fundamental problems that had long hindered development in Nepal, e.g., exclusion and the lack of connectivity in rural areas, finance for rural enterprises, or universal education. These were addressed through a combination of program and project grants and TA support channeled through civil society organizations (CSOs) and local communities, which helped to improve implementation despite the insurgency, institutional weaknesses, and lack of elected local bodies. Conflict assessment and participatory approaches incorporated in all sector projects and programs enabled ADB assistance to progress in many cases despite the challenging environment. However, there were timesgenerally unpredictablewhen the intensity of the conflict was high. The security situation at several project sites hindered implementation. To some extent, the difficult environment offered greater opportunities for reforms, particularly in governance. Because of the Governments desire to reestablish its legitimacy when it was being challenged, governance was prioritized in the development agenda. While working with CSOs and local communities was a useful approach, the capacity limitations of local service providers meant that more systematic and effective monitoring and evaluation of their performance and prompt follow up actions would have further improved project implementation and provided opportunities to learn lessons for the future. ADB spread its assistance widely to poor and excluded people to develop rural infrastructure, provide universal education and rural finance, and stimulate agriculture production and marketing. The priority was to assist the Government in dampening the conflict particularly in areas with deep poverty and exclusion. While this socially inclusive

iii approach meant high transaction and supervision costs, initial project feedback indicates that the benefits were felt directly through improvements in irrigation and other services to agricultural communities, higher quality and availability of education for the poor and excluded, improved rural roads to bring excluded regions and communities into the economic mainstream, and the provision of basic water supply and sanitation in smaller towns and cities. Indirectly, benefits were felt through services from the projects themselves, wages earned on the projects, local institutional strengthening and capacity development, and allowing the voices of the poor and excluded to be heard in public and political institutions previously dominated by narrow elites. While early results are encouraging, the sustainability of such rural infrastructure as roads and irrigation is unclear as there is no certainty of a maintenance regime. A sustainable maintenance regime would require Government assistance as well as community participation and ownership in asset management. Feedback from the stakeholders indicated that the design and quality of roads could have been better in terms of reducing the paving over of agriculture lands by, for example, using more bridges, and ensuring that they are strong enough to withstand rainy seasons. Experience with supporting universal education through the sector-wide approach has been positive. ADB's support to the Education for All Program for primary education using the sector-wide approach has so far been successful. The Government should develop and expand primary and secondary education of higher quality and with easier access. In particular, the lessons and experiences gained from the implementation of ADB assistance to the Governments school sector reform program in pilot districts will be invaluable for planning further actions towards the fully fledged adoption of school sector reform. The experience of ADB assistance in promoting good governance by combating corruption, improving public service delivery, and strengthening capacity has been mixed. Support for legal reform needs to go beyond assisting in drafting laws to achieve the intended development outcome. ADB tried to help reform governance and strengthen anticorruption measures with program and TA supporting anticorruption legislation, the establishment of vigilance centers and a personal information system for civil servants, procurement laws, and public financial management. However, there are major issues regarding the capacity of the National Vigilance Center, the Office of the Prime Minister and local bodies to implement the anticorruption strategy. Though important steps have been taken to pilot results-based monitoring tools in some ministries and departments, it has been difficult to translate new policy measures into organizational performance. ADB has provided considerable assistance to improve the legal and judicial system in Nepal through the drafting of many important laws. However, the weakness is in the effective implementation of these laws. There are still many institutions in Nepal with large capacity gaps, including the judiciary, and enforcement needs to be strengthened if the legal and judicial systems in Nepal are to lead to the intended development results. Political instability created further difficulty in addressing weak governance and corruption. Issues related to project implementation go beyond political instability and conflict. While the conflict, security concerns, and transport strikes have been important reasons for implementation delays, other factors persistently affecting project implementation are project design deficiencies; start-up delays; frequent changes of project officials; and constraints on budgets, institutional capacity, and project monitoring and evaluation.

iv The results-based approach introduced by the CSP has been useful to the Government and ADB as it tried to identify links to the results sought by the Government to which ADB will contribute. ADB is acknowledged among development partners for taking the lead in the Government-led results-based approach (i.e., Managing for Development Results [MfDR] process) to improve development effectiveness. However, only a few indicators were given for Pillar 1 (broad-based growth) targets to start with, and tracking indicators for intermediate outcomes were introduced subsequently in later years. There is still a lot of scope for further improvement, particularly in terms of reporting on outcomes, ADB contribution, and adding the results of ADB's TA operations as well. Moreover, on the Government's side, mainstreaming the tested approach and internalizing it will be fundamental for continued success and sustainability. Lessons and Implications ADBs support for infrastructure was affected by the conflict, policy and institutional constraints, and low public investment. The lack of roads and severity of power shortages are major impediments to economic growth, social development, and poverty reduction in Nepal. Accessibility has improved through the extension and upgrading of key sections of the strategic road network, particularly in the eastern region of the country, and ADB has provided sustained support to the energy sector. Even so, the efficiency and sustainability of ADB-funded infrastructure projects were affected not only by the conflict but also by infrastructure policy, institutional, and capacity constraints, particularly the lack of reform, and by low public investment. Rural and urban roads and power supply are necessary to address infrastructure deficits. There is a growing influx of people from rural to urban areas, putting pressure on roads, housing, and public utilities and requiring the development of urban infrastructure. Opportunities have emerged to develop large power projects to generate export revenues and gain economies of scale in supplying power to domestic market. This scenario illustrates the need to make clear strategic choices so that small and large, rural and urban infrastructure projects can be appropriately timed and sequenced. Pursuing these options would require a lot of capital investment that should come from mobilizing the resources of the private sector, as well as from other development partners. ADB should play a catalytic role in this regard, something similar to the approach taken for West Seti Hydropower Project. Risks to long-term macroeconomic sustainability and inclusive development remain, despite success in recent years. Regarding risks to macroeconomic stability, loose monetary conditions have made the financial system vulnerable, as negative real interest rates and capacity limitations for bank regulation and supervision continue to widen trade imbalances. Lagged impact of the global financial crisis may lead to reduced inflow of remittance, tourist expenditure, and foreign grants. Despite Nepals financial accountability analysis in 2002, the Government-led public expenditure and financial accountability exercise in 2006, and the Public Procurement Act of 2007, the management of public finances in Nepal has deteriorated in recent years, and inherent weaknesses persist. There has been under-spending of government budget on development works during the first 8 months of the current fiscal year. The implementation of many ADB supported rural-based projects is moving slow. Given these and the protracted and complex political transition, sustaining economic growth and poverty reduction momentum will be challenging in the coming years. Local and regional user groups need to be included more in the budgetary process. Over the past few years, a system of performance-based funding of local bodies has been piloted,

v and medium-term budgeting introduced, in districts, municipalities, and villages. If inclusive growth is to continue, the Government will need to focus on the continued delivery of social services to rural and urban areas. Continued ADB assistance during the conflict situation was possible through active involvement of CSOs. ADB continued its operations even during the insurgency, limited implementation and outreach capacity, and absence of elected members in the local governments. During this challenging phase, as prevailing lawlessness and insecurity made it more difficult for ADB to establish direct contact with local communities, the CSOs have filled the niche. The role of CSOs for building consensus among political parties and warring factions at the local level, as well as for social mobilization and raising awareness within the community was essential. Community projects need to be consistent with capacity. ADB experienced capacity constraints in local governance, as it is still weak and procedures for transferring funds to local authorities are not yet in place. Reform for local government finance and a more effective system of supervising and monitoring CSOs are necessary steps toward gradual decentralization and a more effective public service delivery. They need to take place simultaneously with clear national and local roles. The number of districts, regions, and CSOs with which ADB operates should be consistent with its capacity for project design and implementation support. Continued support for policy advice is needed. Improved capacity and human resource development at all levels in the government are crucial for sustaining sound fiscal management and maintaining macroeconomic stability and peace. There is a pressing need for post-conflict support to assist the Government in strategizing and policy making in all areas related to binding constraints on development, as Nepal is going through a critical time of postconflict recovery. Economic and sector work would be useful in the area of cooperatives (rules, regulations, supervision), remittances, quality assurance and sustainability in local communitydriven development works. This can be achieved by providing cluster TA under the ADB Nepal Resident Mission (NRM) that could respond to the country's urgent requests. More delegation to NRM together with necessary additional resources. NRM has always been essential to the responsiveness of ADB assistance. Although the challenges facing Nepal and the difficulty of working in rural communities have added to the NRM workload and, in some cases, slowed the pace of implementation, it is clear that project implementation improved once project responsibility was moved to NRM. As of end 2008, NRM had 12 delegated projects from 7 in 2004. But its national officers increased only to 12 from 10 in 2004 and its international professional staff remained at three, including the country director. While the strategic focus of the CSP was relevant in 2004, it needs to be fine-tuned for the future, taking into account the country's binding constraints, Government's priorities, and ADB's long-term strategic framework 20082020 (Strategy 2020). There is a need for continued assistance to the Government in addressing infrastructure deficits and so contribute to achieving economic development through increased connectivity, access and social inclusion. Equally importantand, to a certain extent, re-enforcingis to provide further support to improving governance by strengthening institutional capacity for public service delivery and results-based management, and by reducing opportunities for corruption through support and policy dialogue for law enforcement and better transparency in public spending. While long-term engagement is important for achieving development results, a narrowly focused approach to sector and subsector coverage would be expedient. Combined with these, private

vi sector development and regional cooperation are other areas for continued ADB assistance. Key Recommendations The CAPE puts forward the following directional recommendations for consideration by ADB management in formulating and implementing future country partnership strategies and operations. The proposed recommendations would help a country moving towards lasting peace by addressing its infrastructure and governance deficits, deep-seated social exclusion, large regional inequalities, and lack of economic opportunity for the poor. Infrastructure-Led Inclusive Growth Strategy. In line with the Government's priorities and policies as set forth in the Three-Year Interim Plan (2006/072009/10) [TYIP], and with ADB's Strategy 2020, ADBs inclusive growth strategy should continue. Considering the challenging political milestones ahead, the strategy should retain its flexibility. A shorter-term strategy may be considered, given the likelihood that the TYIP will be extended for another 23 years and that it will be some time before a new long-term poverty reduction strategy or development plan is formulated. Assistance to infrastructure is fundamental to achieving inclusive economic growth, poverty reduction, and regional integration. More emphasis is needed on policy and institutional reform and on addressing constraints on absorptive capacity. ADB needs to fine-tune the current strategy with more emphasis on efficiently and sustainably expanding transport systems for connectivity, both within the country and with neighboring countries, to facilitate the movement of goods and people. In the power sector, ADB assistance should look at the feasibility of developing large, environmentally friendly hydropower projects and micro projects for small communities not connected to the national grid. It should reduce transmission losses, promote clean energy, and improve core infrastructure. Institutional development should be supported by ADB and other donors with a long-term strategic approach that considers the role of private investment, publicprivate partnership, how prospects for private investment can be improved, and how government capacity can be built. Governance, Capacity Development and the Results Framework. The country would benefit greatly from good governance and greater transparency and accountability. ADB should continue its support for good governance and building the capacity of key public institutions, both local and central, to improve the delivery of public goods and services, make it more cost effective, and broaden inclusiveness. Good governance requires continued improvements in public policy, public institution management, the incentive framework for civil servants, regulatory capacity, and the rule of law. ADB should focus on strategic actions that can keep the governance reform agenda moving forward, particularly in public resource management, local government, and electricity regulation, as well as supporting the development of a road map for governance. Institutional strengthening and capacity development in government are crucial for implementing and sustaining reforms in infrastructure, decentralization, and public sector management. The adoption of results-based monitoring tools to assess performance and development results against targets has facilitated improvement in governance in Nepal. ADB should continue to provide assistance to strengthen capacity in the ministries where MfDR is already in place and to extend capacity development for monitoring and evaluation results to other ministries that wish to use MfDR. MfDR practices should be able to inform and contribute to ADB's corporate results framework.

vii Private Sector Development and Regional Cooperation. Private sector development and regional cooperation should be supported, in line with their importance in the Government's TYIP and ADB's Strategy 2020, as well as with the availability of opportunity. Creating an enabling environment for the private sector in Nepal is contingent on political stability; improved governance and infrastructure; solutions to long-standing labor problems; an improved policy environment, particularly for investment and trade; and a legal system in need of overhaul and strengthening. ADB assistance is required to remove constraints, such as those on physical infrastructure and governance, and to improve the policy environment for investment and trade. ADB's support to capacity building and policy advice for public-private partnerships in infrastructure development (roads, power and water supply) has produced initial encouraging results. ADB should continue to support and promote public-private partnerships in infrastructure. For this purpose, partnership between ADB's South Asia and Private Sector Operations Departments is crucial. ADB should continue its support for regional cooperation and integration in order to create benefits from economies of scale and market access, and accelerate trade and growth. In particular, ADB could help Nepal to realize higher growth through integration and closer links with its neighbors, People's Republic of China and India, realizing Nepals immense potential for hydropower and tourism. It would be mutually beneficial to the People's Republic of China, India, and Nepal to cooperate in tourism, trade, and energy sector development. The following is a summary of the key recommendations for ADB Management's consideration in formulating the new country partnership strategy and business plans and their implementation:
Recommendations 1. Infrastructure-Led Inclusive Growth Continue to support transport, power, and water supply in rural areas and selected cities, and irrigation and water resource management to address infrastructure deficits hindering inclusive growth, with increased attention to policy and institutional reforms to achieve long-term effectiveness and sustainability. 2. Governance, Capacity Development and the Results Framework Continue to promote good governance and build the capacity of key public institutions, both local and central, to improve the delivery of public goods and services, broaden inclusiveness, and enable results-based management for better development results of ADB assistance. 3. Private Sector Development and Regional Cooperation Assist in removing key policy and institutional constraints on inward investment, public-private partnership, trade, and mobilizing financial resources. Increase regional cooperation and integration to allow Nepal to benefit from economies of scale and market access, accelerate trade, and promote tourism. Responsibility South Asia Department (SARD)

SARD

SARD and Private Sector Operations Department (PSOD)

H. Satish Rao Director General Independent Evaluation Department

viii

I. A. Objective and Scope

INTRODUCTION

1. This is the second country assistance program evaluation (CAPE) for Nepal. The first CAPE was prepared in 2004 covering 19882003. As before, the main objective of the current CAPE is to assess the performance of Asian Development Bank (ADB) assistance to Nepal to identify lessons and provide directional recommendations for the formulation and implementation of future assistance strategy and operations. The CAPE therefore (i) assesses projects and programs of the previous country strategy and program (CSP) not covered by the CAPE 2004; (ii) examines how the lessons and recommendations of the CAPE 2004 were incorporated in the CSP 20052009; (iii) assesses the performance of the CSP 20052009 as of 31 December 2008, including also how ADB assistance responded to the needs of a developing member country (DMC) that had been experiencing political turmoil for the last decade, and what has been the experience of a results-based CSP; and (iv) provides findings and forward-looking lessons to assist in the preparation of the next country partnership strategy (CPS). B. Methodology and Approach

2. The CAPE methodology is based on the CAPE guidelines.1 The topdown assessment examines the relevance and strategic positioning of ADBs strategy and program, ADBs institutional performance, and its contribution to development results and value addition. The bottomup assessment examines the performance of lending, grants, and nonlending technical assistance (TA) in key sectors in terms of relevance, effectiveness, efficiency, sustainability, and impact. The main sources of information for CAPE preparation included literature reviews and secondary data; interviews with ADB, government, and development partner officials; site visits; and a perception survey of key stakeholders. Appendix 1 presents the detailed evaluation approach and methodology. C. Key Findings of the 2004 Country Assistance Program Evaluation

3. Over the period 19882003, ADB supported Nepals socioeconomic development with 48 loans amounting to $1.4 billion for a total of 47 projects and programs. ADB managed to complete most of the projects it started despite difficult circumstances related to conflict, rising insurgency, and the unstable political situation, which took a large share of government resources and affected economic growth. The CAPE 2004 focused mostly on sector-level performance. In the sectors that were assessed, the CAPE identified key factors that had impeded the effective delivery of development assistance, including (i) poor implementation performance, (ii) inadequate attention to transport and rural development, (iii) inadequate time horizons for capacity building, (iv) excessive project complexity, and (v) limitations on performance posed by the unfolding political conflict. 4. The CAPE 2004 recommended to ADB (i) that the next CPS be sharply focused, easily understood, and acted upon by ADB; (ii) to allow a large degree of flexibility, given the country's situation; (iii) to be clearly focused on sectors that had been proven to be successful and that would additionally contribute directly to the improvement of incomes of socially and regionally disadvantaged people, such as road transport including rural infrastructure; (iv) that modality be
1

ADB. 2006. Guidelines for the Preparation of Country Assistance Program Evaluation Reports. Manila. The CAPE methodology is covered in chapter II.

2 focused on sector loans or sector development programs rather than project and program loans, as the latter had had relatively lower success rates; and (v) to ensure that large-scale projects are in conformity with the future strategy that could conceivably take Nepal to a higher level of development. Two other major recommendations to the Government were to focus on governance and institutions in priority sectors, and to monitor the delivery of results. No overall performance rating was given in the CAPE 2004; however, based on its narrative information, the 2008 Annual Evaluation Review interpreted it as partly successful.2 D. Trends in Performance Ratings

5. Of the 74 projects (approved in the 1970s to 2000s) evaluated at their completion and during postcompletion, 56.8% were rated "successful" or better (Appendix 2). This success rate is below the ADB-wide average of 65%. The trend in project success ratings was mixed. Projects approved in the 1970s had the highest success rate (81.3%), followed by a sharp decline to 45.2% for those approved in the 1980s, and a recovery to 60% for those approved in the 1990s. Two projects that were approved in the 2000s and evaluated at their completion were found "partly successful." Furthermore, relatively low project success rates were found in (i) law, economic management, and public policy (LEMPP) (0%); (ii) energy sector development (0%); (iii) industry and trade (20%); (iv) basic education (33.3%); and (v) agriculture (production, processing, sector development) and livestock (37%). Higher rates of project success were shown in hydropower and transmission (100%), nonformal and vocational education (100%), roads (83.3%), irrigation and drainage (77.8%), water supply (75%), and civil aviation (66.7%). 6. Nepal is an Asian Development Fund (ADF) recipient, with its allocation based on country performance assessment (CPA) carried out by ADB since 2001.3 The trend in composite country performance ratings4 over 20052007 was slightly upward, but overall it was close to average for all ADF recipient countries. The low-performing CPA dimensions have been portfolio; social protection and labor policy; property rights; and transparency, accountability, and corruption in the public sector. However, there has been an increasing trend in composite country performance ratings. Yearly approvals5 of ADF resources for the country from 2004 to 2008 are shown in Figure 1.

2 3

ADB. 2008. 2008 Annual Evaluation Review: Lessons from a Decade of ADB Country Assistance Program Evaluation. Manila. ADB. 2001. Policy on Performance-Based Allocation for Asian Development Fund Resources. Manila. The policy on the program-based approach was revised in 2004 to place greater weight on performance, especially regarding governance. (ADB. 2004. Review of the Asian Development Bank's Policy on the Performance-Based Allocation of Asian Development Fund Resources. Manila. [R249-04, 19 November].) ADB. 2006. 2005 Annual Report on ADB's Country Performance Assessment Exercise. Manila; ADB. 2007. Annual Report on the 2006 Country Performance Assessment Exercise. Manila. and ADB. 2008. Annual Report on the 2007 Country Performance Assessment Exercise. Manila. Based on actual yearly approval of loans and grants to Nepal from 2004 to 2008, with no approvals in 2005 because of the difficult political situation in the country.

3 Figure 1: Yearly Approvals of Loans and Grants to Nepal, 20042008

180 160 Amount in ($ million) 140 120 100 80 60 40 20 0 2004 2005 2006 Loans Grants 2007 2008

Source of basic data: ADB loan, technical assistance, grant, and equity approvals database.

II. A.

DEVELOPMENT CHALLENGES AND GOVERNMENT PRIORITIES

Challenging Political, Social, and Economic Setting

7. Political Landscape. Civil conflict, political instability, poor governance, and weak structural reform, particularly over the past decade, have hindered economic growth and poverty reduction in Nepal. Early in the CAPE period, the political situation was extremely unstable, with armed conflict at its peak, posing serious difficulties for ADB operations in the country. During 20012005, many parts of the constitution were suspended in response to the evolving situation and as a result of direct rule by King Gyanendra. Life was severely disrupted; political polarization increased; and development activities were highly constrained by violence, frequent strikes, and long closures caused by intense insurgency, except in towns in the Kathmandu Valley. The Governments preoccupation with fighting the insurgency affected its resource allocations and implementation ability, limiting its capacity to make policy decisions or to formulate and implement development programs and projects. The absence of locally elected bodies since 2002 and weak local capacity constrained (i) Nepals decentralization process, (ii) ADB operations, and (iii) the building of institutional structures between the Government and local agencies. The comprehensive peace agreement, signed in November 2006, was followed by an interim constitution. The interim Government's taking over from the monarchy brought new hope to the people and development partners. Constitutional elections were held in 2008, installing a Maoist-led coalition. However, the resignation of the Prime Minister on 4 May 2009 created a vacuum in political leadership until a new Prime Minister was elected on 23 May 2009. The main challenges for the Government in the short term are sustaining the peace process, drafting and introducing a new constitution, and integrating peace into the development process. 8. Economic Performance. Nepals macroeconomic performance has remained stable in recent years despite political upheavals, with slow economic growth of 3.8% per annum over 20042008. Vulnerabilities in the financial system are reflected in negative real interest rates, property price increases, and high credit growth. The exchange rate peg to the Indian rupee has helped contain consumer price inflation during the recent food and fuel price crises, but has damaged prospects for exports. Trade imbalances have widened. The budget deficit declined to 2% of gross domestic product (GDP) in May 2008, albeit with weaknesses related to lower-thanplanned capital expenditures, pressures on the budget for public capital expenditures on

4 infrastructure, and the large drain on the budget caused by losses incurred by the state oil company because of price controls on petroleum. 9. Binding Constraints. Nepal remains one of the poorest countries in the world, with inadequate infrastructure and weak governance as key binding constraints on economic growth and poverty reduction. With a lower road density and paved road percentage than its regional neighbors, Nepal has the lowest road infrastructure quality in South Asia. Power shortages are rampant. The absence of a well-planned rural, urban, and interconnected system of road and power infrastructure constrains the expansion of agriculture and industry in rural areas. The infrastructure deficit is also a major impediment to attracting inward investment and allowing people access to social services. Civil conflict and political turmoil have disrupted labor and commodity markets, causing loss of potential output and both external and internal migration. Internal migration has put further pressure on limited infrastructure and public utilities in urban areas. Civil conflict and political turmoil have created an unfavorable investment climate, with the investment rate stagnating or declining during most of the past decade. The other major constraints on investment include (i) property rights issues and lack of security, (ii) an inflexible labor market with highly politicized trade unions, (iii) weak governance and perceived corruption, and (iv) currency inconvertibility and a fixed exchange rate. These constraints have made the country one of the least competitive in the region, ranked 111 out of 178 by Doing Business 2008,6 with foreign direct investment extremely low at 0.4% of capital formation. 10. While the country is between the two large economies of the People's Republic of China (PRC) and India, its location has not helped in terms of access to supply chains or economies of scale in production. This is because of policies as well as logistical constraints. The formal trade imbalance with India, which accounts for twothirds of Nepal's trade, continues to expand, largely because of the administratively fixed exchange rate for the Indian rupee at Re1.00 equals NRs1.60 since 1988. This, coupled with restricted market access, creates disincentives for local Nepalese producers and suppliers. At the same time, import growth has been strong because of higher consumption expenditure funded largely by remittances from Nepalese living and working abroad. Incentives for capital flight have risen because of security concerns, weak governance, negative real interest rates, and the fixed exchange rate with Indian currency. High and growing balance of payments deficits have, however, been more than offset by remittances, which now provide 18% of GDP. Since the rescinding of the Multi Fiber Agreement quotas in 2004, Nepal's textile exports have stagnated, with growth of almost 12% by value in fiscal year (FY) 2001 falling to less than 3% by FY2006. Nepals accession to the World Trade Organization has not boosted its exports. Real exchange rate appreciation in recent years, as the US dollar fell against the Indian rupee, hobbled Nepal's export competitiveness and ability to attract investment. Nepal's porous border with India and its policy and institutional weaknesses allow unrecorded trade and currency movements, which undermine the overall effectiveness of economic policy and growth performance. 11. The principal development challenge for Nepal is poverty reduction, the pace of which has been limited by slow growth. The conflict is believed to have been intimately linked with poverty and social exclusion. Most of the benefits of development have accrued to the Kathmandu Valley and a few other urban areas, excluding large segments of the population. Rural households' poor access to health and education services and to economic opportunity because of infrastructure deficit and weak service delivery has contributed to uneven poverty reduction. Nepal's socioeconomic indicators are shown in Appendix 3.

World Bank. 2007. Doing Business 2008. Washington, D.C.

5 B. Governments Development Priorities and Strategies

12. While economic growth and poverty reduction have been the overriding goals of development efforts in Nepal, the transition to a multiparty democratic system in the early 1990s raised people's aspirations and political attention. The objective of the Government's Eighth Plan (1991/921996/97) was to reduce poverty by accelerating economic growth, expanding employment opportunities, and providing economic and social services to the poor and backward regions as a priority. It initiated an extensive reform agenda to remove distortions from Nepals economic and administrative structures and to open the economy to private sector participation. While the plan had relevant policies, it failed to accomplish the stated goals in several areas. 13. The Ninth Plan (1997/982001/02) advanced the poverty-reduction agenda further with the stated goal of reducing the income poverty rate from 42% to 32% by its end. The plan placed high priority on agriculture. The Agriculture Perspective Plan, formulated in 1995, aimed to raise agricultural growth to 4% per annum. But its implementation was disrupted by adverse domestic political developments, and it fell short of its targets. 14. The Tenth Plan (2002/032006/07) adopted Nepals first Poverty Reduction Strategy Program (PRSP).7 In 2001, ADB provided TA8 to help the Government prepare this plan, which became a key guiding document for the Government and its developing partners. It adopted a results-based approach that included a results framework with performance indicators for major sectors. It sought to address root causes of the conflict by reducing inequalities and bringing marginalized people and underdeveloped regions into the mainstream of development. The difficulties the conflict posed for project implementation were recognized. Decentralization and the promotion of service delivery through civil society organizations (CSOs), including nongovernment organizations (NGOs) and community-based organizations (CBOs), were proposed to facilitate the implementation of development activities. It had four pillars: (i) sustained high and broad-based economic growth; (ii) social sector and human development; (iii) targeted programs to foster the social inclusion of the ultrapoor; and (iv) good governance for the effective, equitable, and efficient delivery of public services. Crosscutting themes included (i) redefining the role of the state to limit public sector intervention, (ii) enlisting the private sector and CBOs to provide public services, (iii) promoting community participation in the management of local development activities, and (iv) accelerating decentralization. The Tenth Plan recognized that progress in good governance, the fourth pillar, was vital for the achievement of the other three pillars, and it fostered decentralization to ensure people's and communities' greater participation in governance. The strategy for fostering high and broadbased growth, the first pillar, depended on reviving growth in agriculture and a recovery in manufacturing, tourism, and exports.9 Social development measures were initiated to improve services delivery, the second pillar, through decentralization, greater involvement of local
7 8

National Planning Commission. 2003. The Tenth Plan (Poverty Reduction Strategy Paper) 20022007. Kathmandu. ADB. 2001. Technical Assistance to Nepal for Support for Preparation of the Tenth Five-Year Plan. Manila (TA 3689-NEP, for $300,000, approved on 23 July). The TA scope was to (i) assess and identify long-term options for pro-poor development, (ii) identify priorities and strategies for poverty reduction based on realistic resource estimates, (iii) ensure public participation and transparency in the planning process, and (iv) assist in developing effective implementation and monitoring systems. In agriculture, crop and livestock production were to be commercialized with modern technology, rural transport links, and improved farmers' access to modern inputs and credit. For industry and exports, investment was to be stimulated by streamlining regulatory processes, amending labor laws, and reforming property rights that had impeded private sector development.

6 communities, and improved access to and quality of education.10 In implementing key sector programs, special attention was to be paid to ensuring access for women and mainstreaming deprived communities, the third pillar. 15. The Government established a medium-term expenditure framework (MTEF) to enforce fiscal discipline and translate plans into action through an implementation modality called the immediate action plan (IAP). The IAP that started in 2002/03 effectively became an annual plan, prioritizing key measures outlined in the Tenth Plan for immediate implementation, including expediting public service delivery by devolving public services. Public procurement, financial accountability measures, and privatization were prioritized, and development programs targeted excluded groups. The Government introduced a poverty monitoring and analysis system at the national and district levels to collect and analyze data on the achievement of national plan indicators. Indicative monitorable targets were included for overall, sector-specific, and key human development variables. Recognizing the importance of effectively implementing and monitoring the PRSP, the IAP included a participatory results-based framework for monitoring and evaluating performance using tracking indicators for the desired outcomes. While conceptually sound in general, the Tenth Plan had many ambitious targets, especially in light of the prevailing security and political situation. With political change and the emergence of the new Government in 2006, the initiative also stalled. 16. Following the end of the Tenth Plan and the PRSP, the Government launched its ThreeYear Interim Plan (TYIP) 2007/082009/10 to provide a framework for addressing development challenges in the transitional period. The plan's goal is to bring about economic and social transformation by boosting investment in the postconflict period. It envisages an economic growth rate of 5.5% per annum by FY2010, more than double the 2.5% in FY2007, to provide employment, lessen inequality, and reduce poverty incidence to 24%. To help achieve these goals, its stated priority areas include (i) physical infrastructure through physical reconstruction and rehabilitation, as well as providing conflict-affected people with relief for reintegration; (ii) investments to support development through the inclusion of excluded groups; (iii) revitalizing the national economy with increased investments in physical infrastructure supporting agriculture, tourism, and industry; and (iv) increased investment in education, health, water supply, and sanitation to enhance the quality of human resources. The TYIP and the finance minister's budget speech for FY2009 emphasize the role of government, cooperatives, and the private sector as contributors to the country's inclusive development. Cooperatives are expected to contribute to rural development, including agriculture, rural infrastructure, and finance. The TYIP is likely to be extended for 23 years, as indicated to the CAPE mission by senior government officials, instead of formulating a new one, since its goal and priorities remain relevant, and political transition, including writing a new constitution, will require time. The Government was expected to announce this to its development partners at an annual development forum scheduled for mid-May 2009, which did not take place because of the then Prime Minister's resignation. III. A. ADBS COUNTRY STRATEGY AND PROGRAM

Evolution of ADBs Country Strategy

17. Nepal is a founding member of ADB and has a little more than four decades of partnership with ADB toward the country's economic growth and poverty reduction. The ADB10

The improved provision of essential health care and access to safe water, sewerage, and sanitation were expected to result from devolving the management of health facilities to local communities.

7 Nepal partnership has seen many CSPs. More recently since 2002, ADB formulated one CSP update on the ongoing country operations strategy (COS), one new CSP, and two country operations business plans (COBPs) to support the Government in implementing the Tenth Plan and the TYIP. ADB also conducted a CPS midterm review 20052009, which included an indicative rolling COBP 20092011 (see further details in Appendix 4). An examination of the individual strategies, update, and business plans determined that ADBs country strategy and operations plans for Nepal were appropriate to the conditions prevailing in the country, very responsive to the countrys development plans, and supportive of the Governments development priorities. They also incorporated, for the most part, ADBs strategic priorities, which evolved throughout the study period. The CSP 2004, in particular, was formulated in the context of ADB's Enhanced Poverty Reduction Strategy 2004 and Long-Term Strategic Framework (20012015).11 B. Results-Based Country Strategy and Program

18. A "results framework" is a useful management tool for the design and monitoring of CPSs. It is used by the Government and ADB to assist in managing the whole CPS cycle. It defines the logical links among country level development goals, outcomes influenced by the CPS, and ADB-supported interventions and partnerships. Indicators are the quantitative or qualitative variables that provide a simple and reliable means to monitor progress, and to assess achievements. In principle, good outcome indicators should be (i) specific and clearly and directly related to the intended outcomes; (ii) measurable specifying quantity and quality; (iii) achievable realistic in what is to be achieved in a practical and cost-effective manner; (iv) relevant useful for management information purposes; and (v) time bound. 19. ADB embarked on piloting a results-based CSP in 2004, and the Nepal CSP 200509, approved in September 2004, was the first pilot results-based CSP. The CSP 20052009 is fully aligned with the Tenth Plan (paras. 1415). It supports the country's development priorities and includes four strategic pillars. The CSP identifies links to the results sought by the Government to which ADB will contribute and the outcomes that are expected during its implementation, and it provides tracking indicators for implementation progress (although added subsequently). It does not, however, establish any quantitative measures for ADB's contribution to national goals and objectives. 20. In the original CSP results framework, only a few indicators were given and only for Pillar 1 targets.12 They were actually the same as the Tenth Plan's goals. The CSP included the strategic goals for the midterm development agenda to (i) achieve an annual average growth rate of 6.2% during 20022007, (ii) increase overall private investment to 23.5% of GDP by 2007, and (iii) achieve annual average agricultural growth of 4.1% by 2007. Based on the information presented in the draft CSP completion report (2008), the achievements for the same period were (i) GDP growth rate of 3.54%, (ii) overall private investment of 17% in 2007, and (iii) agricultural GDP growth of 2.82%. These were the Government's goals, and the achievements fell short of the targets indicated in the CSP results framework. 21. The GDP growth recovered to 5.6% in 2008, as reported in the Asian Development Outlook 2009, which was due mainly to the sustained expansion of the services and a weather11

ADB. 2004. Enhancing the Fight Against Poverty in Asia and the Pacific: The Poverty Reduction Strategy of the Asian Development Bank. Manila; and ADB. 2001. Moving the Poverty Reduction Agenda Forward in Asia and the Pacific: The Long-Term Strategic Framework of the Asian Development Bank (2001-2015). Manila. 12 The long-term goals for Pillar 1: (i) accelerate broad-based economic growth to 8.3% per annum by FY2017; and (ii) reduce poverty level to 10% by 2017.

8 induced recovery in agriculture, although the industry sector suffered from input supply disruptions and labor agitation. Assuming normal situations concerning weather, political transition, economic policies, and no disruptions in input supply, GDP growth is forecast to be slower at around 3.03.5% for FY2009 and FY2010. 22. The CSP draft completion report highlights progress in achieving physical milestones contributing towards Pillar 1 and Pillar 2 targets. But the information is scant in terms of coverage and time frame, and the results are not necessarily linked to ADB assistance. Under Pillar 2: (i) ADB support to the Education for All (EFA) Program on a sector-wide approach (SWAp) basis has helped in significantly improving access to and quality of basic education; on the vocational front, 5,000 pupils are being trained annually; (ii) 692 rural projects were identified and 10 town water supply projects completed; and (iii) womens and other disadvantaged groups involvement in ADB-assisted projects increased to 41% from 25%. 23. ADB is acknowledged among development partners for taking the lead in the Government-led results-based approach (i.e., the Managing for Development Results [MfDR] process) to improve development effectiveness. ADB provided assistance for these efforts through two TA activities, one at the country level (Operationalization of MfDR) and another at the regional level (Mainstreaming MfDR in Support of Poverty Reduction in South Asia).13 While selected ministries and district development committees14 that were covered by ADB's assistance have been able to come up with results-based frameworks that contain baseline and target data, others did not have such capacity. The Government continued with results-based approaches in the subsequent TYIP with support from these TA operations. 24. ADB's Nepal Resident Mission (NRM) monitors progress towards results at the sector and country levels through a bottomup process. For this, project results profiles and sector results profiles (SRPs) have been prepared. SRPs are consolidated into a country results profile (CRP), which provides a unified picture of ADBs operation in the country. A results management team has been set up at NRM to coordinate the development of SRPs and the CRP, and to update the CSP. In addition, closer monitoring of the CSP results indicators, among others, has helped in portfolio performance monitoring. The annual country portfolio review mission is also being used to facilitate the adoption of MfDR in portfolio management. The benefit of conducting such exercises is that both ADB staff and government counterpart agencies gain clarity about the implementation progress. It has enabled drawing attention to areas that need improvement. Lessons from the first results-based CSP have been well documented in Learning by Doing: The Nepal Results-Based Country Strategy and Program.15 25. Overall, the results-based CSP and ADB's assistance to Nepal for MfDR adoption have been useful. However, there is still considerable scope for further improvement, particularly in terms of reporting on outcomes, ADB contribution, and adding the results of ADB's TA operations as well. Moreover, on the Government's side, mainstreaming the tested approach and internalizing it will be fundamental for continued success and sustainability.
13

ADB. 2006. Technical Assistance for Operationalization of Managing for Development Results. Manila (TA 4765NEP, for $0.4 million, approved on 13 February); and ADB. 2006. Technical Assistance for Mainstreaming Managing for Development Results in Support of Poverty Reduction in South Asia. Manila (TA 6306-REG, for $1.9 million, approved on 27 January). 14 Ministry of Education, Ministry of Local Development, and Ministry of Physical Planning and Works (Department of Roads, Department of Water Supply and Sanitation, and four district development committees (Jumla, Dang, Jhapa, and Dhanusa). 15 ADB. 2006. Learning by Doing: The Nepal Results-Based Country Strategy and Program A Pilot for Achieving Country Outcomes. Manila.

9 C. Incorporation of 2004 Country Assistance Program Evaluation Recommendations

26. The CSP 20052009 addresses many of the CAPE 2004 recommendations (para. 4). While it rightly aligns with the three strategic pillars of broad-based economic growth, inclusive social development, and good governance, the CSP includes a conflict-sensitive approach, which allows flexibility in project design to take into account changing circumstances during implementation and more time for preparation to ensure beneficiary consultation. The CSP provides increased allocation to road and rural infrastructure projects to contribute directly to improving the incomes of socially and regionally marginalized groups (accordingly, 21.8% of the approved value of loans and grants during 20042008 supported multisector rural reconstruction and rehabilitation, and 19.8% supported transport and communications). It includes two fast-disbursing program loans for rural finance and education. Regarding large infrastructure projects, a power generation project in West Seti was added to the lending pipeline; the same is under process. The CSP includes assistance to the Government for ensuring good governance for policy improvement and local institutional development. It supports the development of the framework for results monitoring, which is considered a major undertaking, and it is recognized that considerable capacity building is required at all levels of government to make monitoring effective. D. Trends in Lending, Grants, and Technical Assistance Program

27. Cumulative lending, grants, and TA to Nepal from 1968 to December 2008 comprised $2.3 billion to finance 111 sovereign loans, $390.6 million for 17 grant projects, and $132.1 million for 279 TA operations. ADB also provided nonsovereign loans and equity investments amounting to $58.6 million from 1989 to 1996.16 During 20042008, ADB approved $574.7 million in total assistance to Nepal from ADF resources, of which 61.8% was grant, 34.1% lending, and 4.1% TA (Table 1). Because of the challenges posed by political uncertainty in the country, new loan and grant approvals were suspended in 2005. ADB assistance resumed in early 2006 and shifted from lending to grants, and from projects to programs in some cases, as the need for support in key sectors to achieve inclusive growth became more apparent and urgent (Figure 2). All ADB sovereign loans and grants to Nepal were funded by ADF, while TA was funded mostly by the technical assistance special fund. 17 Table 1: Approved ADB Lending, Grants, and Technical Assistance to Nepal, 20042008 ($ million)
Approval Loans Grants TA Total Year No. Amount No. Amount No. Amount No. Amount 2004 5 110.0 0 0.0 8 3.2 13 113.2 2005a 0 0.0 0 0.0 3 2.2 3 2.2 2006b 2 86.0 5 84.9 13 6.4 20 177.3 b 0 0.0 4 111.0 10 7.2 14 118.2 2007 2008c 0 0.0 3 159.3 9 4.5 12 163.8 Total 7 196.0 12 355.2 43 23.5 62 574.7 % Share to Total Assistance 11.3 34.1 19.4 61.8 69.4 4.1 100.0 100.0 ADB = Asian Development Bank, No. = number, TA = technical assistance. a ADBs assistance in 2005 consisted of TA amounting to $2.2 million against the indicative country program for the year comprising three firm loans for $110.0 million and eight TA operations for $3.5 million. Most of the loans and TA that could not be processed in 2005 were carried over to 2006.
16

The last nonsovereign loan, or equity investment, approved for Nepal was in 1996. Nepals nonsovereign loans and equity investments were funded by ordinary capital resources. 17 Details of ADB's lending and nonlending assistance to Nepal are in Appendix 5.

10
b c

This includes two Japan Fund for Poverty Reduction grants, one approved in 2006 and the other in 2007. Approvals as of 31 December 2008. Source: ADB loan, technical assistance, grant, and equity approvals database.

Figure 2: Sector Distribution - Amount of Loans and Grants to Nepal (approved from 2004 to 2008)
Multisector 21.8% Agriculture and Natural Resources 16.1%

Education 10.9%

Transport and Communications 19.8%

Finance 11.7%

Law, Economic Management, and Public Policy 19.3%

Health, Nutrition, and Social Protection 0.4%

Source: ADB loan, technical assistance, grant, and equity approvals database.

28. The sector focus of ADB lending, grants, and nonlending TA to Nepal approved during 20042008 was consistent with the priority sectors and themes identified in the CSP 2005 2009, namely (i) agriculture and rural development; (ii) education; (iii) energy; (iv) finance; (v) transport and communications; (vi) water supply, sanitation, and urban development; and (vii) governance. The COBPs for 2007200918 and 2008201019 support these priority sectors and themes in the prevailing country context, but with an additional focus on reconstruction and rehabilitation. The CPS midterm review20 confirmed the relevance of this approach, as the country was still recovering from political instability. E. Delivery of Country Strategy and Program 20052009

29. The CSP 20052009 pipeline of projects for the period 20052008 comprised 16 lending and grant projects with an indicative ADF level of $524.5 million. As of December 2008, 79.4% ($416.2 million) of the total planned assistance of $524.5 million had been approved. Of the total number of projects in the pipeline (12 loans and four grants), 87.5% or two loans and 12 grants were approved. In addition, five investment projects worth $187.0 million and two regional cooperation grants worth $9.0 million are programmed for 2009, of which one multisector project21 has so far been approved (April 2009). Table A5.5 in Appendix 5 shows the approved loans and grants from 20052009 compared with the lending pipeline.
18 19

ADB. 2006. Country Operations Business Plan: Nepal 20072009. Manila. ADB. 2007. Country Operations Business Plan: Nepal 20082010. Manila. 20 ADB. 2008. Nepal: Country Partnership Strategy Midterm Review 20052009. Manila. 21 ADB. 2009. Report and Recommendation of the President to the Board of Directors on a Proposed Grant to Nepal for the Emergency Flood Damage Rehabilitation Project. Manila (Grant 0150-NEP, for $25.6 million, approved on 21 April).

11 30. The changes in the lending and nonlending program could be attributed to a number of factors, including (i) reprioritization of the Government's needs, (ii) expected annual allocation to the country, (iii) performance of specific sectors, and (iv) project preparedness. For example, the CSP lending pipeline for 20052008 included three energy projects totaling $115.0 million: (i) the Rural Electrification and Renewable Energy Project for $40 million, (ii) the Power Sector Development Project I for $30 million, and (iii) the West Seti Hydropower Project for $45 million. However, no energy sector loans and grants were approved from 2005 to 2008.22 In the agriculture and natural resources (ANR) sector, only $19 million or 47.5% was approved as compared with the planned amount of $40 million. This can be explained, among others, by the reprogramming for 2010 of the Decentralized Rural Infrastructure and Livelihood Project II. Most of the activities planned under this project have been supported by the Rural Reconstruction and Rehabilitation Sector Development Program ($120 million). In addition, the planned Decentralized Community-Based Water Management Support Project ($20 million) has been dropped. 31. The nonlending assistance pipeline for 20052008 comprised 41 TA activities worth $16.4 million. As of December 2008, $20.3 million or 90.2% of the programmed nonlending projects had been approved. The 2009 nonlending pipeline consists of 10 TA operations worth $4.8 million, of which one23 in the ANR sector has so far been approved. F. Relevance and Strategic Positioning of ADB Assistance 1. Relevance and Alignment

32. The relevance and alignment of ADB assistance is rated "substantial." The CSP 2005 2009 focuses on the countrys needs for broad-based growth, social inclusion, and governance in the conflict environment. The CSP aligns itself closely with the Governments Tenth Plan and PRSP,24 recognizing that it is necessary to work in rural areas, despite the conflict, to address poverty and deep-seated social exclusion. It adopts the Tenth Plan's participatory approach. By engaging in extensive consultations and using their results, it reflects the knowledge of local groups in the design and implementation of assistance projects. 33. As envisaged, congruent with the Government's policy, the CSP 20052009 adopts a conflict-sensitive approach that includes (i) simplified project design with a manageable set of objectives, (ii) greater community participation in project design to create community ownership, (iii) inclusiveness and poverty orientation by ensuring that the socially and ethnically marginalized both work on and benefit from projects, and (iv) transparency and accountability regarding the flow of funds. ADB has been at the forefront of working in conflict areas. Its willingness to take a participatory approach to working with local organizations in conflict areas has served rural areas well. Projects have been simplified and based on the needs of different regions, and community participation has been promoted, particularly in agriculture.

The Rural Electrification and Renewable Energy Project was dropped, and there is no energy project in the pipeline for 2009. The Power Sector Development Project I grant has been dropped; instead, a loan entitled Electricity Connectivity and Energy Efficiency I is being processed, with approval planned for 2009. The West Seti Hydropower Project is still a probable project and is estimated to be approved in 2009. The fact-finding mission was undertaken in January 2008. 23 ADB. 2009. Technical Assistance to Nepal for the Community Irrigation Project. Manila (TA 7229-NEP, for $0.75 million, approved on 29 January). 24 The Tenth Plan and PRSP were developed with the participation of many stakeholders, including the ADB. This gave ADB a clearer perspective on the Governments development priorities.

22

12 2. Sector Selectivity, Focus, and Continuity

34. The selectivity and focus of ADB assistance demonstrate its responsiveness and flexibility in a difficult country situation and its long-term commitment to the sectors in which it has been active. This dimension is rated "substantial" but on the low side. The CSP is spread over seven sectors, which is an improvement over the 10 in the previous country strategy, but it has more than 14 subsectors. Multisector assistance was added late in 2007, seemingly to accommodate the TYIP's priority for rural reconstruction and rehabilitation, which does not seem to have been foreseen by the CSP. As envisaged in the conflict assessment, the CSP could have had an immediate and medium-term strategic approach,25 taking into account absorptive capacity, and reconstruction and development needs. Rural infrastructure deficits are being addressed under agriculture, transport, and multisector assistance. While the CSP is well intended to assist the Government in addressing rural infrastructure deficits and reconstruction priorities, rather complicated project classification and division of labor for implementation are required for coordination in ADB as well as in the Government. Meanwhile, the CSP pays limited attention to addressing structural issues for further improving the long-term policy and regulatory environments at both the macro and sector levels. 35. Poverty in Nepal is predominantly rural, and agriculture dominates rural livelihoods, but agricultural growth is constrained by the deficit in infrastructure and by poor trading opportunities. ADB has supported agriculture for the past four decades, but with limited success. The CSP 20052009 gives priority to agriculture but spreads assistance over more than four subsectors, including rural infrastructure, rural finance, and women's legal empowerment, which do not quite fit in. Assistance does not include forestry, which was the correct decision, as other development partners are sufficiently active in that subsector. ADB has focused its assistance geographically on excluded regions and social groups with the highest incidence of poverty, bringing them into the economic mainstream by fostering connectivity across the country. This is consistent with the CAPE 2004 recommendations. 36. Geographical selectivity depended on areas needs; their comparative advantages in productive potential, existing or potential; wealth creation for the poor and marginalized; and donor coordination. Assistance has been balanced in regard to districts and regions, bearing in mind safety and security issues. Many of the districts covered by ADB projects had poverty rates above the national average. This geographic spread means that ADB's resources have been spread widely over rural areas and sectors, and the focus on rural areas has reduced the resources available for the urban areas in which ADB operates. 37. Meanwhile, at the sector level, the efficiency and sustainability of ADB-funded infrastructure projects have been affected by prevailing policy and institutional constraints. The lack of institutional reform to alleviate management capacity constraints and a reliable maintenance regime has limited the effectiveness of ADB road projects. The subsidy on petroleum in the Governments price setting has caused shortages and additional costs to the Government. In the power sector, the lack of an action plan or strategy and the inability to deal with large transmission and distribution losses, receivables, and theft (which have had to be recovered by charging end users) have contributed to the poor financial health of the Nepal Electricity Authority (NEA) and inadequate investment in hydropower generation. Growing congestion in the Kathmandu airport, the only international airport in the country, continues for lack of facilities or regional flights from cities other than Kathmandu to neighboring countries.

25

Mahat, Prakesh S. 2004. Transition and Post Conflict Strategy. Manila: Asian Development Bank.

13 G. Institutional Performance 1. Flexibility for Repositioning as Context Changes

38. The CSP 20052009 encourages flexible implementation modalities in view of uncertainty and political instability. ADB has responded to situations as they have unfolded and has repositioned itself as the context changed. Through careful conflict assessment, ADB has continued operations even during periods of escalated insurgency that limited implementation and outreach capacity, as frequently changing governments changed their priorities, and now during the fragile peace process. The lack of representative government at all tiers has necessitated greater flexibility and selectivity, more up-front investment in awareness and consensus building, and greater attention to local service delivery by encouraging the involvement of local communities, the private sector, and CSOs. Prevailing lawlessness and insecurity have made it more difficult for ADB to establish direct contact with local communities, so it has relied on CSOs for building consensus among political parties and warring local factions, as well as for social mobilization and raising awareness in the community. 39. The design of community projects often required more input and careful assessment of alternative approaches to select those that best met the needs of the local situation, taking into account assessment of the conflict and risk, local capacity and reliability, and the regulatory framework of local community organizations. Three quarters of projects supported by ADB have been implemented in partnership with CSOs and the private sector. These organizations require careful and continuous monitoring and supervision. To ensure accountability in community projects, ADB contributed to the preparation of the new Local Body Financial Administration Rules 2007, which, in line with the Public Procurement Act 2007, aimed to harmonize, monitor, and regulate public procurement procedures more effectively. ADB also helped establish the Public Procurement Monitoring Office. 40. The lack of locally elected members in local bodies has affected ADB's implementation performance in some projects. Because of the weak capacity of local government officials and communities, reaching consensus through participatory processes and dealing with ad hoc and politically motivated decisionmaking at the grassroots was often timeconsuming and difficult. This required innovative approaches, flexibility, and project transparency. Somewhat fluid situations brought indecision and delays locally that contributed to implementation delays on the part of central government agencies. 2. Applications of ADB Strategies and Policies

41. The country strategies over the CAPE period were consistent with ADB's 2001 LongTerm Strategic Framework (20012015) and its core strategic pillars such as sustainable economic growth, inclusive social development, and governance for effective policies and institutions. As to crosscutting themes, the country strategies were strong on gender and governance, but their strategic thrust was relatively weak in the areas of private sector development and regional cooperation. 42. The CSP did not have any programs of direct lending to the private sector, partly because of political instability and limited market opportunity. The CSP had limited coverage on cross-border and subregional cooperation, as regional cooperation in South Asia was just beginning to evolve. However, emphasis on ADB's potential role as an honest broker and development catalyst would have been useful. The strategy inadequately factored in the opportunities and constraints arising from trade and economic relations with bordering

14 economies in Nepal's development policy choices and efforts. It had no programs explicitly for further improving the policy and regulatory environments at both the macro and sector level to foster long-lasting market-led economic growth and poverty reduction. Environmental protection is another area in which the CSPs were weak in terms of strategic emphasis and the pipeline of projects. Gender and inclusiveness issues were, in contrast, consistently well covered. 3. Partnering and Donor Coordination

43. ADB continues to harmonize its assistance with development partners by implementing joint action plans, strategic alignment, and synergies in program formulation and implementation.26 The four major development partners in NepalADB, World Bank, Department for International Development (DFID) of the United Kingdom, and Japanhave regular coordination meetings. ADB and the World Bank have held joint harmonization retreats and meetings to discuss ways to support Nepals development in the postconflict environment and to enhance aid effectiveness. The four institutions have held review meetings on joint operations to consider important policy, operational, and sectoral collaboration issues. 44. Despite these coordination efforts, ADBs overall performance on key harmonization indicators is less positive, according to the Nepal 2008 Paris Declaration Monitoring Survey. For instance, regarding joint missions, ADB reported that fewer than 11% of its missions were coordinated with other development partners, which was less than a third of the national average of 36%. On joint country analytical work, ADB reported that none of its analytical work in 2007 was collaborated with other partners; the national average was 37%. Similarly, ADB reported that none of its TA was coordinated, compared with 14% for all overseas development assistance and partners. 45. Lately, there is a growing trend toward channeling ADB assistance through programbased approaches or SWAps by pooling funds in joint financing arrangements with other development partners. In education, ADB is one of nine partners of the flagship SWAp for the implementation of the Governments EFA Program, which has a well-established consultative mechanism for joint policy dialogue and program implementation monitoring by the Government and development partners. Good practices of the program-based approach are emerging in other key sectors and/or thematic areas that ADB has actively supported. For example, a new multi-agency-supported program, the Local Governance and Community Development Program, led by the Ministry of Local Development, is jointly funded by ADB, Canadian International Development Agency, Denmark, DFID, Norway, Switzerland, and the United Nations, and the World Bank is considering joining. The Organization of the Petroleum Exporting Countries (OPEC) Fund for International Development has provided $10 million in cofinancing for the Rural Reconstruction and Rehabilitation Sector Development Program, and DFID is considering cofinancing $20 million of the program. The possibility of adopting a SWAp for rural roads is being discussed with the Government, World Bank, DFID, and Swiss Development Corporation (SDC) among other development partners. NRM has been proactive in mobilizing donor partner cofinancing early in the identification stage of new projects, including (i) the Skills for Employment Project cofinancing from SDC, (ii) the Road Connectivity Sector Project cofinancing from OPEC, and (iii) the Road Network Development Project cofinancing from DFID. 46. Another example of multi-agency support is the promulgation of the Public Procurement Act 2007 and the Public Procurement Regulations 2007, the results of rigorous coordination
26

A matrix of donor partners and their activities and programs is given in Appendix 6.

15 among the Government, ADB, and the World Bank. Similarly, TA on Knowledge Transfer for Public Procurement,27 approved by ADB in 2008 to strengthen the newly established Public Procurement Monitoring Office, was prepared in coordination with the World Bank. Currently, ADB, DFID, and the World Bank have a joint procurement review team headed by the Ministry of Finance to suggest best solutions for effectively implementing the Public Procurement Act and Regulations. 4. Portfolio Performance

47. Maintaining higher contract award and disbursement ratios to avoid risk to projects is critical for improving portfolio performance. In 2008, ADBs CPS midterm review 20052009 (footnote 20) noted that, despite the challenging environment, noticeable implementation progress had been made in CSP priority sectors. In particular, the conflict-sensitive approach had facilitated effective project implementation in many cases as described in the performance assessment of key sectors (see Chapter IV of this paper). 48. Implementation issues such as delays in project start-up, lengthy procurement processes, frequent transfer of project staff following changes in political leadership, inadequate staffing, untimely release of program budgets, and weak monitoring and evaluation continue to be hurdles for the timely completion of projects. Furthermore, government efforts need to be significantly strengthened to operationalize MfDR mechanisms, focusing not only on immediate inputs and outputs but also on longer term development outcomes and impacts. 49. In view of its commitment to deliver the envisioned results of its operations, ADB, in partnership with the Government, tried to improve portfolio performance through several initiatives. Designed to enable improved portfolio performance are, among other initiatives, (i) adoption of the first results-based CSP, (ii) initiation of annual country portfolio review missions that involve the Government and development partners, (iii) establishment of an early warning system on portfolio performance, (iv) initiation of reforms to procurement and financial management, (v) increased delegation of projects to NRM, (vi) increased staff monitoring and supervision of their projects, and (vii) adoption of a screening mechanism to assess project design early in project preparation. These initiatives are expected to improve portfolio performance in the coming years. 50. The contract award and commitment ratio for loans and grants, including program loans, also improved, steadily increasing from 7% in 2004 to 24% in 2008. Further, there were no more projects at risk by the end of 2008, a marked improvement from the six (26.1% of the portfolio) in 2004, with the completion of the only at-risk project in 2008. This, however, does not include the South Asia Subregional Economic Cooperation (SASEC) Information Highway Project, approved in 2007, which showed an unsatisfactory rating in terms of implementation progress based on its project performance report as of 30 June 2009. 51. The disbursement performance of sovereign loans has improved substantially in recent years. For instance, the disbursement ratio for project and program loans rose from 4.4% in 2004 to 15.4% in 2008. Including grants, the disbursement ratio during the CAPE period more than doubled in 2006 compared to the previous year (2005) and then remained relatively stable until 2008 (Table 2). However, the overall portfolio performance indicators such as contracts, awards, and disbursements ratings were still below the ADB-wide average.
27

ADB. 2008. Technical Assistance to Nepal for Knowledge Transfer for Public Procurement. Manila (TA7111-NEP, for $0.5 million, approved on 31 July).

16 Table 2: Portfolio Performance of Loans and Grants to Nepal (approved from 2004 to 2008)
Item Total Investment Loans Grants Contract Awards and Commitments Achievement Contract Awards and Commitments Ratio Disbursement Achievement Disbursement Ratio Net Resource Transfer Projects "at risk" Unit $ million $ million $ million $ million % 2004 713.6 713.6 0.0 38.2 7.0 2005 648.3 648.3 0.0 69.6 15.2 2006 770.7 686.8 83.9 101.6 18.7 2007 849.0 656.1 192.9 95.7 22.0 2008 919.0 595.7 323.3 145.3 24.0

$ million % $ million Number %

22.0 4.4 (17.3) 6.0 26.1

43.7 7.7 2.9 7.0 30.4

108.0 18.0 62.4 4.0 16.0

102.3 18.3 49.4 3.0 14.0

127.1 18.0 63.8 0.0 0.0

( ) = negative. Source: Asian Development Bank South Asia Department.

52. With regard to nonsovereign loans, negative net resource transfers have not picked up since 2001 because of the absence of new loans or equity investments since 1997 to balance approvals fully disbursed by 2000. While all nonsovereign loans have been fully disbursed, only one loan has been fully repaid, with the rest restructured or still being repaid. More details on portfolio performance are discussed in Appendix 7. 5. Client Perception of ADB's Responsiveness

53. The perception survey of stakeholders conducted during CAPE preparation indicated a generally positive ADB performance in Nepal.28 Overall, 90.5% of survey respondents perceived ADBs assistance to Nepal as relevant to the countrys development priorities, with half of them rating it "highly relevant."29 This was associated with what they identified as ADB's strengths: (i) responsiveness to sector and country development needs (70.5%), (ii) ability to foster beneficiary participation and ownership (51.6%), and (iii) flexibility in responding to changing environments and needs (35.8%).30 Around 64% of the respondents believed that ADB programs and operations were "efficient," with 15% rating them as "highly efficient." These stakeholders saw ADBs assistance as "effective" (54.7%) or "highly effective" (9.5%) in achieving its intended development outcomes. However, 34.8% thought that ADB was only "partly effective," perhaps because of the weaknesses they identified: the lack of synergy between related programs and projects (47.4%) or of a well-integrated, programmatic modality (29.5%). The sustainability of ADB programs and projects is a little uncertain, as only 50.6% of respondents felt that ADB assistance to Nepal is "sustainable," with 5.3% describing it as "highly sustainable." The benefits of some specific projects nevertheless appear to be "sustainable," as indicated by 92.1% of respondents during focus group discussions. 54. NRM was perceived to be an effective part of ADBs operations by 51.6% of survey respondents, with an additional 25.3% saying that NRM was "highly effective." This view is consistent with the findings of ADBs Special Evaluation Study on the Resident Mission Policy
28 29

The details of the perception survey are in Appendix 8. The response rate was 72.3%. 30 On the other hand, 27.4% of the survey respondents cited lack of flexibility in responding to changing environments and needs as one of ADBs main weaknesses.

17 and Related Operations: Delivering Services to Clients.31 NRM was established in 1989 and is regarded by in-country partners as adding value to ADB operations in Nepal. According to the findings of the survey conducted as a component of the special evaluation study, there is strong consensus among stakeholders that NRM has enhanced ADB operations in Nepal in such areas as strengthening understanding of the country context, strengthening ADB partnerships in Nepal, and heightening ADBs visibility in Nepal. The perception of CAPE survey respondents is further supported by the 2006 Multilateral Organizations Performance Assessment Network (MOPAN) survey,32 which states that NRM is seen as generally flexible and responsive to changing circumstances in the country, as demonstrated by its ability and willingness to balance its mandate with careful consideration of the countrys current political situation. These factors have contributed to the high relevance of ADB operations in Nepal. The external assessment is that NRM is "highly effective." 55. The MOPAN survey results revealed a general external perception that NRM has limited authority to make significant decisions, requiring frequent consultations with ADB headquarters in Manila. In addition, ADBs contributions to harmonization efforts in terms of operational practices and procedures were perceived as limited by rigid administrative requirements imposed by headquarters. The perception survey carried out by the CAPE indicated that about two-thirds of the respondents felt that aid coordination at operational level needs improvement, as only 30.6% viewed it as satisfactory (Appendix 8). H. Contribution to Development Results and Value Addition 1. Macroeconomic Stability and Growth Outlook

56. ADB contributed to Nepals macroeconomic stability by continuing its assistance over the evaluation period, during which the country was in conflict and political transition. Net resource transfer to the country improved, which helped to a certain extent to keep the fiscal balance under control, with a budget deficit equal to 3% of GDP. GDP growth has been maintained, though at a low average of 3.8% over 20042008; inflation has remained stable below 8%;33 and foreign exchange reserves are healthy, worth approximately 6 months of imports as of FY2008. With the return of higher economic growth at 5.6% in 2008, arising largely from the improved security situation (which helped project implementation, and the expanded services sector) and favorable weather for agriculture, the GDP growth outlook for the next 2 years is modest (3.0%3.5%).34 This will depend upon continued peace and political stability, improved security, prudent government spending, supervision and regulation enforcement in the banking sector, tighter monetary policy, and efficient exchange rate management. However, progress on structural reforms has been held back by the fragile political environment. Trade imbalances with India and the rest of the world continue. ADB assistance has been inadequate for leveraging to achieve structural reforms; reduce vulnerabilities in the financial system reflected in negative real interest rates, property price increases, and high credit growth; and more effectively supervise financial institutions. On the
31

ADB. 2007. Special Evaluation Study on the Resident Mission Policy and Related Operations: Delivering Services to Clients. Manila. 32 MOPAN. 2006. The Annual MOPAN Survey 2006: Donor Perceptions of Multilateral Partnerships at Country Level. MOPAN is a network of like-minded donor countries that began in 2003 to jointly survey the partnership behavior of multilateral organizations at country level. Current members are Austria, Canada, Denmark, Finland, Netherlands, Norway, Sweden, Switzerland, and United Kingdom. 33 International Monetary Fund. 2008. Nepal Article IV Consultation. Washington, DC (June). ADB's Asian Development Outlook 2009 shows the year to year inflation being 14.3% for 2009 and 8% for 2010. 34 ADB. 2009. Asian Development Outlook, Manila. Available: www.adb.org/nrm.

18 macroeconomic front is the urgent need to address huge trade deficits with India35 and the rest of the world by improving the policy and regulatory environment for investment and trade. 2. Inclusive Development

57. ADBs assistance for promoting the objective of inclusive social development comprised 20.3% of ADBs operations in 20042008. This has provided momentum to (i) reduce nonincome poverty with improved access to and quality of education in general and vocational education in particular, (ii) improve access to clean drinking water, and (iii) increase economic and social benefits for women. Women and the disadvantaged have worked on rural infrastructure projects, particularly environmentally friendly ones.36 58. Recent successes in the education sector can be attributed to the adoption of a SWAp in implementing the EFA Program in 20052009, in which ADB is participating jointly with eight development partners. ADB has assisted in primary, secondary, and technical education; its interventions have provided teacher training, vocational training, physical infrastructure development, rehabilitation of secondary schools, and construction of hostels. The net enrollment rate in primary education increased from 72.4% in 2004 to 86.6% in 2006, with 91% of households having access to a primary school and the gender-related development index increasing from 0.3 in 1995 to 0.5 in 2005 (Appendix 3). School facilities have been continuously upgraded since 2002. The EFA Program and the Secondary Education Support Project saw the provision of scholarships and school grants increase from 150,000 in 2002 to more than 700,000 in 2007. The percentage of trained teachers increased almost threefold over the same period. Despite the appreciable efforts to enhance basic education, the PRSP target enrollment in primary school was not attained, and the Government still faces many difficulties in providing access to quality education at all levels. 59. The CSP 20052009 aims to help the Government address gender, ethnic, and caste discrimination by (i) encouraging inclusive public policies; (ii) mainstreaming antidiscrimination measures in ADB-supported initiatives in rural development, education, and civil service reform; (iii) building institutional capacity to foster inclusion and promote gender equality; and (iv) providing targeted interventions to empower poor women. Specific mechanisms were developed to enable the participation of women and the poor in projects that might otherwise have excluded them. ADB's gender projects database indicates that all of the loans and 9 of the 12 grants to Nepal during the CAPE period addressed gender concerns.37 ADB-supported projects with a gender action plan increased from 25% in 2002 to 50% in 2008.38 The Special Evaluation Study on Poverty Reduction Technical Assistance Trust Funds39 found that the five TA projects financed by the Poverty Reduction Cooperation Fund in Nepal provided targeted assistance and showed equally strong design focus on women and excluded groups.
35

The approach paper for the TYIP envisaged a review of the exchange rate for the Indian currency, with a view to adopting a more realistic exchange rate system, and measures for ensuring the safe inflow and management of foreign remittances. ADB had an opportunity to help the Government in this regard. See National Planning Commission. 2007. Three-Year Interim Plan, Approach Paper. Kathmandu (July). 36 ADB addressed disparity by ensuring that wages for women were equal to those of men for work of equal value. 37 ADB's gender projects database covers only those projects funded by ADF or ordinary capital resources. A project addressing gender concerns may be classified under the following categories: (i) gender and development as a theme, (ii) effective gender mainstreaming, and (iii) some gender benefits. 38 Loans and grants with gender and development as a theme or categorized under effective gender mainstreaming usually have a gender action plan. 39 ADB. 2008. Asian Development Banks Poverty Reduction Technical Assistance Trust Funds: Poverty Reduction Cooperation Fund and Cooperation Fund in Support of the Formulation and Implementation of National Poverty Reduction Strategies. Manila.

19 60. Nepal is the only DMC that borrowed for a project focused exclusively on gender.40 Through program lending and policy dialogue, ADB was able to assist the Government in the formulation of several landmark legislative acts and policies, such as the amendment of the Civil Service Act 2007 and enactment of the Gender Equality Act 2006, which repealed many discriminatory laws against women. The number of female primary school teachers increased from 21.4% in 2002 to 30.6% in 2007, and the percentage of female parliamentarians in the Interim Parliament rose from 5.9% in 2001 to 17.3% in 2006. ADB assistance likewise helped institutionalize gender awareness in sector agencies. Given the progress of ADB assistance in Nepal with regard to gender and development, the potential impact of ADB support in this area is high and may yield long-term benefits for women and other excluded groups. A more detailed discussion of gender and development is in Appendix 9. This appendix also discusses ADB's assistance to other thematic areas. 3. Governance and Capacity Development

61. Corruption remains a key governance challenge despite the enactment of numerous laws and the establishment of anti-corruption agencies since 2002.41 The World Bank Institute reported that corruption in Nepal has worsened since 1996,42 and Transparency International gave Nepal a score of 2.5 (countries scoring less than 3 are classified as "corruption rampant"). There are widespread complaints of corruption in public service due to poor accountability and transparency. According to ADB's Central Operations Services Office (COSO), the procurement environment is deteriorating. 62. The CAPE survey revealed that 44.2% of respondents felt that ADBs contribution to improving governance was just moderate, though 13.7% found it to be significant or substantial. During the CAPE period, loans and grants to the LEMPP sector, of which governance is a part, accounted for 19.3% of the total. This sector is a close third to the second biggest recipient, which is the transport and communications sector at 19.8%. Even with regard to technical assistance grants to Nepal, the LEMPP sector got the biggest share of financing at 21.9%, followed by water supply, sanitation, and waste management at 21.3%. Given the relative importance of the sector in stakeholders perception, there seems to be further room for improvement in ADBs assistance. Governance continues to be an important area, as a weak regulatory framework was identified by 37.9% of survey respondents as the second-biggest development constraint. 63. Between 2004 and 2008, 13.2% of ADBs assistance to Nepal in terms of value targeted institutional capacity development and focused on three interlinked areas: (i) sector capacity; (ii) crosscutting capacity such as countrywide decentralization, financial management, procurement, planning functions for monitoring results, and accountability capacities; and (iii) local government capacity. Though this approach to capacity development has had significant success, it falls short of the strategic approach to capacity development based on country ownership and leadership as emphasized in ADBs Medium-Term Framework 200743 and the
40

ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Gender Equality and Empowerment of Women Project. Manila (Loan 2143[SF], for $10 million, approved on 16 December). 41 ADB. 2008. Country Partnership Strategy Midterm Review: Nepal 20052009. Manila. 42 The Worldwide Governance Indicators project reports aggregate and individual governance indicators for 212 countries and territories over the period 19962007, for six dimensions of governance, (i) Voice and Accountability, (ii) Political Stability and Absence of Violence, (iii) Government Effectiveness, (iv) Regulatory Quality, (v) Rule of Law, and (vi) Control of Corruption. Available: http://info.worldbank.org/governance/wgi/index.asp/. 43 ADB. 2006. Medium Term Strategy II. Manila.

20 Action Plan for Integrating Capacity Development into Country Programs and Operations.44 The Governments limited ability to formulate and implement development programs and projects has been a major obstacle to sustainable development. Larger donors have recently shown more confidence in the Government by aligning their budget formulation processes and monitoring and reporting systems with the Governments, particularly in the SWAps to education and health. Experience with these approaches demonstrates that the Government has the capability to extend SWAps to capacity strengthening in other sectors, particularly in improving service delivery to the poor and the effectiveness of development lending. 64. The perception survey found 64.2% of respondents believed that ADBs assistance to Nepal made either a "significant" (36.8%) or a "substantial" (27.4%) contribution to strengthening sector and/or country policy and strategy planning capacity. However, 47.4% found that ADBs contribution to the strengthening of organizational capacity in government agencies toward delivering services was only "moderate." This may be partly related to 41.1% of the survey respondents perception that project and TA personnel and/or consultants were only "partly effective," though 41.4% deemed them "effective" and 3.2% "highly effective." 4. Millennium Development Goals and Poverty Reduction

65. Steady improvements in human development indicators have been made as more attention was paid to poor and excluded members of society. Nepal is likely to meet some of its Millennium Development Goals (MDGs) for 2015. Access to education has improved significantly, particularly for primary and secondary schools; life expectancy and adult literacy rates have increased; and infant mortality has fallen. The participation of women and disadvantaged groups in the civil service, vocational training, and secondary education has increased. However, large differences remain between urban and rural poverty rates, as urban poverty fell from 21.5 to 9.5% between 1996 and 2004, while the decline in rural poverty from 43.3 to 34.6% over the same period was much less impressive (Appendix 3).45 66. ADB contributed to improving access to safe drinking water and sanitation in both urban and rural areas by supporting the installation of water supply systems. In urban areas, 92% of the target has been realized, with systems in two large municipalities benefiting 105,000 people and in 21 small towns benefiting 540,000. These projects have helped to improve the quality of life and related health indicators. Promoting social and economic inclusion for women and the disadvantaged by removing social, legal, economic, and other constraints was an important part of the Tenth Plan and PRSP. ADB intervention emphasized increasing the participation of women and excluded groups in all ADB-assisted projects and the representation of women and disadvantaged groups in civil service and political positions. Apart from this, very little progress has been made in other dimensions of the MDGs. ADB's assistance so far has contributed to MDG achievement only modestly. 5. Investment Climate and Private Sector Development

67. Despite the Government's intention, reflected in the last two development plans, for the private sector to lead growth and become increasingly involved in infrastructure development and service delivery, both on its own and in partnership with central and local governments,
44

ADB. 2007. Integrating Capacity Development into Country Programs and Operations: Medium-Term Framework and Action Plan. Manila. 45 There are no poverty data for years after FY2004. Data on progress in achieving MDGs are also unavailable for more recent years.

21 results have been disappointing. With the political tensions and conflict for over the 10 years to 2006, there has been no clear vision for the private sector, and the Government has taken few initiatives to enhance its economic role. Private sector activity is constrained by the lack of clarity on property rights, frequent strikes and labor issues, poor infrastructure, and regulatory and administrative inefficiencies. 68. In the early 1990s, ADB assistance46 to Nepal for private sector development focused on providing direct financing to private sector ventures in industry and services. ADB's private sector operations have not had any projects since 1997 for lack of an enabling environment, private sponsors, or market opportunity. More recently, ADB private sector development assistance to Nepal through advisory TA focused on developing an enabling environment for the private sector in energy, transport, urban, water supply, and finance. For example, TA47 to improve financial market regulation and corporate governance helped to improve the setting for private sector development by restoring the health and soundness of the financial system. However, there is at present little evidence of effectiveness in ongoing TA48 that aims to assist the Government in improving the management and long-term financial sustainability of NEA. 69. More recently, as an integral part of its development framework for the power sector, ADB provided assistance through TA49 to help the Government formulate an investor-friendly policy with enforceable regulations to build the capacity of the Government to design and appraise private sector providers. There have been very few public-private partnerships (PPPs) in Nepal, mainly because of regulatory, institutional, and legal constraints, so TA is designed to help the Government address some of these issues and reform the sector. The West Seti Hydropower Project,50 on the other hand, aims to assist the Government in developing Nepals large hydropower resources in an environmentally sustainable and socially responsible manner through PPP, with ADB financing the Governments equity participation in the project from its public sector window and assisting the preparation of a combination of equity, loan, and guarantees through its private sector window. ADBs contribution to private sector development in Nepal has been quite "modest" because of the challenging implementation environment. However, ADB will continue to focus on creating an enabling environment for private sector development in Nepal, particularly in energy and transport. 6. Environment Sustainability

70. ADB recognizes that environmental sustainability is a prerequisite for economic growth and poverty reduction in Asia and the Pacific. The CSP promotes mainstreaming environmental sustainability and social safeguard measures in ADB-supported development activities in Nepal, rather than merely providing standalone programs and projects for this thematic area. This
46

ADB provided assistance to Nepals private sector through nonsovereign loans and equity investments approved from 1989 to 1996 amounting to $58.6 million. No other approvals were noted during the CAPE period. 47 ADB. 2000. Technical Assistance to the Kingdom of Nepal for Strengthening Corporate and Financial Governance (Technical Assistance Cluster). Manila (TA 3580-NEP, for $3.3 million, approved on 14 December). The TA was completed on 31 December 2006 and financially closed on 25 July 2007. The TA cluster was attached to ADB. 2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for Corporate and Financial Governance Project. Manila ([Loan 1811-NEP[SF], for $7.3 million, approved on 14 December). 48 ADB. 2004. Technical Assistance to the Kingdom of Nepal for Restructuring of Nepal Electricity Authority. Manila (TA 4492-NEP, for $400,000, approved on 18 December). 49 ADB. 2007. Technical Assistance to Nepal for Promoting Private Sector Participation in the Power Sector. Manila (TA 4997-NEP, for $600,000, approved on 30 December). 50 ADB. 2007. Technical Assistance to Nepal for West Seti Hydroelectric. Manila (TA 4985-NEP, for $300,000, approved on 5 November).

22 includes (i) the National Resettlement Policy Framework, which was drafted under ADB TA51 and is expected to address issues on land acquisition, compensation, and resettlement related to the implementation of development projects in Nepal; (ii) programs52 related to managing the environment and climate change; (iii) environmental components included under various infrastructure projects in different sectors; and (iv) integrating environmental and social safeguard measures into several projects and programs that were approved during the CAPE period. Safeguard policies are adopted in programs and projects in education, agriculture, and urban development. I. Overall TopDown Assessment

71. Table 3 reports the result of the overall topdown assessment. The rating is "successful" but on the borderline. Table 3: Summary Result of TopDown Assessment
Criteria Relevance and Strategic Positioning Relevance and Alignment Sector Selectivity, Focus, and Continuity Institutional Performance Flexibility for Repositioning as Context Changes Applications of Asian Development Bank Strategies and Polices Partnering and Donor Coordination Portfolio Performance Client Perception on Asian Development Bank's Responsiveness Contribution to Development Results and Value Addition Macroeconomic Stability and Growth Outlook Inclusive Development Governance, Capacity Building, and Results-based Management Millennium Development Goals and Poverty Reduction Investment Climate and Private Sector Development Overall
a

5.5

5.8

Rating Substantial Substantial Substantial (on the lower side) Substantial Substantial Substantial Substantial Substantial (on the lower side) Substantial

4.8

Modest to Substantial Substantial Substantial Modest Modest Modest Successful (borderline)a

16.1

An aggregate countrywide rating is derived by adding up the scores accorded to the positioning, results contribution and ADB performance rating. Countrywide performance, from a topdown perspective, is assessed as "highly successful" if the total score is equal to or greater than 20, "successful" if the total score is between 16 and 19. Source: Independent Evaluation Mission.

51

ADB. 2004. Technical Assistance to the Kingdom of Nepal for the Preparation of National Resettlement Policy Framework. Manila (TA 4422-NEP, for $150,000, approved on 28 October). 52 ADB. 2008. Technical Assistance to Nepal for Strengthening Capacity for Managing Climate Change and the Environment. Manila (TA 7173-NEP, for $500,000, approved on 18 November), is being implemented in collaboration with the Government's National Adaptation Program of Action to Climate Change and other ongoing initiatives, including the South Asia Department's Climate Change Implementation Plan. ADB actively coordinates with Nepal's other development partners in carrying out a country assessment on climate change.

23 IV. PROGRAM RESULTS ACHIEVED AND PERFORMANCE ASSESSMENTS

72. This chapter presents a bottomup assessment of the sector-level performance of ADB assistance, including projects and programs of the previous CSP not covered by the CAPE 2004, and the progress made under the CSP 2005. The assessment was based on a review of project completion reports (PCRs) circulated after 2004 and the preliminary assessment of selected ongoing projects53 undertaken by the CAPE as most of ADB's assistance in key sectors at the time of evaluation were still ongoing. There were 19 loans, 4 grants, and 9 TA projects included in the evaluation (see Appendix 1). 73. The performance assessment covers the following key sectors that were given priority in the CSP 20052009: (i) transport and communications; (ii) ANR; (iii) finance; (iv) energy; (v) education; (vi) water supply, sanitation and waste management; and (vii) LEMPP. Details of the assessments of these key sectors are given in Appendix 10. A. Performance Assessment of ADB Assistance to Key Sectors 1. Transport and Communication

74. Roads Subsector. ADBs assistance to the roads subsector during the CAPE period amounted to $165.2 million in loans and grants and $3.5 million in TA. The CSP 20052009 for Nepals roads subsector builds on ADBs long and successful experience. It also gave a strong justification for assistance. Despite the difficult political situation and other constraints, CSP 20052009 guided the country programming process without losing strategic focus or direction. Projects were generally well-defined, linked, and sequenced.54 The CSP's emphasis on the roads subsector is consistent with ADB's Strategy 2020, which has infrastructure as one of five core operational areas. ADB approved two projects in the subsector during the CAPE period, both of which are ongoing. In addition, the Road Network Development Project (RNDP),55 approved in December 2001 is still ongoing, and many of the results in the subsector came during the CAPE period. The Subregional Transport Facilitation Project56 aims to integrate Nepal's economy into that of the subregion by constructing an inland clearance depot, improving access roads to it, installing an automated system of cargo clearance and management, and building institutional capacity. The Road Connectivity Sector I Project57 aims to construct new feeder roads to connect three district headquarters and upgrade existing roads to all-weather condition in 17 districts, including the strategic GalchiTrishuliSyaphrubesi road that links Nepal to its neighbors. The Government considered these projects "highly relevant" to economic growth and poverty reduction, and indirectly promoting gender equality. The PCR for

53

This CAPE follows the sector classification of 2004 since the projects covered were all approved prior to January 2009, which is the effectivity date of the new sectoral classification system. 54 For example, the road connectivity projects I and II have been programmed following the CSP strategy of sequencing ADB assistance to the road subsector in phases, with each phase focusing on a certain geographic area. 55 ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Road Network Development Project. Manila. (Loan 1876-NEP[SF], for $46.0 million, approved on 13 December). 56 ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Subregional Transport Facilitation Project. Manila (Loan 2097-NEP[SF], for $20.0 million, approved on 4 November). 57 ADB. 2006. Report and Recommendation of the President to the Board of Directors on a Proposed Asian Development Fund Grant and Technical Assistance Grant to the Kingdom of Nepal for the Road Connectivity Sector I Project. Manila (Grant 0051-NEP, for $55.2 million, approved on 10 August).

24 the Rural Infrastructure Development Project (RIDP)58 rated it "successful." The RIDP was consistent with Government and ADB strategy at the time of approval and at project completion and was assessed as "highly relevant."59 Improving rural transport links and increasing farmers' access to agricultural inputs and markets are high on the Government's agenda and expected to support broad-based growth founded on agriculture. Therefore, ADB focused its assistance on developing rural areas and improving the poor's access to basic services. The CAPE rates ADB assistance to the country's roads subsector as "highly relevant." 75. ADB assistance to the roads subsector is assessed as likely effective in achieving its objectives. Except for the fairly new Road Connectivity Sector I Project, which has just started construction and is experiencing difficulties,60 the other projects in the road portfolio are expected to substantially achieve the outputs originally envisaged. The RNDP connected one district headquarters by opening new track roads; constructed 75 kilometers of new roads; upgraded and improved 264 kilometers of the strategic road network (SRN); and maintained 281 kilometers of highways, mostly achieved within the CAPE period. The RIDP was rated "effective" in terms of delivering its intended outcomes as it helped to (i) improve access to remote villages, (ii) raise the socioeconomic condition of the local people, and (iii) protect the fragile ecology in the hill region. The ongoing Decentralized Rural Infrastructure and Livelihood Project is expected to provide increased access to economic and social services and enhanced social and financial capital for people in the 18 poor, remote hill and mountain districts of Nepal. On the policy and institutional side, most of the required actionsincluding approving transport policy and heavy vehicle management policy, preparing interim guidelines on enhancing the poverty-reduction impact of road projects, and establishing a framework and strategy to help implement the rural infrastructure program in a more organized mannerhave been completed. The assessment for this project is included in the ANR sector assistance program evaluation. 76. The CAPE's preliminary rating for ADB assistance to the roads subsector is likely "efficient." This assessment is made despite time and/or cost overruns in ADBs ongoing road projects. Given the robust economic internal rate of return (EIRR) of the projects at appraisal, their efficiency is expected to remain within an acceptable range, provided that the assets are adequately maintained after project completion to sustain the expected benefits. The RIDP was rated "efficient," with an EIRR estimated at 20% exceeding the appraisal estimate of 13%. The higher EIRR resulted from the higher net incremental value of agricultural and livestock production arising from improved access to the project area and lower actual project costs. However, the efficiency of assistance to the roads subsector could have been raised by addressing concerns related to management efficiency. 77. The sustainability of the benefits of road investments is a concern shared by the Government and its development partners. Inadequate maintenance has shortened the useful life of the roads and reduced related benefits. The Government established the Road Board Nepal (RBN) in 2002 to address maintenance. The World Bank, SDC, and other development partners are assisting the Government in institutional reform and corporate strengthening of RBN to ensure proper maintenance of SRN roads. However, budgetary support from the Government for maintenance has never been adequate or stable.61 For example, the budget allocation in FY2008 to RBN was reduced to NRs664.5 million from NRs760.0 million in
58

ADB. 2006. Project Completion Report on the Rural Infrastructure Development Project. Manila. (Loan 1450NEP[SF], for $12.2 million, approved on 27 June 1996). 59 The PCR rated the project as "relevant," but the CAPE upgraded the rating to "highly relevant." 60 The current estimate is that only 5060% of the proposed road length will be constructed or upgraded. 61 The budgetary allocation does not bear a direct or transparent relation to revenue projections from fuel levies, vehicle registration, tolls, and subsidies.

25 FY2007, while the budgeted amount for road investment, excluding rural roads, jumped sharply by 50.6%. This raises a serious concern regarding policy continuity and the Governments commitment to road maintenance. While RBN has supported routine, recurrent maintenance of some 50% of the SRN, it has no capacity to take care of periodic maintenance, and the maximum periodic maintenance undertaken in FY2008 was only for 230 kilometers of the SRN. As a result, the condition of the SRN is deteriorating, with the percentage of roads in a maintainable condition falling from 92% in 2000 to 84% in 2007 and further to 82% in 2008.62 Another factor undermining road sustainability relates to controlling axle loads, as road damage from overloaded vehicles is considered disproportionate. Though some work has been done in this area with ADB assistance, such as installing weighing bridges, the necessary amendments to the Vehicle and Transport Management Act have not succeeded in improving the enforcement of axle-load control. Thus, the CAPE initially views the sustainability of ADB's assistance to Nepal's roads subsector as "less likely" given deteriorating road conditions and inadequate financing. 78. Since ADB projects in the roads subsector are in various stages of implementation, the CAPE gives only a preliminary assessment on impact. The evidence suggests that ADB assistance may have the potential to substantially promote economic growth and poverty reduction. Moreover, the benefits will start accruing immediately after the completion of project roads. A recent project performance monitoring and evaluation report63 of one of the RNDP roads, the 24 kilometers from Pouwa Bhanjyang to Phidim, a major northsouth SRN link, has reported positive trends, such as the upgrading of the road to a paved, all-weather standard. In addition, local labor has benefited from direct employment during construction. But there has also been a marked increase in road accidents, as injuries increased from two in FY2004 to six in FY2008 and fatalities increased from 4 in FY2004 to 53 in FY2008. The reported causes of accidents were speeding, overloading, and poor vehicle condition. While road safety is emphasized in ADB projects and safety audits are carried out, improving road safety is an area requiring sustained priority attention. Similarly, the ongoing Decentralized Rural Infrastructure and Livelihood Project provided direct employment to about 82,000 unskilled local laborers during construction, and laborers formed 68 savings and credit groups with more than 40% participation by women.64 The groups aim to promote livelihood and income-generating activities to benefit local communities. The net impact of ADB assistance in the roads subsector is likely "modest to substantial," provided that maintenance, particularly periodic maintenance, is properly carried out to extend the life of the roads. 79. With the combined ratings of completed and ongoing projects, ADB assistance to the roads subsector is "highly relevant," likely "effective," likely "efficient," and "less likely sustainable" with likely "modest to substantial" impact. The CAPE initially rates ADB assistance to the roads subsector and the transport and communications sector as "partly successful." 2. Agriculture and Natural Resources

80. Agriculture remains the single largest sector of Nepals economy, though its contribution to the GDP has declined and currently accounts for 33%. Poverty is primarily a rural problem, and it is strongly associated with gender, ethnicity, caste, and religion. It is highest in the midwestern and far western development regions, though there are pockets of poverty
62

Ministry of Finance, Government of Nepal. 2008. Nepal Portfolio Performance Review. Kathmandu. (1314 November) 63 ADB. 2009. Project Performance Monitoring and Evaluation Report for Pouwa Bhanjyang-Phidim Road (24 km), (March, draft). 64 Nepal Resident Mission, ADB. 2008. Fact Sheet, Asian Development Bank and Nepal. Manila.

26 nationwide. Income inequality grew, with a Gini coefficient rising from 0.34 in 1996 to 0.47 in 2004.65 Food insecurity remains a key concern, with 49% of children under-5 stunted, 20% severely stunted, 13% wasted, and 3% severely wasted. The target of the first MDG on hunger (MDG1, Target 2) is further out of reach in Nepal than the targets of any other MDG. 81. The insurgency reached its peak during the CAPE evaluation period, and any accomplishments and failures of both the wider economy and ADB-funded projects have to be viewed in this context. Moreover, the conflict particularly affected rural areas, so it had a disproportionately large effect on the sector portfolio. 82. The country synthesis prepared by the Independent Evaluation Department in 2000 reports that less than half of the sector projects were rated "successful" with 48% rated "generally successful," 29% "partly successful," and 24% "unsuccessful".66 The key factors affecting performance included (i) weaknesses in project preparation and design, (ii) the lack of stakeholder participation, (iii) insufficient assessment of the institutional environment and the capability of executing agencies, (iv) weak supervision by ADB, and (v) inadequate assessment of policy and sector issues. Implementation delays were commonly cited as affecting performance. The average delay was 2.3 years, or a 48% time overrun. Factors that contributed to these delays were related to procurement processes, limited institutional capacity, delays in the release of counterpart funds and noncompliance with loan covenants. The review identified several important issues including the need for (i) beneficiary and private sector participation, (ii) a focus on poverty alleviation, and (iii) strengthening institutional capacity in the Government and executing agencies for timely implementation. 83. The overall bottomup assessment67 of the ANR sector is "partly successful." Most projects were "relevant." The support provided was generally aligned with the main pillars of national development plans and ADB sector strategies; in most cases, the executing agencies took strong ownership of the assistance. Increasingly, the sector projects were designed specifically to take the needs of women and marginalized groups into account. Project design has become more relevant over time as good practices were identified and incorporated. However, it still needs to improve in terms of technical soundness and the assessment of executing agencies and implementation plans to improve quality at entry. 84. The sector assistance is assessed as "less effective." Only two subsectors, (i) livestock, and (ii) agriculture and rural development, were assessed "effective," as they achieved the intended outputs and outcomes in terms of improving food security, employment, household income, gender empowerment, and greater inclusiveness. Policy dialogue has brought an improved enabling environment, and partnerships with civil society enabled projects to continue to function throughout the conflict period. One major problem, however, was with recurring delays, which reduced the effectiveness of some projects and compromised sustainability. While some projects' economic returns were estimated to be generally satisfactory, greater efficiency in resource use could have been achieved had there been fewer delays. Further, the delays required extra time and resources for project supervision. In some cases, hurried, lastminute expenditure caused inefficient resource use, compromising the quality of outputs. Thus, the sector assistance is rated "less efficient."
65 66

Information is not available for subsequent years. ADB. 2000. Country Synthesis of Evaluation Findings in Nepal. Manila. Available: http://www.adb.org/Documents/ PERs/CS-NEP99.pdf. 67 The assessment is based on the ANR sector assistance program evaluation. Details of ADB's support for the ANR sector and its evaluation are given in the 2009 ANR sector assistance program evaluation report.

27 85. The assessment of the sustainability of the sector outputs and outcomes is "likely sustainable" but on the low side. The outcomes of livestock and irrigation projects are likely to be sustained, as profitability provides the necessary motive for continuing activities after project termination. However, the sustainability of rural roads remains problematic, though the Government has committed to a road maintenance fund for their upkeep. There are indications of renewed interest in the sector on the part of other development partners and donors. Some of them have adopted ADB-initiated modalities, which are likely to scale up or replicate ADBinitiated and promoted activities. There is a possibility that the Government may reintroduce agriculture input subsidy. If this happens, it would be a policy reversal undermining the accomplishment of the Agriculture Sector Program Loan and breach of its policy conditions. 86. Impact is assessed in terms of the plausible contribution to long-term changes in development conditions of the ADB assistance program in the sector. This includes how successful the sector program has been in contributing to the attainment of specified development goals (i.e., changes in socioeconomic conditions, income poverty, non-income MDGs, and other specified national poverty-reduction goals and objectives). Overall, the sector assistance is expected to have "modest-to-substantial" impact. Three subsectors68 are assessed as likely to have "modest to substantial" impact while the livestock subsector is assessed as likely to have "substantial" impact. The PCRs that exist show considerable impact for households in terms of production and productivity, income and savings, employment, food security, and environmental factors. Impact on long-term development prospects has taken such forms as capacity development for partners in the Government, the private sector, and local and national NGOs; encouraging a partnership mentality; empowering women and members of excluded groups; and improving the awareness of the disadvantaged of their rights. Policy dialogue has fostered positive change in a range of areas, particularly the enabling environment and development partner coordination. Impact on sectoral development in general is more difficult to assess as the many actors make attribution highly problematic, but impact in the livestock subsector and project areas has often been "significant." 3. Finance (Rural Finance Subsector)

87. During the CAPE period, ADB assistance to rural finance consisted of a sovereign loan for the Rural Finance Sector Development Cluster Program (RFSDCP) Subprogram I of $56.0 million,69 an $8.7 million project grant to facilitate the reform and restructuring of rural finance institutions (RFIs), and a TA grant of $0.5 million for capacity development. The assessment of the rural finance subsector is primarily based on the CAPE's findings on these lending, grant, and TA projects, and the findings of the PCR for the Rural Microfinance Project (RMP).70 The RFSDCP aimed, with a strong partnership with the Government, to (i) provide sustainable and affordable financial services to rural poor and low-income households by reforming and restructuring RFIs to make them efficient and to ensure access to them for all rural households. It aimed eventually to privatize the major RFIs; the Agricultural Development Bank Limited (ADBL),71 Small Farmers Development Bank (SFDB), and Grameen Bikash Bank (GBB). ADB
68 69

These are agriculture production, irrigation, and agriculture and rural development. ADB. 2006. Report and Recommendation of the President to the Board of Directors on a Proposed Sector Development Program Cluster of Loans, Asian Development Fund Grant, and Technical Assistance Grant to Nepal for the Rural Finance Sector Development Cluster Program (Subprogram I). Manila (Loan 2268-NEP[SF], for $56.0 million, approved on 26 October). 70 ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Rural Microfinance Project. Manila (Loan 1650-NEP[SF], for $20.0 million, approved on 8 December). The project was completed in 2007, and the PCR was circulated in November 2008. 71 Formerly known as the Agricultural Development Bank of Nepal.

28 also assisted the finance sector through the RMP. Although not covered by this CAPE period, the RMP was ongoing at the time of the CAPE 2004 and included in it. The RMP aimed to improve the socioeconomic status of women and increase employment opportunities by providing to women better access to financial services and facilitating microenterprise development through the provision of a revolving line of credit to finance viable farm and offfarm economic activities. 88. ADBs assistance to this sector is rated "relevant" as it is aligned with the country strategy objectives and the countrys needs, thus ensuring poor and low-income rural households and their enterprises permanent access to institutional financial services. The RFSDCP had a sharply focused reform agenda, which encouraged private sector participation in rural finance, and the eventual privatization of institutions, through policy and institutional reform. The restructuring and strengthening of major RFIs helped develop sustainable rural financial services and extend the outreach of micro and rural finance services to small and medium-sized enterprises. The restructuring and recapitalization of ADBL and SFDB through the RFSDCP was appropriately timed, as it was implemented following two sets of reforms: (i) reforms to the Nepal Rastra Bank (NRB), which sought to make it an effective regulatory institution, and the enactment of the Bank and Financial Institutions Act 2006, which aimed to strengthen the supervisory capacity of NRB, and (ii) policy reforms for strengthening the Nepal Bank Limited and Rastriya Banijya Bank. The projects overall design and formulation is consistent with the Governments policy of intensifying its rural economic development efforts in recognition of urbanrural disparity, social segregation, and the limited economic opportunities in rural areas as fundamental causes of conflict and political instability. As with the RFSDCP, the RMP's PCR assessed the Project as "relevant," with design, formulation, and implementation consistent with the Governments and ADBs poverty-reduction strategy at the time of approval, coinciding with Nepals Ninth Five-Year Plan (FY1997FY2002), and during implementation, coinciding with the Tenth Five-Year Plan (FY2002FY2007). Considering the demand of implementing agencies for the services extended by the RMP, it is quite clear that the outputs, purposes, and goal of this project remain relevant. The most important contribution of the RMP is its support for the emergence, growth, and development of the Rural Microfinance Development Centre Limited (RMDC) as a wholesale lending agency to Nepals microfinance subsector. 89. The CAPE initially rates ADBs assistance to the finance sector as likely "efficient." RFSDCP was completed within the original completion date, and its efficiency can be judged by the growth and expansion of rural financial services and ADBL's ability to increase its extensive client network and outreach despite the difficult security situation. The restructuring, strengthening, and partial privatization of ADBL and its improving ratio of nonperforming loans72 are on schedule, as are the restructuring of SFDB and GBBs, though two GBBs still need recapitalizing. The PCR rated the RMP as "efficient" in achieving its outputs and purpose on the basis of financial and economic analyses undertaken on a sample of agricultural and incomegenerating activities for which sub-borrowers received microfinance. Following the same methodology used at appraisal, financial internal rates of return ranged from 36% to 96%, higher than the appraisal targets of between 26% and 76%. Economic analyses were undertaken for the same microenterprises reviewed in the financial analyses. All of the crop and livestock enterprises examined were economically viable, with EIRRs ranging from a low of 26% for high-value crops to a high of 57% for dairy buffalo and goat husbandry. The EIRRs obtained by the PCR were slightly higher than those obtained during appraisal. These higher rates of return stem from the beneficiaries being primarily poor women living in food-deficit areas, where
72

The nonperforming loan ratio is the percentage of all loans outstanding that are in arrears.

29 an increment in production could readily find a local market and therefore incur low transport costs. 90. ADB's assistance is assessed to be likely "effective." As expected at appraisal, RFSDCP Subprogram I facilitated major institutional restructuring and reforms in Nepal's rural finance sector. As a result of ADBs assistance, rural financial services have increased significantly as the RFSDCP (i) helped reinstate ADBL as a strong financial institution focused on rural and agricultural development, (ii) improved the delivery mechanism for rural finance, and (iii) facilitated the significant expansion of microcredit. The CSP 20052009 envisaged that the rural poor will have increased access to financial services and that financial intermediaries will be strengthened. This was achieved, as Nepal now has a vibrant and efficient rural financial delivery mechanism that is accessible to poor and disadvantaged rural households. The RMP's intended outcomes were achieved effectively. It provided access to rural microfinance, primarily for poor women, which enabled them to pursue microenterprise self-employment and generate income. The RMPs indirect benefits included the social and economic empowerment of the poor, disadvantaged communities, and women through the formation and strengthening of savings and credit groups. It is estimated that the monthly household income of project beneficiaries rose from $61 to $228, on average, against the appraisal estimate of $86 to $200. 91. The Government and ADBL have exhibited strong ownership and commitment to continue reforms in the rural finance subsector, and good progress has been made so far. Significant support for reforms also resulted from the higher profits, expanded deposit base, and lower nonperforming loan ratios realized by ADBL in the very first year of restructuring. However, nonperforming loans are still high at NRs5.6 billion, or 15% of total loans outstanding in 2008. Overall, the sustainability of the outcomes of ADBs assistance to the rural finance subsector is considered likely sustainable." The reforms supported by ADBs program loan have helped NRB make considerable progress in establishing a sound legal, regulatory, supervisory, and accounting, and auditing framework for ADBL and SFDB by developing a comprehensive microfinance policy. Both financial institutions are supervised effectively, and the rural financial system is working well. Management capacity has significantly improved, and the establishment of the Bankers Institute should bring further improvement in capacity. However, developing a supervisory and regulatory framework for GBBs has taken longer than expected, as the supervisory and regulatory framework pursuant to the Microfinance Policy 2007 is still being developed by NRB and needs further capacity building. The PCR rated the RMP as "likely to be sustainable." The RMP enhanced the institutional capacity of its partner implementing agencies through capacity building. Further, RMDC is confident that, with the effective implementation of the strategic and operational plan, it can develop itself into a fully sustainable wholesale organization. Most of the microenterprises operated by women under the RMP are family owned and managed, which allows for upgrading scale and technology and provides strong indications that these enterprises are sustainable. In addition, demand is high from the clients of partner implementing agencies for the financial services extended under the RMP. The income-generating activities and microenterprises managed by beneficiaries and receiving financial support from the RMP have a high return on investment and are financially viable. 92. The impact of ADB assistance through the RFSDCP Subprogram I is likely substantial." The RFSDCP helped reinstate ADBL as a strong financial institution focused on agricultural and rural development, improved the delivery mechanism for rural finance, and facilitated the significant expansion of microcredit to small and medium-sized enterprises, the rural poor, women, and other excluded groups. Financial services supporting rural areas are more efficient and now able to respond to market signals. The institutional development of the major RFIs is

30 expected to result in a credit environment with improved supervision and regulation. The institutions are moving towards eventual privatization. The loans given by the RFIs have been predominantly for agricultural development and have supported growth in the agriculture sector, which reached its target during the Tenth Plan. The RMP is expected to have "substantial" impact, particularly with the establishment of RMDC as a microfinance organization, providing wholesale funds to retail microfinance institutions for onlending to the poor. Before the establishment of RMDC, fledgling microfinance institutions had very limited access to funds for onlending to their clients. As a result of the RMP, new and future implementing agencies have easy access to funds as well as technical support from RMDC. 93. Access to credit is an important vehicle for agricultural growth and employment generation. Demand for rural and microfinance assistance may intensify if the global financial crisis reduces the inflow of remittances and tourist expenditures, affecting households and rural enterprises in Nepal. Overall, the CAPE rates ADB assistance to the rural finance subsector as likely "successful." 4. Energy

94. No loans and grants in this sector were approved during the CAPE period. The Rural Electrification, Distribution, and Transmission Project (REDTP)73 was the only project under implementation. Assessment of the Kali Gandaki A Hydroelectric Project,74 which was the largest assistance to the energy sector in Nepal, was included in the CAPE 2004 for Nepal. 95. ADB's assistance to the sector is rated "highly relevant." The rationale of REDTP is considered "highly relevant" to the Government's objectives and ADB's operational strategies for the sector as it aims to improve the governance and efficiency of the power sector, promote a more commercial orientation and increased participation by the private sector, and expand rural electrification to increase rural income. 96. ADB has supported NEA with a finance and debt restructuring plan that includes measures such as converting grants to equity and reducing onlending rates to NEA from 8% to 5%. With reference to project framework, REDTP has been effective in terms of institutional strengthening and providing grounds for the commercial orientation of NEA through establishment of distribution district profit centers and computerized billing system. But despite appropriate project and program designs and efficient project monitoring and management, ADBs assistance has not been effective in reducing NEA's total line losses to less than 20% as envisaged due to other external factors. Though partnering has been initiated with other development partners like the OPEC Fund for International Development, there is a need to synchronize the system and procedures with the partners to make them more effective. Despite ADB's proactive approach to pushing for power sector reforms, institutionalizing the PPP approach, building consensus among the stakeholders, and providing lending and nonlending assistance, tangible results have yet to be realized. Therefore, the Project is likely "less effective." However, it is expected that after the completion of all the remaining works, the Project will contribute towards strengthening distribution system in the Kathmandu Valley.

73

ADB. 1999. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Rural Electrification, Distribution, and Transmission Project. Manila (Loan 1732-NEP[SF], for $50.0 million, approved on 21 December). 74 ADB. 1996. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Two Technical Assistance Grants to the Kingdom of Nepal for the Kali Gandaki A Hydroelectric Project. Manila.

31 97. The CAPE initially rated ADB's assistance to the energy sector as likely "efficient." Although implementation difficulties were encountered related to compliance with loan covenants and delays in meeting conditions of loan effectiveness, consultant recruitment, and the awarding of contracts, the REDTP is expected to catch up with the schedule without cost overruns, even in the midst of challenging political circumstances . Delayed implementation was attributed to the Governments lack of effective guidelines on land acquisition. Addressing the environmental safeguard issue was not a problem. ADBs interventions continued to focus on improving the governance and efficiency of the power sector by promoting a more commercial orientation in public institutions and encouraging more participation by the private sector. ADBs policy dialogue with the Government focused on improving the long-term financial sustainability of the energy sector. It includes building the capacity of sector entities, introducing semiautomatic tariff adjustment, reducing electricity theft through the enactment of legislation, and the settlement of long-standing municipal arrears owed to NEA. ADB continued to pursue subregional cooperation to foster trade in electricity with neighboring countries. 98. Mixed results are expected in the project's sustainability and long-term impact, based on the implementation progress so far. The computerized billing system will likely be sustainable and deliver envisaged impacts. But the sustainability of distribution district profit centers will be contingent upon restructuring NEA and its improved financial75 and operational performance, as well as the time-bound implementation of the measures to create a sector environment friendly to the private sector. There is an urgent need to establish the New and Renewable Energy Center and adjust tariffs to take into account the capital cost of generation, power purchases from independent producers, and distribution, as well as system losses. Despite ADBs initiatives through various TAs and advocacy to support the Government in that endeavor, ADB assistance to the energy sector during the CAPE period is "less likely sustainable." 99. In terms of impact, the CAPE rated ADB's assistance to the sector as likely "modest." REDTP was designed within the scope of ADB's strategy within the sector, which focused on growth in rural areas. The Project should have contributed solidly to the achievement of the development goals had implementation not been delayed. Rural areas that should have been connected to the grid went without electricity during the period of delay. Thus, the CAPE considers the Project's impact as likely to be "modest." 100. In addition, the CAPE assessed two advisory TAs to the sector, which were approved during the CAPE period. Both TAs are ongoing and have yet to record significant outcome, though some of their outputs have already been realized. The TA on Restructuring of NEA76 helped draft the legislation for the sector reforms and the establishment of an independent regulator. The TA on Promoting Private Sector Participation in the Power Sector77 supports capacity enhancements of the Government for designing, implementing, and managing PPP. Overall, both TAs have been rated as "successful" ("highly relevant," likely "effective", likely "efficient", and "likely sustainable" and may have a "substantial" impact).

75

Electricity tariffs have not been revised since September 2001, though existing tariffs are considered the highest in the South Asian Regional Cooperation region. NEAs sales revenue has shown a decreasing trend in recent years, while operating costs have increased with inflation and the expansion of services in rural areas. A loss of NRs0.54 has been recorded for each kilowatt-hour sold (refer to page 49 of NEAs Annual Report FY 2006FY2007). 76 ADB. 2004. Technical Assistance to the Kingdom of Nepal for Restructuring of Nepal Electricity Authority. Manila (for $0.4 million, approved on 18 December). 77 ADB. 2007. Technical Assistance to Nepal for Promoting Private Sector Participation in the Power Sector. Manila (for 0.6 million, approved on 30 December).

32 101. Based on the assessments of relevance, efficiency, effectiveness, sustainability, and impact, the CAPE initially rates ADB assistance to this sector as "partly successful." 5. Education

102. From 2004 to 2008, ADB approved $60.0 million in loans and grants and $1.7 million in TA to the education sector, including a three-phase cluster program supporting the Governments EFA Program, vocation skills training, and policy development. 103. ADB assistance to education is rated "highly relevant." The Education Sector Program I cluster78 supports the implementation of the EFA Program, a Ministry of Education (MOE) priority, and assists with planning and piloting the follow-up School Sector Reform (SSR) Project. Through the Education Sector Program I, ADB was able to bridge the Government's budget shortfall to implement reforms. ADB's participation in the EFA Program provided renewed confidence in the sector-reform process and enabled two earlier projects on teacher education79 and secondary education support80 to realign their objectives and approaches to the EFA framework. The Skills for Employment Project81 is consistent with the Government's policies to help alleviate the problem of unemployment among youths, especially females and the socially excluded. Specifically, the project aims to complement the formal education system, which is not sufficiently oriented toward labor market needs and leaves many youths unemployed. 104. Until recently, education projects experienced frequent delays because of over-stretched Government capacity. Another constraint has been uncertainty brought about by the political situation in the country, resulting in frequent organizational and personnel movements and/or departures. However, ADB's involvement in the Government-led EFA Program has brought significant improvement in the management of the education portfolio and fund disbursement, as the program cluster approach to sector development ensured the continuity and timeliness of ADB support. Meanwhile, the EFA pooled-funding arrangement substantially reduced the Government's workload in managing multiple-donor project systems and meeting different reporting requirements, strengthening the core functions of MOE. Cost efficiency was likewise achieved through the use of the Government system and greater community participation in education delivery. However, there is an urgent need for improved efficiency in the sector, especially to address the high repetition rate of over 20% in primary education. The CAPE estimates that repetition wastes 30% of scarce sector resources. High repetition rates contribute to high dropout rates, and quality decline because of over-crowded classrooms. Another area that will require attention is the strengthening of the planning and predictability of capital budgeting to address the growing demand for classrooms arising from rapid enrolment growth in

78

ADB. 2006. Report and Recommendation of the President to the Board of Directors on a Proposed Program Cluster of Loans and Asian Development Fund Grants to Nepal for the Education Sector Program I. Manila (Loan 2277-NEP, for $30.0 million, approved on 1 December). 79 ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Teacher Education Project. Manila (Loan 1840-NEP, for $19.3 million, approved on 24 September). In addition, Loan 1840-NEP received $300,000 in cofinancing from Danish International Development Agency. 80 ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Secondary Education Support Project. Manila (Loan 1917-NEP, for $30.0 million, approved on 20 September). 81 ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for Skills for Employment Project. Manila (Loan 2111-NEP, for $20 million, approved on 25 November).

33 the past few years.82 The Skills for Employment Project still faces some problems and delays in implementation because of overly ambitious design and the complex government institutional arrangements for technical vocation training.83 The CAPE rated ADB assistance to education as likely "less efficient." 105. ADB assistance to education is rated likely "effective." Measuring against the CSP results framework and related education targets, most indicators are on track and likely to be met by 2009, including some underperforming indicators. The effectiveness of the EFA Program implementation can be attributed to several factors, including (i) the establishment of the Education Policy Committee at MOE with support from an ADB TA,84 which enabled the Government to lead in formulating long-term vision and policies for reforming the school system, and (ii) MOEs commitment to implement its decentralization policy. Since 2004, MOE has steadily delegated responsibility to local education authorities. Notwithstanding delays, the Skills for Employment Project produced key outputs such as the technical education and vocational training policy framework, which the Government has endorsed and MOE Education Policy Committee will implement. 106. The CAPE rated ADB assistance to education as "likely sustainable." The Government's commitment and strong demand from families for better education services will likely sustain the momentum for reforms in education. The EFA Program budget increased by 61% over the past 3 years, from $172.0 million in FY2007 to $277.0 million in FY2009. 107. ADB assistance to education is rated likely to have "substantial" impact because of (i) well-sequenced and well-phased support through the program cluster modality; (ii) extensive TA support for sector assessment and policy and strategy development; (iii) program lending in support of the Government-led implementation of the EFA Project complemented by a grant supporting capacity development for the next phase of SSR; and (iv) the use of a traditional project modality targeting underprivileged youths by providing for example, skills for employment. As a result, there has been improved definition, stability, and predictability of sector policy and strategy. The capacity of key central departments has been strengthened with increased focus on delivering performance and results. However, unevenness in the capacity of local education authorities and schools remains a concern. There is a need for greater functional clarity and accountability between districts and schools to ensure effective education service provision in the newly decentralized system. The CAPE initially rates ADB assistance to education as "successful." 6. Water Supply, Sanitation, and Waste Management

108. Water Supply and Sanitation Subsector. During the CAPE period, no sovereign loan or grant projects were approved, but five TA grants amounting to $5.0 million were provided. The recently completed Small Towns Water Supply and Sanitation Sector Project (STWSSP)85 supported 510,000 people in 29 small towns through the provision of improved water supply
82

The EFA capital budget allocation was $11.4 million, or 6.6% of the EFA budget in FY2007, rising to $23.7 million, or 9.7% of EFA budget in FY2008. There is no allocation for FY2009. 83 For example, some project activities are implemented by the district offices of the Ministry of Labor and the Ministry of Industry. It has been difficult for the MOE project implementation unit to ensure timely reporting from these district offices, which are not under MOE jurisdiction. 84 ADB. 2004. Technical Assistance to the Kingdom of Nepal for the Education Sector Development Policy and Strategy. Manila. 85 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 (Loan 1755-NEP, for $35.0 million, approved on 12 September).

34 services by 2009. The ongoing Community-Based Water Supply and Sanitation Sector Project (CBWSSP)86 aims to provide improved water supply and sanitation (WSS) services to more than 1,200 communities in 21 of the remotest, most poverty-afflicted districts of Nepal by 2010. The Melamchi Water Supply Project87 and Kathmandu Valley Water Services Sector Development Program88 supported tariff and institutional reform in the Kathmandu Valley, besides supporting initiatives to address the acute water supply shortage in the capital city. Considerable efforts have been devoted to addressing social and environmental safeguard issues through exhaustive resettlement plans, environmental management plans, and public relations. Except for the Improved Water Quality, Sanitation, and Service Delivery in Emerging Towns Sector Development Program,89 all TA projects approved in the CAPE period were linked to the Melamchi Water Supply Project. 109. In semi-urban and urbanizing areas, the STWSSP supported improved health and hygiene practices; scaled up approaches driven by community demand; and enhanced PPP, gender mainstreaming, and good governance. It assisted the Government in implementing part of its 15-year plan for water supply and sanitation development in small towns and gradually sought to redefine the role of Department of Water Supply and Sewerage (DWSS) from implementer to facilitator. The relevance of this project is adequately established considering the rapid population increase in the urban centers along major national highways. The CBWSSP is in the process of filling the basic WSS needs of 850,000 underserved people. The beneficiary water users' and sanitation committees (WUSCs) are implementing 690 subprojects with support from 174 NGOs, regional and project management consultants, and village and district development committees, as well as the DWSS. 110. The findings of the 2004 benefit monitoring and evaluation survey noted that the STWSSP has been "effective" in terms of (i) reducing the prevalence of diseases such as diarrhea, jaundice, and typhoid fever, as well as skin allergies; (ii) improving personal hygiene; (iii) improving the environment; and (iv) increasing the availability of safe drinking water. The project has done well in terms of beneficiary participation and adopting good governance practices in all stages of subproject implementation. This has helped strengthened the technical, financial, and management capacity of the WUSCs to evolve as effective institutions to manage urban development in the future. The introduction of revolving funds through partnerships with UN-Habitat, Town Development Fund (TDF)90 and private sector organizations can be considered an innovation. The ongoing CBWSSP has been effective so far in orienting all project stakeholders toward gender and cultural sensitivity and sanitation awareness and education, and it has recorded the improved participation of women and disadvantaged groups in project affairs. Significant gains were achieved with respect to indicators supporting decentralization, the institutional reform of DWSS, and instituting a sector-wide approach and
86

ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Community-Based Water Supply and Sanitation Sector. Manila (Loan 2008-NEP[SF], for $24.0 million, approved on 30 September). 87 ADB. 2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Melamchi Water Supply Project. Manila (Loan 1820-NEP[SF], for $120.0 million, approved on 21 December). 88 ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Kathmandu Valley Water Services Sector Development (Program Loan). Manila (Loan 2058-NEP[SF], for $5.0 million, approved on 18 December). 89 ADB. 2007. Technical Assistance to Nepal for Preparing Improved Water Quality, Sanitation, and Service Delivery in Emerging Towns Sector Development Program. Manila (TA 4972-NEP, for $0.72 million, approved on 28 September). 90 TDF, a semiautonomous finance institution, is engaged by the project to disburse and collect the subloans approved.

35 donor coordination. These achievements are expected to significantly help the project deliver outputs within the remaining period and realize the planned outcome. The project is rated as likely "effective." 111. The STWSSP has been substantially completed and the loan account was closed on 31 December 2008 after being extended for 24 months. Due credit goes to the adoption of a conflict-sensitive implementation approach that eventually helped complete construction of all 29 small town subprojects without cost overruns. The project is rated likely "efficient." Beneficiaries contribute 50% of the capital cost, of which 30% is loan repaid to TDF by mobilizing a water tariff. Besides the demand-responsive and interactive development process instituted by project design, wherein water users participate in decision-making at every stage of project formulation, implementation and operation and maintenance are likely to make the project efficient. In the case of the ongoing CBWSSP, physical progress is recorded at 54.2% against elapsed time of 78.4%, and the development phase of all 690 subprojects will be completed by June 2009, leaving only the construction phase in the next year. Thus, the completion of all project activities is likely without time or cost overruns, making the project's rating as likely "efficient." But this is contingent on the efficient performance of NGOs responsible for social mobilization and technical design. 112. The CAPE concluded through field consultations that the sustainability of all subprojects under the STWSSP could be ensured with proactive WUSCs, and project design instituting a mechanism whereby the TDF is required to ensure sound financial health for WUSCs for at least the 1215 years of the loan repayment. Similarly, in CBWSSP, the process of community mobilization, the registration of WUSCs in the planning phase, and the provision of various training provides ample opportunity for the sustainable operation and maintenance of subprojects. Communities are expected to share up to 20% of construction cost, with 1% up front in cash, and to deposit 1 year's equivalent of operation and maintenance cost in the development phase only. Consequently, "substantial" impacts are expected after the completion of subsector activities with the caution that the absence of elected local governments may erode the spirit of decentralization and to some extent, impacts. Therefore, the initial combined rating for STWSSP and CBWSSP is "highly relevant," likely "effective," likely "efficient," "likely sustainable" with likely "substantial" impacts. The CAPE initially rates this subsector as "successful."91 113. The implementation of the Melamchi Water Supply Project was delayed by conflict, political instability, and noncompliance with a loan covenant requiring a performance-based management contract to be engaged prior to commencing tunnel construction. Since then, Kathmandu Upatyaka (valley) Khanipani (drinking water) Limited (KUKL) was incorporated under the Companies' Act in January 2007 and is now fully functional. Recruitment of the PPP support team as an alternative to a management contractor is completed. On 7 February 2008, the ADB Board approved the restructuring of the project with major changes in scope and implementation arrangements, including removing the loan covenant. The restated and amended Loan Agreement was signed on 6 April 2008 and declared effective in July 2008. The project has achieved 45% physical progress with cumulative disbursement of only 16% of net loan amount against the revised elapsed loan period of 64%.92 Based on the foregoing, the Melamchi Water Supply project is initially rated "highly relevant," likely "less effective," likely "less efficient," "less likely sustainable," and with likely "modest" impact.

91 92

This rating excludes the Melamchi Water Supply Project as it has already been assessed by the CAPE 2004. The elapsed loan period is computed against the revised loan closing date of 31 December 2013.

36 114. On the whole, ADB's assistance to the water supply, and sanitation subsector is initially rated as "highly relevant," likely "less effective," likely "less efficient," "less likely sustainable" and with likely "modest to substantial impact." Based on these, the CAPE initially rates this subsector as "partly successful."93 115. Urban Development Subsector. During the CAPE period, no loans or grants were approved for the subsector. The Urban Environment Improvement Project,94 the only project implemented during the period, aims to promote sustainable urban development in nine selected municipalities surrounding the Kathmandu Valley by addressing critical urban environmental and infrastructural service improvement needs. It is likely to be completed by March 2010. TA95 for preparing the ensuing integrated urban environment improvement project96 has recently been approved, and consultant recruitment has been completed. 116. ADB's assistance to the subsector is rated "relevant." The design of the Urban Environment Improvement Project was aligned with the Government's development strategy, ADB's CSP 20052009, and Nepal's PRSP 2002 as an integrated approach to urban environment and decentralized governance. The assessment of problems and opportunities sustained the relevance of the project as it moved from approval to implementation, indicating that project design was appropriate, need assessments were relevant, and the project had linkages with other ADB programs and exhibited high resilience and flexibility. But the project preparatory TA for such complex projects should have been more exhaustive. More time was needed for engineering design and community mobilization to build consensus. 117. ADB assistance to the subsector is rated as "effective." Outcome indicators, such as the increase in land price by several fold, and the increase in the number of branch offices of commercial banks have been achieved prior to project completion. Although the project provided capacity enhancement for municipalities, project steering and oversight arrangements encountered difficulties in the absence of elected representatives. In this regard, more intensive community involvement would have helped realize project objectives. Community involvement is shown by the highly community-driven initiatives in land pooling. 118. The project administration memorandum advocated flexible implementation modalities and decentralized implementation, which, if adhered to, are in line with the conflict-sensitive approach. ADB's internal processing through a proactive NRM and the Government's counterpart funding have been quite adequate. The partnership arrangement with Kreditanstalt fr Wiederaufbau (KfW) through TDF for supplementary urban facilities was in place with ample scope for expansion. Project management has been efficient97 in the procurement of goods and services and arranging short-term training for institutional strengthening in municipalities, but it seems to have problems ensuring the timeliness of activities and outputs, causing less-effective utilization of project resources. This is more evident with less-than-expected progress in improving and expanding urban environmental infrastructure, as some important subprojects
93 94

Without the Melamchi Water Supply Project, the overall rating of WSS would have been "successful." ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Urban Environmental Improvement Project. Manila (Loan 1966-NEP[SF], for $36.0 million, approved on 10 December, the loan became effective from 2 October 2003). 95 ADB. 2008. Technical Assistance to Nepal for Preparing the Secondary Towns Integrated Urban Environmental Improvement Project. Manila (TA 7182-NEP, for a total $0.846 million [Japan Special Fund $700,000 and Water Financing Facility-NET TF $ 146,000], approved on 2 December). 96 Refer to the ADB website, Project Information Document, Project Number 31888-01: Secondary Towns Integrated Urban Environmental Improvement Project, Grant proposed for $40 million. 97 The project has achieved physical progress of 54% against the elapsed time of 85%. Most of the institutional and community development activities and other prerequisites for full-scale construction are in place.

37 like integrated water supply projects for three municipalities have been dropped. Considering that the remaining construction will likely be completed without time or cost overruns, ADBs timely initiation of sequencing with new project preparatory TA, and that a proposed grant will be able to deal with shortcomings in a more robust manner, operations in the subsector are rated likely efficient." 119. As to the project's sustainability and impacts, the trend of progress so far indicates mixed results. Extensive training and other capacity enhancement for central and local government staff are expected to significantly contribute to sustainable subsector operations in the future. But the absence of elected representatives in local government bodies makes it difficult to predict the likelihood of sustainability and achieving the desired capacityenhancement impacts. An ad hoc arrangement of seven-party political representatives cannot provide an alternative to a legitimate and accountable elected body. The subsector is rated "less likely sustainable with "modest" impacts. Overall, ADB assistance to the urban development subsector is "relevant," likely effective," likely "efficient," "less likely sustainable" and likely to deliver "modest" impacts. The CAPE initially rates this subsector "partly successful." 7. Law, Economic Management, and Public Policy (Good Governance)

120. During the CAPE period, only one grant, the Governance Support Program Subprogram I (GSP)98 was approved in this sector. Since the GSP was approved only in October 2008, it would have been premature to include it in the sectors performance assessment. Two PCRs circulated in 2008 were reviewed, one for the Governance Reform Program (GRP)99 and the other for the Public Sector Management Program (PSMP).100 The PCRs rated the program loans "relevant," "less efficient," "less effective," and "less likely sustainable" with "modest" impacts. Overall, the program loans were rated "partly successful." 121. The CAPE found ADB assistance to governance "highly relevant." Good governance is central to the Government's development policies and plans, as the Government recognizes the critical role of governance in achieving poverty reduction and social inclusion. ADB support for governance is consistent with and responsive to the Governments strategic agenda of (i) improving the efficiency and service delivery of the civil service, (ii) assuring accountability and reducing corruption, (iii) accelerating decentralization for better service delivery, and (iv) enabling inclusive development for women and disadvantaged groups. In the first half of CSP 20052009 implementation, the main focus was on civil service reform and anticorruption through the GRP. The GRP supported public sector governance reforms and introduced interrelated interventions and improvements in civil service efficiency. The implementation of the GRP was consistent with the goals set out under the CSP 20052009, which listed improvements in good governance as a priority, and is likewise relevant to the goals of the Government's Tenth Plan. The PSMP supported the Government in implementing its povertyreduction strategy as set out in the Tenth Plan, focusing on addressing key policy and institutional constraints to achieve pro-poor growth. The PSMP was consistent with ADB's
98

ADB. 2008. Report and Recommendation of the President to the Board of Directors on a Proposed Program Cluster and Grant for Subprogram I to the Federal Democratic Republic of Nepal: Governance Support Program. Manila (Grant 0118-NEP, for $106.3 million, approved on 28 October). 99 ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Governance Reform Program. Manila (Loan 1861-NEP[SF], for $30.0 million, approved on 27 November). 100 ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Public Sector Management Program. Manila (Loan 2002-NEP[SF], for $35.0 million, approved on 8 July).

38 country strategies for achieving poverty reduction. The recently approved GSP affirms ADB's continued commitment to assisting the Government by providing support to (i) help local bodies improve their management of resources and delivery of services; (ii) strengthen policy and national institutional frameworks for decentralization, devolution, and community development; and (iii) help citizens, communities, and local bodies work together with accountability. 122. ADBs assistance to good governance is rated effective." Regardless of implementation delays and other difficulties, the GRP made a significant contribution to good governance through (i) parliamentary approval of several anticorruption laws and the Bill on Amendments to the Civil Service Act, (ii) establishment of the National Vigilance Center under the Office of the Prime Minister, and (iii) establishment of the computerized personal information system of civil servants linked to posts and payroll systems. The PSMP partly achieved its intended outcomes, as reforms related to (i) reducing budget transfers to public enterprises, (ii) reconstituting the boards of public enterprises, (iii) amending the privatization and labor entrenchment process, and (iv) promulgating the Local Service Act were either not undertaken or only partly implemented. 123. The CAPE agrees with the PCRs that ADB assistance to governance is less efficient." The implementation of the GRP required broad political and Government leadership and support. The GRP was designed to be implemented over 5 years from 2002 to 2006, with disbursement in three tranches. The first tranche was released in December 2001 upon loan effectiveness, but it took 5 more years for the Government to meet the loan conditions for second tranche release.101 Moreover, the achievement of the project's envisaged outputs was hampered by the deficiency of additional funding required for implementation. Delays were encountered in the implementation of the PSMP from (i) unmet loan tranche release conditions; and (ii) frequent changes in government officials caused by the volatile political situation, which affected the performance of executing and implementing agencies. 124. ADBs assistance is rated less likely sustainable." The Government demonstrated its commitment to good governance by implementing a number of new policy reforms in 2007, which are beyond the scope identified in the CSP 20052009: (i) the inclusion of affirmative action programs in the Civil Service Act of 2007, (ii) the amendment of the Local Body Financial and Administration Regulation to increase the financial autonomy of local bodies, and (iii) the approval of the Anti-Money Laundering Act. ADB's next phase of support for the new Local Governance and Community Development Program is based on the Governments priority on decentralization and local capacity development. However, the implementation of the legal and policy reforms introduced under the GRP remains weak, and key reforms introduced under the PSMP were either not undertaken or were only partly implemented. As a result, risks related to nonperforming enterprises remain, as do gaps in the implementation of key reforms. 125. The impact of ADB's assistance to good governance is rated "modest." The legislative and policy reforms introduced under the GRP are likely to improve local service delivery. Overall, the CAPE rates ADB assistance to the law, economic management, and public policy sector as "partly successful."

101

The third tranche of the GRP was cancelled at the request of the Government because of unattainable policy conditions in the new political context after 2006.

39 B. Overall BottomUp Assessment

126. Table 4 summarizes the result of the bottomup assessment. Based on the foregoing discussions, the sector level performance of ADB assistance to the country is rated "partly successful." Table 4: Summary of BottomUp Assessment
Sector Transport and Communications - Roads Agriculture and Natural Resources Finance - Rural Finance Energy - Rural Electrification Education Water Supply and Sanitation, Waste Management - Water Supply and Sanitation - Urban Development Rating Partly Successful (14) Partly Successful (11) Successful (16) Partly Successful (11) Successful (16) Partly Successful (12.7) Partly Successful (13.5) Partly Successful (12)
a

Law, Economic Management, and Public Partly Successful (12) Policy Overall Partly Successful (13.2)b a This includes the rating for the Melamchi Water Supply Project. Without the Melamchi Project, the WSS subsector would have been rated "successful" (17). b Bottomup rating (BR) is assessed as highly successful if the BR 20, successful if 16 BR 19, partly successful if 11 BR 15, and unsuccessful if BR 10. The overall rating, when weighted by sectoral shares, works out to be 13.1. Source: Independent Evaluation Mission.

V. A.

OVERALL ASSESSMENT, KEY FINDINGS, LESSONS, AND RECOMMENDATIONS Overall Assessment

127. The overall assessment of the performance ADB assistance to Nepal is "partly successful" based on a borderline "successful" rating for the strategic and institutional (top down) performance, and rated "partly successful" for the sector-level performanceboth ratings are based on the discussions in the foregoing chapters. The rating for the sector-level performance may change over time, as many of the projects in the sector portfolio remain active. ADB's key areas of strength include strong country orientation, strategic alliance with the Government's development priorities, flexibility and a conflict-sensitive approach, the introduction of results-based management, and a very responsive and effective NRM. The key areas where the performance of the assistance could be better are its contribution to MDGs, governance and capacity building, policy and institutional reforms, and the investment climate and private sector development; the timeliness of project implementation; and the mitigation of risks to the sustainability of project outputs and outcomes. B. Key Findings

128. The evaluation determined that ADBs country strategy and operational plans for Nepal were appropriate to the conditions prevailing in the country, very responsive to the conflict, and supportive of the Governments development priorities. They also

40 incorporated, for the most part, ADBs strategic priorities, which evolved during the study period. In particular, the CSP 2004 was formulated in the context of ADB's Enhanced Poverty Reduction Strategy 2004 and Long-Term Strategic Framework 20012015. 129. ADB delivered its assistance in a very difficult operating environment by adopting a conflict-sensitive approach. ADB was able to continue implementing its program assistance during periods of conflict and political instability because of strong local community support and because the programs and projects were highly relevant and well aligned with the Government's strategy. ADB's strategic direction was to help the Government address the fundamental problems that had long hindered development in Nepal, e.g., exclusion and the lack of connectivity in rural areas, finance for rural enterprises, or universal education. These were addressed through a combination of program and project grants and TA support channeled through CSOs and local communities, which helped to improve implementation despite the insurgency, institutional weaknesses, and lack of elected local bodies. Conflict assessment and participatory approaches incorporated in all sector projects and programs enabled ADB assistance to progress in many cases despite the challenging environment. However, there were timesgenerally unpredictablewhen the intensity of the conflict was high. The security situation at several project sites hindered implementation. 130. To some extent, the difficult environment offered greater opportunities for reforms, particularly in governance. Because of the Governments desire to reestablish its legitimacy when it was being challenged, governance was prioritized in the development agenda. While working with CSOs and local communities was a useful approach, the capacity limitations of local service providers meant that more systematic and effective monitoring and evaluation of their performance and prompt follow up actions would have further improved project implementation and provided opportunities to learn lessons for the future. 131. ADB spread its assistance widely to poor and excluded people to develop rural infrastructure, provide universal education and rural finance, and stimulate agriculture production and marketing. The priority was to assist the Government in dampening the conflict particularly in areas with deep poverty and exclusion. While this socially inclusive approach meant high transaction and supervision costs, initial project feedback indicates that the benefits were felt directly through improvements in irrigation and other services to agricultural communities, higher quality and availability of education for the poor and excluded, improved rural roads to bring excluded regions and communities into the economic mainstream, and the provision of basic water supply and sanitation in smaller towns and cities. Indirectly, benefits were felt through services from the projects themselves, wages earned on the projects, local institutional strengthening and capacity development, and allowing the voices of the poor and excluded to be heard in public and political institutions previously dominated by narrow elites. 132. While early results are encouraging, the sustainability of such rural infrastructure as roads and irrigation is unclear as there is no certainty of a maintenance regime. A sustainable maintenance regime would require Government assistance as well as community participation and ownership in asset management. Feedback from the stakeholders indicated that the design and quality of roads could have been better in terms of reducing the paving over of agriculture lands by, for example, using more bridges, and ensuring that they are strong enough to withstand rainy seasons. 133. Experience with supporting universal education through SWAp has been positive. ADB's support to the EFA Program for primary education using SWAp has so far been

41 successful. The Government should develop and expand primary and secondary education of higher quality and with easier access. In particular, the lessons and experiences gained from the implementation of ADB assistance to the Governments SSR program in pilot districts will be invaluable for planning further actions towards the fully fledged adoption of SSR. 134. The experience of ADB assistance in promoting good governance by combating corruption, improving public service delivery, and strengthening capacity has been mixed. Support for legal reform needs to go beyond assisting in drafting laws to achieve the intended development outcome. ADB tried to help reform governance and strengthen anticorruption measures with program and TA supporting anticorruption legislation, the establishment of vigilance centers and a personal information system for civil servants, procurement laws, and public financial management. However, there are major issues regarding the capacity of National Vigilance Center, the Office of the Prime Minister and local bodies to implement the anticorruption strategy. Though important steps have been taken to pilot resultsbased monitoring tools in some ministries and departments, it has been difficult to translate new policy measures into organizational performance. ADB has provided considerable assistance to improve the legal and judicial system in Nepal through the drafting of many important laws. However, the weakness is in the effective implementation of these laws. There are still many institutions in Nepal with large capacity gaps, including the judiciary, and enforcement needs to be strengthened if the legal and judicial systems in Nepal are to lead to the intended development results. Political instability created further difficulty in addressing weak governance and corruption. 135. Issues related to project implementation go beyond political instability and conflict. While the conflict, security concerns, and transport strikes have been important reasons for implementation delays, other factors persistently affecting project implementation are project design deficiencies; start-up delays; frequent changes of project officials; and constraints on budgets, institutional capacity, and project monitoring and evaluation. 136. The results-based approach introduced by the CSP has been useful to the Government and ADB as it tried to identify links to the results sought by the Government to which ADB will contribute. ADB is acknowledged among development partners for taking the lead in the Government-led results-based approach (i.e., MfDR process) to improve development effectiveness. However, only a few indicators were given for Pillar 1 (broad-based growth) targets to start with, and tracking indicators for intermediate outcomes were introduced subsequently in later years. There is still a lot of scope for further improvement, particularly in terms of reporting on outcomes, ADB contribution, and adding the results of ADB's TA operations as well. Moreover, on the Government's side, mainstreaming the tested approach and internalizing it will be fundamental for continued success and sustainability. C. Lessons

137. ADBs support for infrastructure was affected by the conflict, policy and institutional constraints, and low public investment. The lack of roads and severity of power shortages are major impediments to economic growth, social development, and poverty reduction in Nepal. Accessibility has improved through the extension and upgrading of key sections of the SRN, particularly in the eastern region of the country, and ADB has provided sustained support to the energy sector. Even so, the efficiency and sustainability of ADB-funded infrastructure projects were affected not only by the conflict but also by infrastructure policy, institutional, and capacity constraints, particularly the lack of reform, and by low public investment.

42 138. Rural and urban roads and power supply are necessary to address infrastructure deficits. There is a growing influx of people from rural to urban areas, putting pressure on roads, housing, and public utilities and requiring the development of urban infrastructure. Opportunities have emerged to develop large power projects to generate export revenues and gain economies of scale in supplying power to domestic market. This scenario illustrates the need to make clear strategic choices so that small and large, rural and urban infrastructure projects can be appropriately timed and sequenced. Pursuing these options would require a lot of capital investment that should come from mobilizing the resources of the private sector, as well as from other development partners. ADB should play a catalytic role in this regard, something similar to the approach taken for West Seti Hydropower Project. 139. Risks to long-term macroeconomic sustainability and inclusive development remain, despite success in recent years. Regarding risks to macroeconomic stability, loose monetary conditions have made the financial system vulnerable, as negative real interest rates and capacity limitations for bank regulation and supervision continue to widen trade imbalances. Lagged impact of the global financial crisis may lead to reduced inflow of remittance, tourist expenditure, and foreign grants. Despite Nepals financial accountability analysis in 2002, the Government-led public expenditure and financial accountability exercise in 2006, and the Public Procurement Act of 2007, the management of public finances in Nepal has deteriorated in recent years, and inherent weaknesses persist. There has been under-spending of government budget on development works during the first 8 months of the current fiscal year. The implementation of many ADB supported rural-based projects is moving slow. Given these and the protracted and complex political transition, sustaining economic growth and poverty reduction momentum will be challenging in the coming years. 140. Local and regional user groups need to be included more in the budgetary process. Over the past few years, a system of performance-based funding of local bodies has been piloted, and medium-term budgeting introduced, in districts, municipalities, and villages. If inclusive growth is to continue, the Government will need to focus on the continued delivery of social services to rural and urban areas. 141. Continued ADB assistance during the conflict situation was possible through active involvement of CSOs. ADB continued its operations even during the insurgency, limited implementation and outreach capacity, and absence of elected members in the local governments. During this challenging phase, as prevailing lawlessness and insecurity made it more difficult for ADB to establish direct contact with local communities, the CSOs have filled the niche. The role of CSOs for building consensus among political parties and warring factions at the local level, as well as for social mobilization and raising awareness within the community was essential. 142. Community projects need to be consistent with capacity. ADB experienced capacity constraints in local governance, as it is still weak and procedures for transferring funds to local authorities are not yet in place. Reform for local government finance and a more effective system of supervising and monitoring CSOs are necessary steps toward gradual decentralization and a more effective public service delivery. They need to take place simultaneously with clear national and local roles. The number of districts, regions, and CSOs with which ADB operates should be consistent with its capacity for project design and implementation support. 143. Continued support for policy advice is needed. Improved capacity and human resource development at all levels in the government are crucial for sustaining sound fiscal

43 management and maintaining macroeconomic stability and peace. There is a pressing need for post-conflict support to assist the Government in strategizing and policy making in all areas related to binding constraints on development, as Nepal is going through a critical time of postconflict recovery. Economic and sector work would be useful in the area of cooperatives (rules, regulations, supervision), remittances, quality assurance and sustainability in local communitydriven development works. This can be achieved by providing cluster TA under NRM that could respond to the country's urgent requests. 144. More delegation to NRM together with necessary additional resources. NRM has always been essential to the responsiveness of ADB assistance. Although the challenges facing Nepal and the difficulty of working in rural communities have added to the NRM workload and, in some cases, slowed the pace of implementation, it is clear that project implementation improved once project responsibility was moved to NRM. As of end 2008, NRM had 12 delegated projects from 7 in 2004. But its national officers increased only to 12 from 10 in 2004 and its international professional staff remained at three, including the country director. 145. While the strategic focus of the CSP was relevant in 2004, it needs to be fine-tuned for the future, taking into account the country's binding constraints, Government's priorities, and ADB's long-term strategic framework 20082020 (Strategy 2020). There is a need for continued assistance to the Government in addressing infrastructure deficits and so contribute to achieving economic development through increased connectivity, access and social inclusion. Equally importantand, to a certain extent, re-enforcingis to provide further support to improving governance by strengthening institutional capacity for public service delivery and results-based management, and by reducing opportunities for corruption through support and policy dialogue for law enforcement and better transparency in public spending. While long-term engagement is important for achieving development results, a narrowly focused approach to sector and subsector coverage would be expedient. Combined with these, private sector development and regional cooperation are other areas for continued ADB assistance. D. Key Recommendations

146. The CAPE puts forward the following directional recommendations for consideration by ADB management in formulating and implementing future CPSs and operations. The proposed recommendations would help a country moving towards lasting peace by addressing its infrastructure and governance deficits, deep-seated social exclusion, large regional inequalities, and lack of economic opportunity for the poor. 1. Infrastructure-Led Inclusive Growth Strategy

147. In line with the Government's priorities and policies as set forth in the TYIP 2006/07 2009/10, and with ADB's Strategy 2020, ADBs inclusive growth strategy should continue. Considering the challenging political milestones ahead, the strategy should retain its flexibility. A shorter-term strategy may be considered, given the likelihood that the TYIP will be extended for another 23 years and that it will be some time before a new long-term poverty reduction strategy or development plan is formulated. 148. Assistance to infrastructure is fundamental to achieving inclusive economic growth, poverty reduction, and regional integration. More emphasis is needed on policy and institutional reform and on addressing constraints on absorptive capacity. ADB needs to fine-tune the current strategy with more emphasis on efficiently and sustainably expanding transport systems

44 for connectivity, both within the country and with neighboring countries, to facilitate the movement of goods and people. 149. In the power sector, ADB assistance should look at the feasibility of developing large, environmentally friendly hydropower projects and micro projects for small communities not connected to the national grid. It should reduce transmission losses, promote clean energy, and improve core infrastructure. Institutional development should be supported by ADB and other donors with a long-term strategic approach that considers the role of private investment, PPP, how prospects for private investment can be improved, and how government capacity can be built. 2. Governance, Capacity Development, and the Results Framework

150. The country would benefit greatly from good governance and greater transparency and accountability. ADB should continue its support for good governance and building the capacity of key public institutions, both local and central, to improve the delivery of public goods and services, make it more cost effective, and broaden inclusiveness. Good governance requires continued improvements in public policy, public institution management, the incentive framework for civil servants, regulatory capacity, and the rule of law. ADB should focus on strategic actions that can keep the governance reform agenda moving forward, particularly in public resource management, local government, and electricity regulation, as well as supporting the development of a road map for governance. Institutional strengthening and capacity development in government are crucial for implementing and sustaining reforms in infrastructure, decentralization, and public sector management. The adoption of results-based monitoring tools to assess performance and development results against targets has facilitated improvement in governance in Nepal. ADB should continue to provide assistance to strengthen capacity in the ministries where MfDR is already in place and to extend capacity development for monitoring and evaluation results to other ministries that wish to use MfDR. MfDR practices should be able to inform and contribute to ADB's corporate results framework. 3. Private Sector Development and Regional Cooperation

151. Private sector development and regional cooperation should be supported, in line with their importance in the Government's TYIP and ADB's Strategy 2020, as well as with the availability of opportunity. Creating an enabling environment for the private sector in Nepal is contingent on political stability; improved governance and infrastructure; solutions to longstanding labor problems; an improved policy environment, particularly for investment and trade; and a legal system in need of overhaul and strengthening. ADB assistance is required to remove constraints, such as those on physical infrastructure and governance, and to improve the policy environment for investment and trade. ADB's support to capacity building and policy advice for PPPs in infrastructure development (roads, power and water supply) has produced initial encouraging results. ADB should continue to support and promote PPPs in infrastructure. For this purpose, partnership between ADB's South Asia and Private Sector Operations Departments is crucial. 152. ADB should continue its support for regional cooperation and integration in order to create benefits from economies of scale and market access, and accelerate trade and growth. In particular, ADB could help Nepal to realize higher growth through integration and closer links with its neighbors, PRC and India, realizing Nepals immense potential for hydropower and tourism. It would be mutually beneficial to the PRC, India, and Nepal to cooperate in tourism, trade, and energy sector development.

Appendix 1

45

EVALUATION APPROACH AND METHODOLOGY 1. The country assistance program evaluation (CAPE) methodology is based on the CAPE guidelines,1 keeping in mind the changing political landscape in Nepal and applying an approach that responds to country contexts, development issues, and emergent needs. This entailed some modifications of the CAPE guidelines template. In preparing the CAPE, two Independent Evaluation Missions (IEMs) were conducted to Nepal.2 In April 2009, a final consultation mission3 was fielded in Kathmandu to obtain feedback on the draft CAPE report findings from the Government, other development partners and Asian Development Bank's (ADB) Nepal Resident Mission (NRM). 2. Data collection and information gathering for the CAPE included the following processes and techniques: (i) literature and data reviews of what was available from ADB, the Government, and independent sources; (ii) meetings and consultations with stakeholders4 associated with or knowledgeable about ADB-funded activities; (iii) key informant interviews with beneficiaries and a range of people associated with ADB operations; (iv) observations in the field at selected project sites;5 and (v) a survey of stakeholders perception of ADB performance in Nepal covering government officials, nongovernment organizations, development practitioners, and academics. The CAPE used secondary data and available statistics for quantitative assessment of development trends. 3. The CAPE identified key issues and assessed selected ADB assistance, covering the main sectors in which ADB has been engaged in Nepal during the CAPE period:6 (i) transport and communications; (ii) finance; (iii) energy; (iv) education; (v) water supply, sanitation and waste management; and (vi) law, economic management and public policy (LEMPP). Regarding agriculture and natural resources (ANR), which is one of the key sectors, a separate sector assistance program evaluation covering 19972007 was conducted, and the results were incorporated into the CAPE. The CAPE assessed selected non-ANR ADB loans, grants and technical assistance (TA) portfolio for Nepal approved from January 2004 to December 2008, those not covered by the 2004 CAPE. In assessing the loan and TA portfolio, the CAPE used information derived from portfolio management indicators, contextual information synthesized from project and TA performance reports, and other sources of information and records available at ADB headquarters and NRM. In addition, it drew pertinent information from the Independent Evaluation Department's (IED) Annual Report on Portfolio Performance for the Year Ending 31 December 2007.7 Information on portfolio performance was also derived from ADB's Central Operations Services Office (COSO) Quarterly Portfolio Update (December 2008). 4. The CAPE identified and assessed key issues of selected ADB assistance related to relevance, effectiveness, efficiency, sustainability, and impact, covering main or core sectors in which ADB is engaged. Within each sector, the CAPE reviewed the major program thrusts of
1 2 3 4 5 6 7

ADB. 2006. Guidelines for the Preparation of Country Assistance Program Evaluation Reports. Manila. (The CAPE methodology is covered in Chapter II of these guidelines, and is not repeated in this paper.) The IEMs were as follows: (i) a preparatory IEM (210 June 2008); and (ii) an IEM that included field visits (18 August15 September 2008). The IEM was conducted in Kathmandu from 28 March to 10 April 2009. The stakeholders include representatives from development partners (government and donor agencies, civil society organizations [CSOs], academic institutions, and the private sector). Local security conditions, travel advisory and fuel shortage restricted the selection of project site visits, which were conducted in Bharatpur, Birgunj, Chitwan, Parsa, Kaski, Makawanpur, as well as Kathmandu and its surroundings. The main sectors were selected based on the priority sectors identified in the CSP 20052009. ADB. 2008. Annual Report on 2007 Portfolio Performance. Manila.

46

Appendix 1

ADB assistance. Each program thrust included a combination of completed projects and programs (if any), and ongoing projects and programs, associated TA, economic and sector work, policy dialogue, and donor coordination. 5. Within the main program thrusts, the CAPE covered: (i) economic and sector work; (ii) thematic studies and initiatives; (iii) nonlending services, such as policy dialogue, development partner coordination, harmonization, and fostering ownership and participation; and (iv) reported output and outcome results in portfolio performance data. The CAPE took into account country contexts and development issues. 6. The CAPE features that differ from the previous CAPE (2004) are as follows: (i) It involved an assessment and rating of the performance of ADB operations in key sectors (i.e., a bottomup approach) and an assessment and rating of ADBs overall contribution to development results nationally (i.e., a top-down approach). A combination of the top-down and bottomup approaches was then used to derive an overall performance assessment. This performance assessment and rating generally followed Appendix 2 of the CAPE guidelines of February 2006. (ii) It included discussions and analysis on private sector development and publicprivate partnership (PPP). (iii) It carefully assessed socioeconomic aspects, particularly the political landscape, as well as development assistance needs, which have changed considerably since the previous CAPE. (iv) With all changes in the country, as well as in ADB with regard to the core operational areas of ADBs long-term strategic framework 20082020 (Strategy 2020),8 it assessed whether ADB assistance strategy has been and will remain relevant for the future. (v) The Nepal country strategy and program (CSP) 20052009 is one of the first pilot results-based CSPs. The CAPE therefore assessed achievements against the targets set in the results framework. It reviewed how the results framework has contributed to managing ADB operations in Nepal. (vi) It examined whether recommendations from the previous CAPE have been incorporated in the CSP. (vii) It assessed cross-cutting themes such as governance, capacity building, partnering, and harmonizing with development partners, as well as aligning with the countrys system.

7. Table A1.1 presents the list of projects included in the bottomup assessment. There are 19 loans, 4 grants, and 9 TA projects.

ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank 20082020. Manila.

Appendix 1

47

Table A1.1: Projects Evaluated in Nepal CAPE 2009

No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. Approval Year 1996 2001 2004 2006 2006 1998 1999 2004 2007 2004 2006 2006 1996 2000 2003 2000 2002 2001 2003 2003 2004 2004 2004 2006 Loan/ Grant/ TA No. L1450 L1876 L2097 G0051 L2268 L1650 L1732 TA4492 TA 4997 L2111 L2277 G0065 L1464 L1755 L2008 L1820 L1966 L1861 L2002 L2071 L2102 L2092 L2143 G0063 Project Title Rural Infrastructure Development Project Road Network Development Project Subregional Transport Facilitation Road Connectivity Sector I Rural finance Sector Development Cluster Program (Subprogram I) Rural Microfinance Project Rural Electrification, Distribution and Transmission Restructuring of Nepal Electricity Authority Promoting Private Sector Participation in the Power Sector Skills for Employment Education Sector Program I Education Sector Program I Capacity Development Projectb Fourth Rural Water Supply and Sanitation Sector Project Small Towns Water Supply and Sanitation Sector Project Community-Based Water Supply and Sanitation Sector Project Melamchi Water Supply Project Urban and Environmental Improvement Project Governance Reform Program Public Sector Management Program Community Livestock Development Community-Managed Irrigated Agriculture Sector Decentralized Rural Infrastructure and Livelihood Gender Equality and Empowerment of Women Commercial Agriculture Development Sector TNC TNC TNC TNC FIN FINa ENE ENE ENE EDU EDU EDU WSS WSS WSS WSS MS LEMPP LEMPP ANR ANR ANR ANR ANR Subsector Roads and Highways Roads and Highways Roads and Highways Roads and Highways Finance Sector Development Finance Sector Development Transmission and Distribution Energy Sector Development Hydropower Technical, Vocational Training, and Skills Development Education Sector Development Education Sector Development Water Supply and Sanitation Water Supply and Sanitation Water Supply and Sanitation Water Supply and Sanitation Urban Development National Government Administration National Government Administration Livestock Irrigation and Drainage Agriculture Sector Development Agriculture Sector Development Agriculture Production, Agroprocessing, and Agrobusiness Agriculture Production, Agroprocessing, and Agrobusiness Livestock Agriculture Sector Development Agriculture Sector Development Approved Amount ($ Million) 12.20 46.00 20.00 55.20 56.00 20.00 50.00 0.40 0.60 20.00 30.00 2.00 20.00 35.00 24.00 120.00 30.00 30.00 35.00 20.00 20.00 40.00 10.00 18.00

25.

2006

G9101

Improving the Livelihoods of Poor Farmers and Disadvantaged Groups in the Eastern Development Region Third Livestock Development Institutional Reforms in the Agriculture Sector Agriculture sector Performance Review

ANR

1.00

26. 27. 28.

1997 1998 2000

TA2851 TA3008 TA3536

ANR ANR ANR

0.75 0.90 0.60

48

Appendix 1

No. 29. 30.

Approval Year 2004 2004

Loan/ Grant/ TA No. TA4353 TA4397

Project Title Promoting Pro-Poor and GenderResponsive Service Delivery Capacity Building in Rural Infrastructure Institutions Economic and Social Inclusion of the Disadvantaged Poor Through Livelihood Enhancement with Micro-Irrigation

Sector ANR ANR

Subsector Livestock

Approved Amount ($ Million) 0.20

Agriculture Sector 0.40 Development 31. 2006 TA4774 ANR Agriculture 0.45 Production, Agroprocessing, and Agrobusiness 32. 2007 TA4969 Strengthening Land Administration ANR Agriculture Sector 0.35 Services Development ANR = agriculture and natural resources; CAPE = country assistance program evaluation; EDU = education; ENE = energy; FIN = finance; G = grant; L = loan; LEMPP = law, economic management, and public policy; MS = multisector; No. = number; TA = technical assistance; TNC = transport and communications; WSS = water supply, sanitation, and waste management. a This is classified under the agriculture and natural resources sector in the loan, technical assistance, grant, and equity approvals database. b Attached to Loan 2277-NEP[SF]: Education Sector Program I. Sources: Independent Evaluation Mission and loan, technical assistance, grant, and equity approvals database.

Table A1.2: Projects Not Included in Nepal CAPE 2009

No. 1. 2. 3. Year of Approval 2008 2008 2008 Loan/ Grant No. G0118 G0106 G0093 Project Title Governance Support Program (Subprogram I) Information and Communication Technology Development Rural Reconstruction and Rehabilitation Sector Development Program Project Grant (Supplementary) Rural Reconstruction and Rehabilitation Sector Development Program South Asia Subregional Economic Cooperation Information Highway Nepal Strengthening Decentralized Support for Vulnerable and ConflictAffected Families and Children Sector LEMPP TNC MS Subsector Subnational Government Administration Telecommunications and Communications Multisector Approved Amount ($ Million) 106.3 25.0 20.0 Reasons for Not Including in the CAPE This grant became effective on 19 December 2008. Thus at the time of the IEM, it was still too early to asses the Program's performance. This grant became effective only on 25 July 2008. Thus at the time of the IEM, it was still too early to asses this Project's performance. This is supplementary to G0093. It was approved on 11 November 2008. These grants became effective on 1 February 2008. Thus at the time of the IEM, it was still too early to assess the Program's performance. The agreement was signed on 9 February 2009. The grant is not yet effective.

4. 5. 6.

2007 2007 2007

G0093 and G0094 G0099 G9110

MS TNC HNSP

Multisector Telecommunications and Communications Social Protection

100.0 9.0 2.0

This grant became effective on 10 February 2008. As of 1 June 2009, total disbursements amounted to $142,221 or 7.1% of the approved amount. At the time of the IEM, it was still too early to asses the Project's performance. Nonetheless, the IEM conducted a preliminary review of this grant. Since the CAPE's focus was on the CSP's key sectors, this was not included. 7. 2003 L2058 Kathmandu Valley Water Services WSS Water Supply and 15.0 Although the loans became effective on 7 and Sector Development Program Sanitation December 2004, total disbursements from the L2059 project loan (L 2059) as of 1 June 2009 amounted to only $520,872 or 5.2% of the approved project loan amount. The CAPE 2009 has a brief discussion on this SDP in connection with the Melamchi Water Supply Project. CAPE = country assistance program evaluation; CSP = country strategy and program; G = grant; HNSP = health, nutrition, and social protection; IEM = independent evaluation mission; L = loan; LEMPP = law, economic management, and public policy; MS = multisector; No. = number; SDP = sector development program; TNC = transport and communications; WSS = water supply, sanitation, and waste management. Sources: Independent Evaluation Mission, and loan, technical assistance, grant, and equity approvals database; various project performance reports.

Appendix 1

49

EVALUATION RESULTSa FOR SOVEREIGN OPERATIONS (PROJECTS AND PROGRAMS) IN NEPAL, BY SECTOR AND BY DECADE OF APPROVAL
Decade of Approval 1980s 1990s Total No. Total No. Success Success of Rated of Rated Rate (%) Rate (%) Projects/ Projects/ Programs Programs 6 4 2 2 3 1 2 20 1 1 1 100.0 100.0 1 2 1 33.3 25.0 50.0 50.0 66.7 0.0 50.0 40.0 0.0 100.0 50.0 0.0 1 1 2 3 3 100.0 100.0 100.0 33.3 33.3 3 66.7 3 33.3 Total 2000s Total No. Success of Rated Rate (%) Projects/ Programs

50

Major Sector

Subsector

1970s Total No. Success of Rated Rate (%) Projects/ Programs 2 1 50.0 100.0

Appendix 2

Total No. of Rated Projects/ Programs 8 8 2 4 9 3 5 39 3 1 2 6 1 1 6 8 5 5

Success Rate (%)

A. Agriculture and Natural Resources Agriculture Production, Agro-processing and Agro-business Agricutlure Sector Development Fishery Forest Irrigation and Drainage Livestock Multisector Subtotal (A) B. Education Basic Education Nonfformal Education Technical, Vocational Skill and Training Subtotal (B) C. Energy Energy Sector Development Hydropower Transmission and Distribution Subtotal (C) D. Industry and Trade Industry Subtotal (D)

37.5 37.5 50.0 50.0 77.8 33.3 60.0 51.3 33.3 100.0 100.0 66.7 0.0 100.0 100.0 87.5 20.0 20.0

1 2 1 1 8

100.0 100.0 0.0 100.0 75.0

1 4 1 2 11 2 1

0.0 75.0 100.0 50.0 54.5 50.0 100.0

3 3 1 1

100.0 100.0 0.0 0.0

2 3 1 1

100.0 66.7 0.0 0.0

Major Sector

Subsector

1970s Total No. Success of Rated Rate (%) Projects/ Programs

Decade of Approval 1980s 1990s Total No. Total No. Success Success of Rated of Rated Rate (%) Rate (%) Projects/ Projects/ Programs Programs

Total 2000s Total No. Success of Rated Rate (%) Projects/ Programs Total No. of Rated Projects/ Programs

Success Rate (%)

E. Law, Economic Management and Public Policy National Government 2 0.0 2 0.0 Administration Subtotal (E) 2 0.0 2 0.0 F. Multisector Urban 1 0.0 1 0.0 Subtotal (F) 1 0.0 1 0.0 G. Transport and Communications Civil Aviation 2 100.0 1 0.0 3 66.7 Roads and Highways 1 100.0 3 66.7 2 100.0 6 83.3 Subtotal (G) 3 100.0 3 66.7 3 66.7 9 77.8 H. Water Supply, Sanitation, and Waste Management Water Supply and 2 50.0 2 100.0 4 75.0 Sanitation Subtotal (H) 2 50.0 2 100.0 4 75.0 TOTAL 16 81.3 31 45.2 25 60.0 2 0.0 74 56.8 a Based on aggregate results (highly successful, successful, and generally successful) of project/program completion reports (PCRs), PCR validation reports (PCVs) and project/program evaluation reports (PPERs) using PCV or PPER ratings in all cases where both PCR and PCV or PPER ratings are available. Source: PCRs, PCVs, and PPERs containing a rating circulated as of 31 December 2008. There are three PCRs, which did not provide a rating.

Appendix 2

51

SOCIOECONOMIC INDICATORS 52 Table A3.1: Country Economic Indicators, 19902008

Item A. Income and Growth GDP, per Capita (rupee, current prices) GDP Growth (%, constant prices) Agriculture Industry Services B. Savings and Investment (market prices) Gross Domestic Investments (% of GDP) Gross Fixed Capital Formation (% of GDP) Public (% of GDP) Private (% of GDP) Change in Stocks (% of GDP) Gross National Savings (% of GDP) C. Money and Inflation Consumer Price Index (annual % change) Money Supply (M2) (annual % change) D. Government Finance (% of GDP) Revenue Total (Current and Capital) Expenditure Overall Budgetary Surplus/Deficit (after grants) E. Balance of Trade/Payments Current Account Balance (% of GDP) Merchandise Exports ($ million) Merchandise Imports ($ million) Trade Balance ($ million) Total Exports Growth (annual % change) Total Imports Growth (annual % change) Foreign Direct Investments ($ million) F. External Payments Indicators Gross Official Reserves ($ million) External Debt Service (% of exports of goods and services) Total External Debt (% of GNI) 1990 1991 1992 1993 1994 1995 1996 1997 Fiscal Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007R 2008P

Appendix 3

6,128 4.7 5.8 4.8 4.2

7,002 6.9 2.3 14.8 10.1

8,496 4.3 (1.1) 18.8 6.3

9,516 3.6 (0.9) 3.8 7.1

10,810 8.6 8.4 9.4 7.9

11,733 3.4 (0.9) 4.3 5.9

13,044 5.2 3.8 9.4 5.7

14,308 5.1 4.4 6.4 4.7

15,024 3.2 0.9 2.2 6.5

16,746 4.3 2.8 5.8 5.1

18,060 6.0 4.9 8.6 5.9

19,072 5.4 5.5 4.1 4.5

19,410 0.1 3.1 0.9 (1.8)

20,340 3.9 3.3 3.1 3.7

21,694 4.7 4.8 1.4 6.8

23,300 3.1 3.5 3.0 2.5

25,289 2.8 1.1 4.3 4.7

27,497 2.6 0.9 3.9 4.5

30,361 5.6 5.7 1.9 7.0

17.2 15.3 7.2 8.1 1.9 7.3

19.4 17.6 6.7 10.9 1.8 8.9

19.6 18.2 6.4 11.8 1.5 10.1

21.5 20.2 6.4 13.8 1.3 12.6

20.8 19.6 6.2 13.3 1.2 13.6

23.5 20.6 6.4 14.2 2.9 13.8

25.3 20.9 6.6 14.4 4.5 12.9

23.6 20.2 6.4 13.8 3.4 13.0

23.1 20.2 7.0 13.2 2.9 12.8

19.0 17.7 6.5 11.2 1.3 12.6

22.6 18.0 6.5 11.5 4.6 14.1

22.3 19.2 4.1 15.1 3.1 26.9

20.2 19.6 3.8 15.8 0.7 24.2

21.4 19.9 3.0 16.9 1.5 23.8

24.5 20.3 2.8 17.6 4.2 27.3

26.5 19.9 2.9 17.0 6.5 28.4

26.0 20.9 2.8 18.2 5.0 29.0

28.0 20.4 2.9 17.5 7.6 28.5

32.0 21.0 3.1 17.9 10.9 32.0

9.7 18.6

9.7 19.5

21.1 21.1

8.8 27.7

9.0 19.6

7.7 16.1

8.1 14.4

8.1 11.9

8.3 21.9

11.4 20.8

3.4 21.8

2.4 15.2

2.9 4.4

4.8 9.8

4.0 12.8

4.5 8.3

8.0 15.6

6.4 14.0

7.4 13.4

8.4 17.7 (7.6)

8.3 18.2 (8.2)

8.4 16.4 (7.0)

8.2 16.7 (6.5)

9.1 15.6 (5.4)

10.4 16.6 (4.5)

10.4 17.4 (5.2)

10.1 16.9 (4.8)

10.2 17.3 (5.5)

10.1 16.1 (4.9)

10.5 16.3 (4.3)

11.1 18.1 (5.5)

11.0 17.4 (5.0)

11.4 17.1 (1.4)

11.6 16.7 (0.9)

11.9 17.4 (0.8)

11.2 17.0 (1.6)

12.1 18.4 (1.8)

13.0 19.7 (2.0)

(7.7) 217.9 (666.6) (448.7) 22.9 12.7

(8.8) 274.5 (756.9) (482.4) 43.3 26.7

(4.8) 376.3 (752.1) (375.8) 85.5 37.5

(5.9) (5.9) (5.2) (8.3) (5.6) (5.0) 0.1 (2.3) (2.5) 4.0 2.4 2.7 2.0 2.2 0.5 0.2 397.0 360.1 354.0 360.6 397.4 444.6 525.3 721.7 754.1 754.2 652.5 748.5 832.0 850.1 892.3 875.3 (858.6) (1,156.5) (1,276.3) (1,350.4) (1,642.3) (1,439.1) (1,290.6) (1,572.7) (1,568.4) (1,448.3) (1,556.2) (1,801.2) (2,022.1) (2,371.9) (2,720.3) (3,301.3) (461.6) (796.4) (922.3) (989.8) (1,244.9) (994.5) (765.3) (851.0) (814.3) (694.1) (903.7) (1,052.7) (1,190.1) (1,521.8) (1,828.0) (2,426.0) 26.0 11.7 (8.6) 12.7 13.9 21.5 29.7 39.7 11.7 (15.6) 6.4 8.0 8.9 2.6 0.9 (1.9) 22.7 31.5 23.5 16.9 25.7 (4.9) (1.7) 24.0 6.6 (7.2) 15.8 9.6 9.7 16.3 10.3 17.0 7.0 28.4 11.0 8.5 3.4 (0.4) (3.7) 12.4 1.9 (6.5) 5.1 5.0

301.7 15.2 44.7

403.4 11.6 44.9

473.9 9.4 52.7

646.7 8.1 54.6

700.1 7.7 56.9

592.9 7.5 54.7

577.8 6.4 52.9

632.7 6.8 49.0

762.7 7.6 54.9

851.5 7.7 59.9

951.9 6.9 52.0

1,044.2 7.0 45.3

1,024.1 6.3 49.5

1,228.9 6.1 50.0

1,468.6 5.6 46.3

1,504.4 4.7 39.0

5.1 37.8

G. Memorandum Items GDP (rupee million, current prices) 110,973 129,467 160,923 184,509 214,694 235,238 267,793 300,745 323,476 369,083 407,617 441,519 459,443 492,231 536,749 589,412 646,469 727,089 820,814 GDP ($ million, current prices) 3,779 3,475 3,767 3,796 4,346 4,533 4,724 5,184 4,903 5,409 5,734 5,991 6,025 6,324 7,256 8,296 9,042 11,160 12,667 Exchange Rate (rupee/$, average) 29.4 37.3 42.7 48.6 49.4 51.9 56.7 58.0 66.0 68.2 71.1 73.7 76.3 77.8 74.0 71.1 71.5 65.2 64.8 Population (million) 18.1 18.5 18.9 19.4 19.9 20.1 20.5 21.0 21.5 22.0 22.6 23.2 23.7 24.2 24.7 25.3 25.9 26.4 27.0 ( ) = negative, = not available, GDP = gross domestic product, GNI = gross national income, M2 = money supply, P = preliminary, R = revised. Note: 2008 data are as of FY 2008 (ended Mid-July 2008) Sources: Asian Development Bank. 2008. Key Indicators 2008. Manila; Central Bureau of Statistics. 2007. National Accounts of Nepal 20002007. Kathmandu; Ministry of Finance. 2008. Economic Survey Fiscal Year 2007/2008. Kathmandu; and Nepal Rastra Bank. 2007. Monetary Policy for Fiscal Year 2007/2008. Kathmandu; Ministry of Finance, available: http://www.mof.gov.np.

Table A3.2: Nepals Progress Towards the Millennium Development Goals

Goal Goal 1 Eradicate extreme poverty and hunger Targets 1a. 1b. 2. 3. 4. 5. 6. 7. 7a. 8. 9a. 9b. 9c. 10. 11. 12. Goal 4 Reduce child mortality 13. Target 5 Reduce by two-thirds, between 1990 and 14. 15. 2015, the under-five mortality rate. 16. 17. 18P. 18P. 18P. 19. 19a. 19bP. Indicators Proportion of population below $1 (PPP) per day Poverty headcount ratio Poverty gap ratio Share of poorest quintile in national consumption Prevalence of underweight children under 5 years of age Proportion of population below minimum level of dietary energy consumption Net enrollment ratio in primary education Proportion of pupils starting grade 1 who reach grade 5 Primay completion rate Literacy rate in the age group of 1524 year olds Ratio of girls to boys in primary education Ratio of girls to boys in secondary education Ratio of girls to boys in tertiary education Ratio of literate women to men, 1524 years old Share of women in wage employment in the nonagriculture sector Proportion of seats held by women in national parliament Under-5 mortality rate (deaths/1,000 live births) Infant mortality rate (deaths/1,000 live births) Proportion of 1-year old children immunized against measles Maternal mortality ratio (deaths/100,000 births) Proportion of births attended by skilled health personnel Target 1 Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day. Target 2 Halve between 1990 and 2015, the proportion of people who suffer from hunger. Target 3 Goal 2 Ensure that, by 2015, children Achieve universal everywhere, boys and girls alike, will be primary education able to complete a full course of primary schooling. Goal 3 Target 4 Promote gender equality Eliminate gender disparity in primary and and empower women secondary education, preferably by 2005, and in all levels of education no later than 2015. 1990/91 49 51.3 50.9 49.6 0.63 0.46 0.33 0.48 18.9 3.4 145 97 42.4 515 7.0 2.6 24.1 616 51.2 1995/96 33.5 41.8 11.8 7.6 47 57.0 56.2 0.56 3.4 118 79 56.6 539 10.1 6.7 28.5 5.3 84.7 Fiscal Year 2000/01 48.3 63.1 55.0 70.1 0.81 0.70 0.25 0.75 17.4 5.9 91 64 70.6 10.9 13,000 0.4 2,000 7.4 52 81 39 79 42 39.3 33 8 303 27.6 58.1 88.3 2003/04 24.1 30.8 7.6 6.2 40 72.4 59.7 50.4 73.0 0.83 0.78 0.34 0.73 5.9 75.0 19.8 0.5 4,000 38.3 268 25.0 66.8 87.0 2005/06 38.6 86.6 80.3 79.4 0.94 0.86 0.83 17.3 61 48 85.0 281 18.7 0.5 5,100 10.0 97.4 87.2 80.5 66.7 44.2 2015 Target 17 29 25 100 100 100 1.0 1.0 1.0 1.0 54 34 >90 213/134 60 67
a

Goal 5 Target 6 Improve maternal health Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio. Goal 6 Target 7 Combat HIV/AIDS, Have halted by 2015 and begun to malaria, and other reverse the spread of HIV/AIDS. diseases

Target 8 Have halted by 2015 and begun to reverse the incidence of malaria and other major diseases.

Children orphaned by AIDS Percentage of people living with HIV, 1549 years old AIDS deaths Condom use rate of the contraceptive prevalence rate Condom use at last high-risk sex Proportion of population aged 1524 years who know condom can prevent HIV, male 19bP. Proportion of population aged 1524 years who know condom can prevent HIV, female 19bP. Proportion of population aged 1524 years who know healthylooking person can have HIV, male 19bP. Proportion of population aged 1524 years who know healthylooking person can have HIV, female 19c. Contraceptive prevalence rate 21a. Prevalence of malaria (per 100,000 people) 21b.

Appendix 3

Death rate associated with malaria (deaths/100,000 people) 23a. Prevalence of tuberculosis (per 100,000 people) 23b. Death rate associated with tuberculosis (deaths/100,000 people) 24a. Proportion of tuberculosis cases detected under directly observed treatment short course 24b. Proportion of tuberculosis cases cured under directly observed treatment short course

53

Goals Goal 7 Ensure environmental sustainability

Targets Target 9 Integrate the principles of sustainable development into country policies and programmes and reverse the loss of environmental resources. 25. 26.

Indicators Proportion of land area covered by forest Ratio of area protected to maintain biological diversity to surface area 27. Energy use (kg oil equivalent) per $1 GDP (PPP) 28a. Carbon dioxide emissions per capita (metric tons) 28b. Consumption of ozone-depleting CFCs (metric tons) 29. Proportion of population using solid fuels 30a. Proportion of population with sustainable access to an improved water source, total 30b. Proportion of population with sustainable access to an improved water source, urban 30c. Proportion of population with sustainable access to an improved water source, rural 31a. Proportion of population with access to improved sanitation, total 31b. Proportion of population with access to improved sanitation, urban 31c. Proportion of population with access to improved sanitation, rural

1990/91 33.7 6.9 2.6 0.05 20 45.9 89.9 42.8 19.8 69.8 16.5

1995/96 29.0 12.6 3.3 0.11 25 63.4 84.9 61.4 22.5 73.7 17.7

Fiscal Year 2000/01 27.3 16.0 3.7 0.14 94 76.9 72.8 86.0 71.1 30.5 79.9 24.7

2003/04 16.3 3.8 0.11 81.1 92.9 78.8 38.7 81.3 30.3

2005/06 25.4 16.3 83.3 81.8 89.5 80.2

2015 Target 73 95 72 53 67 52

54
Appendix 3

Target 10 Halve, by 2015, the proportion of people without sustainable access to safe drinking water and basic sanitation.

Goal 8 Develop a global partnerships for development

Target 12 Develop further an open, rule-based, predictable, non-discriminatory trading and financial system. Includes a Target 16 In cooperation with developing countries, develop and implement strategies for decent and productive work for youth.

36. 44.

ODA received by landlocked countries as a proportion of their GNIs

11.7 15.2

9.8 7.7 7.3 8.9 5.8

7.1 7.3 6.0 8.0 4.3 49

8.0 9.9 6.0 6.7 5.5

Target 17 In cooperation with pharmaceutical companies, provide access to affordable essential drugs in developing countries. Target 18 In cooperation with the private sector, make available the benefits of new technologies, especially information and communications.

Debt service as a percentage of exports of goods and services 45a. Unemployment rate of young people aged 1524 years, both sexes 45b. Unemployment rate of young people aged 1524 years, male 45c. Unemployment rate of young people aged 1524 years, female 46. Proportion of population with access to affordable essential drugs on a sustainable basis

47a. Telephone lines per 100 people 47b. Cellular subscribers per 100 people 48a. Personal computers in use per 100 people 48b. Internet users per 100 people

0.32 0.0 0.00

0.41 0.0 0.12 0.00

1.12 0.1 0.31 0.22

1.6 0.2 0.42 0.42

2.29 2.9

= not available, CFC = chlorofluorocarbons, DOTS = directly observed treatment short course, GDP = gross domestic product, GNI = gross national income, HIV/AIDS = human immunodeficiency virus/acquired immunodeficiency syndrome, kg = kilogram, ODA = official development assistance, PPP = purchasing power parity. a Target of 134 based on Nepal's Health Sector Strategy - An Agenda for Reform (Ministry of Health, 2004). Sources: Central Bureau of Statistics. 2007. MDG Indicators of Nepal. Kathmandu; and National Planning Commission/United Nations. 2005. Nepal Millenium Development Goals Progress Report 2005. Kathmandu.

Table A3.3: Nepals Social Indicators

Item A. Population Indicators 1. 2. Total Population Annual Population Growth Rate (%) 16.2 2.1 5.9 115.4 50.9 50.0 51.6 26.5 2.7 0.38 114 (130) (1985) (1985) (1985) (1985) (1985) (1985) (1985) (1985) 18.1 2.1 5.3 515.0 97.0 53.6 52.9 54.2 35.6 57.0 57.0 33.5 45.9 89.9 42.8 19.8 69.8 16.5 2.0 0.42 152 (173) 0.33 148/163 42.0 21.5 43.3 11.7 (1990) (1990) (1990) (1991) 1991 (1990) (1990) (1990) (1996) (1996) (1990) (1996) (1991) (1991) (1991) (1991) (1991) (1991) (1991) (1990) (1990) (1995) (1995) (1996) (1996) (1996) (1996) 27.0 2.2 3.1 281.0 48.0 63.7 63.3 64.1 48.6 86.6 38.6 24.1 81.8 89.5 80.2 38.7 81.3 30.3 3.4 0.53 142 (177) 0.52 127/177 31.0 9.5 34.6 7.5 38.1 84.0 (2008) (2008) (2007) (2006) (2006) (2007) (2007) (2007) (2005) (2006) (2006) (2004) (2006) (2006) (2006) (2004) (2004) (2004) (20022005) (2005) (2005) (2005) (2005) (2004) (2004) (2004) (2004) (2005) (2005) 1980s Period 1990s Latest Year

B. Social Indicators 1. Total Fertility Rate (births/woman) 2. Maternal Mortality Rate (per 100,000 live births) 3. Infant Mortality Rate (below 1 year/1,000 live births) 4. Life Expectancy at Birth (years) - Female - Male 5. Adult Literacy (%) 6. Net Primary School Enrollment Ratio (%) 7. Child Malnutrition (% below age 5) a 8. Population below Poverty Line (international, %) 9. Population with Access to Safe Water (%) - Urban - Rural 10. Population with Access to Sanitation (%) - Urban - Rural 11. 12. 13. Public Education Expenditure (% of GDP) Human Development Index - Rank (total number of countries) Gender-Related Development Index - Rank/total number of countries

(1985) (1987) (1987)

C. Poverty Indicators 1. Poverty Incidence (%) - Urban - Rural 2. Poverty Gap 3. Human Poverty Index - Rank

Appendix 3

= not available, GDP = gross domestic product. a Based on purchasing power parity. Sources: ADB. 2008. Key Indicators 2008. Manila; ADB. 2008. Nepal: Country Partnership Strategy Midterm Review. Manila; Central Bureau of Statistics. 2007. MDG Indicators of Nepal (1990/912005/06). Kathmandu; Central Bureau of Statistics. 2004. Nepal Living Standards Survey 2003/04. Kathmandu; Central Bureau of Statistics. 2007. Nepal in Figures 2007. Kathmandu; Ministry of Finance. 2007. Economic Survey Fiscal Year 2006/2007. Kathmandu; and United Nations Development Programme. 2007. Human Development Report 2007/2008 - Fighting Climate Change: Human Solidarity in a Divided World. New York.

55

FEATURES OF ADBS COUNTRY STRATEGIES IN NEPAL, 20022010 56

Item Country Strategy and Program Update 20022004 Strategic Focus The overarching objective of ADBs CSP was to achieve sustainable reduction in poverty through (i) job generation and increased rural incomes resulting from faster and broader pro-poor economic growth, (ii) equitable improvements in basic social services to enhance human development, and (iii) good governance. Directions for Lending and Nonlending Operations ADB aimed to sharpen its focus to support a smaller number of key sectors in which ADB has been active and has a comparative advantage. Although the sectors and projects in the program were generally similar to those in the previous strategy, the CSP focused on up to seven sectors: (i) agriculture and rural development as the key sector; (ii) transport; (iii) energy; (iv) finance; (v) education, including nonformal education; (vi) water supply, sanitation, and urban development; and (vii) environmental management. When appropriate, programs and projects would be designed to target excluded groups to reduce poverty and inequality. The strategic approach of the program would continue to emphasize institutional strengthening. The TA program focused on (i) the institutional strengthening and capacity building needed to develop more effective sectoral institutions, (ii) the strategic approach of the proposed CSP, and (iii) project preparation. The proposed lending program for 20032005 consisted of 14 projects, of which poverty interventions constituted 93%. The lending program supported the Governments poverty-reduction strategy, focusing on rural development, improvements in basic services and infrastructure, womens empowerment, and private sector development. ADB assistance would be planned and formulated to enhance economic opportunities and the status of women in, for example, agriculture, rural finance, education, and water supply and sanitation. The Linkage to Poverty Reduction The proposed lending program in 20022004 consisted of 12 projects totaling $306 million. The program was consistent with the strategic thrust of the proposed CSP, emphasizing poverty reduction. Core poverty and poverty intervention projects constituted 75% of the total program in 20022004. External Funding Coordination and Partnership Arrangements

Appendix 4

Country Strategy and Program Update 20032005

Pressures on the economy, and thus the fiscal position of the Government, remained and had a significant impact on the operations of ADB in Nepal. Reducing poverty through the improved delivery of services and effective governance remained essential to a lasting solution to the insurgency. ADBs country strategy and priorities remained fully consistent with these objectives. The effective implementation of government policies, projects, and programs was critical to resolving the conflict. Given the worsening fiscal situation, ADB and other

The lending program supported the Governments poverty-reduction strategy, focusing on rural development, improvements in basic services and infrastructure, womens empowerment, and private sector development. The program placed major emphasis on improving access to basic resources, in particular those resources most vital to escaping poverty, and removing institutional constraints that constrain the poor's access to them. Access to priority inputs (e.g., fertilizers, irrigation, roads, electricity, and agricultural technology) with suitable

To strengthen aid coordination and effectiveness, in March 2002 the Government finalized its foreign aid policy, prepared in cooperation with its development partners with input from civil society. In 2002, the Swiss Development Corporation agreed to fund two key TA projects for awareness building and program monitoring under the Governments Governance Reform Program, which was assisted by ADB. Efforts to secure joint cooperation and financing for ADB-assisted projects and programs in the pipeline for 20032005 continued. ADB worked

Item

Strategic Focus development partners needed to provide more program assistance to support the Governments reform agenda. Like Nepal's other development partners, ADB needed to work with the Government to devise ways to remain engaged in supporting development activities in affected areas, rather than trying to work around the conflict. Ensuring a strong and direct antipoverty focus and strong community participation in all projects and programs was therefore critical. Working more closely with district governments also helped, though the institutional strengthening of decentralized bodies would be necessary to ensure accountability and effective implementation. Given the significant uncertainty in the short-to-medium term, the Government and ADB needed to show flexibility in carrying forward the 20032005 program. The overarching objective of ADBs CSP was to achieve sustainable reduction in poverty through a combination of accelerated broadbased economic growth, social development, and good governance. During 20042006, subject to the improved security situation, priority would be given to assisting the Governments reconciliation, rehabilitation and reconstruction efforts by developing rural areas; improving basic social services and infrastructure; empowering women; enabling private sector development; and improving governance in the public, corporate and financial sectors. When appropriate, programs and projects would be designed to target neglected areas and excluded groups, to reduce poverty and inequality. The strategic approach of the program would continue to

Directions for Lending and Nonlending Operations nonlending program focused on the institutional strengthening and capacity building needed to develop more effective sectoral institutions and project preparation. The worsening scarcity of TA resources meant concerted efforts would be required to augment them through cofinancing. To strengthen the lending pipeline, the TA program was largely focused on project preparation.

Linkage to Poverty Reduction credit and extension services was crucial to effectively reducing rural poverty.

External Funding Coordination and Partnership Arrangements jointly with DANIDA to finance the first phase of a secondary education support program. ADB also worked with various funding agencies to adopt a coordinated approach to sector development in rural water supply and sanitation. Cooperative efforts in 2002 included an agreement with the United Kingdoms DFID and UNICEF for collaboration in implementing the ADB-assisted project preparatory TA for the proposed community-based rural water supply and sanitation project.

Country Strategy and Program Update 20042006

The 20042006 lending program was consistent with the strategic thrust of the proposed CSP. Core poverty intervention projects constituted 93% of the total 2004 2006 program. In support of the Governments emerging need for reconciliation, rehabilitation and reconstruction, the timing of the projects with greater potential to benefit rural communities and conflict-affected areas was adjusted, and their proposed scope and geographical focus was reviewed. The nonlending program focused on institutional strengthening and capacity building, which were needed to develop more effective sector institutions and project preparation. While providing advisory TA remained consistent with the 1999 Country Operational Strategy, which stressed the critical

The country strategy and priorities of the ADB remained fully consistent with the objective of addressing poverty and targeting development in poor and conflict-affected areas. While ADBs proposed operational program for Nepal directly addressed these priorities, there was a need to provide further support for the Governments rehabilitation and reconstruction program and for strengthening its fiscal position and improving governance. In addition, to ensure accountability, effective implementation and improved service delivery, ADB would need to continue to work closely with the Government to promote the wider and stronger participation of local bodies and communities in all projects and programs.

Significant progress continued in Nepal under the Governments leadership in the areas of aid coordination and collaboration. In 2003, DANIDA agreed to provide $30.0 million in cofinancing for the first phase of an ADB-assisted Secondary Education Support Program, and the Swiss Agency for Development and Cooperation provided $470,000 in grant funding for public awareness and monitoring the Governance Reform Program. The United Kingdoms DFID agreed, in principle, to provide a TA fund to complement a public enterprise reform program assisted by ADB.

Appendix 4

57

Item

Strategic Focus emphasize institutional strengthening.

Country Strategy and Program 20052009

Fostering an inclusive development process was ADBs strategic approach toward contributing to the long-term goal of poverty reduction in Nepal. The CSP's crosscutting initiatives included (i) supporting the creation of an enabling environment for increased private sector participation and investment by fostering better policy and more effective implementation of policies and regulatory reform in key sectors; (ii) addressing gender, ethnic, and caste discrimination through policy reform, targeted investments, and the mainstreaming of equal opportunity in key sector investments; (iii) improving social, environmental and resettlement assessment policies, procedures, and practices as they relate to investment projects; and (iv) tapping benefits from regional cooperation initiatives in the areas of transport connections, and trade facilitation, energy, tourism, and communications with neighboring countries. ADBs strategy rested on three pillars: broad-based economic growth, inclusive social development, and good governance. The Nepal CSP is ADBs first pilot results-based CSP. It is results-based because it (i) identifies the "results" sought by the Government to which ADB will contribute; (ii) identifies what outcomes are expected during the implementation of the CSP; (iii) provides a mechanism and indicators for monitoring progress made toward achieving those outcomes; and (iv)

Directions for Lending and Nonlending Operations importance of building effective institutions to maximize the development impacts of ADB assistance, there was a growing need to optimize the use of increasingly scarce TA funds. ADBs program during 20052007 focused on helping the Government foster more inclusive development by providing assistance to develop rural areas, improve basic social services and infrastructure, empower women, promote private sector development, and improve governance in the public and private sectors. Special emphasis would be placed on project design to ensure that the projects primary objectives were fully in line with these priorities and resultsoriented. ADB would help the Government to scale up good practices in poverty reduction and to carry out realistic policy and institutional reforms. From 2005 to 2007, program lending assistance would constitute about a third of overall lending. The higher level of program assistance was warranted to support the Government's wideranging policy reform effort and to ensure that priority sector-specific poverty-reduction activities were adequately financed. The 20052007 nonlending program comprised 26 TA projects and 5 economic, thematic, and sector work activities. The TA program included 16 project preparatory TA projects to support project preparation and 10 institutional development TA projects to support institutional capacity building and managing for development results. The economic, thematic, and sector work program formed the basis of ADBs support for policy reform, capacity building and institutional strengthening.

Linkage to Poverty Reduction

External Funding Coordination and Partnership Arrangements

58
Appendix 4

The overarching objective of the CSP was to achieve sustained poverty reduction by fostering more inclusive processes of broad-based growth, social development and good governance. All lending products were poverty interventions.

ADB made maximum efforts to coordinate with its development partners during the preparation of CSPs and CSPUs and at different stages of project processing. As a result, cofinancing has been obtained for a number of ADB projects from DANIDA under the first phase of the ADB-assisted Secondary Education Support Program; consulting inputs to help prepare the ongoing Communitybased Water Supply and Sanitation Project from United Kingdoms DFID; TA support for the Governance Reform Program from the Swiss Agency for Development and Cooperation; and support for capacity-building interventions under the Governance Reform Program from UNDP. DFID has provided TA support for the Public Sector Management Program and an agriculture and natural resource expert in NRM. A number of projects in the energy and water supply sectors have received assistance from JBIC and JICA. Formal action plans have been agreed with DFID and GTZ to guide cooperation more effectively. NRM initiated a bimonthly harmonization series with the World Banks resident office to improve coordination and collaboration. In conjunction with its lending program, ADB would continue to actively pursue cofinancing from grant and concessional loan sources. While continued efforts would be made to mobilize cofinancing, core components of large projects, and

Item

Strategic Focus provides a basis for evaluating the success of the CSP, thereby providing a basis for adjusting future plans to improve results.

Directions for Lending and Nonlending Operations

Linkage to Poverty Reduction

Country Operations Business Plan 20072009

Political changes in Nepal have not altered the policy and strategic development implications for addressing the root causes of conflict and poverty. The Government is considering a reconstruction and rehabilitation program following a peace accord to help build peace, restore service delivery, and revive economic activity throughout the country. The peace accord will allow long-term strategic development objectives to be addressed effectively. The CSP is fully aligned with these efforts and thus remains relevant.

In view of the political transition, ADBs assistance program should be more responsive and flexible to meet the Governments short-term development needs and priorities while remaining within the CSPs framework. The country program therefore needs to be shorter, 12 years. The tentative country program for 20072009 comprises nine firm and two standby loans and aims to reduce poverty by supporting institutional and policy reforms and operations in road transport, rural and urban infrastructure (water supply, waste management), energy, education, finance, reconstruction and rehabilitation, public finance and economic management, and agriculture. The proposed mediumto long-term program is tentative and will remain under review to ensure proper sequencing and political relevance. In particular, the 2008 2009 program will be closely reviewed with the Government against the evolving political and economic context during the forthcoming country program confirmation mission and the country programming mission. Depending on progress in the peace talks and Nepal Development Forum, ADB may be requested, along with other donors, to provide post-conflict assistance beyond the reconstruction

The tentative country program for 20072009 comprises nine firm and two standby loans and aims to reduce poverty by supporting institutional and policy reforms and operations in road transport, rural and urban infrastructure (water supply, waste management), energy, education, finance, reconstruction and rehabilitation, public finance and economic management and agriculture. The program is in line with the Medium-Term Strategy II priority sectors and subsectors.

External Funding Coordination and Partnership Arrangements especially those relating to engineering design, would be financed directly by ADB to ensure coherence, timeliness and technical soundness. Close coordination was maintained through regular contact and dialogue with the major development partners, and a special effort was being made to involve development partners early on in the identification stage of new projects. Aid coordination and the harmonization of government-donor practices have become particularly important. Donor coordination remains effective, with regular meetings of the local donor group, various thematic groups, and the Basic Operating Guidelines Group to assess the evolving political and security situation and its implications for development activities. There is still significant room to better harmonize government-donor practices. While harmonizing local procurement procedures has made significant progress, harmonizing international procurement procedures remains challenging and constrains ADBs participation in sector-wide, program-based approaches with other donors. ADBs participation in such approaches would be useful for developing specific sectors and furthering donor harmonization. Close and stronger government-donor engagement is needed on development effectiveness as stipulated in the Paris Declaration. While MfDR is a key instrument for development effectiveness, most donors in Nepal are unaware of it. ADB is working with donor partners to be more focused on harmonizing support for building the capacity of weak institutions. ADB is taking the lead in

Appendix 4

59

Item

Strategic Focus

Country Operations Business Plan 20082010

The political and security context in Nepal has changed since the preparation of the Nepal CSP 2005 2009 in 2004 and its review last year. The decade-long conflict has come to an end, and the country is moving toward lasting peace, but the underlying causes of poverty remain unchanged. The conflict-sensitive implementation strategy adopted in the CSP has facilitated the effective and safe implementation of ADBs operations during the conflict period. Since Nepals Tenth Five Year Plan FY2003FY2007 ended in mid-July 2007, the Government prepared a 3year interim development plan rather than an Eleventh Five Year Planto address development challenges during the transitional period. The potential for long-term strategic development in Nepal and pursuit of the CSPs objectives has increased as a result of the peace accord, the interim constitution and the formation of the Parliament. However, Nepal will remain in a conflict environment until lasting

Directions for Lending and Nonlending Operations and rehabilitation project planned for 2007. While ADB is committed to providing such assistance, no new assistance has been included in 20082009 program, since timing is difficult to predict and the resource requirements are not known. However, ADB is undertaking background work to assess rehabilitation and reconstruction needs, which will help guide 2008 2009 programming. The nonlending program for 20072009 has been adjusted to reflect the modified lending program and to accommodate priority Government requests for institutional and sector capacity development in the changed context. The lending and nonlending program for 20082010 has been adjusted to reflect the Governments priorities in the current transitional period, the expected annual allocation, the performance of specific sectors, and project preparedness. The tentative country program for 20082010 was discussed and preliminarily agreed with the Government. However, the challenges and political milestones ahead mean program will need to retain maximum flexibility, so the 2010 pipeline in particular should be considered indicative at this stage. The 20082010 program includes 10 firm and 2 standby projects in the agriculture; education; finance; transport and communications; energy; water supply, sanitation and waste management; and law, economic management, and public policy. Support in these sectors is crucial to address acute poverty and is aligned with the Governments priority sectors. The proposed nonlending program for 20082010 comprises 12 project preparatory TA

Linkage to Poverty Reduction

External Funding Coordination and Partnership Arrangements involving other donors in the Government-led MfDR process. This will improve development effectiveness and enhance absorptive capacity for development assistance.

60
Appendix 4

The CSP includes a framework comprising monitoring indicators for evaluation and midcourse adjustments, if needed. The CSPs results framework was updated in March 2007 with information obtained from the National Planning Commission and the relevant line ministries. The Government has taken some encouraging steps to develop core elements of resultsbased management for planning, budgeting, implementation, and monitoring. The Government has started poverty-based resource allocation to local bodies and is strengthening the monitoring and evaluation system in key ministries to streamline results-based management. Following the establishment of a central poverty monitoring and analysis system, the Government has prepared a district poverty monitoring and analysis system for assessing development interventions and their local impact.

The 2006 country portfolio review mission, conducted jointly by the Government, JBIC, World Bank and ADB, was a results-based exercise. The review assessed whether ADBs portfolio has been effectively contributing to CSP outcomes and discussed the necessary corrective actions for achieving better results. The preparation of SRPs was an important output of the review, having been prepared for those sectors in which ADB provides significant assistance in all developing member countries falling under ADBs South Asia Department (i.e., Bangladesh, Bhutan, India, Maldives, Nepal and Sri Lanka). The sectors include (i) transport and communications; (ii) energy; (iii) education, (iv) agriculture and rural development; (v) finance and governance; and (vi) water supply, sanitation, and urban development.

Directions for Lending and External Funding Coordination Linkage to Poverty Reduction Nonlending Operations and Partnership Arrangements projects; 8 institutional development peace is achieved. Therefore, ADB TA projects; and 3 economic, will continue to carefully monitor the thematic, and sector works. The peace process, follow a conflictproposed annual indicative planning sensitive approach in its operations, figure for the nonlending program is and closely coordinate with other donors. up to $4.0 million. Apart from the ADF trust funds and the Japan Special Fund, other trust funds available within ADB and from cofinancing will be explored. The programmed nonlending activities focus on (i) provide support to strengthen the institutional capacity of the Government and (ii) prepare the future lending program. Grants may be allocated to either standalone projects or blended projects with both loan and grant financing with distinct grant-funded activities. Accountability obligations under grant financing have been fully discussed with the Government, which has expressed its firm commitment to these obligations. In particular, ADF grant financing will allow the Government to continue its poverty-reduction initiatives much more effectively. ADB = Asian Development Bank, ADF = Asian Development Fund, CSP = country strategy and program, CSPU = country strategy and program update, DANIDA = Danish International Development Agency, DFID = Department for International Development, FY = fiscal year, GTZ = Deutsche Gesellschaft fr Technische Zusammenarbeit, JBIC = Japan Bank for International Cooperation, JICA = Japan International Cooperation Agency, MfDR = managing for development results, NRM = Nepal Resident Mission, SRP = sector results profiles, TA = technical assistance, UNDP = United Nations Development Programme, UNICEF = United Nations Children's Fund. Sources: Country Strategy and Program Update: Nepal (20022004), Country Strategy and Program Update: Nepal (20032005), Country Strategy and Program Update: Nepal (20042006), Country Strategy and Program: Nepal (20052009), Country Operations Business Plan: Nepal (20072009), and Country Operations Business Plan (20082010). Item Strategic Focus

Appendix 4

61

62

Appendix 5

ASIAN DEVELOPMENT BANKS LENDING AND NONLENDING ASSISTANCE TO NEPAL, 200420081 Table A5.1: ADB's Sovereign Loans to Nepal, by Sector, 20042008
Loan No. Project Title Amount ($ million) 40.0 20.0 10.0 70.0 20.0 30.0 50.0 56.0 56.0 20.0 20.0 196.0 Approval Date 24 Sept. 2004 17 Nov. 2004 16 Dec. 2004 25 Nov. 2004 1 Dec. 2006

A. Agriculture and Natural Resources 2092(SF) Decentralized Rural Infrastructure and Livelihood 2102(SF) Community-Managed Irrigated Agriculture Sector 2143(SF) Gender Equality and Empowerment of Women Subtotal (A) B. Education 2111(SF) Skills for Employment 2277(SF) Education Sector Program I Subtotal (B) C. Finance 2268(SF) Rural Finance Sector Development Cluster Program (Subprogram I) Subtotal (C) D. Transport and Communications 2097(SF) Subregional Transport Facilitation Subtotal (D) Total
ADB = Asian Development Bank, No. = number, SF = Special Funds resources. Source: ADB loan, technical assistance, grant, and equity approvals database.

26 Oct. 2006 4 Nov. 2004

Approvals from 1 January 2004 until 31 December 2008. The Asian Development Bank (ADB) revised its project classification system in 2009 (effective January 2009) to support the monitoring of the implementation of priorities under ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank 2008 2020. Manila. Projects approved from January 2009 onwards will follow the new classification system (including sector and subsector classifications). Since the projects under country assistance program evaluation review were approved prior to 2009, they follow the 2004 classification system.

Appendix 5

63

Table A5.2: ADB's Grants to Nepal by Sector, 20042008

Grant Project Name No. A. Agriculture and Natural Resources 0063 Commercial Agriculture Development 9101 Improving the Livelihoods of Poor Farmers and Disadvantaged Groups in the Eastern Development Region Subtotal (A) B. Education 0065 Education Sector Program I-Capacity Development Project 0105 Education Sector Program Cluster (Subprogram II) Program Grant Subtotal (B) C. Finance 0059 Rural Finance Sector Development Cluster Program Subtotal (C) D. Health, Nutrition, and Social Protection 9110 Strengthening Decentralized Support for Vulnerable and Conflict-Affected Families and Children Subtotal (D) E. Transport and Communications 0051 Road Connectivity Sector I 0099 South Asia Subregional Economic Cooperation Information Highway 0106 Information and Communication Technology Development Subtotal (E) F. Law, Economic Management, and Public Policy 0118 Governance Support Program (Subprogram I) Subtotal (F) G. Multisector 0093 Rural Reconstruction and Rehabilitation Sector Development Program (Project Grant) 0094 Rural Reconstruction and Rehabilitation Sector Development Program (Program Grant) 0093 Rural Reconstruction and Rehabilitation Sector Development Program (Supplementary) Subtotal (G) Total
Asian Development Bank = ADB, No. = number. Source: ADB loan, technical assistance, grant, and equity approvals database.

Amount ($ million) 18.0 1.0 19.0 2.0 8.0 10.0 8.7 8.7 2.0 2.0 55.2 9.0 25.0 89.2 106.3 106.3 50.0 50.0 20.0 120.0 355.2

Approval Date 16 Nov. 2006 13 Dec. 2006

1 Dec. 2006 24 Jan. 2008

26 Oct. 2006 10 Oct. 2007

10 Aug. 2006 17 Dec. 007 28 Jan. 2008 22 Oct. 2008 12 Dec. 2007 12 Dec. 2007 11 Nov. 2008

64

Appendix 5

Table A5.3: ADB Approved Technical Assistance to Nepal, by Sector, 20042008

TA No. Project Title A. Agriculture and Natural Resources 4353 Promoting Pro-Poor and Gender-Responsive Service Delivery 4397 Capacity Building in Rural Infrastructure Institutions 4774 Economic and Social Inclusion of the Disadvantaged Poor Through Livelihood Enhancement with Micro-Irrigation 4969 Strengthening Land Administration Services Subtotal (A) B. Education 4326 Education Sector Development Policy and Strategy 4326 Education Sector Development Policy and Strategy (Supplementary) 4326 Education Sector Development Policy and Strategy (Supplementary) 4326 Preparation of Education Sector Development Policy and Strategy (Supplementary) 4754 Education Sector Development Program I 7025 Education Sector Program (Subprogram III) Subtotal (B) C. Energy 4492 Restructuring of Nepal Electricity Authority 4493 Rural Electrification and Renewable Energy 4985 West Seti Hydroelectric 4997 Promoting Private Sector Participation in the Power Sector 7076 Transmission and Distribution Project 7176 Electricity Connectivity and Energy Efficiency Subtotal (C) D. Finance 4857 Capacity Building in Rural Finance Institutions 4857 Capacity Building in Rural Finance Institutions (Supplementary) 7196 Rural Finance Sector Development Cluster Program (Subprogram II) Subtotal (D) E. Health, Nutrition and Social Protection 4759 Reaching the Most Disadvantaged Groups in Mainstream Rural Development Subtotal (E) F. Law, Economic Management and Public Policy 4422 Preparation of National Resettlement Policy Framework 4460 Strengthening National Accounts System 4752 Regional Development Strategy 4834 Governance Reforms and Decentralization Cluster Program I 4905 Supporting Preparation of the 3-Year Interim Development Plan 4962 Support to Anticorruption Institutions 7042 Economic Policy Network II 7111 Knowledge Transfer for Public Procurement 7158 Strengthening Capacity for Managing for Development Results Amount ($) 200,000 400,000 450,000 350,000 1,400,000 150,000 50,000 150,000 110,000 600,000 600,000 1,660,000 400,000 600,000 300,000 600,000 150,000 150,000 2,200,000 500,000 600,000 400,000 1,500,000 685,000 685,000 150,000 350,000 760,000 500,000 300,000 400,000 500,000 500,000 500,000 28 Oct. 2004 3 Dec. 2004 21 Dec. 2005 31 Aug. 2006 18 Dec. 2006 30 Aug. 2007 14 Dec. 2007 31 Jul. 2008 22 Oct. 2008 22 Dec. 2005 Approval Date 7 Jul. 2004 24 Sept. 2004 20 Mar. 2006 26Sept. 2007

14 Apr. 2004 15 Oct. 2004 20 Dec. 2004 12 Apr. 2005 21 Dec. 2005 12 Dec. 2007

18 Dec. 2004 17 Dec. 2004 5 Nov. 2007 30 Dec. 2007 21 Apr. 2008 19 Nov. 2008 26 Oct. 2006 8 Dec. 2008 10 Dec. 2008

Appendix 5

65

Project Title Strengthening Capacity for Macroeconomic Analysis Strengthening Capacity for Managing Climate Change and the Environment Subtotal (F) G. Transport and Communications 4347 Transport Connectivity Sector 4760 Enhancing Poverty Reduction Impact of Road Projects 4772 Preparation of Civil Aviation Sector Strategy 4825 Capacity Building in Road Feasibility Study and Construction and Contract Management 4833 Information and Communications Technology Development 4842 North-South Fast Track Road 7031 Civil Aviation Airport 7135 Enhancing Project Readiness for NorthSouth Fast Track Road Connectivity (PPP) Subtotal (G) H. Water Supply, Sanitation, and Waste Management 4096 Kathmandu Valley Water Management Support (Supplementary) 4776 Enabling the Private Sector to Undertake Poverty-Focused Water Distribution and Strengthening of Institutional Reforms in Kathmandu Valley 4893 Kathmandu Valley Water Distribution, Sewerage, and Urban Development 4972 Improved Water Quality, Sanitation, and Service Delivery in Emerging Towns Sector Development Program 7007 Supporting Capacity Development for Water Services Operations and PublicPrivate Partnership in Kathmandu Valley Subtotal (H) I. Multisector 3625 Second Rural Infrastructure Development (Supplementary) 4765 Operationalization of Managing for Development Results 4767 Capacity Building for Gender Equality and Empowerment of Women 4919 Rural Reconstruction and Rehabilitation Sector Development Program 7182 Secondary Towns Integrated Urban Environmental Improvement Subtotal (I) Total

TA No. 7165 7173

Amount ($) 675,000 500,000 5,135,000 600,000 350,000 150,000 300,000 600,000 850,000 750,000 225,000 3,825,000 100,000 720,000 960,000 720,000 2,500,000

Approval Date 04 Nov. 2008 18 Nov. 2008

4 Jun. 2004 3 Jan. 2006 20 Mar. 2006 10 Aug. 2006 30 Aug. 2006 15 Sept. 2006 14 Dec. 2007 26 Sept. 2008

12 Jan. 2004 28 Mar. 2006 13 Dec. 2006 28 Sept. 2007 10 Dec. 2007

5,000,000 34,000 400,000 300,000 500,000 846,000 2,080,000 23,485,000 23 Dec. 2004 13 Feb. 2006 28 Feb. 2006 2 Feb. 2007 2 Dec. 2008

Asian Development Bank = ADB, No. = number, PPP = public-private partnership, TA = technical assistance. Source: ADB loan, technical assistance, grant, and equity approvals database.

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Appendix 5

Table A5.4: Economic, Sector and Thematic Work for Nepal, 20042008
Year 2004 Title Asian Development Outlook Asian Development Outlook Update Country Environment Analysis for Nepal Institutional Reform Assessment and Strategies Nepal Private Sector Assessment Quarterly Economic Review Transition and Post-Conflict Strategy in Nepal Asian Development Outlook Ethnic and Caste Diversity: Implications for Development Managing the Debt: An Assessment of Nepals Public Debt Sustainability Measuring the Economic Costs of Conflict: The Effect of Declining Development Expenditure Nepal Macroeconomic Model Nepal Public Debt Sustainability Analysis Political and Security Assessment Update Public Finance Management Assessment Quarterly Economic Review Regional Strategy for Development Social Protection Study Asian Development Outlook An Empirical Analysis of Conflict in Nepal An Evaluation of the Rural Microfinance Development Centre as a Wholesale Lending Institution Assessment of the Project Implementation Environment in Nepal Environmental Assessment of Nepal: Emerging Issues and Challenges Macroeconomic Impact of Higher Oil Prices in Nepal NorthSouth Transit Corridor Study PublicPrivate Partnership Policy in the Power Sector of Nepal Quarterly Economic Update Rural Development Strategy and Investment Program School Sector Approach Asian Development Outlook Asian Development Outlook Update Country Performance Assessment Effectiveness of user Group Approach to Rural Development Financial Sector Strategy Governance Assessment Land Acquisition, Compensation, and Resettlement in Development Projects Optimal Pricing in Public Utilities Poverty Reduction through Social Inclusion in Infrastructure Quarterly Economic Update Rural Urban Divide Study Study on Streamlining the Procurement System of the Department of Roads Trade Unions in the Nepal Civil ServiceAssessment of Their Influence/Impact on the Civil Service and Recommendations on Their Future Role Asian Development Outlook Asian Development Outlook Update Assessment of the Sanitation Sector in Nepal Country Performance Assessment Gender Working Paper Impact of Rural Roads in Commercialization of Nepalese Agriculture

2005

2006

2007

2008

Appendix 5

67

Year

Title Land Management in Nepal Money Down the Pan? Community Level Models for Financing Sanitation in Rural Nepal, A Sector Review Poverty Assessment Prioritization of Community Demand through the Perspective of PovertyWater Supply Proliferation of Bilateral and Multilateral Trade Agreements in South AsiaImplications for South Asia Free Trade Agreement Quarterly Economic Update Sector Assessment for the Country Partnership Strategy South Asia Economic ReportForeign Direct Investment in South Asia Voices from the Field II (On the Road to Inclusiveness)

Source: Asian Development Bank South Asia Department.

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Table A5.5: Approved Loans and Grants vs. Lending Pipeline, By Sector, 20052009 (amount in $ million)
20052009 CSP 20052008 20052008 % Share of % Share of % Share of COBP 2009 2009 Sector Lending Actual 20052008 20052008 20052008 Lending Actual a Approvals Pipeline to Total Actual to Total Actual to Pipeline Pipelineb Approvals Pipeline No. Amt. No. Amt. No. Amt. No. Amt. No. Amt. No. Amt. No. Amt. ANR 2 40.0 2 19.0 12.5 7.6 14.3 4.6 100.0 47.5 1 17.0 0 0.0 EDU 2 33.0 3 40.0 12.5 6.3 21.4 9.6 150.0 121.2 1 45.0 0 0.0 ENE 3 115.0 0 0.0 18.8 21.9 0.0 0.0 0.0 0.0 0 0.0 0 0.0 FIN 2 65.0 2 64.7 12.5 12.4 14.3 15.5 100.0 99.5 0 0.0 0 0.0 c 0 0.0 1 2.0 0.0 0.0 7.1 0.5 ** ** 0 0.0 0 0.0 HNSP LEMPP/Governance 2 91.5 1 106.3 12.5 17.4 7.1 25.5 50.0 116.2 0 0.0 0 0.0 TNC 4 150.0 3 64.2 25.0 28.6 21.4 15.4 75.0 42.8 2 80.0 0 0.0 WSS 1 30.0 0 0.0 6.3 5.7 0.0 0.0 0.0 0.0 1 45.0 0 0.0 MSd 0 0.0 2 120.0 0.0 0.0 14.3 28.8 ** ** 0 0.0 1 25.6 Total 16 524.5 14 416.2 100.0 100.0 100.0 100.0 87.5 79.4 5 187.0 1 25.6 Amt. = amount; ANR = agriculture and natural resources; CSP = country strategy and program; COBP = country operations business plan; EDU = education; ENE = energy; FIN = finance; HNSP = health, nutrition, and social protection; LEMPP = law, economic management, and public policy; MS = multisector; No. = number; TNC = transport and communications; WSS = water supply, sanitation, and waste management. ** Projects were approved for the sector but these were not programmed. a Based on the indicative assistance pipeline for lending products in the Nepal Country Strategy and Program 20052009, the Nepal Country Operations Business Plan 20072009, and the Nepal Country Partnership Strategy Midterm Review 20052009. This excludes standby loans. The CSP 20052009 had the following priority sectors: (i) agriculture and rural development; (ii) education; (iii) energy; (iv) finance; (v) transport and communications; (vi) water supply, sanitation, and urban development; and (vii) governance. b Based on the Indicative Rolling Country Operations Business Plan 20092011, but excludes standby loans and grants, as well as four grants classified as Regional Cooperation (where two are firm grants and two standby grants). The Government requested ADB to consider increasing financing for two of these grants to cover the expected significant investment needs. c This sector is included in the CSP 20052009. No lending was included in the pipeline, but a grant was approved in 2007. d There were no multisector loans and grants in the CSP 20052009 pipeline for lending products but several multisector loans and grants were approved during the 2005 2008 period. Sources: Loan, technical assistance, grant, and equity approvals database; Nepal Country Strategy and Program 20052009; Nepal Country Operations Business Plan 20072009; Nepal Country Partnership Strategy Midterm Review 20052009; and Indicative Rolling Country Operations Business Plan 20092011.

Appendix 5

PARTNERING AND DONOR COORDINATION ACTIVITIES AND PROGRAMS

Group/Activity/Program Advisory Committee for community-based rural water supply and sanitation project (for project preparatory TA 3844-NEPa) Description The TA advisory committee periodically reviews the project's progress and resolves any issues that may arise during implementation. Members Representatives from the Ministry of Physical Planning and Works, Ministry of Local Development, Ministry of Finance, National Planning Commission, Ministry of Health, DFID, UNICEF, Department of Water Supply and Sewerage, and ADBs Nepal Resident Mission ADB, DFID, GTZ, JICA, Swiss Development Cooperation, World Bank, and United Nations World Food Program All bilateral and multilateral agencies in Nepal ADB Role Member

Assistance to the Rural Transport Sector Basic Operating Guidelines Group

Several donors signed a statement of intent with the Government to move toward a sector-wide approach in assisting Nepal's rural transport sector. The Basic Operating Guidelines Group assesses with the Nepal Development Group the revolving political and security situation and its implications for development activities, which include sharing experiences in field operations and discussing operational and sectoral issues and approaches. Since 2001, joint portfolio reviews have been conducted to assess portfolio performance and harmonize efforts to strengthen the monitoring and reporting systems of projects funded by multilateral and bilateral donors. The Nepal portfolio performance review is a yearly activity of representatives from the Government and selected multilateral donors that aims to examine the portfolio performance as measured by key indicators, discuss Government procedures and policies to strengthen portfolio performance and contribute to enhanced development impact, assess progress towards CPS outcomes, assess the progress of the portfolio performance review action plan, and prepare a new action plan to reflect recent portfolio performance assessments. The group of selected multilateral donors aims to facilitate coordination and collaboration in key areas of assistance. The group piloted the principles of good international engagement in Nepal in 2007. Two TA projects financed activities related to awareness building and program monitoring under the Governments Governance Reform Program.

Member

Member

Country Portfolio Performance Reviews

Government of Nepal, ADB, World Bank, and JBICand recently with DFID, DANIDA, Finnish Department for International Development Cooperation, and Norwegian Agency for International Development as observers in 2007

Chair

Country-Level Joint Action Plans Donor Group Governance Reform Program (Loan 1861-NEPb)

ADB, DFID, and GTZ Government of Nepal, OECD-DAC, ADB, and selected multilateral and bilateral donors Government of Nepal, ADB, World Wildlife Fund, and Swiss Development Corporation

Member Member ADB assisted the Government in formulating the Governance Reform Program

Appendix 6

69

Group/Activity/Program Managing for Development Results

Description Efforts are being undertaken to implement MfDR nationally, but they have yet to be fully institutionalized or adapted for sectoral and local MfDR implementation.

Members Government of Nepal, ADB, and donor agencies with activities in Nepal

Nepal Donor Group

Operations Coordination Meetings Project Managers' Meetings Public Sector Management Program (Loan 2002-NEPc)

Reviews conflict and development issues in Nepal and meets every 2 months. The Nepal Donor Group also oversees 12 thematic subgroups, many of which are chaired or co-chaired by the Government. ADB collaborated with the World Bank through frequent operational cooperation meetings to achieve strategic alignment and synergies in program formulation and implementation. Bi-monthly project managers' meetings are held to address implementation issues of ADB-assisted projects. The Public Sector Management Program aims to support poverty reduction by facilitating the implementation of the Governments poverty-reduction strategy embodied in the 10th Five-Year Plan. To achieve the objective, the program addresses some key policy and institutional constraints to strengthen the Government's resource position over the medium term and lay the foundation for accelerating pro-poor growth. DFID has agreed to provide TA support for the program and finance the services of an agriculture and natural resource expert in the Nepal Resident Mission. The TA aims to help the Government (i) develop and implement an effective privatization and

All bilateral and multilateral agencies in Nepal ADB and World Bank

ADB Role ADB takes the lead in assisting the Government via two TA projects (i) to assess MfDR readiness, develop MfDR strategy, adopt MfDR as a public sector management practice, and institutionalize MfDR approaches within the Government and (ii) to strengthen M&E systems and capacity. ADB collaborates with other key donor partners in supporting the Government's efforts to reorient its reform and development agenda to achieve results and harmonize donor practices as a key part of their overall assistance. Co-chair of agriculture and rural development subgroup and energy subgroup Member

70
Appendix 6

Government of Nepal, ADB, and project managers ADB and DFID

Co-chair Cofinancing arrangement with DFID through TA support

Group/Activity/Program

Reform and Development Group

Regional Cooperation Initiatives

Secondary Education Support Program (Loan 1917-NEPd)

Sector-Wide and ProgramBased Approaches

Description liquidation process, (ii) build capacity in the Government for undertaking divestment, (iii) manage and supervise the transactions, (iv) implement an effective and fair policy for labor retrenchment, and (v) support overall management of the program. The Reform and Development Group is a joint governmentdevelopment partner task force that reviews implementation progress and helps the Government to formulate its reform agenda, including the immediate action plan. Regional cooperation initiatives such as the South Asia Association for Regional Cooperation and the South Asia Subregional Economic Cooperation aim to further enhance growth potential through regional cooperation among Bangladesh, Bhutan, India, and Nepal. The strategy is to proceed first with project-level initiatives involving bilateral and trilateral linkages. Areas of potential cooperation include multimodal transport and communication, energy (particularly hydropower development), trade and investment, natural resource use and environmental management, and tourism. ADB works jointly with DANIDA to finance the first phase of a Secondary Education Support Program. Progress to date includes a joint appraisal for the project in June 2002. The project aims to (i) improve the learning environment by upgrading the physical infrastructure in schools and (ii) enhance teacher capability through the training of trainers and teachers, improved curriculum, and instruction materials. Sector-wide and program-based approaches pool donors' assistance through joint financing arrangements to implement programs and projects. Sector-wide and program-based approaches provide budgetary support to Government priorities for earmarked activities and budget items. Progress is monitored through periodic joint reviews that include all donors and the Government.

Members

ADB Role

A select group of development partners that actively support the Government's reform agenda Governments of South Asia DMCs, various stakeholders, and ADB

Member

Lead convener and member

ADB and DANIDA

Cofinancing arrangement with DANIDA

Government of Nepal, ADB, and donor agencies with activities in Nepal

Member

Appendix 6

ADB = Asian Development Bank, CPS = country partnership strategy, DANIDA = Danish International Development Agency, DFID = Department for International Development of the United Kingdom, DMC = developing member country, GTZ = Deutsche Gesellschaft fr Technische Zusammenarbeit, JBIC = Japan Bank for International Cooperation, JICA = Japan International Cooperation Agency, M&E = monitoring and evaluation, MfDR = Managing for Development Results, NEP = Nepal, OECD-DAC = Organisation for Economic Cooperation and DevelopmentDevelopment Assistance Committee, TA = technical assistance, UNICEF = United Nations Children's Fund. a ADB. 2002. Technical Assistance to the Kingdom of Nepal for Preparing the Community-Based Water Supply and Sanitation Project. Manila (TA3844-NEP, for $0.75 million, approved on 13 March). b ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Governance Reform Program. Manila (Loan 1861-NEP[SF], for $30.0 million, approved on 27 November).

71

ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the Kingdom of Nepal for the Public Sector Management Program. Manila (Loan 2002-NEP[SF], for $35.0 million, approved on 8 July). d ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Secondary Education Support Project. Manila (Loan 1917-NEP[SF], for $30.0 million, approved on 20 September). Sources: Country Operational Business Plans (20072009 and 20082010), Country Strategy and Program (20052009), Country Strategy and Program Update (20022004, 20032005, 20042006), Country Partnership Strategy Midterm Review (20052009), and Nepal portfolio performance reviews (20062007).

72
Appendix 6

Appendix 7

73

ADB ASSISTANCE PROGRAMS AND PERFORMANCE, 20042008 A. Introduction

1. Nepal is one of the founding members of the Asian Development Bank (ADB). From 19681 until December 2008, ADB approved $2.3 billion to finance 111 sovereign loans, $390.6 million for 17 grant projects, and $132.1 million for 279 technical assistance (TA) projects. ADB also provided nonsovereign loans and equity investments amounting to $58.6 million from 1989 to 1996.2 Except for one blended loan3 derived partly from ordinary capital resources (OCR), all sovereign loans to Nepal are funded by the Asian Development Fund (ADF).4 Nonsovereign loans and equity investments were funded by OCR, while the main funding source for TA projects is ADBs technical assistance special fund (TASF). 1. Sovereign Loans and Grants

2. During the period 2004 to 2008, ADB provided total assistance of $551.2 million in loans and grants to Nepal consisting of 7 sovereign loans ($196.0 million) and 12 grants ($355.2 million) in seven sectors. The biggest share of financing went to multisector projects (21.8%) followed by projects in transport and communications (19.8%); law, economic management, and public policy consisting mostly of assistance to good governance (19.3%); agriculture and natural resources (16.1%); finance (11.7%); education (10.9%); and health, nutrition, and social protection (0.4%). 3. Portfolio Performance. The disbursement performance of sovereign loans and grants to Nepal showed a marked improvement in recent years. The disbursement ratio improved from 4.4% in 2004 to 18% in 2008 (Table A7.1). As a result, a turnaround was observed in net resource transfer to Nepal from negative $17.3 million in 2004 to $62.4 million in 2006 and further to $63.8 million in 2008. The negative net transfer of resources from 2002 to 2004 was significantly affected by the volatile political situation and armed conflict. The contract awards ratio for both sovereign loans and grants also showed significant improvement from 7% in 2004 to 18.7% in 2006 and 24% in 2008. Further, with the completion at the end of 2008 of the last project considered to be at risk, no project is now considered at risk, which is a marked improvement over having six projects, or 26.1% of the portfolio in 2004, at risk. This, however, excludes the South Asia Subregional Economic Cooperation Information Highway Project, which is still not effective (as of June 2009).

1 2 3

ADBs assistance to Nepal began in 1968 but the country has been a member since ADBs establishment in 1966. The last nonsovereign loan or equity investment approval for Nepal was in 1996. ADB. 1970. Report and Recommendation of the President to the Board of Directors on the Proposed Loans to the Kingdom of Nepal for the Jute Development Project. Manila (Loan 0045/0046-NEP[SF], for $2.0 million from ADF for Loan 0045-NEP[SF] and for $2.0 million from ordinary capital resources for Loan 0046-NEP, approved on 10 December). ADB currently has three country classifications for its DMCs: Group A, eligible for ADF financing only; Group B, eligible for a blend of ADF and OCR financing; and Group C, eligible for OCR financing only. As a category A client, Nepal is eligible to receive ADF lending. ADB adopts the International Development Associations operational per capita gross national income (GNI) cutoff of $1,065 in 2006 US dollars as the income threshold for eligibility to ADF-lending. ADF loans are made with concessionary terms that include grace periods of 810 years, repayment periods of up to 40 years, and an interest rate of 1% during the grace period and 1.5% thereafter.

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Appendix 7

Table A7.1: Portfolio Performance of Loans and Grants to Nepal, (approved from 2004 to 2008)
Item Total Investment Loans Grants Contract Awards and Commitments Achievement Contract Awards and Commitments Ratio Disbursement Achievement Disbursement Ratio Net Resource Transfer Projects "at risk" Unit $ million $ million $ million 2004 713.6 713.6 0.0 2005 648.3 648.3 0.0 2006 770.7 686.8 83.9 2007 849.0 656.1 192.9 2008 919.0 595.7 323.3

$ million %

38.2 7.0

69.6 15.2

101.6 18.7

95.7 22.0

145.3 24.0

$ million % $ million Number %

22.0 4.4 (17.3) 6.0 26.1

43.7 7.7 2.9 7.0 30.4

108.0 18.0 62.4 4.0 16.0

102.3 18.3 49.4 3.0 14.0

127.1 18.0 63.8 0.0 0.0

( ) = negative. Source: Asian Development Bank South Asia Department.

2.

Sovereign and Nonsovereign Loans

4. Sovereign Loans. ADBs cumulative lending assistance to Nepal since 1968 makes the country the 11th largest recipient of sovereign loans among 45 developing member countries (DMCs), but it is ranked 15th during the country assistance program evaluation (CAPE) period. From 2004 to 2008, ADBs sovereign loans to Nepal represented 34.1% of total approved assistance to the country. Of the sovereign loans approved during the period, five were project loans and two were cluster program loans. 5. ADBs lending assistance to Nepal during the CAPE period focused on four sectors. Of the total sovereign loans approved from 2004 to 2008, agriculture and natural resources sector received the largest share at $70.0 million (35.7%) and highest number of loans (three of the seven sovereign loans approved for the period or 42.8%). Finance received $56.0 million, or 28.6% of total approved lending for the period, followed by education with $50.0 million (25.5%), and transport and communications with $20.0 million (10.2%) (Figure A7.1). During the 5-year period under review, 2004 recorded the highest inflow of sovereign loans from ADB with the focus of assistance in agriculture and natural resources (63.6%), education (18.2%), and transport and communications (18.2%).
Figure A7.1: Sector DistributionAmount of ADB's Sovereign Loans to Nepal (approved from 2004 to 2008)
Transport and Communications 10.2% Agriculture and Natural Resources 35.7% Finance 28.6%

Education 25.5%

Source of basic data: Asian Development Bank loan, technical assistance, grant, and equity approvals database.

Appendix 7

75

6. In terms of targeting classifications5 of the sovereign loans approved during the CAPE period, 71.4% were classified as general intervention and 28.6% were classified as targeted intervention (Table A7.2). In terms of loan amount per project, those with targeted interventions received more at $35.0 million per project, while those with general interventions received $25.2 million per project. Further, a loan or project may be assigned up to three themes.6 From 2004 to 2008, Nepals projects were funded by only one loan each and had an average of 1.9 themes. Sustainable economic growth was the most recurrent theme applied to 30.8% of projects, with (i) inclusive social development and (ii) gender and development each having a 23.1% share. Governance was the theme of 15.4% and capacity development 7.7%. However, in terms of amount, loans with governance as a theme garnered more than those loans that had gender and development as a theme. Table A7.2: Targeting and Thematic Classifications of Loans and Projectsa (approved from 2004 to 2008) (Amount in $ million)
Loan Classification A. By Targeting Classification 1. Targeted Intervention 2. General Intervention Total Distribution of Loans, by Number ADF 2 5 7 % 28.6 71.4 100.0 Distribution of Loans, by Amount ADF 70.0 126.0 196.0 % 35.7 64.3 100.0 Projects Number 2 5 7
b

% 28.6 71.4 100.0

B. By Thematic Classificationc 1. Sustainable Economic Growth 4 30.8 136.0 35.6 4 30.8 2. Governance 2 15.4 76.0 19.9 2 15.4 3. Inclusive Social Development 3 23.1 90.0 23.6 3 23.1 4. Environmental Sustainability 0 0.0 0.0 0.0 0 0.0 5. Gender and Development 3 23.1 50.0 13.1 3 23.1 6. Private Sector Development 0 0.0 0.0 0.0 0 0.0 7. Regional Cooperation 0 0.0 0.0 0.0 0 0.0 8. Capacity Development 1 7.7 30.0 7.9 1 7.7 Theme Factor 1.9 1.9 1.9 ADF = Asian Development Fund. a Excludes grants. b A project may be financed by multiple loans. In the case of Nepal, each project was financed by only one loan. c A project may be assigned up to three themes. The theme factor shows the average number of themes per loan. Note: 1. All sovereign loans under CAPE review were approved from 2004 to 2008, and followed the targeting and thematic classifications based on Staff Instructions on Updating the Project Classification System (2004). Since the Asian Development Bank revised its project classification system in 2009, loan projects approved from January 2009 onwards will follow the 2009 classification system. 2. Loan approvals to Nepal were until 2006 only. Source: Asian Development Bank's project processing information system.
5

Since 2004, all loans followed the targeting and thematic classifications based on Staff Instructions on Updating the Project Classification System 2004. Public sector loans have since been classified in terms of (i) targeted or general interventions in relation to the approach to poverty, (ii) thematic areas, and (iii) primary sectors. ADB revised its project classification system effective in January 2009 to support the monitoring of the implementation of priorities under Strategy 2020. Projects approved from January 2009 onwards follow the new classification system. Since the projects under CAPE review were approved prior to 2009, they follow the 2004 classification system. Thematic classification is an important tool for tracking (i) the allocation of ADB operational resources and (ii) the intended purposes and impacts of ADB operations. ADB updated the thematic classification of its operational projects supported by loans, equity, guarantees, and grants effective in July 2004. Theme assignment is not mutually exclusive, so one project can be assigned up to three themes and subthemes. The themes include (i) sustainable economic growth, (ii) governance, (iii) inclusive social development, (iv) environmental sustainability, (v) gender and development, (vi) private sector development, (vii) regional cooperation, and (viii) capacity development.

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Appendix 7

7. Over 20042008, the average time taken for sovereign loans in Nepal to proceed from approval to effectiveness was longer than the standard.7 The time elapsed from loan approval to signing and from signing to effectiveness of Nepals sovereign loans showed a lengthening trend from 2004 to 2008 (Figure A7.2). In 2004, Nepals sovereign loans took an average of 3.7 months from approval to signing, further increasing to 4.6 months in 2006 and 4.7 months in 2008 (Table A7.3). This translates into a 5-year average of 4.4 months from approval to signing, longer than the South Asian average of 3.5 months and the ADB-wide average of 3.8 months (Table A7.4). The same lengthening trend occurred for the average time taken for loans to become effective: 5.3 months in 2004, 6.5 months in 2006, and 6.9 months in 2008. Over the 5year period, Nepals sovereign loans took an average of 6.3 months to become effective, or slightly more than twice the benchmark time period and longer than the South Asian average of 4.6 months and the ADB-wide average of 4.5 months. Nepal's sovereign loans took an average of 10.7 months from approval to effectiveness, or more than twice the current benchmark of 4 months. Delays in loan effectiveness were caused by issues related to compliance with conditions for loan effectiveness, mostly linked to working with nongovernment organizations, civil service organizations, and local communities, which could be very time consuming. The annual report on 2006 portfolio performance8 found that intervening periods between loan signing and loan effectiveness were, on average, slightly longer than those between loan approval and loan signing. However, this is not the case for Nepal, as the average of 3.4 months it took from approval to signing is longer than the average of 3.3 months from signing to effectiveness. To address the issue of start-up delays, the South Asia Department adopted the use of project readiness filters during project processing to avoid carrying start-up delays forward into the actual implementation period. Figure A7.2: Time Elapsed from Loan Approval to Signing and Signing to Effectiveness, 20042008
14 Average Number of Months 12 10 8 6 4 2 0 2004 2005 Approval to Signing 2006 2007 2008 3.7 4.1 4.6 4.9 4.7 5.3 6.2 6.5 6.7 6.9

Signing to Effectiveness

Source: Central Operations Services Office.

Loan approval by ADBs Board of Directors indicates that loan processing has been initiated and completed. Loan documents must be signed by ADB and the borrower once the initial loan conditions, as stipulated in the loan agreement, have been met before implementation can actually begin. Loan signing is normally expected within 30 days following ADB approval and the standard loan agreement provides for 90 days from loan signing to loan effectiveness, for a combined benchmark of 120 days from loan approval to loan effectiveness. ADB. 2006. Annual Report on Loan and Technical Assistance Portfolio Performance for the Year Ending 31 December 2005. Manila. ADB. 2007. Annual Report on 2006 Portfolio Performance. Manila.

Appendix 7

77

8. As of 31 December 2008, Nepal had 20 active sovereign loans in its portfolio, 17 project loans and 3 program loans, amounting to $635.2 million (Table A7.3). The average age of Nepals active loan portfolio was 5.7 years, longer than the South Asian average of 4.1 years and the ADB average of 3.8 years. Over the CAPE period, the average age of Nepals active loans is 4.3 years, longer than the South Asian and ADB-wide average of 3.7 years (Table A7.4). This may be attributed to, among other things, delayed project start-up, project implementation extensions, disruptions in implementation from political or security concerns, and delayed decision-making on policy issues related to project implementation. Nepals active loan portfolio as of 2008 supported projects in seven sectors, for an average of 2.9 loans per sector (Table A7.5). 9. Extensions in loan closing dates have been frequent in Nepals sovereign loan portfolio. All nine9 sovereign loans approved between 1994 and 2003 whose accounts were closed during the CAPE period had extensions to their loan closing dates (Table A7.6). Five of these closed loans had three extensions each, and the rest had two extensions each. All nine closed loans required an extension of more than 1 year, with an average extension of 2 years per loan (Table A7.7). A quick review of available project completion reports (PCRs) revealed that implementation extensions were required because of the late mobilization of contractors and consultants, late start-up or suspension of civil works, and changes in project scope. Other key performance issues included lengthy internal government approval processes, frequent changes in project staff (both in ADB and in the Government), inadequate staffing, and delays in the release of government counterpart funds. 10. Portfolio Performance. As more attention was directed toward improving project management, the performance of contract awards and commitment for program and project loans in Nepal improved from 2004 to 2006, with contract awards and commitments exceeding the projected amount by 54.9% in 2006a significant improvement compared with $38.2 million in 2004, or 51.7% of the target (Table A7.8). A decline occurred in 2007 at $88.4 million, or an 88.1% achievement of the projected $100.3 million in contract awards and commitment. But the 2008 level further declined to $64.5 million, or 82.6% of the projected $78.1 million target for the year. On average, annual contract awards and commitments from 2004 to 2008 were 85.4% of
9

Loans closed in 2004 include: (i) ADB. 1994. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Irrigation Management Transfer Project. Manila (Loan 1311-NEP[SF], for $12.1 million, approved on 13 September), (ii) ADB. 1996. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Second Tourism Infrastructure Development Project. Manila (Loan 1451-NEP[SF], for $16.0 million, approved on 2 July), (iii) ADB. 1996. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Two Technical Assistance Grants to the Kingdom of Nepal for the Kali Gandaki A Hydroelectric Project. Manila (Loan 1452-NEP[SF], for $148.5 million, approved on 23 July), and (iv) ADB. 1996. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Third Livestock Development Project. Manila (Loan 1461-NEP[SF], for $16.9 million, approved on 19 September). No loans were closed in 2005. Loans closed in 2006 include: (i) ADB. 1996. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Rural Infrastructure Development Project. Manila (Loan 1450-NEP[SF], for $11.4 million,approved on 27 June) and (ii) ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the Kingdom of Nepal for the Public Sector Management Program. Manila (Loan 2002-NEP[SF], for $35.4 million, approved on 8 July). Loans closed in 2007 include: (i) ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Governance Reform Program. Manila (Loan 1861-NEP[SF] for $33.2 million, approved on 27 November) and (ii) ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Rural Microfinance Project. Manila (Loan 1650-NEP[SF], for $20.7 million, approved on 8 December). One loan was closed in 2008 (ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Community Groundwater Irrigation Sector Project. Manila (Loan 1609-NEP[SF], for $30.0 million, approved on 26 February).

78

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target. Similarly, the contract award and commitment ratio showed continuous improvement beginning in 2004, when it stood at 7.03%, reaching 24.5% in 2007, the highest since 1998. The contract award and commitment ratio for 2008 dipped slightly to 23.5%. From 2004 to 2008, Nepals average contract and commitment ratio was 18.5%, well below the ADB average ratio of 27.5%. 11. Improvements in disbursement occurred from 2004 to 2008. In fact, 2006 actual disbursements of $108.0 million for both project and program loans exceeded the full-year target by 79.9%, while disbursements in 2007 exceeded projections by 9.3%. In 2008, disbursement achieved 66.3% of the full-year target of $91.8 million (Table A7.9). The disbursement ratio for both project and program loans showed an increasing trend from 2004 onwards, peaking in 2007 at 20.3%. However, this declined in 2008 to 15.4%. Nepals average disbursement ratio over the period 20042008 was 13.6%, much lower than the ADB-wide average of 23.3%. 12. Improvements in disbursement meant the transfer of resources from ADB to Nepal increased sharply from its negative level in 2004 ($17.3 million) to $62.4 million in 2006 (Figure A7.3). Two sizable disbursements for two program loans contributed to this performance. However, substantial loan repayments made in 2007 caused net resource transfers to decline to $43.9 million for the year and decline further to $2.4 million in 2008 owing to a $63.3 million loan service payment made during the period. This, however, was excluding grants (see para 1821). Figure A7.3: Sovereign Loans to NepalDisbursements, Payments, and Net Resource Transfers, 19882008
120,000 100,000

Amount ($ '000)

80,000 60,000 40,000 20,000 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08

(20,000) (40,000)

Loan Disbursements Net Resource Transfers

Loan Service Payments Linear (Net Resource Transfers)

Source of basic data: ADB Controller's Department.

13. Project performance from 2004 to 2008 also showed improvement. On average, 82.2% of ongoing loans in Nepal, or an average of 18 projects per year, were rated satisfactory; 14.3%, or an average of 3 projects per year, were partly satisfactory; and the remaining 3.5% were rated unsatisfactory (Table A7.4). In contrast, of the ongoing ADB-wide projects and programs over the same period, 90.7%, or an average of 467, were rated satisfactory; 5.0%, or an average of 26, were rated partly satisfactory, and 3.5%, or an average of 18, were rated unsatisfactory.

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79

14. The proportion of projects rated at risk10 in Nepals portfolio was higher than the ADBwide average, with 18.6% of projects in Nepal rated at risk from 2004 to 2008, or twice the ADB average of 9.5% over the same period. Among the implementation issues that brought at-risk rating, as noted in the 2008 Portfolio Management Strategy Paper,11 were long start-up delays, slow implementation progress, and the lack of project preparedness or readiness. The proportion of projects rated at risk in Nepals portfolio fell from 26.1% in 2004 to just 5.0% in 2008 (Table A7.3). Moreover, no projects were flagged as potential problem from 2005 onward. 15. The improvement in the proportion of at-risk projects was accompanied by an increase in the average supervision intensity index,12 measured in terms of staff-days per project. The average of staff-days spent per project for project administration missions increased from 30.9 days in 2004 to 38 days in 2008, reflecting the proactive initiatives taken by ADB through the Nepal Resident Mission (NRM) to ensuring smooth project implementation (Table A7.3). Moreover, positive developments in the countrys security situation beginning in 2006 contributed to a significant improvement in the project implementation environment, facilitating the monitoring and supervision of project sites. Another contributing factor is the increased delegation of projects to NRM since 2004, when 30.4% of Nepal's active loan portfolio was administered by NRM. The proportion of loans administered by NRM increased to 50% in 2008, with the rest being administered by headquarters.13 On average, supervision intensity for projects in Nepal was at 31.3 staff-days per project, which is higher than the South Asian average of 25.7 staff-days and the ADB-wide average of 26.1 staff-days (Table A7.4). 16. Efforts to improve ADBs portfolio management in recent years, particularly by NRM, are paying off, as reflected in the decrease in the number of problem projects14 in Nepals sovereign loan portfolio. The combined rating for implementation progress and the achievement of implementation objectives improved, with only one problem project identified in 2008, compared with three in 2007, four in 2006, seven in 2005, and five in 2004 (Table A7.3). On average, 17.8% of Nepals active sovereign loan portfolio over 20042008 was rated as problem projects, compared with 11.0% in South Asia and 8.5% across ADB. The performance ratings of 45 completed projects in Nepal showed that 55.6% had been assessed in PCRs15 as "highly successful," "generally successful," or "successful;" 42.2% were "partly successful;" and 2.2% were "unsuccessful" (Table A7.10). Of the projects assessed as "successful" or better, 28.0% were in agriculture and natural resources, followed by transport and communications (20.0%), energy (16.0%), education (12.0%), water supply, sanitation and waste management (12.0%), industry and trade (8.0%), and multisector projects (4.0%). Evaluation ratings16 of 19 completed
10

Projects that are rated at risk have actual and potential problems. An actual problem is failure to meet criteria for implementation progress and/or development objectives. A project with a potential problem is rated satisfactory on implementation progress and development objectives but exposed to risk factors historically associated with unsatisfactory project performance. Source: Central Operations Services Office. 11 ADB. 2008. Nepal 2008 Portfolio Management Strategy Paper. Manila. 12 Supervision intensity pertains to the total staff-days spent on missions divided by the number of projects reviewed. 13 Sources: Various years of the annual report on loan and technical assistance portfolio performance. 14 Problem projects are those whose implementation progress and implementation objectives are rated partly satisfactory or unsatisfactory in project performance reports. 15 The ratings were based on project completion reports circulated from 1995 to 2008. Completion reports were not required to have ratings prior to 1995. Ratings were based on the old guidelines prior to 2001, when new guidelines were introduced. 16 Project and program performance evaluation reports were prepared for completed projects about 34 years after completion. The ratings were based on project or program performance evaluation reports circulated from 1996 to 2008. In 2000, the Independent Evaluation Department shifted from a three-category rating system (generally successful, partly successful, and unsuccessful) to a four-category rating system (highly successful, successful,

80

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projects showed that 57.9% were assessed as "highly successful," "generally successful," or "successful," while 31.6% were assessed as "partly successful," and 10.5% were "unsuccessful" (Table A7.11). Of the projects rated "successful" or better, 27.3% were in the energy sector, followed by (i) education, (ii) transport and communications, (iii) multisector (each with an 18.2% share); (iv) agriculture and natural resources (9.1%); and (v) industry and trade (9.1%). 17. Nonsovereign Loans and Equity Investments. ADB provided assistance to Nepals private sector with cumulative approvals amounting to $58.6 million in nonsovereign loans and equity investments from 1989 to 1996. The last nonsovereign loan to Nepal was approved in 1996. All these loans have been fully disbursed, only one has been fully repaid, and the rest are either still being repaid or were restructured. The negative net resource transfers have not picked up since 2001 because of the absence of new loans or equity investments since 1997 to balance approvals fully disbursed by 2000. Figure A7.4 shows the disbursements, payments, and net resource transfers of private sector loans to Nepal from 1988 to 2008. Figure A7.4: Nonsovereign Loans to NepalDisbursements, Payments, and Net Resource Transfers, 19882008
20,000 15,000

Amount ($ '000)

10,000 5,000 (5,000) (10,000) (15,000)

Source of basic data: ADB Controller's Department.

3.

Grants

18. ADB has approved a total of 17 grants amounting to $390.6 million since 2001, 12 of which, amounting to $355.2 million, were approved during the CAPE period (Figure A7.5). The total amount of approved grants to Nepal from 2004 to 2008 represented 61.8% of the total approved assistance to the country in the period. ADBs assistance modality to Nepal shifted from lending to grants beginning in 2006 to help the Government finance activities that aim to achieve broad-based growth and in light of the challenges faced by the country at that time. Grants17 have become essential tools in promoting ADBs goal of inclusive growth among DMCs in recent years.

partly successful, and unsuccessful). The four-category rating system has been retrofitted to projects and programs evaluated from 1996 to 1999. 17 Grants are financial resources provided to DMCs to support nationally owned poverty-reduction objectives, for which no repayment is expected. Very poor DMCs that are debt-vulnerable or in post-conflict situations are often

19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08

Loan Disbursements Net Resource Transfers

Loan Service Payments Linear (Net Resource Transfers)

Appendix 7

81

Figure A7.5: Number and Amount of Grants to Nepal (approved from 2004 to 2008)
6 5 Number of Grants 4 3 2 1 0 2004 2005 2006 Number 2007 Amount 2008 160 140 120 100 80 60 40 20 0 Amount ($ million)

Source: Asian Development Bank loan, technical assistance, grant, and equity approvals database.

19. ADB grants to Nepal from 2004 to 2008 focused on seven sectors, with multisector grants receiving the largest share of financing at 33.8% ($120.0 million). This is followed by grants to the law, economic management, and public policy sector at 29.9% ($106.3 million); transport and communications at 25.1% ($89.2 million); agriculture and natural resources at 5.3% ($19.0 million); education at 2.8% ($10.0 million); finance at 2.4% ($8.7 million); and health, nutrition, and social protection at 0.6% ($2.0 million) (Figure A7.6). About 67% of the grants to Nepal were classified as general intervention, and the rest were targeted intervention (Table A7.12). On average, ADBs grants to Nepal had two themes per project. Grants with sustainable economic growth as a theme had the highest share in terms of amount (26.8%), followed by governance (24.4%), inclusive social development (18.9%), capacity development (15.6%), gender and development (12.3%), and private sector development (2.0%). In terms of the number of projects, the themes of sustainable economic growth and inclusive social development each had a 27.6% share, followed by capacity development (20.7%), governance (13.8%), gender and development (6.9%), and private sector development (3.4%). 20. In terms of average grant size by sector, grants to law, economic management, and public policy were the largest at $106.3 million, followed by multisector grants ($40.0 million), and transport and communications grants ($29.7 million). Of the 12 grants approved from 2004 to 2008, ten were funded by ADF IX,18 amounting to $332.2 million and two were funded by the Japan Fund for Poverty Reduction, amounting to $3.0 million. One supplementary grant19 was financed by the Government of the United Kingdom. 21. As of December 2008, Nepal had 10 grants under implementation worth a net amount of $352.2 million. For grants approved from 2004 onwards,20 the elapsed time between approval and effectiveness was close to 4 months. This is significantly lower than the time needed for sovereign loans to progress from approval to effectiveness. An improvement occurred in terms of disbursement, as 90.2% of the target of $73.4 million was achieved in 2008, compared with
unable to afford development finance in the form of loans. (Source: ADB. 2007. Annual Report on 2006 Portfolio Performance. Manila.) 18 The ADF IX grants program may comprise up to 21% of total ADF IX operations, including an allocation of 3% to replenish the technical assistance special fund. 19 The supplementary amount for Grant 0093-NEP: Rural Reconstruction and Rehabilitation Sector Development Program (RRR) of $20 million was approved on 11 November 2008. 20 Excluding Japan Fund for Poverty Reduction-funded grants.

82

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just 34.3% achievement in 2007. Also, 90% of the active grants in 2008 have been rated in project performance reports as satisfactory, and the rest were rated unsatisfactory. 4. Technical Assistance

22. From 2004 to 2008, ADB approved 43 TA projects amounting to $23.5 million and covering a diversity of topics and sectors. The sectoral pattern of TA operations differed with that for lending operations, as projects in law, economic management, and public policy accounted for the largest share of financing (21.9%), followed by water supply, sanitation, and waste management (21.3%); transport and communications (16.3%); energy (9.4%); multisector projects (8.9%); education (7.1%); finance (6.4%); agriculture and natural resources (6.0%); and health, nutrition, and social protection (2.9%) (Figure A7.7). 23. The primary funding source for TA in Nepal is ADBs TASF. Other funding sources include the Japan Special Fund and the Poverty Reduction Cooperation Fund. TASF funded 48.2% of all TA projects approved in the CAPE period, followed by the Japan Special Fund at 31.2%, and other sources making up the remaining 20.6%.21 24. During the CAPE period, $14.3 million was approved for 27 advisory TA projects and $9.2 million for 16 project preparatory TA projects (Figures A7.8 and A7.9). Most of the social infrastructure projects were preceded by project preparatory TA, while most of the advisory TA was for capacity building and institutional strengthening in ministries. Other TA was mainly for sector reviews and strategy development. As of December 2008, there are 31 active TA projects in the Nepal portfolio, 19 advisory and 12 project preparatory, amounting to $18.3 million (Table A7.12). 25. TA Portfolio Performance. TA projects showed continuous improvement in start-up compliance over the CAPE period. The average time from approval to signing shortened from 3.2 months in 2004 to 2.2 months in 2008, with an average of 3.1 months over the 5-year period, which is at par with the ADB-wide average (Tables A7.4 and A7.13). The average time from signing to the fielding of consultants, however, increased from 4.4 months in 2004 to 4.7 months in 2008. TA supervision deteriorated from 2004, which had 11.4 staff-days per project, to 2007, which had 4.2 staff-days per project, owing to implementation issues such as the lack of adequate staff resources and the security situation at project sites. However, supervision intensity improved to 12.3 staff-days per project in 2008, as the project-implementation environment improved. Disbursement of TA funds slowed from $10.3 million in 2004 to $5.5 million in 2008, with undisbursed balance increasing from $8.5 million in 2004 to $12.8 million in 2008. Nepals 2007 Portfolio Performance Review22 noted the need for increased attention to the TA portfolio and highlighted the following issues that affect TA administration: (i) the increased number of TA projects, (ii) the lack of adequate staff resources, (iii) low prioritization in staff work plans, (iv) the lack of ownership from the Government, (v) contract variations, (vi) limits to statements of expenditures, and (vii) delays in closing TA accounts.

21

Other sources of financing for TA approved during the CAPE period include the Cooperation Fund in Support of Managing for Development Results, Cooperation Fund for the Water Sector, Government of Denmark, Government of Norway, Korea e-Asia and Knowledge Partnership Fund, Gender and Development Cooperation Fund, Poverty Reduction Cooperation Fund, Regional Cooperation and Integration Fund, and Netherlands Trust Fund for the Water Financing Partnership Facility. 22 ADB. 2007. 2007 Nepal Portfolio Performance Review. Manila.

Appendix 7

83

5.

Conclusion

26. Project implementation in recent years has been significantly influenced by political and security concerns, which affected the fielding of consultants to project sites, government participation in field activities, staff monitoring and supervision of projects, and the timely delivery of project inputs, resulting in delays in loan effectiveness and implementation. These factors affected the overall performance of ADB's assistance portfolio in Nepal, which lagged behind regional and ADB-wide performance. Analysis of ADB's assistance portfolio in the country identified several deterrents to portfolio performance, including (i) a volatile political and security situation that affected the implementation environment, (ii) poor compliance with loan covenants, (iii) inadequate staffing on the part of the Government and frequent staff turnover on the part of ADB, (iv) procedural bottlenecks or lengthy tendering and procurement procedures, (v) land acquisition issues, (vi) the lack of adequate preparation during project design, (vii) weak monitoring and evaluation, (viii) weak institutional capacity in executing and implementing agencies, (ix) the untimely provision of counterpart funds, (x) insufficient quality control of civil works, (xi) the lack of a clear policy on recruiting nongovernment organizations on the part of the Government, (xii) the unsatisfactory performance of contractors, (xiii) the dearth of available technical expertise, (xiv) implementation delays caused by the late mobilization of consultants and contractors, (xv) the late start-up or suspension of civil works, and (xvi) changes in project scope. 27. In view of the commitment to deliver the envisioned results of its projects and programs in Nepal, ADB made a conscious effort, in partnership with the Government, to improve portfolio performance through several initiatives. The enablers to improve portfolio performance include (i) the adoption of the first results-based country strategy and program in 2005; (ii) the Portfolio Management Strategy Paper in 2006,23 which was key to focusing attention on a number of portfolio performance concerns; (iii) strong Government support and ownership; (iv) the initiation of annual country portfolio review missions with the involvement of the Government and development partners; (v) the preparation of portfolio performance action plans; (vi) the establishment of an early warning system on portfolio performance; (vii) the undertaking of annual spring cleaning exercises; (viii) the adoption of project readiness filters since 2005; (ix) the adoption of a sector results profile as a monitoring tool; (x) the initiation of reforms in procurement and financial management; (xi) the preparation of portfolio performance action plans; (xii) the increased delegation of projects to NRM; (xiii) increased project monitoring and supervision by project staff; (xiv) the adoption of a screening mechanism to assess project design early in project preparation; and (xv) positive developments in the countrys security situation in recent years, which improved the project implementation environment. 28. The initiatives undertaken by ADB and the Government have yielded positive results in terms of improving portfolio performance in the CAPE period. Steady progress occurred in performance indicators for loans and grants. The contract award and commitment ratio for loans and grants more than tripled from 7% in 2004 to 24% in 2008, while the disbursement ratio quadrupled in 2008 from 4% in 2004. Positive achievement also occurred in net resource
23

ADB. 2006. Nepal 2006 Portfolio Management Strategy Paper. Kathmandu.

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transfer to Nepal as it rose from negative in 2004 to $63.8 million in 2008. Also, no projects were considered at risk following 2008, compared with 26% of the portfolio in 2004. Over the CAPE period, more than 82% of ongoing sovereign loans in Nepal were rated satisfactory in project performance reports, somewhat below the South Asian average of 88% and the ADBwide average of 91%. The performance ratings of 45 completed projects and programs showed that 56% have been rated in PCRs as "highly successful," "generally successful," or "successful." Meanwhile, evaluation ratings of 19 completed projects and programs showed that almost 60% were assessed as "successful."

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85

Table A7.3: Nepal's Loan and TA Portfolio Management Indicators, 20042008 (as of 31 December 2008)
Indicator A. Public Sector Loans 1. Loan Portfolio a. Active Loan Portfolio a. Project Loans b. Program Loans c. DFI/Credit Loans d. Combined Projects and DFI Loans b. Average Age of the Active Loan Portfolio c. Inactive Loan Portfolio 2. Start-Up Compliance a. Loans Approved During the Year b. Loans Not Yet Signed c. Loans Awaiting Effectiveness d. Average Time from Approval to Signing e. Average Time from Signing to Effectivity f. Loans that Became Effective More than 90 Days After Signing 3. Financial Performance a. Contract and Commitment Achievement b. Contract/Commitment Ratioa c. Disbursement Achievement d. Disbursement Ratio e. Imprest Fund Turnover Ratiob f. Submission of APA and AFS (PC and NC) i. Less than 6 months overdue ii. Greater than 6 months but less than 12 months overdue iii. Greater than 12 months overdue g. Loan Service Payments h. Net Resource Transfer 4. Portfolio Performance a. Project Ratings i. Highly Satisfactory ii. Satisfactory iii. Partly Satisfactory iv. Unsatisfactory b. Projects at Risk i. Problem Projects (IP or IO is rated PS or U) ii. Potential Problem Projects (4 or more problem flags) iii. Problem Projects Implementation Progress (PS and U) Unit 2004 2005 2006 2007 2008

No. | $M No. | $M No. | $M No. | $M No. | $M Years No. | $M No. | $M No. No. Months Months No. | %

23 20 3 0 0

713.6 638.4 75.2 0.0 0.0 2.8

23 20 3 0 0

648.3 576.4 71.9 0.0 0.0 3.8

23 19 4 0 0

686.8 561.4 125.4 0.0 0.0 4.2

21 18 3 0 0

656.1 562.2 93.9 0.0 0.0 4.9

20 17 3 0 0

635.2 541.7 93.4 0.0 0.0 5.7

0 5 4 2

0.0 110.0

0 0 1 2

0.0 0.0

0 2 0 1

0.0 86.0

0 0 0 0

0.0 0.0

0 0 0 0

0.0 0.0

3.75 5.29 11 64.7 14

4.05 6.18 70.0 16

4.60 6.48 72.7 16

4.90 6.69 76.2 15

4.71 6.85 75.0

$M % $M % %

38.17 7.03 21.98 4.39 1.38

69.59 15.24 43.66 7.72 1.75

101.59 22.14 108.01 20.04 1.55

88.39 24.54 96.84 20.33 1.60

64.48 23.45 60.86 15.35 1.23

No. | % No. | % No. | % $M $M

0 1 0

0.0 9.1 0.0 39.32 (17.34)

0 1 0

0.0 7.1 0.0 40.74 2.92

0 1 0

0.0 7.7 0.0 45.56 62.45

0 2 0

0.0 11.1 0.0 52.87 43.98

0 1 1

0.0 5.3 5.3 63.26 (2.40)

No. | % No. | % No. | % No. | % No. | % No. | % No. | %

0 18 4 1 6 5 1

0.0 78.3 17.4 4.3 26.1 21.7 4.3

0 16 4 3 7 7 0

0.0 69.6 17.4 13.0 30.4 30.4 0.0

0 19 4 0 4 4 0

0.0 82.6 17.4 0.0 17.4 17.4 0.0

0 18 3 0 3 3 0

0.0 85.7 14.3 0.0 14.3 14.3 0.0

0 19 1 0 1 1 0

0.0 95.0 5.0 0.0 5.0 5.0 0.0

No. | %

17.4

26.1

13.0

9.5

0.0

86
Indicator

Appendix 7

Unit 2004 2005 2006 2007 2008 Impact and Outcome No. | % 2 8.7 2 8.7 1 4.3 3 14.3 1 5.0 (PS and U) c. Risk Ratiosc i. Project Implementation Delays No. | % 9 39.1 10 43.5 7 30.4 8 38.1 8 40.0 ii. Loan Utilization Delays No. | % 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 iii. Established, Staffed, and/or No. | % 1 5.0 0 0.0 0 0.0 0 0.0 0 0.0 Operation of PMU/PIU iv. Fielding of Consultants No. | % 1 4.35 0 0.0 0 0.0 1 4.76 0 0.0 v. Environmental or Social No. | % 1 5.0 1 5.0 0 0.0 1 5.6 2 11.8 Problems vi. Poor Compliance with APA and No. | % 1 5.0 1 5.0 0 0.0 1 5.6 0 0.0 AFS vii. Poor Compliance with Other No. | % 4 17.4 4 17.4 2 8.7 4 19.0 3 15.0 Covenants viii. Shortage of Counterpart No. | % 2 8.7 1 4.3 2 8.7 1 4.8 1 5.0 Funds/Cofinancing ix. Unsettled Cost Overrun No. | % 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 x. Significant Disbursement Delays No. | % 9 39.1 10 43.5 8 34.8 5 23.8 6 30.0 xi. In Risk Sector or Country with No. | % 8 34.8 8 34.8 11 47.8 7 33.3 4 20.0 History of Past Problems xii. Project Fielded Missions No. | % 7 30.4 10 43.5 2 8.7 2 9.5 4 20.0 d d. Overall Risk Ratio of the Portfolio % 17.8 18.7 13.5 13.7 13.5 5. Portfolio Supervision a. Proactivity Indexe No. | % 3 75.0 2 33.3 5 71.4 1 25.0 2 66.7 b. Average Supervision Intensity Days 30.9 20.8 31.9 34.7 38.0 (staff-days/project) c. Loans with Settled Cost Overruns No. 0 0 0 0 1 d. Loans with Changes in Project No. 0 1 1 4 5 Scope e. Loans with Changes in No. 3 4 2 5 5 Implementation Arrangements f. Loans with Extensions No. 2 6 8 8 9 g. Loans with Cancellations $M 25.94 17.62 43.97 11.19 3.99 B. Technical Assistance A. Active TA Portfolio No. | $M 30 18.75 24 16.80 34 20.47 30 18.04 31 18.27 B. Average Time from Approval to Months 3.23 3.80 3.12 3.17 2.22 Signing of TA Letter/Agreement C. TAs Completed but not Financially No. | $M 3 0.60 1 0.01 0 0.00 0 0.00 2 0.28 Closed (potential savings) ( ) = negative, $M = million dollars, AFS = agency financial statements, APA = audited project accounts, DFI = development finance institution, IO = implementation objectives, IP = implementation progress, NC = not complied, No. = number, PC = partly complied, PIU = project implementation unit, PMU = project management unit, PS = partly satisfactory, TA = technical assistance, U = unsatisfactory. a Ratio of actual contract awarded or committed during the year over the value available for contract awards or commitment at the beginning of the year. The value of contracts/commitments to be awarded or committed under newly approved loans during the period is/will be added to the opening balance of the value available for contract or commitment awards. b The annualized turnover rate is computed as the ratio of total liquidation over the time-weighted average fund balance for 12 months. c Percent share of problem-flagged projects (loans) to the total number of loans in the various loan portfolio categories. d The weighted average of the 12 risk ratios. e Percent share of problem projects changed through upgrading, restructuring, closure, or cancellation during the last 12 months. Source: Central Operations Services Office.

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87

Table A7.4: Loan and TA Portfolio Management Indicators: Nepal, South Asia and ADB, 20042008 (as of 31 December 2008)
Indicator A. Public Sector Loans 1. Loan Portfolio a. Active Loan Portfolio i. Project Loans ii. Program Loans iii. DFI/Credit Loans iv. Combined Projects and DFI Loans b. Average Age of the Active Loan Portfolio c. Inactive Loan Portfolio 2. Start-Up Compliance a. Loans Approved During the Year b. Loans Not Yet Signed c. Loans Awaiting Effectiveness d. Average Time from Approval to Signing e. Average Time from Signing to Effectivity f. Loans that Became Effective More than 90 Days After Signing 3. Financial Performance a. Contract/Commitment Achievement b. Contract/Commitment Ratioa c. Disbursement Achievement d. Disbursement Ratio e. Imprest Fund Turnover Ratiob f. Submission of APA and AFS (PC and NC) i. Less than 6 months overdue ii. Greater than 6 months but less than 12 months overdue iii. Greater than 12 months overdue g. Loan Service Payments h. Net Resource Transfer 4. Portfolio Performance a. Project Ratings i. Highly Satisfactory ii. Satisfactory iii. Partly Satisfactory iv. Unsatisfactory b. Projects at Risk i. Problem Projects (IP or IO is rated PS or U) ii. Potential Problem Projects (4 or more problem flags) iii. Problem Projects Implementation Progress (PS and U) Impact and Outcome (PS and U) c. Risk Ratiosc i. Project Implementation Delays ii. Loan Utilization Delays Unit NEP Average 20042008 South Asia Average 20042008 ADB Average 20042008

No. | $M No. | $M No. | $M No. | $M No. | $M Years No. | $M No. | $M No. No. Months Months No. | %

22 19 3 0 0 0 1

668.0 576.0 92.0 0.0 0.0 4.3 0.0 39.2 1.0 1.0 4.4 6.3 71.7

158 136 13 6 3 0 21

12,243.4 10,494.0 1,282.5 436.4 30.5 3.7 0.0 1,963.8 10.0 6.0 3.5 4.6 59.0

515 436 53 12 13 0 73

36,895.1 29,969.4 5,833.9 649.6 442.3 3.7 0.0 6,996.6 40.0 22.0 3.8 4.5 59.8

14

84

271

$M % $M % %

72.4 18.5 66.3 13.6 1.5

1,896.6 1,532.1

6,132.4 27.5 5,535.3 23.3 1.5

No. | % No. | % No. | % $M $M

0 1 0

0.0 8.1 1.1 48.3 17.9

25 3 2

21.9 2.7 2.2 1,261.2 524.8

59 10 6

17.7 2.9 1.9 4,299.7 1,235.4

No. | % No. | % No. | % No. | % No. | % No. | % No. | %

0 18 3 1 4 4 0

0.0 82.2 14.3 3.5 18.6 17.8 0.9

2 138 11 7 18 17 1

1.4 87.6 6.7 4.3 11.7 11.0 0.6

4 467 26 18 48 44 5

0.8 90.7 5.0 3.5 9.5 8.5 0.9

No. | % No. | % No. | % No. | %

3 2 8 0

13.2 8.2 38.2 0.0

15 6 50 29

9.6 3.6 32.6 360.7

39 13 126 3

7.6 2.4 25.0 11.6

88

Appendix 7

Indicator

Unit

NEP Average 20042008

iii. Established, Staffed, and/or Operation No. | % 0 1.0 13 2.9 of PMU/PIU iv. Fielding of Consultants No. | % 0 1.8 12 8.1 25 5.0 v. Environmental or Social Problems No. | % 1 5.5 2 1.5 13 3.0 vi. Poor Compliance with APA and AFS No. | % 1 3.1 4 2.7 26 5.7 vii. Poor Compliance with Other No. | % 3 15.5 11 7.5 45 8.7 Covenants viii. Shortage of Counterpart No. | % 1 6.3 4 2.6 14 2.7 Funds/Cofinancing ix. Unsettled Cost Overrun No. | % 0 0.0 5 3.5 5 1.0 x. Significant Disbursement Delays No. | % 8 34.2 25 16.5 153 29.7 xi. In Risk Sector or Country with History No. | % 8 34.1 15 10.2 80 15.6 of Past Problems xii. Project Fielded Missions No. | % 5 22.4 48 30.9 152 29.6 d. Overall Risk Ratio of the Portfoliod % 15.4 12.6 12.1 5. Portfolio Supervision a. Proactivity Indexe No. | % 3 54.3 13 59.1 39 68.8 b. Average Supervision Intensity (staffDays 31.3 25.7 26.1 days/project) c. Loans with Settled Cost Overruns No. 0.2 2.2 12.0 d. Loans with Changes in Project Scope No. 2.2 20.6 58.8 e. Loans with Changes in Implementation No. 3.8 26.2 76.2 Arrangements f. Loans with Extensions No. 6.6 42.8 142.6 g. Loans with Cancellations $M 20.5 287.3 785.7 B. Technical Assistance a. Active TA Portfolio No. | $M 30 18.5 994 862.2 b. Average Time from Approval to Signing Months 3.1 3.1 of TA Letter/Agreement c. TAs Completed but not Financially No. | $M 1 0.2 77 8.9 Closed (potential savings) $M = million dollars, ADB = Asian Development Bank, AFS = agency financial statements, APA = audited project accounts, DFI = development finance institution, IO = implementation objectives, IP = implementation progress, NC = not complied, NEP = Nepal, No. = number, PC = partly complied, PIU = project implementation unit, PMU = project management unit, PS = partly satisfactory, TA = technical assistance, U = unsatisfactory. a Ratio of actual contract awarded or committed during the year over the value available for contract awards or commitment at the beginning of the year. The value of contracts/commitments to be awarded or committed under newly approved loans during the period is/will be added to the opening balance of the value available for contract or commitment awards. b The annualized turnover rate is computed as the ratio of total liquidation over the time-weighted average fund balance for 12 months. c Percent of problem-flagged projects (loans) to the total number of loans in the various loan portfolio categories. d The weighted average of the 12 risk ratios. e Percent of problem projects changed through upgrading, restructuring, closure, or cancellation during the last 12 months. Source: Asian Development Bank Central Operations Services Office.

South Asia Average 20042008 1 1.0

ADB Average 20042008

Appendix 7

89

Table A7.5: Distribution of Ongoing Loans to Nepal, by Sector, 20042008

Loan per ANR EDU ENE FIN HNS INT LEMPP TNC WSS MS Loan Sector Sector 2004 7 3 1 1 0 0 2 3 5 1 23 8 2.9 2005 7 3 1 1 0 0 2 3 5 1 23 8 2.9 2006 7 4 1 2 0 0 1 2 5 1 23 8 2.9 2007 6 4 1 2 0 0 0 2 5 1 21 7 3.0 2008 5 4 1 2 0 0 0 2 5 1 20 7 2.9 ANR = agriculture and natural resources; EDU = education; ENE = energy; FIN = finance; HNS = health, nutrition, and social protection; INT = industry and trade; LEMPP = law, economic management, and public policy; MS = multisector, TNC = transport and communications; WSS = water supply, sanitation and waste management. Source: Asian Development Bank loan financial information system. Year Sector Total

Table A7.6: Number of Extensions to Loan Closing Date for Closed Loans, 20042008
Item 2004 Year of Loan Closing 2005 2006 2007 2 0 0 2 100 0 1 1 0 0 0 0 2008a 1 0 0 1 100 0 0 1 0 0 0 0 Total 9 0 0 9 100 0 4 5 0 0 0 0 %

Total Loans Closed 4 0 2 Loans Without Extension 0 0 0 % Without Extension 0 0 0 Loans With Extension 4 0 2 % With Extension 100 0 100 1 Extension 0 0 0 2 Extensions 1 0 2 3 Extensions 3 0 0 4 Extensions 0 0 0 5 Extensions 0 0 0 6 Extensions 0 0 0 7 Extensions 0 0 0 a As of 31 December 2008. Source: Asian Development Bank loan financial information system.

0.0 100.0 0.0 44.4 55.6 0.0 0.0 0.0 0.0

Table A7.7: Number of Days Extension to Loan Closing Date for Loans Closed, 20042008
Item 2004 4 0 0 0 0 0 0 4 100 2.21 Year of Loan Closing 2005 2006 2007 0 2 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 0 100 100 0.0 2.23 1.88 2008a 1 0 0 0 0 0 0 1 100 2.51 Total 9 0 0 0 0 0 0 9 100 2.17

Loans Closed Cancelled % Cancelled Extended <92 Days % <92 Days Extended 92365 Days % 92365 Days Extended >365 Days % >365 Days Average Extension/Loan (years) a As of December 2008. Source: Asian Development Bank loan financial information system.

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Table A7.8: Contract Awards and Commitment Performance of Sovereign Loans to Nepal, 20042008
Item 2004 2005 A. Contract Awards/Commitment 1. Projected ($ million) - With Program Loans 73.8 106.3 - Without Program Loans 62.3 79.8 2. Achieved ($ million) - With Program Loans 38.2 69.6 - Without Program Loans 38.2 67.1 3. Achieved (Percent) - With Program Loans 51.7 65.5 - Without Program Loans 61.3 84.1 B. Contract Awards/Commitment Ratio (%) a - With Program Loans 7.0 15.2 - Without Program Loans 7.6 16.1 C. ADB-wide Contract Awards/Commitment Ratio (%) - With Program Loans
a

2006

2007

2008b

65.6 63.1 101.6 50.8 154.9 80.5 22.1 14.6 29.3

100.3 66.5 88.4 55.9 88.1 84.0 24.5 18.1 30.2

78.1 59.8 64.5 46.3 82.6 77.5 23.5 18.1 33.2

17.4

27.4

- Without Program Loans 14.6 22.2 25.0 25.3 24.8 Ratio of actual contract awarded or committed during the year over the value available for contract awards or commitment at the beginning of the year. The value of contracts and commitments to be awarded or committed under newly approved loans during the period is/will be added to the opening balance of the value available for contract or commitment awards. b As of 31 December 2008. Source: Asian Development Bank Central Operations Services Office.

Table A7.9: Disbursement Performance of Sovereign Loans to Nepal, 20042008

Item A. Disbursement 1. Projected ($ million) - With Program Loans - Without Program Loans 2. Achieved ($ million) - With Program Loans - Without Program Loans Achieved (%) - With Program Loans - Without Program Loans 38.6 27.1 22.0 22.0 57.0 81.1 72.4 45.9 43.7 41.2 60.3 89.7 60.0 57.5 108.0 57.2 179.9 99.5 88.6 54.8 96.8 64.5 109.3 117.8 91.8 73.5 60.9 58.3 66.3 79.3 2004 2005 2006 2007 2008b

3.

B.

Disbursement Ratio (%) a - With Program Loans 4.4 7.7 20.0 20.3 15.4 - Without Program Loans 4.8 7.9 12.4 15.1 14.4 C. ADB-wide Disbursement Ratio (%) - With Program Loans 17.7 20.7 23.4 25.4 29.5 - Without Program Loans 14.2 14.6 16.5 18.8 20.3 ADB = Asian Development Bank. a Disbursement ratio is the ratio of total disbursement in a given year/period over the net loan amount available at the beginning of the year/period plus the loan amounts of newly approved loans which have become effective during the year/period. Where: (i) "Total disbursement in a given year/period" refers to the confirmed disbursement for a particular year/period covered. (ii) "Net loan amount available at the beginning of the year/period' refers to all loans that were effective at the beginning of the year. (iii) "Loan amounts of newly approved loans which have become effective during the year/period" refers to all loans

Appendix 7

91

approved before and after the beginning of the year that have become effective after the beginning of the year. As of 31 December 2008. Source: Asian Development Bank Central Operations Services Office.

Table A7.10: Project Completion Report Ratingsa of Completed Projects in Nepal, by Sector
Sector HS/GS/S Number % 7 28.0 3 12.0 4 16.0 0 0.0 0 0.0 2 8.0 0 0.0 5 20.0 PS Number 9 1 0 0 0 2 2 2 % 47.4 5.3 0.0 0.0 0.0 10.5 10.5 10.5 US Number % 1 100.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 Total Number % 17 37.8 4 8.9 4 8.9 0 0.0 0 0.0 4 8.9 2 4.4 7 15.6

Agriculture and Natural Resources Education Energy Finance Health, Nutrition, and Social Protection Industry and Trade Law, Economic Management, and Public Policy Transport and Communications Water Supply, Sanitation, and Waste 3 12.0 0 0.0 0 0.0 3 6.7 Management Multisector 1 4.0 3 15.8 0 0.0 4 8.9 Total 25 100.0 19 100.0 1 100.0 45 100.0 % Share to Total 55.6 42.2 2.2 100.0 GS = generally successful, HS = highly successful, PS = partly successful, S = successful, U = unsuccessful. a The ratings were based on project completion reports circulated from 1995 to 2008. Completion reports were not required to have ratings prior to 1995. Prior to 2001, ratings were based on the old guidelines. From 2001 onwards, ratings were based on new guidelines. Source: Asian Development Bank post-evaluation information system.

Table A7.11: Project/Program Performance Evaluation Report Ratingsa of Completed Projects and Programs in Nepal, by Sector
HS/GS/S PS US Total Number % Number % Number % Number % Agriculture and Natural Resources 1 9.1 3 50.0 1 50.0 5 26.3 Education 2 18.2 0 0.0 0 0.0 2 10.5 Energy 3 27.3 0 0.0 1 50.0 4 21.1 Finance 0 0.0 0 0.0 0 0.0 0 0.0 Health, Nutrition, and Social Protection 0 0.0 0 0.0 0 0.0 0 0.0 Industry and Trade 1 9.1 1 16.7 0 0.0 2 10.5 Law, Economic Management, and Public Policy 0 0.0 0 0.0 0 0.0 0 0.0 Transport and Communications 2 18.2 0 0.0 0 0.0 2 10.5 Water Supply, Sanitation, and Waste Management 0 0.0 1 16.7 0 0.0 1 5.3 Multisector 2 18.2 1 16.7 0 0.0 3 15.8 Total 11 100.0 6 100.0 2 100.0 19 100.0 % Share to Total 57.9 31.6 10.5 100.0 GS = generally successful, HS = highly successful, PS = partly successful, S = successful, U = unsuccessful. a For PPERs circulated from 1996 to 2008. In 2000, the Independent Evaluation Department shifted from a three-category rating system (generally successful, partly successful, and unsuccessful) to a four-category rating system (highly successful, successful, partly successful, and unsuccessful). The four-category rating system has been retrofitted to projects/ programs evaluated from 1996 to 1999. Source: Asian Development Bank post-evaluation information system. Sector

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Appendix 7

Figure A7.6: Sector Distribution - Amount of Approved Grants to Nepal (approved from 2004 to 2008)
Agriculture and Natural Resources 5.3% Education 2.8% Finance 2.4% Health, Nutrition, and Social Protection 0.6%

Multisector 33.8%

Law , Economic Management, and Public Policy 29.9%

Transport and Communications 25.1%

Source: Asian Development Bank loan, technical assistance, grant, and equity approvals database.

Table A7.12: Targeting and Thematic Classifications of Grants Approved, 20042008 (amount in $ million)
Classification A. By Targeting Classification 1. Targeted Intervention 2. General Intervention Distribution of Grants, by Number ADF % 4 8 12 33.3 66.7 100.0 Distribution of Grants, by Amount ADF % 13.0 342.2 355.2 3.7 96.3 100.0

Total B. By Theme Classification 1. Sustainable Economic Growth 8 27.6 236.9 26.8 2. Governance 4 13.8 215.0 24.4 3. Inclusive Social Development 8 27.6 167.0 18.9 4. Environmental Sustainability 0 0.0 0.0 0.0 5. Gender and Development 2 6.9 108.3 12.3 6. Private Sector Development 1 3.4 18.0 2.0 7. Regional Cooperation 0 0.0 0.0 0.0 8. Capacity Development 6 20.7 137.3 15.6 Theme Factor 2.4 2.5 ADF = Asian Development Fund. Note: 1. All grant projects under the country assistance program evaluation review were approved from 2004 to 2008 and followed the targeting and thematic classifications based on Staff Instructions on Updating the Project Classification System (2004). Since the Asian Development Bank revised its project classification system in 2009, projects approved from January 2009 onwards will follow the 2009 classification system. 2. A grant may be assigned up to three themes. The theme factor shows the average number of themes per grant. 3. Three grants approved between 2006 and 2007 are attached to loans. In this table, these grants assumed the targeting and thematic classifications of their source loans. Source: Asian Development Bank loan, technical assistance, and equity approvals database and various grant documents.

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93

Figure A7.7: Sector DistributionAmount of Technical Assistance to Nepal (approved from 2004 to 2008)
Agriculture and Natural Resources Education 6.0% 7.1% Energy 9.4% Finance 6.4% Health, Nutrition, and Social Protection 2.9% Law , Economic Management, and Public Policy 21.9%

Multisector 8.9% Water Supply, Sanitation, and Waste Management 21.3%

Transport and Communications 16.3%

Source of basic data: Asian Development Bank loan, technical assistance, grant, and equity approvals database.

Figure A7.8: Amount of Technical Assistance to Nepal, by Type (approved from 2004 to 2008)
8 6
2.9

2.9

4 2 0 2004 2005 2006 ADTA PPTA 2007

1.3 0.6 1.9 1.6 3.5 4.3

1.5

3.0

2008

Source of basic data: Asian Development Bank loan, technical assistance, grant, and equity approvals database.

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Appendix 7

Figure A7.9: Number of Technical Assistance to Nepal, by Type (approved from 2004 to 2008)
14 12 4 10 8 2 6 4 6 2 0 2004 2005 2006
ADTA PPTA

5 9 1 2 2007 5

2008

Source of basic data: Asian Development Bank loan, technical assistance, grant, and equity approvals database.

Table A7.13: Nepal Technical Assistance Portfolio Management Indicators, 20042008 (as of 31 December 2008)
Indicator A. Country Portfolio 1. Active TA Portfolio (i) Advisory Technical Assistance (ii) Project Preparatory Technical Assistance (iii) Regional Technical Assistance 2. Average Age of Active TA Portfolio 3. Physically Completed but not Financially Closed B. Start-Up Compliance 1. Average Time from Approval to Signing of TA Letter or Agreement 2. Average Time from Signing to Fielding of Consultants C. Financial Performance 1. Total Disbursement 2. Total Undisbursed Balance 3. Potential TA Savingsa 4. Cancellations of TA Fundsb D. Portfolio Supervision 1. Supervision Intensity (staffdays/project) E. TA Completion Reports 1. TCR Programmed Unit No. | $M No. | $M No. | $M No. | $M Months No. | $M 30 20 10 0 2004 18.7 12.0 6.8 0.0 24.4 3.1 24 17 7 0 2005 16.8 11.4 5.4 0.0 26.6 0.8 34 24 10 0 2006 20.5 13.0 7.4 0.0 24.8 0.0 30 19 11 0 2007 18.0 11.1 7.0 0.0 18.3 0.0 31 19 12 0 2008 18.3 11.4 6.8 0.0 19.4 1.0

Months Months $M $M $M $M

3.2 4.4 10.3 8.5 0.6 0.6

3.8 4.3 9.2 7.6 0.0 0.2

3.1 4.0 10.3 10.2 0.0 0.3

3.2 3.9 5.4 12.7 0.0 0.8

2.2 4.7 5.5 12.8 0.3 0.4

Days No.

11.4 6

8.8 2

8.4 2

4.2 4

12.3 7 7 100.0

2. TCR Circulated No. 8 2 2 4 3. % Achieved % 133.3 100.0 100.0 100.0 $M = million dollars, No. = number, TA = technical assistance, TCR = technical assistance completion report. a Undisbursed TA amount of physically completed TA but not financially closed. b Undisbursed amount of financially closed TAs for the year. Source: Asian Development Bank Central Operations Services Office.

Appendix 8

95

STAKEHOLDERS' PERCEPTIONS SURVEY A. Introduction

1. The Independent Evaluation Mission (IEM) conducted a perceptions survey1 to complement the analysis presented in the country assistance program evaluation (CAPE) for Nepal. The survey aimed to gauge the perceptions of stakeholders about the responsiveness of the Asian Development Bank (ADB) to the countrys development needs. A combination of methods was used to conduct the survey: (i) the distribution of survey questionnaires to target respondents, (ii) semi-structured interviews based on the survey questionnaires, and (iii) focus group discussions using a structured questionnaire. A total of 184 stakeholders were contacted to respond to the survey. Two questionnaires were used: (i) one that was administered to 146 stakeholders, including government officials from sector and central Government agencies and representatives from the private sector, nongovernment organizations (NGOs), and academic institutions and (ii) another that was used for conducting focus group discussions with 38 project beneficiaries (Table A8.1). The questionnaire administered to stakeholders consisted of questions that aimed to gain insight into (i) the relevance, efficiency, effectiveness, and sustainability of ADBs assistance; (ii) ADBs contribution to strengthening the policy and strategic planning capacity of the Government; (iii) ADBs contribution to improving governance; (iv) the perceived strengths and weaknesses of ADBs assistance relative to the needs of Nepal; (v) stakeholders perceptions about development priorities and constraints in Nepal; (vi) ADBs performance in key sectors; and (vii) overall aid coordination in the country. The questionnaire used in focus group discussions aimed to elicit the perceptions of project beneficiaries of three ADB projects 2 about the relevance, effectiveness, and benefits of ADB assistance. Table A8.1: Respondent Categories
Item Target Actual % of Target

A. Stakeholder Survey Government agencies 98 60 61.2 NGOs and academic 33 29 87.9 institutions Private sector 15 6 40.0 Subtotal (A) 146 95 65.1 B. Focus Group Discussion Project Beneficiaries (B) 38 38 100.0 Total Respondents (A+B) 184 133 72.3 NGO = nongovernment organization. Source: Nepal country assistance program evaluation survey results.

2. A total of 95 stakeholders (or 65.1% of the 146 targeted respondents) responded to the survey, of which 63.2% were representatives of the Government, ranging from divisional
1 2

The survey was conducted from August to November 2008. The projects are: (i) 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 (Loan 1755-NEP[SF], for $35.0 million, approved on 12 September); (ii) ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Urban and Environmental Improvement Project. Manila (Loan 1966-NEP[SF], for $30.0 million, approved on 10 December); and (iii) ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Skills for Employment Project. Manila (Loan 2111-NEP[SF], for $20.0 million, approved on 25 November).

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Appendix 8

managers to senior ministry officials; 30.5% were representatives of NGOs and academic institutions; and 6.3% were in the private sector (Table A8.2). All 38 targeted project beneficiaries participated in the focus group discussions. The summary of stakeholder responses, summary of the focus group discussion responses, the synthesis of the narrative responses from the focus group discussions, and the questionnaires used are presented in Supplementary Appendix A. Table A8.2: Survey Respondents
Item Respondents % Government agencies 60 63.2 NGOs/Academic institutions 29 30.5 Private sector 6 6.3 Total 95 100.0 NGO = nongovernment organization. Source: Nepal country assistance program evaluation survey results

B.

Main Survey Findings

3. Relevance, Efficiency, Effectiveness, and Sustainability of ADB Assistance to Nepal. The first five questions in the survey aimed to assess ADB assistance in relation to Nepals development priorities and the achievement of development outcomes and impacts. Most respondents were of the view that ADB assistance was "highly relevant" (46.3%) or "relevant" (44.2%) to Nepals development priorities, while 9.5% believed otherwise. In terms of the overall efficiency of assistance programs and operations, around 15% believed that they have been "highly efficient," almost half said they were "efficient," and the rest said that the interventions were either "partly efficient" (28.4%) or "inefficient" (1.1%) or did not provide an answer. More than half of the respondents opined that ADBs assistance had been "effective" (54.7%) or "highly effective" (9.5%) in achieving its intended development outcomes, with 34.8% saying that the assistance was either "partly effective" (33.7%) or "ineffective" (1.1%). A little over half of the respondents believed that ADB assistance programs and projects are either "sustainable" (45.3%) or "highly sustainable" (5.3%), while 40.0% believed that they were "partly sustainable" or "unsustainable" (5.3%). The rest did not respond. 4. ADB and Policy and Strategy Development. More than half (64.2%) of the respondents believed that ADBs assistance programs and projects have made either a "significant" (36.8%) or "substantial" (27.4%) contribution to strengthening sector and/or country policy and strategy planning capacity, but 33.7% said that ADBs contribution was only "moderate," and 1.1% said it was "negligible." There were concerns about the contributions of ADB assistance to strengthen the organizational capacity of government agencies to deliver services as only 41.1% of respondents found these contributions to be "significant" (29.5%) or "substantial" (11.6%). The remaining respondents said that ADBs contribution was "moderate" (47.4%) or "negligible" (7.4%). Among respondents from NGOs and civil society organizations, 34.5% believed that their influence or contribution to the development of the sector agenda and strategy was just "moderate," while 31.0% said it was just "negligible." A little over 3.0% of respondents from NGOs said they had a "substantial influence," while close to 7.0% said they had a "significant influence." 5. ADB and Governance Reform. Good governance was identified by about 15% of respondents as one of the keys to achieving sustainable poverty reduction and meeting the

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97

Millennium Development Goals (MDGs). ADBs assistance related to good governance included both policy improvement and institutional development. Progress in these areas varied because policy reforms were affected by political uncertainty. Survey results revealed that almost half of the respondents (44.2%) felt that ADBs contribution to improving governance was just "moderate," while 33.7% believed that the contribution was "significant," and 13.7% believed it "substantial." Only 7.4% of the respondents thought that ADBs contribution to governance reform was "negligible." The rest of the respondents did not provide an answer. 6. Delivery of ADB Services. Stakeholder perceptions about the overall effectiveness of ADBs service delivery revealed that project and technical assistance (TA) personnel and consultants were deemed "effective" by 41.1%, while 3.2% thought that they were "highly effective." However, 41.1% of the respondents felt that project and TA personnel and consultants have been "partly effective," 6.3% thought they were "not effective," and 8.4% did not provide an answer. Regarding the Nepal Resident Mission (NRM), 51.6% of respondents consider it an "effective" part of ADBs operations, and a little more than a quarter believed that NRM was "highly effective" in delivering services to ADB clients. However, around 19% of respondents thought that NRM was only "partly effective" and 1.1% said it was "not effective" at all. ADBs main strengths were considered to be its responsiveness to the sectors and countrys development needs (70.5%), its ability to foster beneficiary participation and ownership (51.6%), and its flexibility in responding to changing environments and clients needs. Meanwhile, ADB's main weaknesses were the lack of synergy between related programs and projects (47.4%); the lack of a well-integrated, programmatic modality (29.5%); and the lack of flexibility in responding to changing environments and needs (27.4%). In addition, respondents from government agencies, NGOs, and academic institutions were asked about their perceptions about whether ADB should reduce or withdraw assistance from any sector. About 10% of respondents felt that ADB should not withdraw from any of the sectors it currently provides assistance to, while only 2.2% said ADB should withdraw assistance from some sectors, though respondents did not identify them. The rest did not provide an answer. 7. Development Priorities and Constraints. Almost three quarters of the respondents (74.7%) thought that the sector development agenda and strategy were generally led by the Government and 18.7% of respondents felt that they were fully led by the Government, with 21.3% of respondents saying that they were led by donors. Close to 74% of respondents believed that their sector or the country as a whole did not have sufficient budget to achieve long-term development objectives and priorities, with 11.6% of the respondents saying that the budget was sufficient. The rest did not respond. When asked which development priority should their sector have over the next 5 years to achieve sustainable poverty reduction and the MDGs, the top five priorities that emerged from survey responses were infrastructure development (32.6%), effective implementation of projects (30.5%), energy (27.4%), education (21.1%), and information and communication technology (20.0%). Meanwhile, 46.3% of respondents believed that poor infrastructure was the main impediment to the development of the country, followed by weak regulatory framework (37.9%) and labor difficulties related to trade unions (16.8%). Respondents identified the following as development constraints: the lack of good governance (7.4%), inadequate financing (6.3%), the lack of effective implementation policies (6.3%), poverty (4.2%), inefficient development leadership (3.2%), the precedence of the political agenda over the development agenda (3.2%), poor monitoring and evaluation (2.1%), and the weak capacity of project executives (2.1%). 8. Aid Coordination. Respondents believed that assistance response in terms of aid coordination was weak as a little over 45.0% felt that aid coordination needed some improvements, compared with 30.6% who felt that aid coordination was generally satisfactory

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(23.2%) or better (7.4%) and 17.9% who felt that aid coordination needs a lot of improvement. Most (64.2%) felt that program- and operational-level aid coordination was needed, followed closely by those who believe that policy and strategic aid coordination was essential (63.2%), while a little over half felt that dialogue and consultation with other development partners (donors, private sector groups, civil society, and NGOs) were needed, and that more monitoring and assessment coordination was needed (50.5%). A little more than half of respondents felt that the main obstacles to adopting the sector-wide approach (SWAp) was insufficient coordination among donors, while 43.2% felt that the ministry and government agencies had insufficient capacity to adopt and implement the SWAp and 33.7% thought that there was insufficient guidance or support from central Government agencies (e.g., finance, planning) in adopting or implementing the SWAp. Others (27.4%) felt that different donors use different definitions of SWAp, which created difficulties in coming up with appropriate project design and project implementation plans. Still others (6.3%) thought that the different reporting requirements and formats used by donors contributed to over-burdening the local government in adopting the SWAp. Respondents identified other constraints that hinder the adoption of the SWAp as different donor agenda; the diverse interests of implementing agencies; the lack of standard rules, regulations, and systems; and insufficient knowledge about the SWAp concept. 9. Focus Group Discussion. Results of discussions indicated that projects had succeeded in focusing on the priority needs of beneficiaries, as around 61% of respondents revealed that projects have substantially addressed these priority needs, while around 29% felt that projects have significantly addressed their priority needs, 5.0% felt that the projects have modestly addressed these needs, and the rest had no opinion about this. In terms of beneficiaries satisfaction with how projects were implemented, most (63.1%) said they were moderately satisfied, and 18.5% said they were more satisfied. However, 15.8% said their satisfaction was low, and the rest were not satisfied at all, mainly because of, among other things, their reservations regarding the beneficiary contribution required by the project, the emphasis on project cost recovery, eligibility for allowances, and the lack of project information dissemination. Most respondents (60.7%) felt that project benefits matched their expectations, 26.4% said the project benefits were greater than they expected, and 12.9% felt that they were less than expected, identifying as the main reasons weaknesses in project design that led to delays in implementation, as well as delays in getting agreed benefits. An overwhelming majority (92.1%) of respondents were confident about the likelihood of sustainability of project benefits, particularly if beneficiaries continue to have income-generating activities and livelihood training (even in lieu of stipends) and the training programs are transferred to local governments. Only 5.3% said that sustainability was less likely and 2.6% said that the projects would not have benefits at all. In terms of improving the capacity of beneficiaries, most respondents believed that the projects had highly improved (50.0%) or improved (44.7%) their capacity in terms of resource mobilization, community participation, and/or group organization. However, 5.3% believed there was minimal improvement, as they felt that additional support was needed to substantially improve their capacity and competence. Respondents believed that the performance of project staff, consultants, and contractors in terms of implementing the projects had been effective (47.6%) or better (34.0%). Respondents who found that implementation staff were not effective (2.6%) referred to NGO staff in charge of community mobilization. C. Conclusion

10. Most survey respondents perceived ADB assistance to Nepal as "relevant" to the countrys development priorities. Out of 90.5%, 46.3% rated ADB assistance as "highly relevant," and 44.2% as "relevant." This may be associated with the strengths identified by the

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survey respondents: ADBs (i) responsiveness to sector and country development needs (70.5%), (ii) ability to foster beneficiary participation and ownership (51.6%), and (iii) flexibility in responding to changing environment and needs (35.8%).3 Almost 50% of the respondents believed that ADB programs and operations were "efficient" (with around 15% rating them as "highly efficient"). Stakeholders saw ADB assistance as effective (54.7%) or highly effective (9.5%) in achieving its intended development outcomes. However, around 34.8% thought that ADB was only partly effective. This may be because of the weaknesses identified by the respondents, including (i) the lack of synergy between related programs and projects (47.4%) and (ii) the lack of a well-integrated, programmatic modality (29.5%). The sustainability of ADB programs and projects is a little uncertain, as only 50.6% of the respondents felt that ADB assistance to Nepal was "sustainable" or "highly sustainable," with 5.3% saying the latter. Nonetheless the benefits of some specific projects appear to be "sustainable," as indicated by 92.1% of respondents during the focus group discussions. 11. Many survey respondents (64.2%) believed that ADB assistance to Nepal had either a "significant" (36.8%) or "substantial" (27.4%) contribution in strengthening sector and/or country policy and strategy planning capacity. However, 47.4% of the respondents found that ADBs contribution to strengthening organizational capacity in government agencies to deliver services was only "moderate." This may be partly related to the perception of 41.1% of survey respondents that project and TA personnel and/or consultants were only "partly effective," although 41.4% deemed them "effective" and 3.2% "highly effective." 12. With regard to governance reform, the survey revealed that 44.2% felt that ADB contribution to improving governance was just "moderate," though 47.4% found it to be "significant" or "substantial." During the CAPE period, loans and grants to the law, economic management, and public policy (LEMPP) sector, of which governance is a part, accounted for 19.3% of the total. This sector is a close second to the biggest recipient, which is transport and communications (19.8%). With regard to TA grants to Nepal, the LEMPP sector got the biggest share of financing (21.9%), followed by TA grants to water supply, sanitation, and waste management (21.3%). Given the relative importance of the sector in stakeholders perceptions, there seems to be room for improvement in ADB assistance. Governance continues to be an important area, as the weak regulatory framework was identified by 37.9% of survey respondents, making it the second biggest development constraint and challenge. 13. NRM was perceived to be an effective part of ADBs operations by 51.6% of survey respondents, with an additional 25.3% saying that NRM was highly effective. This view is consistent with the findings of an ADB study on the resident mission policy.4 Established in 1989, NRM was regarded by in-country partners as adding value to ADB operations in Nepal. According to the findings of the survey conducted as a component of the special evaluation study cited here, there is strong consensus among stakeholders that NRM has enhanced ADB operations in Nepal in areas such as strengthening understanding of the country context, strengthening ADB partnerships in Nepal, and heightening ADBs visibility in Nepal. The perception of the CAPEs survey respondents is further supported by the 2006 Multilateral Organizations Performance Assessment Network (MOPAN) survey,5 which states that NRM is
3 4 5

On the other hand, 27.4% of the survey respondents identified the lack of flexibility in responding to changing environment and needs as one of ADBs main weaknesses. ADB. 2007. Special Evaluation Study on the Resident Mission Policy and Related Operations: Delivering Services to Clients. Manila. Multilateral Organisations Performance Assessment Network. 2006. The Annual MOPAN Survey 2006: Donor Perceptions of Multilateral Partnerships at Country Level. MOPAN is a network of like-minded donor countries that began in 2003 to jointly survey the partnership behavior of multilateral organizations at the country level. Current

100

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seen as generally flexible and responsive to changing circumstances in the country, as demonstrated by its ability and willingness to balance its mandate with careful consideration of the countrys current political situation. These factors, along with strong leadership, have contributed to the high relevance of ADB operations in Nepal. The external assessment is that NRM is highly effective. 14. The MOPAN survey results appear to show, however, a general external perception that NRM has limited authority to make significant decisions, requiring more frequent consultations with ADB headquarters in Manila. In addition, ADBs contributions to harmonization in terms of operational practices and procedures were perceived to be limited by the rigid administrative requirements imposed by headquarters. This is also consistent with the perception survey result with about twothirds of the respondents felt aid coordination needs improvement (only 30.6% viewed it as satisfactory). 15. The CAPEs survey respondents identified infrastructure development (32.6%), energy projects (27.4%), and information and communications technology (20.0%) as the top priority sectors in the next 5 years. During the CAPE period, transport and communications was the largest sector recipient of loans and grants, with 20.6%, and the recipient of 18.8% of TA. Apart from this sector, ADB may revisit its sectoral focus to possibly address perceived need in the energy sector. 16. Almost three-quarters (74.7%) of the CAPEs survey respondents opined that the sector development agenda and strategy is generally led by the Government, and 18.7% said it was fully led by the Government. Considering the strong feeling among the respondents that their respective sectors and the country as a whole does not have sufficient budget to achieve its long-term development objectives and priorities (as indicated by 73.7%), donors can still be seen as essential and continuing partners in Nepals development efforts.

members are Austria, Canada, Denmark, Finland, Netherlands, Norway, Sweden, Switzerland, and United Kingdom. The focus of the Annual MOPAN Survey is on the partnership behavior of multilateral organizations toward national stakeholders in developing countries, as well as toward other international development agencies. It is based on the perceptions of MOPAN member embassies and country offices, arising from their day-to-day contacts with multilateral organizations. The 2006 Survey assessed the partnership behavior of the United Nations Childrens Fund, International Labour Organization, and ADB. Country coverage for the ADB component includes Indonesia, Nepal, Pakistan, and Sri Lanka.

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101

CONTRIBUTION OF ADB'S ASSISTANCE BY THEMATIC AREA A. Gender and Development

1. The Asian Development Bank (ADB) recognizes that gender and development is a structural issue and that an investment-oriented approach alone cannot resolve it. The country strategy and program 200520091 aimed to help the Government address gender, ethnic, and caste discrimination by (i) encouraging inclusive public policies; (ii) mainstreaming antidiscrimination measures in ADB-supported initiatives for rural development, education, and civil service reform; (iii) building institutional capacity to foster inclusion and promote gender equality; and (iv) providing targeted interventions to empower poor women. Specific mechanisms were developed to enable the participation of women and the poor in projects that might have potentially excluded them. ADB's gender projects database indicates that all of the loans and 9 of the 12 grants to Nepal during the country assistance program evaluation (CAPE) period addressed gender concerns2 (Table A9.1). The percentage of ADB-supported projects with a gender action plan increased from 25% in 2002 to 50% in 2008.3 The special evaluation study on poverty reduction technical assistance (TA) trust funds4 found that the five TA projects in Nepal funded by the Poverty Reduction Cooperation Fund provided targeted assistance and showed equally strong design focus on women and excluded groups. However, some projects had difficulty securing the participation of women because training courses were designed for traditionally male-oriented professions such as electrician and welder. Other concerns related to ADB's channeling many of its targeted projects through the Department of Women Development of the Ministry of Women, Child, and Social Welfare, which is overstretched with the number of ADB-supported projects. Table A9.1: Loans and Grants Addressing Gender and Gender Issues, 20042008
Projects Addressing Gender Issues Gender Theme Effective Gender Mainstreaming Some Gender Benefits Gender Action Plans

Item

Approvals

Loan Grant

7 12

7 9

3 1

1 4

3 4

4 3b

Excludes one supplementary grant approval. Of the five grants (for four projects) with a gender and development theme or categorized under effective gender mainstreaming, only one did not have a gender action plan. Note: Some projects meet multiple gender criteria. Source: Asian Development Bank gender projects database (available: http://www.adb.org/gender/ summaries.asp).
b

2. Nepal was the only developing member country that borrowed for a project focused exclusively on gender.5 Through program lending and policy dialogue, ADB was able to assist the Government in the formulation of several landmark legislative acts and policies, such as the
1 2 3 4

ADB. 2004. Nepal Country Strategy and Program 20052009. Manila. ADB's gender projects database covers only those projects funded by the Asian Development Fund and ordinary capital resources. Loans and grants with gender and development as a theme or categorized under effective gender mainstreaming usually have a gender action plan. ADB. 2008. Asian Development Banks Poverty Reduction Technical Assistance Trust Funds: Poverty Reduction Cooperation Fund and Cooperation Fund in Support of the Formulation and Implementation of National Poverty Reduction Strategies. Manila. ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Gender Equality and Empowerment of Women Project. Manila (Loan 2143[SF], for $10 million, approved on 16 December).

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amendment of the Civil Service Act 2007 and the enactment of the Gender Equality Act 2006, which repealed many discriminatory laws against women. ADB supported the inclusive and affirmative action program in the Civil Service Act of 2007, which reserved 45% of positions for women and other excluded groups and developed mechanisms for a gender-responsive environment. This has not yet translated into significant changes, but the number of women in the civil service and other public office slowly increased, from 8.6% in 2001 to 12.7% in 2007. Inclusive growth is beginning to happen even though the institutional development of affirmative policy implementation has not been fully realized. The number of female primary school teachers increased from 21.4% in 2002 to 30.6% in 2007, and the percentage of women in the Interim Parliament rose from 5.9% in 2001 to 17.3% in 2006. ADB assistance likewise helped institutionalize gender awareness in sector agencies. ADB assistance was extended through attached TA and support under the Gender and Development Cooperation Fund especially for policy reforms and institutional capacity building on gender mainstreaming in the key government institutions. Support for developing the gender mainstreaming strategy in three sectoral ministriesAgriculture and Cooperatives, Education, and General Administrationand building the capacity of gender focal points in sectoral ministries were among the important interventions made by ADB in institutional capacity development. Two projects approved in 2003 but implemented mainly within the CAPE period have shown positive results. For instance, over 4,000 farmer groups, 62% of whose members are women, were formed and strengthened, and close to 250 community livestock assistants, 60% of them women have been trained through the Community Livestock Development Project.6 Through the Community-Based Water Supply and Sanitation Sector Project,7 1,780 water and sanitation committee members, 50% of them women, and 575 female community volunteers received training. Women hold 53% of the executive positions in the committees. This gender-inclusive approach in ADBs assistance can be traced to the initial development of gender action plans during loan processing and the inclusion of gender-related loan assurances, which helped the Government to internalize gender and development and to monitor and report results. ADB assistance to gender and development is likely to be sustained by the new Government whose commitment to continue to monitor the results of policy and program implementation in most line ministries is set out in the Basis of Alliance of the Coalition Government. Given the progress of ADB assistance in Nepal with regard to gender and development, the potential impact of ADB support in this area is high and may yield long-term benefits for women and other excluded groups. B. Capacity Development

3. Between 2004 and 2008, 13.2% of ADBs assistance to Nepal in terms of dollar amount targeted institutional capacity development and focused on three interlinked areas: (i) sector capacities; (ii) crosscutting capacities such as countrywide decentralization, financial management, procurement, planning functions for monitoring results, and accountability; and (iii) local government capacity. This approach to capacity building and development has had significant success, though it falls short of the strategic approach to capacity development based on country ownership and leadership as emphasized in ADBs 2007 Medium-Term

ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Community Livestock Development Project. Manila (Loan 2071-NEP, for $20.0 million, approved on 19 December). ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Community-Based Water Supply and Sanitation Sector Project. Manila (Loan 2008-NEP, for $24.0 million, approved on 30 September).

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Framework8 and the Action Plan for Integrating Capacity Development into Country Programs and Operations.9 4. The Governments limited ability to formulate and implement development programs and projects has been a major obstacle to sustainable development in Nepal. This led donors to establish separate project implementation units to give them more control over direct budgetary expenditure and the procurement of goods and services. More recently, larger donors have shown more confidence in the Government by aligning their budget formulation processes and monitoring and reporting systems with the Governments, particularly for the sector-wide approach (SWAp) to education and health. Experience with SWAps demonstrates that the Government has the capability to extend them to capacity strengthening in other sectors, particularly to improve service delivery to the poor and the effectiveness of development lending. 5. Sector Capacities. Between 2004 and 2008, institutional reforms and capacity building were achieved as part of the various ADB sector assistance as ADB sought to enhance the organizational capacity of government agencies and the policy environment in which they operate, primarily with the aim of strengthening the implementation of executing agencies. At the sector level, most ADB assistance provided to agriculture, rural finance, strategic road network and rural roads, and water supply projects has made significant contributions to improving the capacity of government agencies and local organizations. Road management by the Department of Roads (DOR) was strengthened and guidelines were provided to enhance the poverty-reduction impact of road projects. The SWAp to education brought more coherence to capacity development in the education sector, as the line ministry, educational institutions, district education offices, school management, and resource centers' teacher-training institutions were strengthened using ADB support. ADB contributed to the institutional strengthening of the Customs Agency at major custom points with a focus on automation. In agriculture and natural resources, ADB supported the approval of the institutional strategic action plan to help build capacity for commercializing agriculture. Experience with capacity development in the energy sector has been mixed. 6. The Independent Evaluation Department's 2007 Annual Evaluation Review10 identified several factors that affect capacity development performance in selected sectors in Nepal. Capacity development in Nepals education sector was considered "generally successful" mainly because of (i) the appropriate mix and sequencing of modalities; (ii) long-term continuity of support; (iii) strong commitment and involvement of the executing agencies and the National Center for Education Development during design and implementation; (iv) conducive regulations, which did not permit teachers to transfer; (v) integration of the project implementation unit into the National Center for Education Developments regular system in more recent design; (vi) involvement of other donors through the SWAp during design in more recent assistance; (vii) continued cooperation from other agencies during implementation, some of which cofinanced the capacity-development components; (viii) generally qualified consultants; and (ix) increases in the Governments recurrent budget shares to primary and secondary education and external contributions to pooled funding support. Deterrents included (i) the lack of baseline assessment, particularly of the context, and the resulting inability to address important capacity development constraints at the design stage, which adversely affected the
8 9

ADB. 2006. Medium Term Strategy II. Manila. ADB. 2007. Integrating Capacity Development into Country Programs and Operations: Medium-Term Framework and Action Plan. Manila. 10 ADB. 2007. 2007 Annual Evaluation Review The Challenge of Capacity Development. Manila.

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utilization of trained staff;11 (ii) weak design (e.g., inadequate design of effective mechanisms to monitor the use of training in classroom practices and of publicprivate partnerships policy); (iii) topdown process of capacity development design that did not address capacity development needs in school management; and (iv) long delays in recruiting consultants. 7. Capacity development in Nepals roads sector yielded mixed results. Drivers of success included (i) an appropriate mix of modalities, consisting of loans and advisory TA grants in more recent ADB assistance; (ii) the strong involvement and ownership of the Department of Local Infrastructure and Agricultural Roads; (iii) generally competent consultants; and (iv) continued funding to the Road Board Nepal, which is responsible for road maintenance. Deterrent factors, mainly associated with earlier ADB assistance to the DOR, were the (i) lack of baseline assessments, (ii) lack of involvement and ownership by DOR during design and implementation, (iii) lack of security in many project areas, and (iv) remotely located project implementation units. 8. Crosscutting Capacities. ADB interventions have been successful in building crosscutting capacities in Nepal. ADB helped build capacity in different areas of economic management and public policy through a series of TA projects that gave impetus to the continuation of the poverty-reduction strategy program and performance-based strategy through support for the Governments Three-Year Interim Plan (TYIP). ADB helped strengthen Nepals capacity to develop the national accounts system. ADB-financed investment loans have improved the budget implementation capacity of executing agencies by improving their management and efficiency in public spending and investment; strengthened country ownership and commitment; and improved access, quality, accountability and responsiveness in public service delivery. This capacity building has enhanced the effectiveness of ADB operations. TA grants with capacity development components have provided nonlending-related capacity building in law, economic management, public policy, and finance. Project results profiles, sector results profiles, and country results profiles have been prepared to monitor the development effectiveness of ADB operations. 9. Local Government and Civil Service Organizations. ADB-financed projects sought to strengthen the capacity of local and community organizations with the aim of increasing community participation in ADB projects and improving service delivery. The devolution of agricultural extension, education, local infrastructure and water supply to local bodies in 2005 and support for capacity building have enhanced the institutional capacity of local organizations, improved local resource management, and provided greater service outreach. ADB was instrumental in supporting this by instituting financial administrative rules for local bodies, and progress in these areas is helping to address the factors that caused the conflict and longstanding poverty in the first place. Enhanced local capacity development has taken place mainly by linking ADB sector projects to nongoverment organizations (NGOs), community-based organizations, and other local community organizations, while supporting community-managed projects through water users' groups and associations.12 At the same time, there are concerns, in light of Nepals decentralization process and the expansion of ADB operations to local communities, NGOs, and community-based organizations, regarding their institutional capacity. Over the past few years a system of performance-based funding of local bodies has been piloted and medium-term budgeting introduced in districts, municipalities and village
11

Including (i) a system of frequent transfers of government staff, except for teachers and statisticians, every 2 years; and (ii) low teacher motivation and high teacher absenteeism because of low salaries, overcrowded classrooms, and inadequate class materials. 12 The Community Groundwater Irrigation Sector Projects policy of promoting community participation brought considerable achievement in groundwater development.

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development committees. However, much remains to be done, and there is an urgent need to improve the capacity of local organizations and streamline institutional structures between the Government and local agencies. C. Environmental Sustainability

10. ADB recognizes that environmental sustainability is a prerequisite for economic growth and poverty reduction in Asia and the Pacific. The country strategy and program 20052009 states that "fostering economic growth that is environment-friendly and ecologically sustainable will be an important priority to ADB. ADB will assist the Government to improve social and environmental policies and procedures, especially when these relate to large public sector projects. ADB will also provide assistance to address urban and peri-urban environment issues. Community-based management systems will be encouraged as a means of protecting the environment and safeguarding fragile natural resources." 11. The country strategy and program espouses the approach of mainstreaming environmental sustainability and social safeguards in ADB's development activities in Nepal, rather than just providing standalone programs and projects for this thematic area. For instance, the National Resettlement Policy Framework was drafted with ADB TA,13 and it fully adopts the principles and processes of ADB's Involuntary Resettlement Policy (1995).14 The National Resettlement Policy Framework is currently under consideration by the Government through a Cabinet subcommittee and, once approved, it is expected to address the issues of land acquisition, compensation, and resettlement related to the implementation of development projects in Nepal. ADB initiated several programs on managing the environment and climate change in the country. TA15 was provided to strengthen Nepal's capacity to manage the environment and adapt to climate change, which is being implemented in close collaboration with the Government's National Adaptation Program of Action to Climate Change and other initiatives, including the South Asia Regional Department's Climate Change Implementation Plan. ADB actively coordinates with Nepal's development partners in carrying out a country assessment on climate change. A number of ADB projects included environmental components, such as the Urban and Environment Improvement Project,16 which intended to bring about sustainable urban development in nine urban areas outside of the Kathmandu Valley through the improvement of essential urban and environmental infrastructure and services and the strengthening the relevant institutions. It included aspects of municipal environmental services such as managing waste water, solid wastes, and water supply. Similarly, water management is a major component under five ADB-approved projects.17 Further, ADB has increasingly
13

ADB. 2004. Technical Assistance for the Preparation of National Resettlement Policy Framework. Manila (TA 4422-NEP, for $150,000, approved on 28 October 2004). 14 ADB. 1995. Involuntary Resettlement Policy. Manila. (Available: http://www.adb.org/Documents/Policies/Involuntary_Resettlement/involuntary_resettlement.pdf) 15 ADB. 2008. Technical Assistance to the Federal Democratic Republic of Nepal for Strengthening Capacity for Managing Climate Change and the Environment. Manila (TA 7173-NEP, for $500,000, approved on 18 November). 16 ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Urban and Environmental Improvement Project. Manila (Loan 1966-NEP[SF], for $30.0 million, approved on 10 December 2002). 17 The five projects are: (i) Small Towns Water Supply and Sanitation Sector Project (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 [Loan 1755-NEP[SF], for $35.0 million, approved on 12 September]); (ii) Melamchi Water Supply Project (ADB. 2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Melamchi Water Supply Project. Manila [Loan 1820-NEP[SF], for $120.0 million, approved on 21 December]); (iii) Community-Based Water Supply and Sanitation Sector Project (ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Community-Based Water Supply and Sanitation Project.

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mainstreamed social and environmental safeguards into projects and programs18 approved during the CAPE period. Safeguard policies are adopted in programs and projects in education, agriculture, and urban development.

Manila [Loan 2008-NEP[SF], for $24.0 million, approved on 30 September]); (iv) Kathmandu Valley Water Services Sector Development Program and Project Loans (ADB. 2003. Report and Recommendation of the President to the Board of Directors on Proposed Loans to the Kingdom of Nepal for the Kathmandu Valley Water Services Sector Development Program. Manila [Loan 2058-NEP[SF], for $5.0 million, approved on 18 December] and [Loan 2059NEP[SF], for $10.0 million, approved on 18 December]); and (v) Community-Managed Irrigated Agriculture Sector Project (ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Community-Managed Irrigated Agriculture Sector Project. Manila [Loan 2102NEP[SF], for $20.0 million, approved on 17 November]). 18 These projects include the (i) Decentralized Rural Infrastructure and Livelihood Project (ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Decentralized Rural Infrastructure and Livelihood Project. Manila [Loan 2092-NEP[SF], for $40.0 million, approved on 24 September]), (ii) Community-Managed Irrigated Agriculture Sector Project (ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Community-Managed Irrigated Agriculture Sector Project [Loan 2102-NEP[SF], for $20.0 million, approved on 17 November]), (ii) Gender Equality and Empowerment of Women (ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Gender Equality and Empowerment of Women Project. Manila [Loan 2143-NEP[SF], for $10.0 million, approved on 16 December]), (iii) Subregional Transport Facilitation Project (ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Subregional Transport Facilitation Project. Manila [Loan 2097-NEP[SF], for $20.0 million, approved on 4 November]), (iv) Road Connectivity Sector I Project (ADB. 2006. Report and Recommendation of the President to the Board of Directors on a Proposed Asian Development Fund Grant and Technical Assistance Grant to the Kingdom of Nepal for the Road Connectivity Sector I Project. Manila [Grant 0051-NEP, for $55.2 million, approved on 10 August]), (v) South Asia Subregional Economic Cooperation Information Highway (ADB. 2007. Report and Recommendation of the President to the Board of Directors on a Proposed Asian Development Fund Grant and Technical Assistance Grant to the People's Republic of Bangladesh, Kingdom of Bhutan, India, and Nepal for the South Asia Subregional Economic Cooperation Information Highway. Manila [Grant 0099-NEP, for $9.0 million, approved on 17 December]), (vi) Governance Support program (Subprogram I) (ADB. 2008. Report and Recommendation of the President to the Board of Directors on a Proposed Program Cluster and Grant for Subprogram I to the Federal Democratic Republic of Nepal for the Governance Support Program. Manila [Grant 0118-NEP, for $106.3 million, approved on 22 October]), and (vii) Rural Reconstruction and Rehabilitation Sector Development Program/Project (ADB. 2007. Report and Recommendation of the President to the Board of Directors on a Proposed Asian Development Fund Grants to the Kingdom of Nepal for the Rural Reconstruction and Rehabilitation Sector Development Program. Manila [Grant 0093/0094-NEP, for $100.0 million, approved on 12 December]).

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PERFORMANCE ASSESSMENT OF ADB ASSISTANCE BY KEY SECTORS 1. This appendix presents a summary of sector (bottomup) performance assessment of Asian Development Bank (ADB) assistance to Nepal in 20042008, covering projects not assessed by the country assistance program evaluation (CAPE) 2004 and new projects approved and implemented under the country strategy and program (CSP) 20052009.1 The key sectors included in the assessment are the priorities of the CSP 20052009, which are (i) transport and communications; (ii) agriculture and natural resources (ANR); (iii) finance (rural finance subsector); (iv) energy; (v) education; (vi) water supply, sanitation and waste management, urban development; and (vii) law, economic management, and public policy (LEMPP). The assessment of competed projects is primarily based on a review of their completion reports. For ongoing projects, the assessment was based on a review of project documents, field visits, and interviews with ADB staff, executing agencies, and development partners. As most of the assessed projects are still ongoing, the assessment and rating of their performance are preliminary and may change as implementation progresses. There were 19 loans, 4 grants, and 9 technical assistance (TAs) projects included in the evaluation. A. Transport and Communications

2. Roads subsector. ADB has supported the roads subsector since 1976. As of 31 December 2008, six projects in the roads subsector that were evaluated at completion and postcompletion showed a success rate of 83.3%. Projects approved in the 1970s and the 1990s were 100% "successful." Because of the good performance of the roads subsector, the transport and communications sector was rated 77.8% "successful." 3. Nepal has an immense connectivity challenge caused by road deficits, and the lack of connectivity is considered a key impediment to economic growth, poverty reduction, and social inclusion. The Government of Nepal (the Government) aims to (i) extend and upgrade the strategic road network (SRN) and (ii) restore and rehabilitate rural infrastructure. To help the Government in this regard, the CSP 20052009 has focused on these priorities. ADB has also assisted the communication2 subsector through grants and TA (see details of the grants and TA in Appendix 5).

During the CAPE period, ADB provided three grants to finance one multisector project: the Rural Reconstruction and Rehabilitation Sector Development Program (RRR). (ADB. 2007. Report and Recommendation of the President to the Board of Directors on a Proposed Asian Development Fund Grants to the Kingdom of Nepal for the Rural Reconstruction and Rehabilitation Sector Development Program. Manila [Grant 0093/0094-NEP, for $100.0 million, approved on 12 December]). A supplementary amount for Grant 0093-NEP of $20 million from the Government of the United Kingdom was approved on 11 November 2008. These grants made the multisector the biggest recipient (21.8%) of total ADB loans and grants from 2004 to 2008. However, RRR became effective only in February 2008 and was not included in the assessment. ADB approved two grants for the communications subsector during the CAPE period. It is too early to assess their performance. One is a regional grant (ADB. 2007. Proposed Grant to Nepal for: South Asia Subregional Economic Cooperation [SASEC] Information Highway Project. Manila [Grant 0099-NEP, for $9.0 million, approved in December]) prepared by ADB. 2006. Technical Assistance for Preparing the South Asia Subregional Economic Cooperation Information Highway Project. Manila (TA 6358-REG, approved on 1 December). The other is ADB. 2008. Proposed Grant to Nepal for Information and Communications Technology Development Project. Manila (Grant 0106-NEP, for $25.0 million, approved in January) and prepared by ADB. 2006. Technical Assistance to the Kingdom of Nepal for Information and Communications Technology Development. Manila (TA 4833-NEPl, approved on 20 August). In addition, ADB. 2005. Technical Assistance for the South Asia Subregional Economic Cooperation Information and Communication Technology Master Plan. Manila (TA 6232-REG, approved on 25 February, for $0.45 million) was completed in November 2006. The TA completion report rated the TA "successful."

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4. ADB assistance to the roads subsector during the CAPE period amounted to $165.2 million in loans and grants,3 as well as $3.5 million in TA comprising two loans, two grants, and four project preparatory TA projects, as well as four advisory TA projects. The CSP 20052009 outlined a clear and coherent strategy for Nepals roads subsector while building on ADBs long and successful experience in it. Despite the difficult political situation and other constraints, the CSP 20052009 guided the countrys programming process without losing strategic focus or direction. Projects were generally well defined, linked, and sequenced.4 The CSP's emphasis on the road subsector is consistent with ADB's Long Term Strategic Framework 200120155 and long-term strategic framework 20082020 (Strategy 2020),6 which has infrastructure as one of its five core operational areas. 5. ADB approved two projects in the roads subsector during the CAPE period, both of which are still being implemented. The Road Connectivity Sector I Project7 was ADBs response to the challenges posed by the conflict. The Subregional Transport Facilitation Project (STFP)8 aims to help integrate Nepals economy with member countries of the South Asia Subregional Economic Cooperation through the development of transport and transit links. The ongoing Road Network Development Project (RNDP) is expected to be completed in 2009. Project implementation successfully adopted conflict-sensitive measures; using labor-intensive construction methods instead of explosives increased the use of local labor considerably and so lifted community acceptance of the project.9 6. The project completion report (PCR) for the Rural Infrastructure Development Project (RIDP),10 which rated the project "successful," was circulated in 2006. The RIDP was consistent with Government and ADB strategies at the time of approval and completion and was thus assessed as "highly relevant."11 The Government accorded high priority under its Tenth Plan to improving rural transport links and farmers access to agricultural inputs and markets, to support broad growth founded on agriculture. ADB similarly focused its support on developing rural areas and improving access for the poor to basic services.

Includes projects for rural roads development: (i) Decentralized Rural Infrastructure and Livelihoods Project (DRILP) (ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Decentralized Rural Infrastructure and Livelihood Project. Manila [Loan 2092NEP[SF], for $40.0 million, approved on 24 September]) and (ii) Rural Reconstruction and Rehabilitation Sector Development Program (project grant) (RRRSDP) (ADB. 2007. Report and Recommendation of the President to the Board of Directors on a Proposed Asian Development Fund Grants to the Kingdom of Nepal for the Rural Reconstruction and Rehabilitation Sector Development Program. Manila [Grant 0093-NEP, for $50.0 million, approved on 12 December]). The latter is a multisector project but with a dominant allocation for developing rural roads. 4 For example, road connectivity projects I and II have been programmed following the CSP strategy of sequencing ADB assistance in the road subsector in phases, each phase focusing on a certain geographical area. 5 ADB. 2001. Moving the Poverty Reduction Agenda Forward in Asia and the Pacific: The Long-Term Strategic Framework of the Asian Development Bank (20012015). Manila. 6 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank 20082020. Manila. 7 ADB. 2006. Proposed Asian Development Fund Grant and Technical Assistance Grant for the Road Connectivity Sector I Project (Nepal). Manila (Grant 0051-NEP, for $55.2 million, approved on 10 August). 8 ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Subregional Transport Facilitation Project. Manila (Loan 2097-NEP[SF], for $20.0 million, approved on 4 November). 9 The MudheBasantpur section was built by locals. In other road subprojects implemented by contractors, locals were employed to the extent available. 10 ADB. 2006. Project Completion Report on the Rural Infrastructure Development Project. Manila (Loan 1450NEP[SF], for $12.2 million, approved on 27 June 1996). 11 The PCR rated the project relevant, but the CAPE upgraded the rating to highly relevant.

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7. Subsector Outputs, Outcomes, and Impacts. ADBs assistance to the roads subsector is highly relevant. It addresses the Governments priorities in the subsector. It is highly relevant to the countrys poverty-reduction strategy and consistent with ADB's corporate strategy. The assistance projects are expected to have positive social and economic impact on the poor. They contribute to promoting equitable regional development and are consistent with ADBs sector strategy under the CSP 20052009. 8. ADB assistance to the roads subsector is likely "effective in achieving its objectives. The RNDP has already connected one district headquarters by opening a new track road; constructed 75 kilometers (km) of new roads; upgraded or improved 264 km of the SRN; and maintained 281 km of highways. In the December 2008 monthly report, the project consultants estimated the completion of construction at 82%.12 Current indications are that the outputs envisaged by the STFP will be substantially achieved. Although road safety and axle load control are emphasized in ADB projects, there has been an increase in road accidents. On the Pouwa BhanjyangPhidim road, for example, injuries and fatalities in accidents increased from 4 in 2004 to 53 in 2008, mainly from speeding, overloading, and poor vehicle condition. Improving road safety is an area requiring priority, sustained attention toward changing the attitude and behavior of road users. 9. Most of the required actions, including the approval of transport policy and heavy vehicle management policy and the preparation of interim guidelines on enhancing the povertyreduction impact of road projects, have been completed. Under TA 4825-NEP,13 training has been provided to Department of Roads staffers on road feasibility studies including economic evaluation and environmental analysis, which equipped them to supervise the preparation of environmental studies and the implementation of an environmental management and monitoring plan. Complementary social development activities were undertaken along some road sections (e.g., the MudheKhandbari road), under which poor families were organized into savings and credit groups and provided with skills training for income generation. HIV/AIDS initiatives under the ADB projects helped to link the transport sector with the existing HIV/AIDS and antitrafficking programs in support of the Government strategies. More broadly, ADB is coordinating with other development partners to introduce sector-wide approaches (SWAps) and policies in the roads sector. It supports the Government in promoting public-private partnership (PPP) to build toll roads (TA 4842-NEP).14 10. The RIDP was rated "effective" in (i) improving access to remote villages, (ii) raising the socioeconomic condition of local people, and (iii) protecting the fragile ecology in the hill region. The ongoing Decentralized Rural Infrastructure and Livelihoods Project (DRILP) is expected to increase access to economic and social services and enhance peoples social and financial capital in the 18 poor, remote hill and mountain districts of Nepal. Besides interventions for building rural roads, ADB supported the Government in establishing a coherent framework and strategy with associated institutional and human resource development support that helped implement the rural infrastructure program in a more organized manner by streamlining

12

Project implementation picked up and project performance improved in 2005, 2006, and 2007, for which the project was recognized, but implementation slowed in 2008 because of political disturbances, a few problematic contracts, and the turnover of key staff. 13 ADB. 2006. Report and Recommendation of the President to the Board of Directors on a Proposed Asian Development Fund Grant and Technical Assistance Grant to the Kingdom of Nepal for the Road Connectivity Sector I Project. Manila (TA4825-NEP, for $0.3 million, approved on 10 August). 14 ADB. 2006. Technical Assistance to Nepal for Preparing the North-South Fast Track Road. Manila (TA4842-NEP, for $0.85 million, approved on 15 September).

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implementation procedures, reflecting local priorities, and introducing safeguards.15 Assessment of DRILP is included in the ANR sector assistance program evaluation (SAPE). 11. ADBs assistance to the subsector has thus contributed to the results targeted by the Government's national plans.16 It has improved transport connectivity and managed traffic growth, facilitating economic activity and trade. The rural road network has been extended and/or upgraded, and accessibility has been enhanced, thereby improving rural peoples access to economic opportunities and social services. Moreover, these results were achieved during armed conflict. The adoption of a conflict-sensitive approach, close progress monitoring by the Nepal Resident Mission (NRM), and ADBs capacity-building support are some of the factors that helped achieve outputs and ensure the effectiveness of ADB's assistance. 12. The roads subsector is rated likely "efficient." This assessment is made despite some delays in ongoing road projects that were mainly caused by the conflict. In response to the conflict, RNDP adopted conflict-sensitive measures, including avoiding the use of explosives and adopting labor-intensive construction methods to provide employment for local people; even some supervisors were hired locally. While the high use of local labor considerably improved project acceptance, it slowed work progress. Since 2007, progress has been further slowed, mainly by the intensification of unrest in the Terai, where there are frequent strikes, blockades, and vehicular stoppage, and the now-eased shortage of petroleum products in project districts. Construction has also been hampered by the recent Koshi River flooding of a 13 km section of the eastwest highway. Other reasons for slow progress are the management inefficiency of several contractors and frequent transfer of key project staff (e.g., the project director was replaced within 8 months). 13. Notwithstanding the delays, the RNDP is unlikely to suffer cost overruns; the actual cost of the Pouwa BhanjyangPhidim road was lower than the original estimate by NRs83.9 million. The estimated project cost at appraisal will be adequate to complete the project in its original scope, and there has been no major change in scope to date. A funding shortfall is affecting the completion of the MudheKhandbari road, cofinanced with the Department for International Development of the United Kingdom. The sensitivity analysis carried out at appraisal shows that, while delays reduce economic viability, a 1-year delay will cause the economic internal rate of return (EIRR) to fall close to or below the cutoff rate of 12% only for the DolalghatChautara and Pouwa BhanjyangPhidim roads, as the EIRRs for other roads are significantly above the rate. Meanwhile, the DolalghatChautara road was completed on schedule in May 2007, and the Pouwa BhanjyangPhidim road was completed on schedule in July 2007. As the works planned under the RNDP will be substantially completed by the revised loan-completion date, the project remains likely "efficient," assuming that the roads are adequately maintained to sustain their benefits. 14. The implementation of the Road Connectivity Sector I Project has been largely smooth and on schedule.17 However, it experienced a significant cost overrun at a very early stage,
15

ADB is helping the Government to assess the feasibility of adopting SWAp in the rural infrastructure sector. The passenger vehicle-per-kilometer ratio increased from 2,525 in 2005 to 3,343 in 2007, and the SRN was accessible to 78% of the population in 2008, up from 62% in 2005. Source: Ministry of Finance. 2008. Nepal Portfolio Performance Review 2008: Strengthening Country Systems for Improved Portfolio Performance. Kathmandu. 17 The environmental assessment of GalchiTrisuliDhuncheSyaphrubesi road, which began in 2004 during project preparatory TA (ADB. 2004. Technical Assistance to the Kingdom of Nepal for Preparing the Transport Sector Connectivity Project. Manila [TA 4347-NEP, approved on 4 June]) was completed with environmental impact assessment approval in April 2009.
16

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partly from the considerable rise in construction material prices. The subprojects under implementation or in the pipeline are likely to have an EIRR close to or just above 12%.18 Given these developments, it is important that funding availability and adequacy for the Road Connectivity Sector I Project be closely and constantly reviewed and that project scope be revised at the earliest opportunity.19 The 9 km, NRs140 million TaplejungSurket airport link that was added to the PhidimTaplejung road during detailed design, but did not enhance the value of the subproject, could be reconsidered. So could the practice of picking roads from outside the predetermined long list of non-sample roads. Further, the inputs of the attached TA 4825-NEP should be more effectively utilized and front-loaded to strengthen Department of Road's capacity for determining road feasibility and contract management. 15. Similarly, the implementation of the ongoing STFP has recently picked up20 after initial delays and slow work progress caused by the security situation in general and specific problems like the unavailability of bricks in the local market and difficulty in transportation because of Koshi River flooding. But there is still considerable catching up to do as several project components, including installing an automated system for customs data and a wide area network and training activities, are falling behind schedule, as cumulative disbursements to the net ADB loan as of 31 March 2009 was only 36%, against 78% elapse of the loan period. The 2008 portfolio performance review has flagged poor disbursement achievement. Contractors work schedule needs to be revised to make up for the implementation delays, and the loan closing date may have to be extended. Progress has occurred on such key actions as setting toll rates,21 selecting the terminal management company for Kakarbhitta inland clearance depot,22 appointing independent technical audit consultants, and implementing an awareness campaign on HIV/AIDS and anti-trafficking. Agency coordination has improved, though some problems persist regarding relocating electricity and telephone posts along stretches of the road for which widening is proposed. In all, the likelihood of achieving project outputs within budget has been enhanced. In that the estimated EIRR of the project is robust, the STFP is expected to remain likely "efficient." Thus, the ADB road assistance is rated likely "efficient." 16. The sustainability of the benefits of road investment is an ongoing concern shared by the Government and its development partners. Inadequate maintenance has reduced the useful life of roads and their benefits. The establishment of the Road Board Nepal (RBN) in 2002 was the Governments major institutional response to address maintenance issues. The World Bank, Swiss Development Corporation, and other development partners are assisting the Government with needed institutional reforms to, and corporate strengthening of, RBN to ensure the proper maintenance of SRN roads. Although the Governments routine maintenance program has improved, concern about the projects sustainability remains. RBN has been able to support the
18

For example, the reevaluation showed the EIRR of the PhidimTaplejunj road to be around 12.12%, against the rate of 12.7% at appraisal. The reevaluation of this sample subproject was prompted by the addition of 12.5 kilometers of link roads during detailed design. 19 Action should be taken to expedite Organization of Petroleum Exporting Countries cofinancing of $10 million. It may be worthwhile to explore the possibility of preparing the Road Connectivity Sector II Project (currently a firm loan for 2011) to make funds available to finance the feasible and detail-designed subprojects not sampled under the Road Connectivity Sector I Project. 20 For example, progress in civil works for the Kakarbhitta inland clearance depot improved from 33.7% in November 2008 to 55.1% in March 2009 and for the road from Birgunj inland clearance depot to the Tribhuwan Highway at Jitpur from 9.0% in November 2008 to 28.0% in March 2009. 21 The Road Board Nepal has forwarded the toll rate proposal, approved by its board, to the Ministry of Physical Planning and Works for Cabinet approval. 22 Following the Cabinets decision to hand over the inland clearance depot to the Nepal Intermodal Transport Development Board, draft bid documents have been prepared and discussion between the Ministry of Physical Planning and Works, the Department of Roads, and the Nepal Intermodal Transport Development Board are underway to resolve the issue of financial viability.

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routine and recurrent maintenance of only 50% of the SRN. Routine maintenance of 4,792 km of black-topped and graveled SRN was carried out in fiscal year (FY) 2008 out of the SRN total of 9,400 km.23 It has no capacity to take care of periodic maintenance, and the maximum periodic maintenance undertaken in FY2008 was for only 230 km of the SRN. RBN is constrained by the lack of adequate and stable funding24 and needs major policy reforms and strengthened agency capacity for maintenance to establish a functional system for managing road assets (a proposal for amending the Roads Board Act has been tabled in Parliament). As a result, the condition of the SRN is deteriorating, with the percentage of roads in maintainable condition falling from 92% in 2000 to 84% in 2007 and 82% in 2008.25 Another factor undermining road sustainability relates to axle-load control for heavy vehicles, as road damage from overloaded vehicles is considered disproportionate. It is for this reason that a thick asphaltconcrete pavement was laid on the BelbariChauharwa road under the RNDP. Though some work has been done in this area with ADB assistance, amendments to the Vehicle and Transport Management Act have not improved the enforcement of axle loads. For rural roads, the Government's stated policy for a road maintenance fund has not been realized. Local communities are unlikely to maintain the roads on their own because of the initial poor quality of roads and the likely occurrence of heavy rains and flooding. 17. ADB has introduced performance-based maintenance in the strategic road sections under the RNDP, and the preventive and catch-up maintenance of HetaundaNarayani bridge and KohalpurGaddha Chawki road under the performance-based maintenance contract has now been completed. Tolls have been proposed for two commercial and border roads under the ongoing STFP to fund their maintenance. At present, collected tolls go to the Government exchequer and are routed through budgetary allocation to RBN, with all project roads coming under the purview of RBN for maintenance financing following their completion. As most of the roads under ADB assistance are high traffic, high priority, and upgraded to maintainable standards, it can be assumed that routine maintenance of them will be performed. But these roads must wait for donor funding for periodic maintenance. The maintenance of rural roads suffers from severe financial, institutional, and human deficiencies. Further, much more needs to be understood about current maintenance, its cost and effectiveness, and the rural road inventory. Despite these shortfalls, the PCR assessed the RIDP as "likely sustainable," as there is strong demand for the roads built under this project and local communities actively participated in their planning, construction, and maintenance. Overall, the CAPE initially rates ADB's assistance to the roads subsector as "less likely sustainable" in light of deteriorating road conditions and inadequate financing. 18. The roads subsector has the potential to bring about a "substantial" impact on economic growth and poverty reduction in the project areas, assuming that the roads are maintained. Enhanced road connectivity will increase trade and economic activity and facilitate the movement of goods and people across the country and to neighboring countries. Opening
23

Dipak Nath Chalise. Roads Board Nepal A Step Forward to Sustainable Road Maintenance Management. Kathmandu. (Available: http://roadsboardnepal.org/notice/PeopleVoice.pdf). 24 RBN does not receive even the full amount collected from fuel levy, vehicle registration, and toll revenue; worst still, the road agencies have not been able to spend the amount allocated by RBN. (Source: Dipak Nath Chalise. Roads Board Nepal A Step Forward to Sustainable Road Maintenance Management. Kathmandu.). Moreover, the Government budget allocation to RBN was reduced to NRs664.5 million in FY2008 from NRs760.0 million in FY2007, while the budgeted amount for road investment, excluding rural roads, jumped sharply by 50.6%. Budgetary allocation does not bear a direct or transparent relation to revenue projections from fuel levies, vehicle registration, tolls, or subsidies. This raises serious questions about policy continuity and the Governments commitment to road maintenance. 25 Ministry of Finance, Government of Nepal. 2008. Nepal Portfolio Performance Review. Kathmandu (1314 November).

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access routes into areas not served by roads and upgrading highly trafficked roads help bring excluded regions and communities into the economic mainstream. In some cases, local people's access to economic and social services has already improved, as has commerce along the road corridor and in regions connected by the road network. 19. As a substantial part of ADB project intervention involves strengthening, upgrading, and maintaining the pavements of existing sections of the SRN, the savings to users of the roads from reduced vehicle operating costs and travel time will start accruing immediately after their completion, though benefits will be somewhat restricted in the current transition period by frequent traffic disruption and stoppage caused by political unrest and protests in the project areas. Anecdotal evidence26 suggests that benefits have already ensued from the improvement of the highly trafficked BelbariChauharwa and HetaundaNarayani bridge segments of the eastwest highway, though, in the case of the former, benefits have been compromised by the washing out of 13 km of the road in this years Koshi River flooding27 and the cancellation of the planned improvement of 30 km of road because of local disputes and resistance. A recent project performance monitoring and evaluation report28 on one of the RNDP roads, the 24 km Pouwa BhanjyangPhidim road, a major northsouth SRN link, has reported notable initial impact from the upgrading of the road to paved, all-weather standard in terms of traffic use, passenger fares, freight rates, travel time, vehicle ownership, commodity prices, household cash income, and other project-induced socioeconomic changes.29 In addition, local labor has benefited from direct employment during construction. Further, along some road sections (e.g., the MudheKhandbari road), poor families benefited from savings and credit programs and skills training provided as complementary social development interventions. 20. Rural roads are expected to have a significant positive impact on the economy. The PCR of the RIDP documented some initial impacts of project roads. The project has provided local employment and injected cash into the local economy through wages earned during construction. Female participation in road construction increased from 11% in 1999 to 25% in 2005, against the appraisal target of 20%. The roads built by the project reduced the burden on women carrying heavy loads of goods, agricultural inputs, and other household necessities. Local communities became more empowered and capable, and many acquired construction skills. Access to other economic activities improved. The project benefited 29,573 households, including the marginalized farmers who constitute 52% of the farmers in the project districts. Small businesses such as shops and tea stalls have become more numerous since the road was built, though it is believed that many of them are owned by better-off people. The PCR notes that, although some workers developed skills that could be used in other projects or road maintenance, the livelihoods of most of the very poor people did not improve after construction was completed. Similarly, the ongoing DRILP provided direct employment to about 82,000 unskilled local laborers during the construction of district roads and trail bridges, and some 68 savings and credit groups were formed by the laborers, with more than 40% participation by women.30 The groups aim to promote income-generating activities to benefit local communities.

26

The passenger vehicle-per-km ratio of the SRN increased from 2,525 in 2005 to 3,343 in 2007. (Source: Ministry of Finance. 2008. Nepal Portfolio Performance Review 2008: Strengthening Country Systems for Improved Portfolio Performance. Kathmandu.). 27 This section, previously strengthened under the project, will now be reconstructed with Indian assistance. 28 ADB. 2009. Project Performance Monitoring and Evaluation Report for Pouwa BhanjyangPhidim Road (24 km). (March, draft). 29 However, road accidents have markedly increased, yields of cash crops have decreased, and fertilizer prices have increased. 30 Nepal Resident Mission, ADB. 2008. Fact Sheet, Asian Development Bank and Nepal. Manila.

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The impact of ADB assistance in the roads subsector is likely "modest to substantial," provided that maintenance, particularly periodic maintenance, is properly carried out. 21. With the combined ratings of completed and ongoing projects, the CAPE initially rates ADB assistance to the roads subsector as likely "partly successful," 22. Based on the above, ADB assistance to the transport and communications sector is "highly relevant," likely "effective," likely "efficient," "less likely sustainable," and likely "modest to substantial" impact. Hence, the CAPE's overall preliminary rating to the transport and communications sector is "partly successful." B. Agriculture and Natural Resources

23. Introduction. This assessment is based on the SAPE of the agriculture and natural resources (ANR) sector separately prepared by the Independent Evaluation Department (IED)31 to provide input to CAPE preparation and to future assistance program design and implementation. 24. Sector Constraints. The agriculture sector continues to be important to Nepals economy, providing 33% of the gross domestic product. Poverty is primarily a rural problem, strongly associated with gender, ethnicity, caste, and religion. It is highest in the midwestern and far western development regions, though there are pockets of poverty nationwide. Income inequality grew, with the Gini coefficient rising from 0.34 in 1996 to 0.47 in 2004.32 Food insecurity remains a key concern, with 49% of children under 5 stunted, 20% severely stunted, 13% wasted, and 3% severely wasted. The first Millennium Development Goal (MDG) target on hunger (MDG1, Target 2) is further out of reach in Nepal than any other MDG target. 25. Low factor productivity has been the major concern of agriculture in Nepal. Yields of major crops are the lowest in South Asia. Value addition in production processes has been low, and real profit per hectare from crop production declined for all categories of farmerssmall, medium, and largebetween FY1996 and FY2004.33 Several factors have constrained the commercialization of agriculture. These include (i) small holding size, land fragmentation, and unplanned land management systems; (ii) the lack of effective value chain linkages among input providers, farmers, traders, processors, and service providers; (iii) inadequate efforts to attract private sector investment in the commercialization of the subsector; (iv) inadequate capacity of the key stakeholders to make investment decisions with respect to technology, infrastructure, marketing, and capacity enhancement, aggravated by shortcomings in policy and institutional environments and inadequate physical and social infrastructure; (v) the countrys inability to restrict imports of low-quality agricultural inputs and other products from neighboring countries;34 (vi) inadequate knowledge and information services for farmers; and
31

Independent Evaluation Department, ADB. 2009. Nepal: Agriculture and Natural Resources Sector Assistance Program Evaluation. Manila (May). 32 Information for subsequent years is unavailable. 33 Department for International Development, World Bank, and Asian Development Bank. 2006. Nepal Resilience Amidst Conflict. Kathmandu. 34 This particularly applies to growing high-value crops.

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(vii)

the low competitiveness of agricultural products, even those with comparative advantage, due to poor marketing conditions.

26. Several major factors constrain sector growth that can be broadly grouped as economic, institutional, and policy. Agriculture still depends heavily on weather, as only 30% of agricultural land has year-round irrigation. National agricultural productivity has remained low and unstable. The diversification of agriculture is constrained by farmers limited access to markets and other services. Budgetary constraints have limited the capacity of the Government to invest in rural roads and other marketing infrastructure. Poor coordination among ministries and departments in planning and implementing programs reduces their effectiveness and efficiency. Similarly, delivery through local government institutions and nongovernment organizations (NGOs) is weak. Regarding policy, substantial increases in rural investments are needed to support agricultural growth, broaden income and employment opportunities, and improve connectivity and inclusion. These constraints can be categorized under six sector challenges: (i) sustainably raising factor productivity; (ii) commercializing the sector; (iii) improving the enabling environment; (iv) developing institutions and running them effectively; (v) strengthening partnerships with the private sector and NGOs; and (vi) improving intersectoral linkages and coordination. (Appendix 3 of the ANR sector assistance program evaluation provides further details). 27. Government Plans and Priorities. Government policies and strategies in agricultural production, agro-processing, and agribusiness are described in the agriculture perspective plan (APP), National Agriculture Policy 2004, and Agriculture Business Promotion Policy 2006. With respect to basic features, these policies have now been made broadly consistente.g., in the areas of enhanced private sector roles and facilitating firms investment in subsector developmentremoving market distortions by withdrawing subsidies and dismantling price controls on inputs and produce, improving the quality of produce, and improving market access for domestic produce. Issues of market liberalization and removing structural barriers to private sector participation are central to all of these policies. 28. The ninth and tenth plans envisaged increasing agricultural productivity through the judicious use of improved seed, fertilizer, and irrigation facilities, backed up by improved agricultural technology. The need for implementing intensive production programs in irrigated areas (e.g., in the Terai area35 and small irrigation projects in the hills) are also highlighted. The importance of linking production pocket areas with market centers and nearby roads has been acknowledged. Generally in these areas, the Tenth Plan 20022007 follows the Ninth Plan 19972002, but with added focus on good governance, social inclusion, and targeted programs for the poor and vulnerable groups. 29. One of the key objectives of the National Agriculture Policy 2004 is to make the country's agriculture competitive in regional and international markets by developing the bases for commercial and competitive agricultural systems. The policy has proposed several strategies for increasing agricultural productivity, supporting small and marginal farmers with less than 0.5 hectares and minimal irrigation, bringing in members of deprived and vulnerable groups such as Dalits,36 and supporting landless agricultural laborers. Another feature is the development of competitive and commercial farming systems. Some important strategies
35

The Terai region is a 2632 km wide belt of fertile alluvial plain extending across southern from the westernmost part of the country to the eastern limit and covering 17% of the total land area. 36 Dalit is a self-designation for a low-caste South Asian group traditionally called untouchables in English. Dalits are a mixed population of numerous caste groups all over South Asia that speak various languages but are indistinguishable from other castes by race.

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requiring special mention with regard to this subsector are (i) developing and expanding irrigation facilities, agricultural roads, rural electrification, and the use of appropriate agricultural technologies intensively and extensively in suitable areas; (ii) giving special priority to the cultivation of high-value agricultural products in areas with high potential along the northsouth highway and feeder roads; (iii) giving priority to the production of commodities with high value density in remote areas; (iv) promoting a competitive agricultural research and development system with the participation of the private sector and NGOs; (v) providing seeds, saplings, and technical services either free or on concessional credit terms to farmers belonging to depressed and oppressed classes and to landless agricultural laborers; (vi) developing high-production pockets to produce agricultural produce on a large scale and of a quality that meets the demands of the market; and (vii) regulating and strengthening agriculture and livestock quarantine services to ensure the production of high-quality agricultural products and raise their credibility in local and external markets. 30. ADB's Assistance Programs. By end-2008, there were 39 evaluation reports including PCRs on Nepal's ANR sector. The reports rated only about half of the projects "successful" (51.3%). The success rate was low in agricultural production processing (37.5%) and livestock (33.3%), but irrigation had a higher success rate (77%). Projects approved in the 1970's had a relatively high success rate of 75%, and those approved in 1980's had lowest, at 40%. Projects approved in 1990's had a 54.5% success rate, indicating a slight improvement. In general, these success rates are higher than the ADB-wide average success rate for ANR of 42.6%. 31. The country synthesis prepared by IED in 2000 reports that less than half of the sector projects were rated "successful," with 48% rated "generally successful," 29% rated "partly successful," and 24% rated "unsuccessful."37 The key factors affecting performance included (i) weaknesses in project preparation and design, (ii) the lack of stakeholder participation, (iii) insufficient assessment of the institutional environment and capability of executing agencies (EAs), (iv) weak supervision by ADB, and (v) inadequate assessment of policy and sector issues. Implementation delays were commonly cited as affecting performance. The average delay was about 2.3 years, for a time overrun of 48%. Factors that contributed to these delays were related to procurement processes, limited institutional capacity, delays in the release of counterpart funds, and noncompliance with loan covenants. The review identified several important issues, including the need for (i) beneficiary and private sector participation, (ii) a focus on poverty alleviation, and (iii) strengthening the institutional capacity of the Government and EAs for timely implementation. 32. The CAPE 2004 raised serious questions about sector balance during 19992004. Noting that the lending program was meant to continue supporting the implementation of the APP, it observed that this focus seemed to have been lost to a certain degree. During 2000 2003, only 25% of lending was for APP-related projects (i.e., agriculture and roads), and just 8% of lending was for projects entirely in the ANR sector. Overall, the CAPE 2004 concluded that sector assistance had contributed to the countrys development as a whole and has helped advance gender equity and environmental sustainability. Generally, sector projects were found to have a good record of proactive design relevance and capacity development, but implementation efficiency was rated lower.38
37

ADB. 2000. Country Synthesis of Evaluation Findings in Nepal. Manila. Available: www.adb.org/Documents/ PERs/CS-NEP99.pdf. 38 Of the 16 criteria used for evaluating the projects, design relevance and capacity development scored above average, and implementation efficiency and adequate governance were rated below average. As the CAPE 2004 was conducted prior to the development of the IED guidelines, it did not give ratings on performance.

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33. Country Operational Strategy (COS) 19931998 and 19992003. Under these two country strategies, ADB provided advisory TA to prepare the APP, supported its implementation with a program loan, and subsequently provided four loans, for the projects Community Groundwater Irrigation Sector, Crop Diversification, Community Livestock Development, and Rural Microfinance, and a series of TA projects for strengthening the planning process, institutional reforms, and the development of statistical systems for supporting sector development. These were followed by two loans, DRILP and Gender Equality and Empowerment of Women, both approved in 2004. 34. The CSP 20052009 is closely aligned to the Governments Tenth Plan. The strategy adopted a medium- to long-term perspective to help reduce poverty and achieve the MDGs. The insurgency was already in full swing at CSP preparation, which factored in the implications of conflict for development and poverty reduction. It stated that the lack of opportunity for advancement in rural areas contributed to endemic poverty, leading to conflict. The CSP considered improving agricultural productivity and food security and diversifying economic opportunities as key to rural development. Its focus has been on providing assistance in rural areas to (i) build or rehabilitate rural infrastructure, (ii) improve access to credit, and (iii) improve livelihoods by improving productivity, diversifying crops, and improving animal husbandry in line with local needs. 35. Sector Outputs, Outcomes, and Impacts. This assessment looks at 13 lending and nonlending projects consisting of 4 loan projects, 2 grant projects, and 7 advisory TA projects. All loan and grant projects continue, while 5 of the 7 advisory TA projects have been completed. Of the $127.85 million total, loan projects accounted for 70.4%. Overall sector assessment is "partly successful." While most projects were "relevant," there were shortfalls in their effectiveness in achieving objectives and efficiency in using resources to produce outputs. The sustainability of outputs and outcomes is "likely" but on the low side, and the impacts are expected to be "modest to substantial." 36. ADB sector assistance was "relevant." ADB's strategies and programs were well intended to help the Government address poverty and inequality issues. ADB support to fostering inclusive development by addressing gender, caste, and ethnic discrimination through inclusive public policies, promoting broad economic growth, improving the enabling environment for private sector development are noteworthy in this regard. The support provided was generally aligned with the main pillars of national development plans and ADB's sector strategies. In most cases, the EAs took strong ownership of the assistance. Increasingly, sector projects were specifically designed to take into account the needs of women and marginalized groups. Project design has become more relevant over time as good practices were identified and incorporated. Areas for future improvement are technical soundness and assessment of EA capacity and implementation plans. 37. The sector assistance is assessed as "less effective." Only two subsectors, (i) livestock and (ii) agriculture and rural development, were assessed effective, as they have achieved the intended outputs and outcomes in terms of improving food security, employment, household incomes, gender empowerment, and greater inclusiveness. Policy dialogue has improved the enabling environment, and partnerships with civil society enabled projects to continue to function throughout the conflict. One major problem, however, was recurring delays, which reduced project effectiveness and compromised sustainability. While some projects economic returns were estimated to be generally satisfactory, greater efficiency in resource use could have been achieved had there been fewer delays. Further, the delays required extra time and resources for project supervision. In some cases, hurried, last-minute expenditure resulted in

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inefficient resource use, compromising the quality of outputs. The assistance is rated "less efficient." 38. The overall assessment of sustainability of the sector outputs and outcomes is "likely sustainable" but on the low side. The outcomes of livestock and irrigation projects are likely to be sustained, as profitability provides the necessary motive for continuing activities after project termination. However, the sustainability of rural roads remains problematic, despite the Governments stating its commitment to a road maintenance fund to their upkeep. There are indications of renewed interest in the sector on the part of other development partners and donors. Some of them have adopted ADB-initiated modalities and are likely to scale up or replicate activities initiated and promoted by ADB. 39. Impact is assessed in terms of plausible contribution to long-term changes in development conditions through the ADB assistance program in the sector. This includes how successfully the sector program has contributed to the attainment of specified development goals, including changes in socioeconomic conditions, income poverty, non-income MDGs, and other specified national poverty reduction goals and objectives. While assistance to the livestock subsector is assessed as likely to have "substantial" impact, assistance to the other three subsectorsagriculture production, irrigation, and agriculture and rural developmentis expected to have "modest to substantial" impacts. Impact on long-term development prospects has taken such forms as capacity development for partners in the Government, the private sector, and local and national NGOs; encouraging a partnership mentality; and empowering women and members of excluded groups and improving their awareness of their rights. Policy dialogue has fostered positive change in a range of areas, particularly the enabling environment and development partner coordination. Impact on sectoral development in general is more difficult to assess because the number of actors makes attribution highly problematic, but impact on the livestock subsector and in project areas has often been significant. C. Finance (Rural Finance Subsector)

40. Sector Output, Outcomes, and Impact. ADB's assistance to Nepals finance sector focused on rural finance, microfinance, corporate governance, policy reform, and finance sector restructuring. During the CAPE period, ADB supported a sovereign loan for the Rural Finance Sector Development Cluster Program (RFSDCP) Subprogram 1 (for $56.0 million)39 with a $8.7 million project grant attached to facilitate the reform and restructuring of rural finance institutions (RFIs) and a TA grant of $0.5 million for capacity development. 41. The RFSDCP was to support the Government in improving the mechanism for delivering rural finance and increase private sector activity in rural financial services. It aimed to provide sustainable, affordable financial services to rural poor and low-income households to (i) generate income and reduce poverty by reforming and restructuring RFIs; (ii) provide efficient RFIs; (iii) ensure all rural households access to financial services; and (iv) privatize the major RFIs: Agricultural Development Bank Limited (ADBL), Small Farmers Development Bank (SFDB), and Grameen Bikash Bank (GBB). The programs key components include (i) policy reforms to create an enabling environment for rural finance; (ii) restructuring and reforming RFIs, including the institutional strengthening of the rural financial system; (iii) creating a
39

ADB. 2006. Report and Recommendation of the President to the Board of Directors for the Proposed Sector Development Program Cluster of Loans, Asian Development Fund Grant, and Technical Assistance Grant to Nepal for the Rural Finance Sector Development Cluster Program (Subprogram I). Manila. (Loan 2268-NEP, for $56.0 million, approved on 26 October).

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supportive legal and regulatory framework; (iv) building capacity in the sector; and (v) innovating products. Policy reforms enabled the legal and policy environment. Important policy measures developed with the support of ADB and approved in 2006 included the Bank and Financial Institution Act, Company Act, Insolvency Act, Secured Transaction Act, and Securities Act. Policy reforms were designed to strengthen Nepal Bank Limited (NBL) and Rastriya Banijya Bank (RBB). The reform of NBL and RBB through other donors has helped improve the credit environment. 42. Plans for the Nepal Judiciary Academy ordinance were put in place to provide training in corporate legal concepts. ADBL reduced its percentage of nonperforming loans (NPLs) from 36.5% in 2005 to 15% in 2008. Disbursements increased by NRs3.0 billion from 2004 to 2008, annually growing by 10%, higher than targeted. Microcredit increased nationally from NRs2.7 billion in 2002 to NRs7.5 billion in 2007. ADBL now provides credit to over 350,000 clients, of whom almost 17,000 are underprivileged or members of lower and scheduled caste, and holds deposits from over 600,000 clients, of which 99,000 are women. Its microcredit disbursement increased tenfold from FY2002 to FY2007, and the repayment rate on loans borrowed from ADBL is high. 43. ADB assisted the finance sector through the Rural Microfinance Project (RMP).40 Although not in the current CAPE period, RMP continued at the time of the CAPE 2004 and was included in it. The RMP aimed to improve the socioeconomic status of women and employment opportunities by providing women better access to financial services and promoting microenterprise development through the provision of a revolving line of credit to finance viable farm and off-farm economic activities. The project targeted households living below the poverty line, with at least 7580% of beneficiaries being poor rural women. The project also supported a program for assessing and identifying local investment opportunities for women, mobilizing women and improving their skills and capabilities, supporting womens access to markets, and providing improved financial services through institutional strengthening. The scope of the RMP included (i) the provision of a revolving line of credit to support rural microenterprises and agricultural activities, (ii) institutional strengthening in the executing and implementing agencies for project implementation, and (iii) forming and strengthening groups of subborrowers and beneficiaries. 44. ADBs assistance to this sector is rated "relevant," as it is aligned with country strategy objectives and the countrys needs. It aimed to ensure poor and low-income rural households and enterprises permanent access to institutional financial services. The RFSDCP had a sharply focused reform agenda, which encouraged private sector participation in rural finance and the eventual privatization of institutions through policy and institutional reform. The restructuring and strengthening of major RFIs (ADBL, SFDB, and GBBs) helped develop sustainable rural financial services and extend the reach of microfinance and rural finance services to small and medium-sized enterprises. The restructuring and recapitalization of ADBL and SFDB through the RFSDCP was appropriately timed, as it was implemented following two sets of reforms: (i) the reforms to NRB, which sought to make it an effective regulatory institution, and the enactment of the Bank and Financial Institutions Act 2006, which aimed to strengthen the supervisory capacity of NRB, and (ii) policy reforms for strengthening NBL and RBB. RFSDCPs design and formulation is consistent with the Governments policy of intensifying its rural economic development efforts. It recognized urban and rural disparity,
40

ADB. 1998. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Rural Microfinance Project. Manila (Loan 1650-NEP[SF], for $20.0 million, approved on 8 December). The project was completed in 2007, and the PCR was circulated in November 2008.

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social segregation, and limited economic opportunity in rural areas as fundamental causes of conflict and political instability. 45. As with the RFSDCP, the RMP's PCR assessed the project as "relevant," with design, formulation, and implementation consistent with the Governments and ADBs poverty reduction strategy at the time of approval. It coincided with Nepals Ninth Five-Year Plan FY1997FY2002 and, during implementation, with the Tenth Five-Year Plan FY2002FY2007. Considering demand from implementing agencies for the services extended by the RMP, it is quite clear that the outputs, purposes, and goal of this project remain relevant. The most important contribution of the RMP is its support for the emergence, growth, and development of the Rural Microfinance Development Centre Limited (RMDC) as a wholesale lending agency to Nepals microfinance sector. 46. ADBs assistance to rural finance is initially rated likely "efficient." The RFSDCP was completed within the specified dates, and its efficiency can be judged by the expansion of rural financial services and ADBLs ability to increase its extensive client network and outreach despite the difficult security situation. The restructuring, strengthening, and partial privatization of ADBL and its decreasing NPL ratio are on track, as are the restructuring of SFDB and GBBs, though two GBBs still need recapitalizing. The reforms to the NRB as an effective regulatory institution, and the strengthening of NBL and RBB have brought confidence in the system. The data show that they provide efficient services to the public and ADBL that enjoys high public confidence in its operation and governance, as reflected in the high demand recently for its shares. 47. The PCR rated the RMP "efficient" in achieving its outputs and purpose on the bases of financial and economic analyses undertaken for a sample of agricultural and income-generating activities for which subborrowers received microfinance. Following the same methodology used at appraisal, the financial internal rates of return ranged from 36% to 96%, better than the appraisal targets of between 26% and 76%. Economic analyses were undertaken for the same microenterprises reviewed in the financial analyses. All of the crop and livestock enterprises examined were economically viable, with EIRRs ranging from a low of 26% for high-value crops to a high of 57% for dairy buffalo and goat husbandry. The EIRRs in the PCR were slightly higher than the EIRRs during appraisal. This higher rate of return stems from the beneficiaries primarily being poor women living in food-deficit areas, where an increment in production could readily find a local market and therefore incurred low transport costs. 48. The CAPE rates ADB's assistance as likely "effective." RFSDCP Subprogram I facilitated major institutional restructuring and reforms in Nepal's rural finance sector. ADBs assistance expanded rural financial services significantly by (i) helping to reinstate ADBL as a strong financial institution focused on rural and agricultural development, (ii) improving the mechanism for delivering rural finance, and (iii) facilitating the significant expansion of microcredit. Institutional development in the major RFIs ensued in an environment of improved credit, supervision and regulation, and these institutions moved toward privatization. 49. The RMPs intended outcomes were achieved effectively. It provided access to rural microfinance, primarily to poor women, which enabled them to engage in microenterprise and self-employment and generate income. The RMPs indirect benefits included the social and economic empowerment of poor, disadvantaged communities and women through the formation and strengthening of savings and credit groups. It is estimated that the monthly household income of project beneficiaries rose from $61 to $228 on average, against the appraisal estimate of $86 to $200.

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50. The Government and ADBL have exhibited strong ownership and commitment to continue reforms in the rural finance subsector, and good progress has been made so far. Significant support for reforms arose from the higher profits, expanded deposit base, and lower NPLs ratios realized by ADBL in the very first year of restructuringthough, at around NRs5.6 billion, NPLs are still high. The sustainability of the outcomes of ADB assistance to rural finance is considered likely. The reforms supported by ADBs program loan have helped NRB make considerable progress in establishing a sound legal, regulatory, supervisory, accounting, and auditing framework for ADBL and SFDB by developing a comprehensive microfinance policy. Both financial institutions are supervised effectively, and the rural finance system works well. Management capacity has been significantly improved, and the establishment of the Bankers Institute should lead to further improvements in capacity. However, the process of developing a supervisory and regulatory framework for GBBs has taken longer than expected, as the framework pursuant to the Microfinance Policy 2007 is still being developed by NRB and needs further capacity building. While NRB has the capability to supervise ADBL, it remains to be seen if NRB can improve its capacity to supervise the multilateral development banks. The progress of both interventions is impressive and suggests that the RFSDCP is well on the way to attaining its envisaged goals of ensuring rural households sustainable access to institutional financial services and enhancing private sector participation in rural finance. 51. The PCR rated the RMP as "likely to be sustainable." The RMP enhanced the institutional capacity of the partner implementing agencies by building capacity. Further, RMDC is confident that, with the effective implementation of the strategic and operational plan, it can develop into a fully sustainable wholesale organization. Most of the microenterprises operated by women under the RMP were family owned and managed, which allowed for scale and technology upgrading. Therefore, indications are strong that these enterprises are sustainable. In addition, there is high demand from the clients of partner implementing agencies for the financial services extended under the RMP. The income-generating activities and microenterprises managed by beneficiaries receiving financial support from the RMP have a high return on investment and are financially viable. The RMP has therefore been rated "successful." 52. The impact of ADB assistance through the RFSDCP Subprogram I to support Nepals rural finance sector is likely "substantial." The RFSDCP helped reinstate ADBL as a strong financial institution focused on rural and agricultural development, improved the mechanism for delivering rural finance, and facilitated the significant expansion of microcredit to small and medium-sized enterprises and the rural poor, women, and other excluded groups. Financial services supporting rural areas have become more efficient and can now respond to market signals. The institutional development of the major RFIs took place in an improved supervisory and regulatory environment, and the institutions are moving toward eventual privatization. The loans given by the RFIs have been predominantly for agricultural development and have supported growth in agriculture, which reached its growth target during the Tenth Plan. Since access to credit is an important vehicle of agricultural growth and employment generation, the reform initiatives should bring further growth. The RMP is expected to have "substantial" impact, particularly with the establishment of RMDC to wholesale funds to retail microfinance institutions for onlending to the poor. Before the establishment of RMDC, small, new microfinance institutions had very limited access to funds for onlending to their clients. As a result of the RMP, new implementing agencies have easy access to funds and technical support from RMDC. Overall, the CAPE rates ADB assistance to the rural finance subsector as "successful."

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Energy

53. Sector Context and ADB Assistance. Existing capacity to generate electricity is grossly inadequate to meet domestic demand that is growing by more than 8.5% per annum. The electricity supply deficit greatly affects daily life and hinders economic activity. It is projected that load shedding will continue throughout the year for at least 78 years. Substantial capital41 needs to be mobilized to meet the shortfall, and most of it is expected to come from the private sector, foreign direct investment, and multilateral and bilateral sources. The uncertainties of the country's proposed federal structure, adverse law-and-order situation, lack of appropriate social and environmental safeguard guidelines, abundant red tape, and dearth of technical resources limit the scope of private and foreign investments in the sector. The Nepal Electricity Authority (NEA) has conflicting roles in representing the state in policy and regulatory work on one hand and functioning as commercial monopoly on the other. The basic instruments of power sector reform, i.e., the enactment of revised Electricity Act and the establishment of an independent regulatory body and a mechanism to adjust tariffs, have yet to be concluded. Challenges such as improving the commercial viability and financial sustainability of the public institution, mobilizing investments in transmission and distribution, and creating funds to subsidize the rural electrification program need to be addressed. Over the past 10 years, NEA's poor financial health has further deteriorated with declining profitability, no tariff increases since 2001, and the rising cost of energy purchases and other operating expenses. The budgeted loss for FY2009 is projected to be highest in NEA's history. 54. The strategic focus of the Three-Year Interim Plan (TYIP)42 is to increase the efficiency of sector institutions and enable an investment environment friendly to the private sector. Massive power sector reforms,43 including the establishment of Nepal Power Grid Cooperation44 to attract private sector investments for transmission lines, have been high on the agenda for a long time. The sector policy guided by the National Water Plan 2005 advocates developing large storage-type hydroelectric generation units to meet peak energy demand and earn revenue by exporting surplus energy. Small and medium-sized hydroprojects are expected to help meet domestic demand. An action plan45 to build 10,000 MW of generating capacity within 10 years aims to address the prevailing acute load-shedding situation more urgently.

41

By rough estimate, building hydroelectric generating capacity costs $0.2 million per megawatt in Nepal. The additional generation of at least 1,500 megawatts within 5 years is essential to meet the shortfall. The action plan of the Government includes adding 10,000 megawatts in 10 years. 42 The strategies outlined in the TYIP for energy include (i) arranging the effective regulation of sector operations, (ii) enabling a friendly investment environment for foreign and domestic firms by institutionalizing a one-window system, (iii) expanding generation capacity with due consideration of domestic demand, (iv) expanding transmission capacity to facilitate comprehensive socioeconomic development and exports of electricity, and (v) strengthening and expanding the electricity distribution system to support the rural economy and facilitate social and geographic inclusion. 43 The Cabinet forwarded to Parliament in 2009 for final approval the revised Electricity Act and legislation for setting up the Nepal Electricity Regulation Commission. The drafting of this legislation was an outcome of ADB TA 3552 but awaited Cabinet approval for more than 2 years. 44 This is required to integrate small and medium-sized private sector hydropower projects into the national grid. 45 The action plan, made available in the website on 31 March 2009, realizes that load shedding will continue at least for the next 5 years. It recommends that only surplus energy, if any, from the proposed large storage-type generation units be allowed to be exported. It consents to restructuring public sector agencies, but only gradually. More emphasis is on strengthening and streamlining the existing organizational structure. The Governments priority seems to be on mobilizing bilateral and multilateral funds, preparing a master plan for transmission lines within a year, and closely monitoring and facilitating the progress of private entities that have already acquired survey licenses and entered into public-private partnership agreements for small and medium-sized hydropower projects.

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55. No loans and grants in the energy sector in Nepal were approved during the CAPE period. ADB's largest assistance to the sector was the Kali Gandaki A Hydroelectric Project.46 The project was commissioned in 2002 and succeeded in easing the acute power shortage by harnessing the Kali Gandaki River.47 It contributes around 21% of the generation capacity of the country at present. Only one loan project was implemented during the CAPE period, the Rural Electrification, Distribution, and Transmission Project (REDTP). 56. Energy Sector Output, Outcomes, and Impact. ADB assistance to the energy sector over the past decade focused on transmission, distribution system reinforcement, hydropower generation, rural electrification, and institutional strengthening, including promoting a more commercial orientation in NEA. The most noteworthy contributions of ADB to the sector are consistent advocacy and support for power sector reforms and initiatives for institutionalizing the PPP approach. 57. REDTP has six components: (i) rural electrification, (ii) distribution systems for isolated power projects, (iii) distribution system reinforcement, (iv) transmission system development, (v) computerized billing systems, and (vi) other institutional strengthening. Grid substation reinforcement, which is part of the transmission system development component, helped enhance substation capacity in three areas. One of the project's positive contributions is to improve the operating performance and commercial orientation of NEA. Distribution district profit centers have been institutionalized, and a computerized billing system has been put into operation in 24 collection centers. The project helped NEA establish its fixed asset database and is expected to improve its accounting procedures and enhance its commercial orientation. After the completion of all remaining components and activities, the project will significantly strengthen the distribution system in the Kathmandu Valley. However, the project had difficulties reducing NEAs losses to less than 20% as expected due to external factors. Institutional and policy reforms have yet to be implemented. This can be attributed to underestimation of the complexities of the project implementation environment and high expectations for NEA's capacity. The implementation of REDTP continues with Government funding. 58. The rationale of REDTP is considered "highly relevant" to the Government's objectives and ADB's operational strategies for the sector as it aims to improve the governance and efficiency of the power sector, promote a more commercial orientation and increased participation by the private sector, and expand rural electrification to increase rural income. 59. Though partnering has been initiated with other development partners such as the Organization of Petroleum Exporting Countries (OPEC) Fund for International Development, there is a need to synchronize the system and procedures with the partners to make it more effective. ADB's proactive approach to pushing for power sector reforms, institutionalizing the PPP approach, and building consensus among stakeholders through lending and nonlending assistance is beginning to show results, as the current Government, led by the Communist Party of Nepal (Maoist), is aligning to this approach. REDTP interventions require more time to show their effectiveness, as the prevailing political turmoil and transitional state of affairs marked with lawlessness clouds the picture. Therefore, the initial rating is likely "less effective." But the effectiveness of ADB initiatives with policy dialogue through various TA projects is
46

ADB. 1996. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grants to the Kingdom of Nepal for the Kali Gandaki "A" Hydroelectric Project. Manila (Loan 1452-NEP[SF], for $160 million, approved on 23 July). The project was completed in 2003, and its PCR was issued in April 2004. 47 Assessment of the Kali Gandaki "A" Hydroelectric Project was included in the CAPE for Nepal 2004.

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manifest. Recent legislation to establish the independent regulator and sector reforms has been approved by the Cabinet and is now in the Parliament. 60. ADB assistance to the energy sector is initially rated likely "efficient." Although implementation difficulties were encountered related to compliance with loan covenants and delays in meeting conditions of loan effectiveness, consultant recruitment, and awarding contracts, the effort to catch up with the schedule without cost overruns in the challenging political circumstances is commendable. ADB interventions continued to focus on improving the governance and efficiency of the power sector by promoting a more commercial orientation in public institutions and encouraging more participation by the private sector. ADBs policy dialogue with the Government focused on improving the long-term financial sustainability of the energy sector. It included building the capacity of sector entities, introducing semi-automatic tariff adjustment, reducing electricity theft, and preparing an action plan to reduce municipal arrears owed to NEA. ADB continued to pursue subregional cooperation to foster power trade with neighboring countries. 61. Mixed results are expected in the project's sustainability and long-term impact, based on the implementation progress so far. Components such as the computerized billing system are likely to be sustainable and will likely deliver the envisaged impacts. But the sustainability of distribution district profit centers will be contingent upon NEA restructuring and improved financial48 and operational performance, as well as time-bound implementation measures to create a private sector-friendly environment. There is an urgent need to establish the New and Renewable Energy Center and adjust tariffs by taking into account the capital costs of generation, purchases from independent power producers, distribution, and system losses. Despite ADBs initiatives through various TA projects and advocacy to support the Government in that endeavor, ADB's assistance to the energy sector during the CAPE period is "less likely sustainable." 62. In terms of impact, the CAPE rated ADB's assistance to the sector as likely "modest." REDTP was designed within the scope of ADB's strategy within the sector, which focused on growth in rural areas. The Project should have contributed solidly to the achievement of the development goals had implementation not been delayed. Rural areas that should have been connected to the grid went without electricity during the period of delay. Thus, the CAPE considers the Project's impact as likely to be "modest." 63. In addition, two advisory TAs to the sector were approved within the CAPE period. Both TAs are ongoing and have yet to record significant outcome, though some of their outputs have already been realized. The TA on Restructuring of NEA49 helped facilitate drafting of legislation for the Electricity Act 2008 and the establishment of the NEPGRID. The legislation for establishment of regulatory body was simultaneously drafted and the bills are being tabled in the Parliament for approval. The TA aims to help manage electricity generation, transmission, distribution and trade in a more simplified, transparent and competitive manner, regulate tariff, facilitate unbundling of the NEA and eventually create a private sector investment-friendly atmosphere. The regulator will also ensure regular tariff adjustments and financial sustainability
48

Electricity tariffs have not been revised since September 2001, though existing tariffs are considered the highest in the South Asian Regional Cooperation region. NEAs sales revenue has shown a decreasing trend in recent years, while operating costs have increased with inflation and the expansion of services in the rural area. A loss of NRs0.54 has been recorded for each kilowatt-hour sold (refer to page 49 of NEAs Annual Report FY2006 FY2007). 49 ADB. 2004. Technical Assistance to the Kingdom of Nepal for Restructuring of Nepal Electricity Authority. Manila (for $0.4 million, approved on 18 December).

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of the sector. The TA on Promoting Private Sector Participation in the Power Sector50 supports capacity enhancements of the Government for designing, implementing, and managing PPP. The TA recognizes the need for a clear separation between policy, regulatory, operational and promotional functions. Creating an enabling environment for private sector participation as well as in doing so, supporting capacity enhancements for designing, implementing, and managing PPP are a few of the expected outcomes of the Project. Overall, the above TAs have been rated "highly relevant," likely "effective," likely "efficient" and "likely sustainable" and may contribute to a "substantial impact." 64. Overall, ADB assistance to the energy sector is assessed as "highly relevant," likely "less effective," likely "efficient," and "less likely sustainable," with likely "modest" impact. The CAPE initially rates ADB assistance to this sector as "partly successful." E. Education

65. Sector Context and ADB Assistance. ADBs strategy for the education sector, as set out in the CSP 20052009, aims to provide more holistic support for the comprehensive development of the sector through policy-based and sector-wide approaches. The CSP recognizes the need to pay greater attention in improving educational opportunities for a range of disadvantaged groups, especially girls, to foster more inclusive development processes. From 2004 to 2008, ADB approved $60.0 million in loans and grants and $1.7 million in TA projects for education, including a three-phase cluster program supporting the Governments Education for All (EFA) Program, vocational skills training, and policy development. 66. Sector Outputs, Outcomes, and Impacts. As ADB education projects during the CAPE period still continue, the following analysis focuses on the implementation of the SWAp to education and the extent to which other ADB-supported projects have managed to harmonize with the sector development framework. 1. Education for All Program

67. The Government is implementing the EFA Program 20042009 in primary and preprimary education following a SWAp jointly supported by nine development partners including ADB.51 The EFA Program is guided by the Core Document for EFA 20042009, which serves as the policy, program, and financing framework for the Ministry of Education (MOE) and development partners. This reaffirms the objective of the Tenth Plan of making education equitable and inclusive at all levels. It is based on and is part of Nepals EFA National Plan of Action 20012015, formulated in 2000, that sets out the Governments long-term vision and strategy to achieve EFA goals and related MDGs. The EFA Program enabled two earlier ADB projects on teacher education52 and supporting secondary education53 to realign their objectives
ADB. 2007. Technical Assistance to Nepal for Promoting Private Sector Participation in the Power Sector. Manila (for 0.6 million, approved on 30 December). 51 The nine partners of the EFA program are ADB; Australian Agency for International Development; European Union; Department for International Development of the United Kingdom; United Nations Childrens Fund; World Bank; and the governments of Denmark, Finland, and Norway. 52 ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Teacher Education Project. Manila (Loan 1840-NEP[SF], for $19.3 million, approved on 24 September). In addition, Loan 1840-NEP received $300,000 in cofinancing from the Danish International Development Agency. 53 ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Secondary Education Support Project. Manila (Loan 1917-NEP[SF], for $30.0 million, approved on 20 September).
50

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and approaches within a broader sector framework. ADBs Education Sector Program I54 supports the implementation of the Governments EFA Program and assists with planning and piloting of the follow-up School Sector Reform (SSR). The Education Sector Program I also helped bridge the significant education budget shortfall of the EFA Program. 68. ADB assistance contributed to the results achieved under the EFA Program. Measuring against the results framework of the CSP 20052009 and related education targets, most indicators are on track and likely to be met by 2009, including some of the underperforming indicators. For example, enrollment, including the enrollment of girls, increased substantially with the net enrollment rate in primary schools reaching 89% in 2007 (the CSP 20052009 target is 90%); in 2007 the share of Dalits in total primary enrollment reached 19.2% and of Janjatis 40.9%; the survival rate to grade 5 improved from 60% in 2002 to 81.1% in 2007; and the proportion of trained teachers increased from 20.1% in 2002 to 60.2% in 2007, though this falls short of the CSP target of 100%.55 While the EFA Program has so far been successfully implemented, there is an urgent need to improve efficiency at the sector level, especially by addressing the high repetition rate of over 20% in primary education (which is improving gradually as, for example, the repetition rate for grade 1 declined from 39% in 2001 to 29% in 2007). The CAPE conservatively estimates that repetition wastes 30% of scarce sector resources.56 High repetition rates contribute to high dropout rates and quality decline because of over-crowded classrooms. 69. Rapid enrolment growth in the past few years intensifies the need to strengthen the planning and predictability of capital budgeting to address the growing demand for school facilities.57 Overall, despite the shortfall and weaknesses of the EFA Program, its effectiveness can be attributed to the following: (i) the establishment of the Education Policy Committee at MOE with support from ADB TA,58 which enabled the Government to lead in formulating longterm vision and policies for the reform of the school system; (ii) the strengthening of MOE organizations through restructuring, capacity development with support from the teacher education TA and TA supporting secondary education, and the restructuring of the Department of Education in early 2000, which helped ensure the integrated planning, management, and monitoring of the EFA Program; and (iii) MOEs commitment to implementing its decentralization policy. Since 2004, MOE has steadily delegated responsibility to local education authorities. At present, over 90% of the EFA Program budget is transferred to schools and managed by them. District education offices are responsible for overseeing the management of schools operating within their districts. Teacher supervision improved in schools that were transferred to the local community (16% nationally), as reflected in decreased teacher absenteeism, better teacher classroom performance, and higher parental satisfaction.59
54

ADB. 2006. Report and Recommendation of the President to the Board of Directors on a Proposed Program Cluster of Loans and Asian Development Fund Grants to Nepal for the Education Sector Program I. Manila (Loan 2277-NEP[SF], for $30.0 million, approved on 1 December). 55 There appears to be inconsistency between the indicator and target. While the achievement relates to training all primary teachers, the target refers to training permanent teachers only, which reached 85% in 2008. MOE projects achieving the 100% target in 2009. 56 Using the Markov cohort flow rate model, it is estimated that only 42% of the cohort managed to complete grade 5 and requires 5.9 years to do so. 57 The EFA Program capital budget allocation was $11.4 million, or 6.6% of the EFA budget, in FY2007, rising to $23.7 million (9.7%) in FY2008. 58 ADB. 2004. Technical Assistance to the Kingdom of Nepal for the Education Sector Development Policy and Strategy. Manila. 59 Sources: Economic Survey 2008, World Bank website, and CAPE field observations. According to an economic survey in 2008, communities had taken over management responsibility for 4,672 of the countrys 29,448 schools (i16%) as of July 2008. The survey states that the academic status of the community-managed schools has been improving, attributed especially to the direct participation of stakeholders, increased transparency, effective

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2.

Secondary Education

70. To complement the EFA Program, the Government is developing and expanding secondary education to cope with the increased primary enrollment and completion rate. ADB has assisted the Government in this endeavor, both technically and financially, with a series of projects. The ongoing Secondary Education Support Project (SESP)60 follows up the Secondary Education Development Project.61 Consolidating the gains of the previous intervention, the SESP has been investing in high-priority areas, covering (i) the teaching and learning environment; (ii) curriculum and assessment; (iii) the development and management of teachers; and (iv) institutional management and capacity development within a sector policy framework to make secondary education more accessible, relevant, effective, and efficient.62 The SESP supports the Governments secondary education program in all 75 districts nationwide and provides 10 poorer districts with intensive inputs. The midterm review of the project, conducted in March 2006, noted the slow progress of SESP activities, particularly relating to curriculum, teacher education and training, and institutional capacity building. However, streamlining loan administration arrangements (e.g., simplifying loan categories) and adopting the other recommended actions allowed implementation progress to improve considerably after the midterm review. Aside from improved capital spending and physical progress, other developments include the (i) approval of the National Curriculum Framework in January 2007, (ii) ongoing development of training materials for teachers based on new curricula, (iii) identification of constraints on training centers, (iv) training program for head teachers and school management committee members being expedited, (v) enhancement of the Office of the Controller of Examination's capacity with the assistance of consultants, (vi) strengthening of the school inspection system, and (vii) improvement of implementation monitoring and the education management and information system. 71. Overall, secondary education is making good progress toward achieving intended outcomes. The Department of Educations Status Report 200763 revealed that student enrollment increased with the improved participation of girls and ethnic minorities, including Dalits. Lower repetition rates, both at the lower secondary and secondary level, were noted, but the pupil-teacher ratio for lower secondary education is still high compared with the ratio for secondary education. Learning achievement improved, and the national school-leaving certificate passing rate increased from 32.1% in 2003 to 58.6% in 2007. In the 10 programintensive districts, learning achievement improved by an average of 50% but remains
program implementation, and school management by the individuals elected by guardians and parents. Similarly, the World Bank reports on its website, under the topic Participation and Civil Engagement and the subtopic Community Management of Schools in Nepal, that a survey of 30 selected schools serving over 10,000 households recorded significantly improved access to primary education for children from disadvantaged communities residing in the service area of community-managed schools. Other surveys have found the following qualitative changes in community-managed schools: (i) increased community ownership and participation expressed as more frequent school meetings, increased resource generation, and more frequent parental visits to schools; (ii) the transfer of children from private schools to community-managed schools; (iii) reduced teacher absenteeism; and (iv) an improved learning environment. 60 ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Secondary Education Support Project. Manila (Loan 1917-NEP[SF], for $30.0 million, approved on 20 September). This project received $30 million in cofinancing from the Danish International Development Agency. 61 ADB. 1992. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for Secondary Education Development Project. Manila (Loan 1196-NEP[SF], for $12.6 million, approved on 24 November). 62 ADB. 2004. PPAR of Secondary Education Development Project in Nepal. Manila. (Loan 1196-NEP[SF]). The project was rated as "successful"). 63 DOE. 2008. Status of Annual Progress 2007 for EFA, SESP, and CSSP Programs. Kathmandu.

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significantly lower than the national level of about 59%. These achievements need to be further strengthened and sustained by pursuing a pro-poor inclusive strategy and decentralized system of planning and management. Further, the lessons of the SESP in terms of the achievements and challenges should guide the design of the Governments proposed comprehensive SSR initiative. 3. Sector Reform Program

72. After the completion of the current EFA Program in 2009, MOE plans to implement SSR to integrate primary grades (18) and secondary grades (912). Through SSR, MOE will broaden the scope of the EFA SWAp beyond its current focus on primary education. Though still continuing, ADB TA and capacity-building support contributed to sector preparation for transition to SSR. Program achievements to date can be attributed to the Governments strong commitment and the well-planned and sequenced ADB support program using the innovative program cluster design (e.g., front-loaded TA support for sector assessment and policy and strategy development). While the Governments intent to improve synergy by using a more holistic approach to school education is laudable, and while there are several advantages to the adoption of integrated school planning and implementation, such a major undertaking requires substantial preparation, consensus building, capacity development, and funding. In particular, utmost care should be given to matching increased program scope with institutional capacity, including the capacity of the local government and other local stakeholders, and ensuring the long-term financial sustainability of the program. Systemic issues and sector reforms should be addressed up front to establish a clear and consistent policy and institutional framework.64 The lessons and experience gained from the proposed implementation of SSR in the pilot districts of the Education Sector Program Cluster (Subprogram II)65 should be the bases for planning further action toward the full-fledged adoption of SSR and should feed into SSR program design supported by TA on preparing the Education Sector Program.66 This pilot exercise should help identify the issues of scaling the program nationwide. 73. Although not directly supported under the EFA Program or other Government programs, private schools are an integral part of Nepals school system and account for 12% of all schools in the country.67 There are 3,513 institutional schools across the country accommodating 624,514 students, 43% of whom are girls, and employing 35,535 teachers, 44% of whom are female.68 These schools are generally well managed with a well supervised faculty, have a better student-teacher ratio than their public counterparts and superior facilities and learning environment, and, more importantly, are largely depoliticized. Considered the hallmark of quality education in Nepal, they are parents first choice and are responsible for the decreasing number of students going abroad. In terms of their passing rate, these schools have performed considerably better than their public counterparts. Further, private investment in the schools has increased since 2003, after the 8th Amendment of the Education Act, which established a clear
64

Also to be considered are uncertainty factors associated with the political transition and the ramifications of the imminent federal state structure. 65 ADB. 2008. Report and Recommendation of the President to the Board of Directors on a Proposed Asian Development Fund Grant to Nepal for the Education Sector Program Cluster (Subprogram II). Manila. (Grant 0105NEP, for $8.0 million, approved on 24 January). The project aims to restructure, on a pilot basis, grades 18 (basic education) in Rasuwa, Dadeldhura, and Kapilvastu districts as a model. 66 ADB. 2007. Technical Assistance to Nepal for Preparing the Education Sector Program (Subprogram III). Manila. (TA 7025-NEP, for $0.6 million, approved on 12 December). 67 Only sporadic support is provided by EFA partners, despite DOEs flash reports showing a significant proportion of teachers in private schoolsas many as 69% at the primary levelas untrained or only partly trained. 68 DOE. 2007. Flash Report 2007. Kathmandu.

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legal basis of ownership. Some NRs8 billion10 billion has reportedly been invested in private school infrastructure. 4. Technical Education and Vocational Training

74. Nepal suffers high unemployment and underemployment.69 Low human capital constrains the countrys economic growth and employment. Some 300,000 adults enter the labor force every year, most of them without appropriate skills. In recent years, an increasing number migrate to foreign countries beyond India for employment, mainly in jobs that do not require specific skills.70 Thus, there is a wide demand-supply gap in terms of technical education and vocational training (TEVT). Though the number of public and private training providers has increased, their combined skills training capacity falls far short of national requirements. The poor and disadvantaged gender, caste, and ethnic groups have less access to the limited training opportunities available. 75. There is a mismatch between the demand for skills and the supply of skills, particularly with respect to public vocational training. This is mainly because of the supply-driven nature of training provision and the lack of guidance from labor market information or employers effective involvement. The quality of training varies across training institutions. This is generally considered as less satisfactory for lack of training standards or an effective quality-assurance system. Improving the quality of training is deemed important because poor-quality training compromises trainees employability. There is also a lack of post-training support to facilitate self-employment,71 which is a main mode of employment in Nepal. There is scope for improving the efficiency of public training by ensuring the better use of available resources, avoiding fragmentation, and improving system-wide management and coordination. In addition to making better use of available resources, it is necessary to generate additional resources for expanding training coverage and outreach. With the entry of the private sector, financing training programs has been enlarged and diversified. However, the sustained financing of an expanded program of subsidized training for target groups is an issue. To address this, sector reforms are needed in the way the national training system is organized, managed, financed, governed, and sustained. 76. The Government is committed to improving training policies, systems, and institutions with donor support. ADB provided support through the Skills for Employment Project,72 which aimed to (i) increase access to market-oriented, short-term skills training, particularly for women, Dalits, and the disadvantaged; (ii) strengthen the capacity of key agencies to enhance their services, particularly in vocational training; (iii) strengthen trainers to enhance access and improve the relevance and quality of training; and (iv) develop and articulate a new national policy to achieve greater integration, relevance, and efficiency in TEVT. However, this project has been approved only after a gap of nearly 15 years from the date of approval of the last ADB
69

Unemployment stood at 7% of the labor force in 2005, and underemployment at 24.4% (Source: South Asian Association for Regional Cooperation. 2005. Regional Poverty Profile. Kathmandu: South Asian Association for Regional Cooperation Secretariat (August). 70 People seeking foreign employment increased from 35,543 in FY2000 to 204,533 in FY2007, and the country earned close to NRs100.0 billion in remittances in FY2007 from Nepalese working abroad (excluding India) for more than a year. Remittance inflows can be further increased and labor welfare improved if the country can fill demand for semiskilled and skilled workers. (Source: MOF. 2008. Economic Survey. Kathmandu). The latest NRB data show remittances received in FY2008 amounted to $2.2 billion, or approximately NRs176 billion. 71 Though limited, post-training support is, however, included in donor schemes using the private trainers. 72 ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for Skills for Employment Project. Manila (Loan 2111-NEP[SF], for $20 million, approved on 25 November).

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TEVT project.73 The CAPE 2004 noted that the TEVT project was never followed up, despite the acknowledged success of the original project. 77. Unlike the TEVT project, which focused more on constructing physical facilities, the focus of the Skills for Employment Project is on inclusive training delivery and policy and capacity development. As of 30 June 2008, 1,759 trainees were enrolled in six short-term training packages designed for formal and international labor markets, and 1,065 trainees had graduated. Preparatory activities, including training needs assessment and training package development, were completed to provide training in communities in selected first-phase districts. However, implementation weaknesses include not targeting poor women or Dalits for training; applying eligibility criteria for stipend and transport allowances, and finding graduates jobs. The project is therefore working to strengthen its gender, caste, and ethnic component and posttraining services. Concurrently, work is underway to develop and install a geographical information system and a training information management system. The Government approved a new TEVT sector policy in September 2008 that focuses on five key elements: expansion, inclusion, integration, relevance, and funding. The Government is considering the integration of TEVT in the school system and its pilot implementation in 200 public secondary schools. However, this is an area where the Government has to move cautiously, learning from the experiences of other countries. 5. Performance Assessment

78. ADB's assistance to education is rated "highly relevant." The Education Sector Program 1 cluster supports the implementation of MOE's priority EFA Program and assists with planning and piloting the follow-up SSR. Through the Education Sector Program 1, ADB was able to bridge the Government's budget shortfall for implementing reforms. ADB's participation in the EFA Program provided renewed confidence in the sector reform process and enabled two earlier projects on teacher education and supporting secondary education to realign their objectives and approaches within the EFA framework. The Skills for Employment Project is consistent with the Government's policies to help alleviate youth unemployment, especially of women and the socially excluded. Specifically, the project aims to complement the formal education system, which is not sufficiently oriented toward labor market needs, leaving many youths unemployed. 79. ADB assistance to education is rated likely "effective." Measured against the CSP results framework and related education targets, most indicators are on track and likely to be met by 2009, including some underperforming indicators. The effectiveness of the EFA Program implementation can be attributed to several factors. Despite delays, the Skills for Employment Project produced key outputs such as the TEVT policy framework, which the Government has endorsed and the MOE's Education Policy Committee will implement. 80. Until recently, education projects experienced frequent delays because of over-stretched Government capacity to manage additional tasks. Another constraint has been uncertainty brought about by the political situation in the country, resulting in frequent organizational and personnel movements and/or departures. However, ADB's involvement in the Government-led EFA Program has brought significant improvement in education sector portfolio management and fund disbursement, as the program cluster approach for sector development ensures the
73

ADB. 1989. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Technical and Vocational Training Development Project. Manila (Loan 0974-NEP[SF], for $12 million, approved on 28 September). The project performance audit report rated this project successful.

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continuity and timeliness of ADB's support. Meanwhile, the EFA pooled-funding arrangement substantially reduced the Government's workload in managing projects with multiple donors and reporting requirements, strengthening the core functions of MOE. Cost efficiency was achieved through the use of the Government system and greater community participation in education service delivery. Nonetheless, there is an urgent need for improved sector efficiency, especially to address the high primary repetition rate, currently at over 20%. The CAPE estimates that repetition wastes 30% of scarce sector resources. High repetition rates contribute to high dropout rates and quality decline because of over-crowded classrooms. Another area that will require attention is the need to strengthen the planning and predictability of capital budgeting to address the growing demand for classrooms arising from rapid enrolment growth in the past few years. The Skills for Employment Project still faces some implementation problems and delays because of overly ambitious design and the complex government institutional arrangements for technical vocation training.74 The CAPE rated ADB assistance to education as likely "less efficient." 81. The CAPE rated ADB assistance to education as "likely sustainable." The Government's commitment and strong demand from families for better education services will likely sustain the momentum for reforms in education. The EFA Program budget increased by 61% over the past 3 years, from $172.0 million in FY2007 to $277.0 million in FY2009. 82. ADB assistance to education is rated likely to have "substantial" impact because of (i) well-sequenced and well-phased support through the program cluster modality; (ii) extensive TA support for sector assessment and policy and strategy development; (iii) program lending in support of the Government-led implementation of the EFA complemented by a grant supporting capacity development for the next phase of the SSR; and (iv) the use of a traditional project modality targeting underprivileged youths by providing, for example, skills for employment. As a result, there has been improved definition, stability, and predictability of sector policy and strategy. The capacity of key central departments has been strengthened with increased focus on delivering performance and results. However, unevenness in the capacity of local education authorities and schools remains a concern. There is also a need for greater functional clarity and accountability between districts and schools to ensure effective education service provision in the newly decentralized system. The CAPE initially rates ADB assistance to education as "successful." F. Water Supply, Sanitation, and Waste Management 1. Water Supply and Sanitation

83. Access to water has increased from 72% in 2002 to 77% in July 2007.75 At this pace, the target of 85% coverage will likely be achieved by 2015. The proportion of the population with access to sanitation increased from 20% in 2002 to 46% by July 2007. The reduced availability of surface water and absence of a data base or monitoring mechanisms to avoid duplication of effort or the misuse of resources are some of the key issues that need urgent attention. The lack of sewerage systems and sanitation facilities has affected standards of water service delivery in urban and suburban areas. The provision of safe drinking water to all is the declared commitment of the Government and an important MDG.
74

Some project activities are implemented by the district offices of the Ministry of Labor and the Ministry of Industry. It has been difficult for the MOE project implementation unit to ensure timely reporting from these district offices, which are not under MOE jurisdiction. 75 National Planning Commission. 2007. Three Year Interim Plan of the Government of Nepal. Kathmandu (Chapter 22: Water Supply and Sanitation).

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84. The Government's efforts to achieve the MDG targets related to water supply and sanitation (WSS) is guided by the TYIP 20072010, National Urban Policy 2007, National Water Plan 20022017, National Policy on Rural Drinking Water Supply and Sanitation 2004, Local Self Governance Act 1999, and Nepal Urban Water Supply and Sanitation Sector Policy, which is currently being adopted by the Government and drafted under ADB project preparatory TA 4972. The key sector policy and strategy of the Government has evolved over ADB operations. 85. ADBs assistance to WSS, particularly in rural areas, i.e., the three Rural Water Supply and Sanitation Sector Projects,76 is considered "successful." ADB has provided five project loans since 1984 amounting to $90 million. The $24 million Community-Based Water Supply and Sanitation Sector Project (CBWSSP)77 continues. These projects provided 3.5 million rural residents with access to safe water. They helped build capacity in the public sector and among end users. They ultimately encompassed such critical issues as water quality, sharing, and ownership. Most recently, assistance was expanded from rural areas to small towns, as ADB provided a $34 million loan for the Small Towns Water Supply and Sanitation Sector Project (STWSSP),78 which was recently completed. ADBs support to alleviate shortages of potable water in Kathmandu, the capital, through the Melamchi Water Supply Project has been instrumental in coordinating external funding agencies, and mobilizing resources for the project. ADB has provided a total of $7.05 million in nonlending assistance since 1982, including eight TA projects79 supporting the preparation of a profile of the sanitation sector and various loan projects. In recent years, a significant proportion of nonlending assistance has supported institutional and other aspects related to the Melamchi Water Supply Project.
76

CAPE 2004 considered the following projects as "successful": (i) Fourth Rural Water Supply and Sanitation Sector Project (ADB. 1996. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Fourth Rural Water Supply and Sanitation Sector Project. Manila [Loan 1464NEP[SF], for $20.0 million, approved on 24 September]); (ii) Third Water Supply and Sanitation Sector Project (ADB. 1992. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the Kingdom of Nepal for the Third Water Supply and Sanitation Sector Project. Manila [Loan 1165-NEP[SF], for $20.0 million, approved on 25 June]); and (iii) Second Water Supply Sector Project (ADB. 1989. Report and Recommendation of the President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the Kingdom of Nepal for the Second Water Supply Sector Project. Manila [Loan 0949-NEP[SF], for $13.8 million, approved on 31 January]). 77 ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Community-Based Water Supply and Sanitation Sector. Manila (Loan 2008-NEP[SF], for $24.0 million, approved on 30 September). 78 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 (Loan 1755-NEP[SF], for $35.0 million, approved on 12 September). The loan account was closed in 31 December 2008. 79 The eight TA projects are: (i) Water Supply and Sanitation Sector Profile (ADB. 1982. Technical Assistance to the Kingdom of Nepal for the Water Supply and Sanitation Sector Profile. Manila [TA 0482-NEP, for $0.05 million, approved on 15 September]); (ii) Rural Water Supply and Sanitation (ADB. 1983. Technical Assistance to the Kingdom of Nepal for the Rural Water Supply and Sanitation Project. Manila [TA 0514 NEP, for $0.15 million, approved on 12 May]); (iii) Second Water Supply Sector Project (ADB. 1987. Technical Assistance to the Kingdom of Nepal for the Second Water Supply Sector Project. Manila [TA 0876-NEP, for $0.25 million, approved on 18 May]); (iv) Third Water Supply and Sanitation (ADB. 1991. Technical Assistance to Nepal for the Third Water Supply and Sanitation Project. Manila [TA 1510-NEP, for $0.08 million, approved on 18 April]); (v) Fourth Rural Water Supply and Sanitation Sector Project (ADB. 1995. Technical Assistance to the Kingdom of Nepal for the Fourth Rural Water Supply and Sanitation Sector Project. Manila [TA 2340-NEP, for $0.171 million, approved on 1 June]); (vi) Small Towns Water Supply and Sanitation Project (ADB. 1998. Technical Assistance to the Kingdom of Nepal for the Small Towns Water Supply and Sanitation Project. Manila [TA 3059-NEP, for $0.6 million, approved on 20 August]); (vii) Community-Based Water Supply and Sanitation Project (ADB. 2002. Technical Assistance to the Kingdom of Nepal for Preparing the Community-Based Water Supply and Sanitation Project. Manila [TA 3884NEP, for $0.75 million, approved on 13 March]); and (viii) Improved Water Quality, Sanitation, and Service Delivery in Emerging Towns Sector Development Program (ADB. 2007. Technical Assistance to Nepal for Preparing the Improved Water Quality, Sanitation, and Service Delivery in Emerging Towns Sector Development Program Manila [TA 4972-NEP, for $0.72 million, approved on 28 September]).

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86. ADB's sector strategy for water supply and sanitation and waste management in Nepal aligns with the Governments sector policies, including (i) decentralization, or devolving authority and responsibility for developing, operating, and maintaining urban services to local authorities and community organizations; (ii) participation, or mobilizing through appropriate policy reform adequate beneficiary and NGO participation in providing local resources, initiatives, and skills; (iii) planning, or encouraging the Government to take a long-term, strategic view of sector development and broaden the stakeholder base; (iv) standards, or promoting higher standards for affordable public and private sanitation; and (v) targeting the poor, or seeking innovative ways to benefit the poorer groups in urban centers while striving for the economic, financial, environmental, and institutional viability of development projects. 87. Water Supply and Sanitation Subsector Outputs, Outcomes, and Impact. During the CAPE period, no sovereign loan or grant projects were approved, but four TA projects amounting to $5.0 million were provided. The recently completed STWSSP provided by 2009 improved water supply to 510,000 people in 29 small towns. The ongoing CBWSSP aims to provide by 2010 improved WSS services to more than 1,200 communities in 21 of the remotest, most impoverished districts in Nepal. The Melamchi Water Supply Project80 and Kathmandu Valley Water Services Sector Development Program81 supported tariff and institutional reform in the Kathmandu Valley and initiatives to address the acute water shortage in the capital. 88. The Melamchi Water Supply Project cost is estimated at $464 million. ADB provided $120 million (readjusted to $140 million) and the Government $118 million. Other partners include the Japan Bank for International Cooperation, Nordic Development Fund, OPEC Fund for International Development, and Japan International Cooperation Agency. The World Bank withdrew from the project in 2002. The Norwegian Agency for Development Cooperation pulled out in July 2005 and the Swedish International Development Cooperation Agency in March, leaving the funding gap to be filled by a further ADB sector development loan package, the $15.5 million Kathmandu Valley Water Services Sector Development Program. The funding gap will be further covered by the $27 million Kathmandu Valley Water Distribution, Sewerage, and Urban Development Project. The project has strong institutional measures to hand over management to a private sector entity. The intent of the project is to provide water to a city that has experienced burgeoning population growth and serious water shortages. The project outputs are grouped as subproject I for the Melamchi Valley and subproject II for the Kathmandu Valley. Subproject I aims to divert water from the Melamchi Valley to the Kathmandu Valley by constructing a 27 km tunnel, access road, and water treatment plant. Support for the social and environmental component in the Melamchi Valley and for efficient project management is included. Subproject II aims to support (i) institutional reforms expected to be achieved by the end of 2013, (ii) capital works for improved water distribution and an improved wastewater system, (iii) source improvement within the Kathmandu Valley, (iv) social and environmental components with funding from ADB and the Government, and (v) project
80

ADB. 2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Melamchi Water Supply Project. Manila (Loan 1820-NEP[SF], for $120.0 million, approved on 21 December). 81 ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Kathmandu Valley Water Services Sector Development (Program Loan). Manila (Loan 2058-NEP[SF], for $5.0 million, approved on 18 December).

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implementation through the provision of consultancy services. The original completion date of 31 March 2007 had been revised to 31 December 2013. 89. The implementation of the Melamchi Water Supply Project was delayed by the conflict, political instability, and noncompliance with a loan covenant requiring a performance-based management contract to be engaged prior to commencing tunnel construction. Kathmandu Upatyaka Khanipani (Kathmandu Valley drinking water) Limited (KUKL) was incorporated under the Companies' Act in January 2007. Since taking over operational responsibility for Kathmandu Valley water operations in February 2008, KUKL has been fully functional. Recruitment of the capacity-building and PPP support team as an alternative to a management contractor is completed. On 7 February 2008, the ADB Board approved the restructuring of the project, with major changes in scope and implementation arrangements by, among other things, removing the loan covenant. The restated and amended Loan Agreement was signed on 6 April 2008 and declared effective in July 2008. The project has achieved 45% physical progress with cumulative disbursement of only 16% of net loan amount against the revised elapsed loan period of 64%.82 Based on the foregoing, the Melamchi Water Supply project is initially rated "highly relevant," likely "less effective," likely "less efficient," "less likely sustainable," and with likely "modest" impact. 90. In semi-urban and emerging urban areas, STWSSP is expected to (i) improve water supply, health, and sanitation; (ii) support the participation of local beneficiaries in all stages of the project; and (iii) build the capacity of water users and sanitation committees (WUSCs) and promote community water-quality monitoring. This project is consistent with the priorities set out in the CSP 20052009 and the Government's Poverty Reduction Strategy Program, particularly on improved health and hygiene practices, scaling up community-based demand-driven approaches, PPP, gender mainstreaming, and good governance. The findings of the 2004 benefit monitoring and evaluation survey noted that the STWSSP has been "effective" in terms of (i) reducing the prevalence of diseases such as diarrhea, jaundice, and typhoid fever, as well as skin allergies; (ii) improving personal hygiene; (iii) improving the environment; and (iv) increasing the availability of safe drinking water. Based on field consultations, the CAPE concluded that the sustainability of all subprojects under the STWSSP could be ensured with proactive WUSCs and a project design that instituted a mechanism whereby the Town Development Fund83 is required to ensure the sound financial health of WUSCs for at least the 1215 years of loan repayment. The policy dialogue initiated through this project has led to a demand-responsive and interactive development process wherein water users have full decision-making power at every stage of project formulation, implementation, operation, and maintenance. Dialogue has also touched on the need for the Government to develop a longterm sector plan. The Government has responded positively and worked out the 15-year plan for small town water supply and sanitation. The STWSSP has been rated "highly relevant," likely "effective," likely "efficient," and "likely sustainable" and, accordingly, is expected to deliver "substantial impacts." 91. Building upon the success of ADBs assistance to rural WSS and the lessons learned, the CBWSSP aims to address the basic water supply and sanitation needs of 850,000 people in 21 remote districts in the western, mid-western, and far-western regions of Nepal using a community-based, demand-driven approach in line with the Government's decentralization strategy. The WUSCs will implement the 690 subprojects with support from NGOs, regional and
82 83

The elapsed loan period is computed against the revised loan closing date of 31 December 2013. A semiautonomous finance institution under the Government of Nepal engaged to disburse and collect the subloans approved by the project.

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project management consultants, village and district development committees, and the Department of Water Supply and Sewerage. Village and district development committees are meant to ensure sustainable operation and maintenance, with full cost to be borne by end users. Skill training for WUSC members and capacity enhancement for village and district development committee staff are likely to help the sustainability of operations. 92. The CBWSSP has set up a sanitation revolving fund to provide credit for the construction of household latrines, and female community health volunteers have been trained to disseminate sanitation awareness and education. The project initiated the institutional review of the Department of Water Supply and Sewerage. The policy and strategy recommendations of the sector stakeholders group are being adopted to pave the way toward a SWAp and to improve the quality of aid coordination. The CBWSSP is considered on track to meet most of the output and outcome indicators in its results framework. Physical progress is at 54%, against elapsed time of 78%. However, the completion of critical milestones has set the stage to complete the construction of all the 690 subprojects on time and without cost overruns. This project could be considered a case study for conflict-sensitive implementation and has been rated "highly relevant," likely "effective," likely "efficient," "likely sustainable" with likely "substantial" impact. 93. Except for the Improved Water Quality, Sanitation, and Service Delivery in Emerging Towns Sector Development Program,84 all TA projects approved within the CAPE period were linked to the Melamchi Water Supply Project. These TA projects helped initiate the institutional reform process for water and sanitation services in the Kathmandu Valley by establishing three entities: (i) the Kathmandu Valley Water Supply Management Board, as asset owner of water and wastewater systems in the Kathmandu Valley; (ii) the Water Supply Tariff Fixation Commission, which is responsible for the economic regulation of the sector; and (iii) KUKL, which is in charge of operating assets leased and licensed from the Kathmandu Valley Water Supply Management Board and is expected to provide a model for PPP in the management of urban WSS. The Improved Water Quality, Sanitation, and Service Delivery Sector Development Program85 is expected to build on lessons from the STWSSP and formulate a comprehensive design for a sector development program. This project preparatory TA supported the Governments drafting of its urban water supply and sanitation sector policy and revision of the 15-year small towns water supply development plan. The draft policy is being translated into Nepali and will be submitted to the Cabinet once the political situation has stabilized. 94. On the whole, ADB assistance to the water supply and sanitation subsector is "highly relevant," likely "less effective," likely "less efficient," and "less likely sustainable" with likely "modest to substantial" impact. The CAPE initially rates this subsector "partly successful."86 2. Urban Development

95. Some of the key issues in the urban development subsector include the (i) accelerated pace of urbanization, at 7% per annum;87 (ii) town development, which is unplanned and

84

ADB. 2007. Technical Assistance to Nepal for Preparing Improved Water Quality, Sanitation, and Service Delivery in Emerging Towns Sector Development Program. Manila (TA 4972-NEP, for $0.72 million, approved on 28 September). 85 ADB. 2007. Technical Assistance to Nepal for Preparing the Improved Water Quality, Sanitation, and Service Delivery in Emerging Towns Sector Development Program. Manila (TA 4972-NEP, for $0.72 million, approved on 28 September). 86 Without the Melamchi Water Supply Project, the overall rating of WSS would have been "successful."

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sprawling; and (iii) complex and confusing institutional framework for urban planning and management. Urban roads and transportation system are inadequate, and water supply, sanitation, solid waste disposal, and street lighting are poor. 96. The Government has yet to come up with a comprehensive long-term master plan, strategies, and regulations to guide investment in urban development. In line with the recently adopted National Urban Policy 2007, the TYIP 20072010 has emphasized the integration of physical and economic development planning to achieve a regional balance in urban development. The scope of the enhanced rural-urban interrelationship has been highlighted in the context of developing regional economic centers and linking them with medium and small centers with roads and other infrastructure. The plan advocates effectively coordinating the efforts of the Government, local agencies, and the private sector to develop and expand basic urban services, facilities, and infrastructure. Most importantly, the plan has explicitly recognized the central role of municipalities in managing their urban development affairs and highlights the need for its institutional strengthening. 97. In the past, the rural-urban dichotomy prevailed in the policy regime of Nepal, evidently overshadowing ADB's assistance to the urban sector. Successive governments in Nepal have concentrated their investments in rural areas. Any lending for urban development projects had to additionally assure their growth-enhancing potential,88 and the projects had to be seen as offering substantial benefits to the urban poor. Consequently, the first and second Tourism Infrastructure Development Project89 were the only projects since 1992 that covered urban areas in Nepal. The Kathmandu Urban Development Project90 could be considered an exception, but, apart from supporting storm water drainage improvements in Kathmandu, it was not rated "successful" owing to problems with the Bishnumati Link Road and Nayabazaar Land Pooling components. With the approval of Urban Environmental Improvement Project (UEIP)91 in December 2002, ADB assistance began to reach urban centers outside the Kathmandu Valley. ADB assistance in these projects, including UEIP, totaled $57 million. Most of them were rated as "partly successful." 98. Urban Development Subsector Outputs, Outcomes, and Impact. During the CAPE period, no loans or grants were approved. The UEIP, which became effective on 2 October 2003, is the only project being implemented in the subsector during the evaluation period. This project aims to promote sustainable urban development in nine selected municipalities surrounding the Kathmandu Valley, and in Kathmandu, by addressing critical urban environmental and infrastructural service improvement needs. It is likely to be completed by March 2010. The outcomes envisaged for the UIEP include reduced urban poverty, improved public health, constrained environmental degradation, and reduced migration into the Kathmandu Valley. To continue these initiatives further, ADB has agreed in principle to provide
87

New Era. 2006. Nepal Population Perspective Plan 20022027. Kathmandu. Nepals urban population is 16% of the total and forecast to reach 32% by 2025. 88 The most common way of doing that in Nepal was to incorporate urban infrastructure improvement works under the tourism development sector. 89 ADB. 1996. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Second Tourism Infrastructure Development Project. Manila (Loan 1451 NEP[SF], for $20 million, approved on 2 July). 90 ADB 1993. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Kathmandu Valley Water Services Sector Development (Program Loan). Manila (Loan 1240-NEP[SF], for $15.0 million, approved on 29 June). 91 ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Urban Environmental Improvement Project. Manila (Loan 1966-NEP[SF], for $36.0 million, approved on 10 December).

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grant assistance worth $40 million for the subsequent UEIP. Project preparatory TA92 for preparing the next UEIP93 has recently been approved, and consultant recruitment is completed. The expected outputs of the TA include (i) a feasibility study for integrated urban environmental improvement and supplementary urban facilities and (ii) the formulation of an institutional and implementation framework. 99. Considering the importance of the urban facilities for enhanced rural-urban connectivity and broad economic growth, the proposed investment is in line with the National Urban Policy 2007 and the CPS. Using lessons learned from the past interventions, the project preparatory TA will develop safeguard plans carefully to obtain public acceptance and avoid implementation delays. 100. The ongoing UEIP has five components: (i) municipal institutional strengthening and revenue mobilization, (ii) the provision of urban and environmental infrastructure, (iii) the provision of supplementary urban facilities, (iv) community development, and (v) project implementation assistance. At the end of February 2009, physical progress of 54% was recorded against elapsed time of 85%. The project is largely driven by its project coordination office, and the effectiveness of investments is contingent on the timely completion of urban infrastructure improvement. 101. ADB's assistance to the subsector is rated "relevant." Project design was aligned with the Government's development strategy, ADB's CSP 20052009, and Nepal's Poverty Reduction Strategy Program 2002 as an integrated approach to urban environmental improvement and decentralized governance. The assessment of problems and opportunities and continued relevance of project as it moved from approval to implementation indicates that project design was appropriate, the needed assessments were relevant, the assistance had linkages with other ADB programs, and it exhibited high resilience and flexibility. But the project preparatory TA for such complex projects should have been more exhaustive. More time needed to be allocated for engineering design and community mobilization for building consensus. It was found that the Government's policy on land pooling was not in line with ADBs Involuntary Resettlement Policy (1995). The design and monitoring framework should be better designed to align with the results chain. The complexities of project implementation, particularly in the absence of elected municipal officials and the capacity constraints of the implementing agencies, could have been better assessed. 102. ADB's assistance to the subsector is rated "effective." Outputs with reference to training for institutional strengthening of municipalities in urban management and revenue mobilization, and health awareness in communities raised through community development programs, have been substantially achieved. Outcome indicators, such as the increase in land price by several folds and increase in the number of commercial bank branch offices have been achieved prior to project completion. Although the projects provided capacity enhancement for municipalities, project steering and oversight arrangements encountered difficulties in the absence of elected representatives. In this regard, more intensive community involvement would have helped the realization of project objectives. Community involvement is shown by highly community-driven initiatives in land pooling. Implementation relied heavily upon municipal administrations supported by staff seconded from the Department of Urban Development and Building
92

ADB. 2008. Technical Assistance to Nepal for Preparing the Secondary Towns Integrated Urban Environmental Improvement Project. Manila (TA 7182-NEP, for a total $0.846 million [Japan Special Fund $700,000 and Water Financing Facility-NET TF $146,000], approved on 2 December). 93 Refer to ADB website, Project Information Document, Project Number 31888-01: Secondary Towns Integrated Urban Environmental Improvement Project, Grant proposed for $40 million.

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Construction. More formal training and capacity enhancement of implementing agencies were required. The lack of municipal political accountability because of the absence of legitimate political leadership has made decision-making very difficult. Consequently, a lot more time was required for consensus building and pre-construction activities. 103. ADB operations in the sector are likely "efficient." The project administration memorandum advocated flexible implementation modalities and decentralized implementation, which, if adhered to, would have been in line with the conflict-sensitive approach. ADB's internal processing through a proactive NRM and Government's counterpart funding have been quite adequate. The partnership arrangement with Kreditanstalt fr Wiederaufbau (KfW) through the Town Development Fund for supplementary urban facilities was in place with ample scope for expansion. Project management has been efficient in procuring goods and services and arranging short-term institutional strengthening in municipalities, but it seems to have problems ensuring the timeliness of activities and outputs leading to more effective utilization of project resources. This is more evident with less-than-expected progress in improving and expanding urban environmental infrastructure, as some important subprojects such as integrated water supply projects for three municipalities were dropped. However, construction is likely to be completed without time or cost overruns. 104. The trend of progress so far suggests mixed results. Extensive training and other capacity enhancement for central and local government staff are expected to significantly contribute to sustainable subsector operations in the future. But the absence of elected representatives in local government bodies makes it difficult to predict the likelihood of sustainability or achieving the desired impacts of capacity enhancement measures, particularly as intensive community involvement is lacking in most components. An ad hoc arrangement of seven-party political representation cannot legitimately channel the peoples voice. Subsector assistance is rated "less likely sustainable with "modest" impacts. 105. Overall, ADB's assistance to urban development is "relevant," likely effective," likely "efficient," "less likely sustainable," and likely to deliver "modest" impact. The CAPE initially rates this subsector as "partly successful." G. Law, Economic Management, and Public Policy

106. Through the CSP 20052009, ADB aimed to make governance more inclusive and results-oriented by (i) encouraging the participation of women and disadvantaged and excluded groups in both the development process and government; (ii) supporting the Government's decentralization initiatives, including fiscal decentralization, by strengthening the planning and implementation capacity of local institutions; (iii) improving devolved service delivery at the grassroots by encouraging the involvement of the local community, private sector, and nongovernmental organizations; (iv) pursing institutional strengthening and deregulation to minimize opportunities for corruption; and (v) supporting civil service reforms to enhance the accountability, transparency, and results-orientation of public service delivery. Specifically, ADB was to focus its support for good governance on building the capacity of key public institutions, especially local ones, to deliver essential services, thereby improving the quality and inclusiveness of the public service and helping to combat corruption. Between 2004 and 2008, ADB assistance to the sector amounted to $110.2 million, consisting of a $106.3 million grant for

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the Governance Support Program (Subprogram I)94 and TA amounting to $5.1 million to build capacity in different areas of economic management and public policy. 107. Sector Output, Outcomes, and Impact. Since the single grant during the CAPE period was approved only in October 2008, it is premature to include it in the sector performance assessment. Two PCRs for projects approved in 2001 and 2003 that were circulated in 2008 were reviewed. These are for the Governance Reform Program (GRP)95 and the Public Sector Management Program (PSMP).96 The GRP supported comprehensive public sector governance reforms and aimed to introduce a number of interrelated interventions and changes in the civil service and governance environment. In addition to the program loan, ADB provided two TA grants. The first97 was to enhance the Governments capacity to lead, coordinate, and support the implementation of its long-term governance-reform strategy. The second98 supported the establishment of processes for improving performance in key ministries. The third tranche of the program loan was cancelled because most policy measures had not been completed by the extended loan-closing date. The PSMPs objective was to support the Government in the implementation of its poverty reduction strategy embodied in the Tenth Plan FY2003FY2007 by addressing key policy and institutional constraints, strengthening the Governments resource position over the medium term, and laying the foundation for accelerating pro-poor growth in support of poverty reduction. The PSMP covered three broad components: (i) strengthening the fiscal position of the Government, (ii) facilitating the Governments disengagement from public enterprise management and ownership, and (iii) strengthening public and corporate governance. Attached to the loan was advisory TA99 to help the Government undertake public enterprise reforms and manage the PSMP. 108. Public expenditure management in Nepal was reformed in 2002, at the beginning of the Tenth Plan, with the adoption of the Public Expenditure and Financial Accountability Assessment, which established the strategic allocation of resources through the medium-term expenditure framework and a performance-based budget release system. Strategic business plans were developed and public expenditures development prioritized, reducing portfolio size from over 700 projects to around 400. Improvements to the traditional monitoring and evaluation system enhanced implementation and effectiveness. A poverty monitoring and analysis system was instituted, and a process was initiated to institutionalize it at the district level. The Public Procurement Act and Public Procurement Regulations were passed in 2007 and the Public Procurement Monitoring Office was established. Public finance management performance was assessed by the Government in 2007 using the public expenditure and financial accountability methodology. Further, the Government budget had become a policy tool that was largely credible and was clearly linked to outcomes and policies in some sectors, and public financial
ADB. 2008. Report and Recommendation of the President to the Board of Directors on a Proposed Program Cluster and Grant for Subprogram 1 to the Federal Democratic Republic of Nepal for the Governance Support Program. Manila (Grant 0118-NEP, for $106.3 million, approved on 28 January). 95 ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Governance Reform Program. Manila (Loan 1861-NEP[SF], for $30.0 million, approved on 27 November). 96 ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom of Nepal for the Public Sector Management Program. Manila (Loan 2002-NEP[SF], for $35.0 million, approved on 8 July). 97 ADB. 2001. Technical Assistance to the Kingdom of Nepal for Institutional Support for Governance Reforms. Manila (TA 3622-NEP, for $1,525,000, approved on 18 January). 98 ADB. 2004. Technical Assistance to the Kingdom of Nepal for Strengthening Performance Based Management. Manila (TA 4249-NEP, for $275,000, approved on 12 December). 99 ADB. 2003. Technical Assistance to the Kingdom of Nepal for Supporting Government Disengagement from Public Enterprises. Manila (TA 4141-NEP, for $425,000, approved on 8 July).
94

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resources had for the most part been used for their intended purpose. The budget was resultsoriented and rooted in a medium-term framework. Strategic business plans, medium-term expenditure frameworks, and budget allocations are now more aligned with the Government's strategies, improving services delivery and reducing the fiscal deficit to a sustainable 2.5% of the gross domestic product. 109. Despite these improvements, more needs to be done to strengthen implementation, management, and accountability mechanisms. Further, the public financial management system needs to become fully owned by the ministry and line agencies through more engagement of the political leadership if financial resources are to be used efficiently. Improved data monitoring and evaluation of fiscal risks is needed to reduce uncertainty. Subprogram I of the Governance Support Program provides support to the Governments national Local Governance and Community Development Program, which will contribute to poverty reduction through inclusive, responsive, and accountable local governance and participatory, community-led development. The three main expected outcomes of subprogram I are as follows: (i) citizens and communities engage actively with local bodies and hold them accountable; (ii) capable local bodies manage resources and the delivery of services in a more inclusive and equitable manner; and (iii) policy and national institutional frameworks, including legal frameworks, are strengthened for decentralization, devolution, and community development. 110. TA projects were provided to (i) strengthen the National Accounts System;100 (ii) prepare a Regional Development Strategy;101 (iii) support the preparation of the Governments TYIP;102 (iv) continue the Economic Policy Network;103 and (v) support managing for development results (MfDR).104 All these projects are meant to build capacity to support the four pillars of the Government's strategy. 111. Strengthening the National Accounts System. Good governance relies heavily on the provision of accurate and timely data, but the statistical system in Nepal has been unable to produce some of the basic data needed to support the compilation of national accounts and other indicators required for monitoring poverty and the MDGs. Recognizing this weakness, ADB approved TA to improve Nepals capacity in national account compilation through the Central Bureau of Statistics.105 The TA helped strengthen the methodology and coverage of national account estimates to harmonize the concepts used in the balance of payments, government finance, and monetary and banking statistics. TA supported benchmarking, rebasing the national accounts estimates, developing a system to compile quarterly and monthly indicators, and regular monitoring of poverty-specific indicators for MfDR and the MDGs. TA also supported surveys of economic activity, including services. Capacity development in the Central Bureau of Statistics included training staff and the provision of equipment for data

100

ADB. 2004. Technical Assistance to the Kingdom of Nepal for Strengthening National Accounts System. Manila (TA 4460-NEP, for $0.35 million, approved on 3 December). 101 ADB. 2005. Technical Assistance to the Kingdom of Nepal for the Regional Development Strategy. Manila (TA 4752-NEP, for $0.76 million, approved on 21 December). 102 ADB. 2006. Technical Assistance to Nepal for Supporting Preparation of the Three-Year Interim Development Plan. Manila (TA 4905-NEP, for $0.3 million, approved on 18 December). 103 ADB. 2007. Technical Assistance to Nepal for the Economic Policy Network II. Manila (TA 7042-NEP, for $0.5 million, approved on 14 December). 104 ADB. 2008. Technical Assistance to Nepal for Strengthening Capacity for Managing for Development Results. Manila (TA 7158-NEP, for $0.5 million, approved on 22 October). 105 The bureau is mandated to provide the leadership required for developing a strong statistical system. However, it is not adequately prepared, as its statistical activities have been limited to preparing and conducting population and agricultural censuses every 10 years and a census of manufacturing establishments every 5 years.

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collection. Although the timeliness of the field work was somewhat affected by the insurgency and political instability, the project continues and is highly likely to achieve its intended impact. 112. Preparation of a Regional Development Strategy. Decentralization on the principle of peoples participation and empowerment is considered the backbone of democracy and a vehicle of good governance in Nepal. With resources and accountability transferred from central to local government bodies, meaningful popular participation is the key to ensuring the realistic planning, prioritization, preparation, implementation, and sustainability of locally relevant development activities. The TYIP106 emphasized the importance of fully devolving functions, funds, and functionaries, but participatory planning has been almost impossible in the absence of elected bodies, and gaps, inconsistencies,107 and issues108 in the decentralization process need to be resolved. To assist the Government in adopting a balanced approach for the five regions in Nepal, ADB provided TA for the preparation of the Regional Development Strategy to look into the comparative advantages of economic regions toward possible market development and investment plans. The study identified eight economic regions using development concepts and an investment strategy that would realize the comparative advantages of each region. Major economic centers were identified along with generalized trade flow regimes and the spheres of influence of economic centers. Results from this TA will be useful in the context of a federal structure, providing useful options for how fiscal management could take place. 113. Three-Year Interim Plan. ADB provided TA to prepare the TYIP and strengthen the Governments capacity to formulate national development plans and ensure that the TYIP followed the MfDR approach. TA addressed the main strategic concerns of the TYIP, formed sectoral and subsectoral objectives, and verified key indicators: (i) rehabilitation and reconstruction, (ii) the creation of employment opportunities, (iii) broad and pro-poor, sustainable economic growth, (iv) the promotion of good governance and improvement in the effectiveness of the service delivery, (v) the development of social and physical infrastructure, (vi) the adoption of inclusive development processes, and (vii) the planning and implementation of targeted programs for geographical and social inclusion. Risks and obstacles beyond the
106

The TYIP's objectives are to make local governments more effective in service delivery and development by mainstreaming social inclusion and participatory planning based on local realities, and by involving stakeholders at all levels of planning, implementation, and monitoring of local development programs. Other objectives are to promote good local governance by enabling and equipping local government boards and establishing clear divisions of responsibility and accountability based on fully decentralized structures. Inclusive democratic concepts, including complete and systematic devolution of political, economic, social, legal, and administrative power, are also promoted. The TYIP strategy is to strengthen and ensure the meaningful participation of public, private, nongovernment and civil institutions and groups and create an environment conducive to adopting full decentralization and devolution, including ensuring the mainstreaming of women, children, Dalits, indigenous people, Madhesis, ethnic, and caste groups and the physically, socially, economically, geographically, and culturally disadvantaged, and ensuring real and complete devolution by establishing local service commissions and local fiscal commissions. 107 Village development committees are not economically, administratively, or politically viable, and clarity is lacking on the roles and responsibilities of local, district, and central governments, as well as duplication and triplication of efforts. No actual database exists for realistic targeted planning. Sectoral acts conflict with local self governance acts. Resources allocated to local government bodies are very small and insufficient even to cover limited devolved functions. The allocation of funds is inequitable, as all village development committees receive the same amount, irrespective of population or geographic area. There is a need for well defined mechanisms for regular and meaningful local participation in policy formulation, planning, implementation, and monitoring, especially decentralized fiscal planning and policy; local involvement in formulating development programs; and the participation of the private sector and civil society in local initiatives. 108 Issues highlighted by some groups include (i) the lack of good governance, (ii) the long absences and frequent transfer of government officials, (iii) lack of transparency and accountability, (iv) extremely slow and lengthy central and district decision-making processes, and (v) mismatch between programs and budgets. Lengthy and slow bureaucratic processes make it almost impossible for PPP to take place even where a positive environment exists.

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control of the particular sectoral or subsectoral management systems were identified and improvements made to define outputs, outcomes, and sectoral objectives for impact. Sources of data were identified for monitoring progress against indicators and identifying risk. Needed improvements to implementation, monitoring, and evaluation capabilities in ministries and sectors were identified. 114. As the largest share of ADB assistance to the sector financed projects on governance, the CAPE focused its assessment on this area. ADBs assistance to governance is rated as highly relevant." Good governance is central to the Government's development policies and plans, as it recognizes its critical role in achieving poverty-reduction and social-inclusion goals and targets. ADB's support for governance is consistent with and responsive to the Governments strategic agenda of (i) improving the efficiency and service delivery of the civil service, (ii) assuring accountability and reducing corruption, (iii) accelerating decentralization for better service delivery, and (iv) enabling inclusive development for women and disadvantaged groups. In the first half of CSP 20052009 implementation, the main focus was on civil service reform and fighting corruption through the GRP. It supported public sector governance reforms and introduced interrelated interventions for and improvements in civil service efficiency. The implementation of the GRP was consistent with the goals set out under the CSP 20052009, which listed improvements in good governance as a priority and is likewise relevant to the goals of the Government's Tenth Plan. The recently approved Governance Support Program (Subprogram 1)109 affirms ADB's continued commitment. The PSMP supported the Government in implementing its poverty-reduction strategy as set out in the Tenth Plan. It focused on addressing key policy and institutional constraints to achieve pro-poor growth. The PSMP was consistent with ADB's country strategies in achieving poverty reduction. The recently approved GSP affirms ADB's continued commitment to assisting the Government by providing support to (i) help local bodies improve their management of resources and delivery of services; (ii) strengthen policy and national institutional frameworks for decentralization, devolution, and community development; and (iii) help citizens, communities, and local bodies work together with accountability. 115. ADB assistance to governance is rated "effective." Measuring against the CPS results framework and its specific targets on governance, five out of nine indicators for 2007 were achieved. These include the (i) implementation of affirmative action, including measures to promote inclusion and decentralization, through the promulgation of the Local Service Act; (ii) progressive devolution of service delivery responsibilities, including the increase in the number of district development committees with citizen charters; (iii) increase in the number of schools transferred to community management; (iv) increased number of complaints lodged with the Commission for the Investigation of Abuse of Authority; and (v) conduct of project-based social audits in districts. In addition, regardless of implementation delays and other difficulties encountered, the GRP contributed to good governance in Nepal by introducing new reform measures to enable greater efficiency, transparency, and accountability in the Government, such as (i) Parliamentary approval of several anticorruption legislative acts and the Bill on Amendments to Civil Service Act, (ii) the establishment of the National Vigilance Center under the Office of the Prime Minister, and (iii) the establishment of the computerized personal information system for civil servants linked to posts and payroll systems. The PSMP only partly achieved its intended outcomes, as reforms related to (i) reducing budget transfers to public enterprises, (ii) reconstituting the boards of public enterprises, (iii) amending the privatization

109

ADB. 2008. Proposed Program Cluster and Grant for Subprogram 1 Governance Support Program (Nepal). Manila (Grant 0118-NEP, for $106.3 million, approved on 22 October).

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and labor entrenchment process, and (iv) promulgating the Local Service Act were either not undertaken or were only partly implemented. 116. ADBs assistance to governance is rated likely "less efficient." The implementation of the GRP required broad political and Government leadership and support. The GRP was designed to be implemented over 5 years from 2002 to 2006, with disbursement in three tranches. The first tranche was released in December 2001 upon loan effectiveness, but it took 5 more years for the Government to meet the loan conditions for second tranche release.110 The GRP's overly ambitious and unrealistic design created constraints. The Government needed to comply with 19 loan conditions for second tranche release but was able to comply with only 15 conditions, and substantially or partly comply with 3. Other design constraints included (i) limited baseline assessment of the Governments capacity, (ii) insufficient TA funding to help address Government capacity gaps, (iii) limited linkages between policy reforms and development results in the program framework, and (iv) underestimation of the adjustment costs of reforms.111 Delays were encountered in the implementation of the PSMP arising from (i) unmet loan tranche release conditions and (ii) frequent changes in government officials caused by the volatile political situation, which affected the performance of executing and implementing agencies. 117. ADB assistance is rated less likely sustainable." The Government demonstrated its commitment to good governance by implementing a number of new policy reforms in 2007 that are beyond the scope of the CSP 20052009, including the (i) inclusion of affirmative action and programs in the Civil Service Act 2007, (ii) amendment of the Local Body Financial and Administration Regulation to increase the financial autonomy of local bodies, and (iii) approval of the Anti-Money Laundering Act. ADB's next phase of support for the new Local Government and Community Development Program is based on the Governments priority on decentralization and local capacity development. However, the implementation of legal and policy reforms introduced under the GRP remains weak. Key reforms introduced under the PSMP were either not undertaken or only partly implemented. As a result, risks related to nonperforming enterprises and gaps in the implementation of key reforms remain. The overall impact of ADB assistance to good governance is rated "modest." The legislative and policy reforms introduced under the GRP are likely to improve local service delivery. 118. Overall, the CAPE rates ADB assistance to the law, economic management, and public policy sector as "partly successful."

110

The third tranche of the GRP was cancelled at the request of the Government because policy conditions became unattainable in the new political context after 2006. 111 The GRP design projected a total adjustment cost of $105 million over a 4 years, fully recovered through efficiency gains. Some of the assumptions on cost recovery can be questioned, including no cost for implementing the (i) contracting out of public services and projected savings of $6 million, (ii) decentralization plan and projected savings of $6 million, and (iii) medium-term expenditure framework, as well as projected savings of $67 million.

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Table A10: Summary of BottomUp Assessmenta

Sector
TNC - Roads FIN - Rural FIN EN - Rural Electrification EDU WSS and WM - WSS - Urban Development LEMPP Highly Relevant (3) Relevant (2) Less Efficient (1.5) Efficient (2) Less Effective (3) Effective (4) Less Likely (3) Less Likely (2) Modest to Substantial (3) Modest (2)

Relevance
Highly Relevant (3) Relevant (2) Highly Relevant (3) Highly Relevant (3)

Efficiency
Efficient (2) Efficient (2) Efficient (2) Less Efficient (1)

Effectiveness
Effective (4) Effective (4) Less Effective (2) Effective (4)

Sustainability
Less Likely (2) Likely (4) Less Likely (2) Likely (4)

Impact
Modest to Substantial (3) Substantial (4) Modest (2) Substantial (4)

Overall
Partly Successful (14) Successful (16) Partly Successful (11) Successful (16) Partly Successful (12.75) Partly Successful b (13.5)

Partly Successful (12) Partly Successful Highly Less Effective (4) Less Likely (2) Modest (2) (12) Relevant (3) Efficient (1) ANR Partly Based on the bottomup assessment of the ANR SAPE Successful (11) Overall Ratingc Partly Successful (13.25) ANR = agriculture and natural resources; EDU = education; EN = energy; FIN = finance; LEMPP = law, economic management, and public policy; SAPE = sector assistance program evaluation; TNC = transport and communications; WSS = water supply and sanitation; WM = waste management. a Bottomup rating (BR) is assessed as highly successful if the BR 20, successful if 16 BR 19, partly successful if 11 BR 15, and unsuccessful if BR 10. b This includes the rating for the Melamchi Water Supply Project. Without the Melamchi Project, the WSS subsector would have been rated "successful" (17). c The overall rating is weighted based on the volume of loans, grants and/or TAs for each sector. The weighted average overall rating is 13.1. Source: Independent Evaluation Mission.

MANAGEMENT RESPONSE TO THE COUNTRY ASSISTANCE PROGRAM EVALUATION FOR NEPAL: DELIVERING ASSISTANCE IN A CHALLENGING ENVIRONMENT

On 8 July 2009, the Director General, Independent Evaluation Department, received the following response from the Managing Director General on behalf of Management:

I.

General Comments

1. The Country Assistance Program Evaluation (CAPE) process has evolved over the last several years to become a key assessment tool for both looking back on past performance and, drawing on lessons learnt, making recommendations for future ADB operations in its developing member countries. We appreciate the effort undertaken by IED to provide a comprehensive analysis of ADB's operations in Nepal over the period 2004 to 2008, and acknowledge the wide consultation process involved, with extensive engagement with all the key stakeholders, notably Government, the private sector, civil society and other development partners in Nepal, as well as with ADB staff. 2. The CAPE's subtitle "Delivering Assistance in a Challenging Environment" captures the context in which ADB delivered its program of assistance. During the period under review, Nepal emerged from armed conflict and political instability to embark on a peace process which led to a cessation of hostilities, successful elections for a Constituent Assembly and formation of a coalition government. Nepal also achieved modest economic growth. ADB and the broader donor community played an important role in supporting Nepal during this pivotal time and achieving these outcomes. We regard the CAPE's top-down assessment of borderline "successful" as reflecting well ADB's overall contribution to these positive developments in Nepal. 3. The bottom-up assessment of "partly successful" is based on concerns with implementation efficiency, the timely completion of projects, and the sustainability of project and program outcomes. Conflict and political uncertainty exacerbated weak governance and very limited capacity, particularly at the local level, resulting in limited outcomes despite the high level of effort made by Government, the range of stakeholders and ADB. The re-emergence of political uncertainty and deteriorating rule of law indicate that this unfavorable environment for both development assistance and private sector development will need to be addressed in the next country partnership strategy (CPS). 4. The CAPE documents a range of important lessons learnt during four years of operations in Nepal. Among these, the adoption of a conflict sensitive approach which enabled ADB operations to continue during a highly unstable period in Nepal's history is arguably the most significant. As Nepal now addresses the challenge of completing its peace process, and seeks to draw excluded groups into the political process and the mainstream economy, this lesson will remain relevant for future operations. Completion of the peace process and the formation of a federal state under a new constitution will take time, and ADB will need to continue to develop approaches that deliver services

2 and infrastructure in rural areas while maintaining high standards of accountability and transparency. II. Comments on Specific Recommendations

5. Recommendation 1. Infrastructure-Led Inclusive Growth Strategy. We agree. Assistance to infrastructure is fundamental to achieving inclusive economic growth, poverty reduction and regional integration. Nepal faces a very large infrastructure deficit in transport, power and urban services delivery (including water supply and sanitation). The CAPE rightly emphasizes the need to address policy and institutional constraints to improve absorptive capacity, financial sustainability and maintenance, with the objective of improving service quality and extending coverage to excluded groups. ADB can play an important role in helping improve connectivity with neighboring countries, so that Nepal is better able to participate in regional growth and exploit its potential for hydropower development. In the short term Nepal will be reliant on budget and donor funding to support infrastructure development, but the CAPE correctly identifies the need for greater private sector involvement, including through public-private partnerships (PPPs). Irrigation and water resource management will be pursued within the context of Nepal's response to global climate change. 6. Recommendation 2. Governance, Capacity Development and the Results Framework. We agree. Improved governance and accountability are critical for achieving Nepal's development goals. The country strategy and program (CSP) under review was ADB's first results-based CSP, and over the period, ADB was active in institutionalizing the results orientation in its own program and providing support to the government as it sought to introduce management for development results. We agree that the adoption of resultbased monitoring tools to assess performance and development results against targets has facilitated improvement in governance in Nepal. These efforts should be consolidated and expanded in the next phase of ADB support; the new CPS will continue ADB's focus on promoting good governance and capacity building of key public institutions. However, political instability and weakened rule of law are putting government procurement and financial management at risk. Under these circumstances additional measures and effort will be required to ensure that government and donor resources are used efficiently and effectively, particularly in rural areas. 7. Recommendation 3. Private Sector Development and Regional Cooperation. We agree. Much needs to be done to improve the environment for private sector development in Nepal. The CAPE sets out clearly the main constraints facing the private sector and those areas considered appropriate to concentrate ADB support -- notably provision of physical infrastructure and governance, improvement of the policy environment for investment and trade, and support for PPPs in infrastructure development, in particular the energy sector. The constraints to private sector growth are confirmed by the recently completed important input (prepared by ADB/DFID and ILO under leadership from ADB's Economics and Research Department) to the formulation of the next CPS: "Nepal: Critical Development Constraints". Given the range of constraints facing private investment in Nepal, PPPs will need to be prepared carefully and appropriately sequenced to build support and confidence in this potentially very

3 important investment modality. In this regard, the South Asia Department and Private Sector Operations Department are already cooperating and coordinating in the preparation of the CPS to ensure a successful role for the private provision of infrastructure in Nepal and mobilization of financial resources. 8. The CAPE rightly identifies the importance of regional cooperation and integration in contributing to Nepal's future economic growth and development. As a relatively small, open economy located between two of Asia's major economies, Nepal has much to gain from more active participation in the regional economy. ADB is well placed to provide assistance through the provision of key linking infrastructure, notably in the transport and power sectors, and support for trade and transport facilitation and tourism development. Nepal's active participation in the South Asian Association for Regional Cooperation provides a sound institutional framework within which it can pursue regional economic integration.