Report and Recommendation of the President to the Board of ...€¦ · requiring gradual introduction of cost-reflective utility tariffs and user fees. B. Impact and Outcome . 9

Report and Recommendation of the President to the Board of Directors

Project Number: 44240 November 2011

Proposed Loan Kingdom of Bhutan: Urban Infrastructure Project

CURRENCY EQUIVALENTS (as of 13 October 2011)

Currency Unit – ngultrum (Nu) Nu1.00 = $0.020424

$1.00 = Nu48.96

ABBREVIATIONS ADB – Asian Development Bank DUDES – Department of Urban Development and Engineering Services EIRR – economic internal rate of return EMP – environmental management plan FIRR – financial internal rate of return IEE – initial environmental examination km – kilometer LPSC – local project steering committee MLD – million liters per day MOWHS – Ministry of Works and Human Settlement O&M – operation and maintenance PAM – project administration manual PIU – project implementation unit PMU – project management unit SDR – special drawing rights SJM – Samdrup Jongkhar Municipality TA – technical assistance UIDP – Urban Infrastructure Development Project WSS – water supply and sanitation WWTP – wastewater treatment plant

NOTE In this report, “$” refers to US dollars.

Vice-President X. Zhao, Operations 1 Director General S.H. Rahman, South Asia Department (SARD) Director M.T. Kho, Urban Development and Water Division, SARD Team leader R.V. Barba, Safeguards Specialist, SARD Team members K.M. Emzita, Senior Counsel, Office of the General Counsel J.G. Hauber, Principal Private Sector Development Specialist, SARD F. Tornieri, Senior Social Development Specialist, SARD R. Slangen, Urban Development Specialist, SARD V. Lisack, Urban Development Specialist, SARD Peer reviewer H. Jenny, Principal Urban Development Specialist, Southeast Asia

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

CONTENTS

Page PROJECT AT A GLANCE

I. THE PROPOSAL 1

II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 3 C. Outputs 3 D. Investment and Financing Plans 4 E. Implementation Arrangements 5

III. DUE DILIGENCE 5 A. Technical 5 B. Economic and Financial 7 C. Governance 8 D. Poverty and Social 8 E. Safeguards 9 F. Risks and Mitigating Measures 9

IV. ASSURANCES 10

V. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework 11 2. List of Linked Documents 14

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loan to the Kingdom of Bhutan for the Urban Infrastructure Project.1

2. The project will support the Government of Bhutan’s efforts toward sustainable urban development in its two largest municipalities (Phuentsholing and Thimphu) and two emerging urban centers (Samdrup Jongkhar Municipality [SJM] and Nganglam Town). It will have four outputs: (i) water supply and sanitation (WSS) infrastructure rehabilitation and expansion, (ii) mobility improvement, (iii) urban management strengthening, and (iv) project management and capacity development.2

II. THE PROJECT

A. Rationale

3. Unprecedented urban growth3 coupled with inadequate urban infrastructure has resulted in a shortfall of basic urban services for Bhutan’s urban residents. Infrastructure requirements across urban centers vary, but access to water, sanitation, solid waste management, and urban transport are often inadequate. The government’s Tenth Five-Year Plan identifies the need to invest in urban infrastructure and management in Bhutan’s two major municipalities—Thimphu and Phuentsholing—and other larger urban centers4

to ensure sustainable urban management.

4. Thimphu Municipality is Bhutan’s capital, with a population of 92,0005 making up 40% of Bhutan’s urban population. This population is expected to double by 2025. 6 Thimphu’s development strategy 7 identifies four primary issues in the infrastructure and environment sector: (i) water supply, (ii) wastewater collection and treatment, (iii) drainage and flooding, and (iv) solid waste collection and disposal. The ongoing Urban Infrastructure Development Project (UIDP)8 supported by the Asian Development Bank (ADB) covers water supply, solid waste management, and wastewater collection. The UIDP and Thimphu’s local area plan identifies wastewater management as a priority issue in Thimphu, with water pollution from wastewater discharge, 9 solid waste, and effluent from workshops and industries degrading the urban environment.10

1 The design and monitoring framework is in Appendix 1. 2 The Asian Development Bank (ADB) provided project preparatory technical assistance (TA). ADB. 2010. Technical

Assistance to the Kingdom of Bhutan for Urban Infrastructure Project. Manila. 3 Bhutan’s urban population comprises 31% of the total population; by 2020, more than 50% of the population is

expected to be living in urban areas (ADB. 2009. Country Partnership Strategy Midterm Review: Bhutan, 2006–2010. Manila).

4 This includes the four municipalities that are autonomous and are now responsible for the provision of all municipal services (Gelephu, Phuentsholing, SJM, and Thimphu) and five regional growth centers, one of which is the Nganglam Dunghkha Administration.

5 Based on the 2005 census population of 79,185 and 2.5% growth rate. 6 Government of Bhutan. 2003. Thimphu Structure Plan: 2002–2027. Thimphu. 7 Government of Bhutan. 2008. Thimphu City Development Strategy. Bhutan: Cities Alliance. 8 ADB. 2006. Report and Recommendation of the President to the Board of Directors: Proposed Loan and Technical

Assistance Grant to the Kingdom of Bhutan for the Urban Infrastructure Development Project. Manila. 9 Wastewater from central and southern Thimphu is conveyed to its sole wastewater treatment plant in Babesa, a

facultative lagoon system, with a design capacity of only 1.75 million liters per day (MLD). No additional connections have been allowed since 2010 to prevent overloading of the treatment plant. South Thimphu and sections of the core city with laterals produces 6 MLD of wastewater.

10 Government of Bhutan. 2007. Bhutan Millennium Development Goals Needs Assessment and Costing Report. Thimphu.

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5. Following Thimphu Municipality, Phuentsholing Municipality is the second largest urban center in Bhutan. The 2005 urban population of 20,537 is expected to increase to 31,996 by 2025.11 It is the busiest commercial hub where most of the country’s cross-border trade takes place. Its urban development plan12 identifies congestion and poor urban mobility as a key issue that restricts the municipality’s growth. There is only one entry and exit point for the core area, which results in traffic congestion from local traffic and trucks transporting goods to and from Thimphu, and containers carrying raw materials and finished goods to and from the Pasakha industrial area. Bypass roads and bridges are required to divert traffic and reduce congestion, provide an alternative crossing over the Om Chu River to connect the eastern and western portions of the municipality, and accommodate the expected traffic from the proposed dry port. In addition, to avoid border traffic passing through the core area, a second border gate is proposed that will link directly to the proposed bypass road.13

The UIDP has contributed to rehabilitating and improving roads and other municipal services in Phuentsholing.

6. SJM has recently 14 been designated the fourth municipality of Bhutan. The urban population of 5,952 in 2005 is expected to almost triple by 2025. In addition, the satellite town of Deothang with a current population of about 2,000 was subsumed under SJM when it was designated a municipality. While the municipality serves as the gateway to six districts of eastern Bhutan and is one of the oldest urban areas, there has been considerably less investment in urban infrastructure compared with the other three municipalities (Gelephu, Phuentsholing, and Thimphu). This burdens existing infrastructure in an area that is rapidly expanding and has large growth potential as a trade node with the development of the Asian Highways Project and the proposed east–west transnational highway. Structure and local area plans15 identify the need to improve road infrastructure, which is unplanned; water supply, which has insufficient capacity to meet current demands, lacks treatment, is of poor quality, and does not meet potable standards; water distribution, which is badly deteriorated with high leakage; sanitation, which is currently restricted to on-site facilities not properly maintained; and drainage, which is primarily an open drain system. A study16 commissioned by the government shows that, based on projected water demand of 3.7 million liters per day (MLD), current sources of 1.1 MLD will not be sufficient. A comparison of supply and consumption of water suggests nonrevenue water was over 50% in July 2011.17

7. Nganglam, which was designated the growth center of southeastern Bhutan and identified as a nationally important urban center18 with large industrial development potential,19

11 Government of Bhutan. 2005. Population and Housing Census of Bhutan. Bhutan: National Statistics Bureau; and

Government of Bhutan. 2004. Phuentsholing Urban Development Plan (2002–2017). Phuentsholing for the population growth rate of 3.0%.

12 Government of Bhutan. 2004. Phuentsholing Urban Development Plan (2002–2017). Bhutan: Danish International Development Assistance Urban Sector Support Programme and Phuentsholing City Corporation, Ministry of Works and Human Settlements.

13 The proposed bypass road will eventually link the Samtse–Phuentsholing national highway (nearing completion) to Phuentsholing Municipality and the Phuentsholing–Thimphu national highway.

14 Recently classified class A Thromde by the National Assembly. 15 Government of Bhutan. 2007. Structure Plan for Samdrup Jongkhar (2006–2025). Bhutan: Centre for Environment

Planning and Technology, Ahmedabad, India. 16 Progressive Research and Consultancy Services. Undated. Formulation of Urban Water Supply Master Plan for

Samdrup Jongkhar Municipality. Thimphu. 17 Poyry IDP Consultant, Inc. 2011. Draft Final Report for the Urban Infrastructure Project. Manila. 18 Government of Bhutan. 2008. Bhutan’s National Urbanization Strategy. Bhutan: World Bank and Cities Alliance. 19 A new cement plant and a polymer bag plant are expected to be commissioned in 2012; estimated to employ over

1,000. A hydroelectric plant (1,800 megawatts) is also planned 40 kilometers away from Nganglam. The new second east–west transnational highway and Gyalposhig–Nganglam national highway, both under construction, will connect Nganglam to other towns of Bhutan.

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has not adequately invested in urban infrastructure. Nganglam’s investment plan20

identifies urban expansion to the planned Rinchenthang town with water supply and urban transport as priority urban infrastructure needs. Infrastructure investments in Bhutan’s urban areas need to be preceded by further planning and detailed design.

8. The project is consistent with government plans and strategies, and with the inclusive social development objective of ADB’s Bhutan country partnership strategy,21 which aims to improve urban infrastructure services, upgrade city planning, and strengthen the planning and management functions of municipalities. It is consistent with ADB’s Strategy 2020 22 as it contributes to regional outcomes in terms of Millennium Development Goal 7; Bhutan’s infrastructure, specifically urban infrastructure, which is one of ADB’s five core areas of specialization; and environmentally sustainable development. Lessons learned from past and ongoing urban projects and the country assistance program evaluation23

are incorporated in the project. These include: (i) expanded assistance for integrated urban development in key urban centers; (ii) continued involvement in the sector as key to capacity building of municipalities and for meeting municipal service requirements of rapidly growing populations; (iii) the ability of local governments to plan budgets, manage operation and maintenance (O&M), and deal with private sector service providers requires considerable strengthening and technical capacity building; and (iv) local governments have low revenue bases and struggle to provide basic O&M, thus requiring gradual introduction of cost-reflective utility tariffs and user fees.

B. Impact and Outcome

9. The impact of the project is sustainable access to urban services in Chukha, Pemagatshel, Samdrup Jongkhar, and Thimphu districts (dzongkhags). The expected outcome is that Phuentsholing, SJM, and Thimphu municipalities (thromde), and Nganglam Town (throm) will provide improved urban infrastructure to its residents. C. Outputs

10. To achieve outcomes, the project will have four outputs. Output 1: WSS infrastructure rehabilitation and expansion will (i) rehabilitate the existing water supply system24 in SJM, and (ii) construct a wastewater treatment plant in Thimphu Municipality. This output will include provision of access and connections for WSS to public primary and secondary schools within WSS service areas improved or constructed through the project. Output 1 will ensure major infrastructure is properly operated and maintained through provision of required equipment,25

20 Asia-Pacific Economic Cooperation and Department of Urban Development and Engineering Services. 2010.

Socio-Economic Environment and Investment Plan. Thimphu: Ministry of Works and Human Settlements.

and outsourcing of O&M through design–build–operate contracts. Output 2: mobility improvement will construct a bridge and road access in Phuentsholing and resurface sections of associated existing roads. This output includes provision of road maintenance equipment for proper O&M. Output 3: urban management strengthening will include (i) urban planning through

21 ADB. 2005. Country Strategy and Program: Bhutan, 2006–2010. Manila. 22 ADB. 2008. Strategy 2020: The Long-Term Strategic Framework of the Asian Development Bank, 2008–2020.

Manila. 23 ADB. 2010. Country Assistance Program Evaluation. Manila. 24 Includes rehabilitation of the existing water supply network in two zones; source and treatment improvements

including rehabilitation of the infiltration gallery, rehabilitation of a storage tank, rehabilitation of the treatment system including provision of chlorination equipment; rehabilitation of transmission mains; and emergency drinking water storage and distribution facilities for Deothang.

25 Includes septic tank desludging equipment for SJM.

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the development and strengthening of local area and structure plans26 for SJM and Nganglam Town; (ii) WSS planning (footnote 26), due diligence, 27 and detailed design for WSS infrastructure requirements consistent with plans developed for SJM and Nganglam Town; (iii) mobility and drainage planning for Phuentsholing Municipality (footnote 26); and (iv) due diligence and detailed design for transport infrastructure requirements consistent with plans developed for Phuentsholing Municipality. Output 4: project management and capacity development will expand public awareness in health and hygiene, 28

and strengthen project implementation in the four project areas.

D. Investment and Financing Plans

11. The project is estimated to cost $23.38 million (Table 1). 12. The government has requested a loan in various currencies equivalent to SDR12,727,000 from ADB’s Special Funds resources to help finance the project. The loan will have a 32-year term, including a grace period of 8 years, an interest rate of 1.0% per annum during the grace period and 1.5% per annum thereafter, and such other terms and conditions set forth in the draft loan and project agreements. 13. The financing plan is in Table 2.

Table 1: Project Investment Plan

($ million) Item Amounta A. Base Costb 1. Water supply and sanitation infrastructurec 15.28 2. Mobility improvementd 1.29 3. Urban management 0.88 4. Project management and capacity development 1.66 Subtotal (A) 19.12 B. Contingenciese 3.58

C. Financing Charges During Implementationf 0.68 Total (A+B+C) 23.38

Note: Numbers may not sum precisely because of rounding. a Includes taxes and duties of $3.04 million to be financed from government resources. b In 2011 prices. c This includes water supply infrastructure for the Samdrup Jongkhar Municipality ($0.88 million) and sanitation

infrastructure for Thimphu Municipality ($14.22 million). d This includes bridge and roads for Phuentsholing Municipality ($1.25 million). e Physical contingencies computed at 8% for civil works; and 10% for equipment. Price contingencies computed at

1.5% on foreign exchange costs and 5.5% on local currency costs; includes provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate.

f Includes interest. Interest during construction for Asian Development Bank loan has been computed at 1%. Source: Asian Development Bank estimates.

26 Planning will include (i) identification of current and future service needs, (ii) definition of appropriate service levels

and performance criteria for service, and (iii) quantification of revenue requirements for O&M and future investments. With these, opportunities for the private sector can be identified.

27 Infrastructure proposed for detailed design will be subjected to technical, economic and financial, and safeguards (infrastructure will be climate-change responsive and will include plans to avoid and/or mitigate environmental and social impacts) due diligence including preparation of required planning documents.

28 Awareness in health and hygiene will be conducted in Nganglam Town and SJM, and will build on the program developed for the UIDP. In the case of the UIDP currently under implementation, SNV Netherlands Development Organization will finance technical advisory costs while the project will finance program management and coordination costs, and other non-personnel costs.

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14. The TA for the Urban Infrastructure,29

was provided to prepare the project in the amount of $700,000 equivalent. ADB financed $600,000 equivalent on a grant basis, from ADB’s TA funding program. The government provided the remaining balance equivalent to $100,000.

Table 2: Financing Plan

Source Amount

($ million) Share of Total (%)

Asian Development Bank 19.87 84.99 Government 3.51 15.01

Total 23.38 100.00 Source: Asian Development Bank estimates.

E. Implementation Arrangements

15. The implementation arrangements are summarized in Table 3 and described in detail in the project administration manual (PAM). 30

The procurement for goods, works, or services (other than consulting services) will be done in compliance with ADB’s Procurement Guidelines (2010, as amended from time to time). The procurement of consulting services will be done in compliance with ADB’s Guidelines on the Use of Consultants (2010, as amended from time to time). Additional financing for urban infrastructure may be considered to scale up the project if it performs well. The project will identify urban infrastructure requirements through the urban management strengthening output. On the basis of urban infrastructure requirements identified, due diligence (including safeguards) and detailed design will be undertaken as part of the project. This will achieve readiness for possible additional financing.

III. DUE DILIGENCE

A. Technical

16. The major component under the project is the new wastewater treatment plant (WWTP) in Thimphu Municipality. The existing lagoon facility, with an area of 4.9 hectares, was an appropriate low technology solution31 when constructed in 1992. However, because of rapid population growth, it is now treating only about 17% (1.75 MLD) of wastewater generated. To treat 2020 design flows of 14 MLD, an additional 36 hectares would be required using the lagoon process. However, as a result of land restrictions in the narrow river valley below Thimphu, such a large land area is unavailable. A mechanical WWTP is the only viable option. While a number of possible process options exist, the three most practical in terms of capital and O&M costs, local climate and temperature considerations, local wastewater characteristics, and Bhutan’s effluent standards were evaluated and cost estimates prepared.32

The O&M of the proposed WWTP will require skilled operators, electricity, chemicals, and other recurring costs. While Thimphu Municipality’s Sewage Section has experience with O&M of small mechanical package plants, the new WWTP is of significantly larger capacity.

29 ADB. 2011. Quarterly Summary Report on Approved (A) Preparatory Technical Assistance Projects not exceeding

$1,500,000; (B) Technical Assistance Projects not exceeding $225,000; and (C) Technical Assistance Cluster Subprojects (October-December 2010).. Manila (TA 7630-BHU $700,000, approved on 29 October 2010).

30 The project will build on existing implementation arrangements under the ongoing UIDP. The UIDP has an existing project steering committee, local project steering committee (LPSC)-Phuentsholing, LPSC-Thimphu, project management unit (PMU), project implementation unit (PIU)-Phuentsholing, and PIU-Thimphu. Additional LPSCs and PIUs will be established in Nganglam Town and SJM.

31 No power requirement and low operator skill level requirement. 32 The actual process will be as offered by the winning bidder, but the three options evaluated are representative of

expected costs.

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17. To address the lack of mechanical WWTP process experience in Bhutan, the WWTP contract will be procured as design–build–operate whereby the operation of the new WWTP is proposed to be done by the contractor for a 3-year period.

Table 3: Implementation Arrangements

Aspects Arrangements Implementation period 15 February 2012–14 February 2018 Estimated completion date 14 February 2018 Management

(i) Oversight body Project steering committee MOWHS (chair) Department of Public Aid, Ministry of Finance; DUDES, MOWHS; Gross National Happiness Commission; National Environment Commission; National Commission on Women and Children; Planning and Policy Division (MOWHS); Thimphu Municipality; Phuentsholing Municipality; SJM; Nganglam Town; Bhutan Power Corporation; development partners (members) Local project steering committee for Thimphu, Phuentsholing, SJM, and Nganglam Town Mayor thrompon or town head (dungpa) [chair] Municipal agencies in the urban sector and other stakeholders (members)

(ii) Executing agency DUDES, MOWHS (iii) Key implementing agencies Thimphu, Phuentsholing, SJM, Nganglam Town, and DUDES (iv) Implementation unit PMU, four staff; PIU-Thimphu, five staff; PIU-Phuentsholing, four staff; PIU-

SJM, four staff; and PIU-Nganglam Town, three staff Procurement ICB 2 contracts $15.630 million

NCB 1 contracts $0.890 million Shopping 3 contracts $0.180 million

Consulting services QCBS (project management consultant)

68 person-months $0.635 million

QCBS (design, monitoring, and supervision consultant)


QCBS (urban management consultant)


Advance contracting Tendering and bid evaluation of equipment and civil works packages and recruitment of consultants This includes (i) shopping for chlorinators in SJM; (ii) ICB, and bid evaluation for Phuentsholing bridge and access roads; and (iii) recruitment of project management, design, management, and supervision, and urban management consultants.

Disbursement The loan proceeds will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2007, as amended from time to time) and detailed arrangements agreed upon between the government and ADB.

ADB = Asian Development Bank; DUDES = Department of Urban Development and Engineering Services; ICB = international competitive bidding; MOWHS = Ministry of Works and Human Settlement; NCB = national competitive bidding; PIU = project implementation unit; PMU = project management unit; QCBS = quality- and cost-based selection; SJM = Samdrup Jongkhar Municipality. Source: Asian Development Bank. 18. O&M costs for various process options are likely to be similar as the majority of the cost of operating a mechanical WWTP is approximately electricity (60%), chemicals (15%), replacement parts and consumables (10%), and only 10%–15% is labor. The O&M cost of the new WWTP will be about Nu3.5 per cubic meter. The government plans to increase water

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tariffs33 and subsidize WWTP O&M to ensure affordability. A tariff plan has been prepared showing increases required to meet the increased O&M of the new WWTP.34

19. While the WWTP will be sized for 14 MLD, with provision for easy expansion in a modular fashion as sewage flows continue to grow, the aeration equipment/blowers will be limited to the equivalent of 11 MLD—the expected flow by 2016. The reasons for this include the cost of concrete structures, primary treatment of screening and de-gritting, and the sludge stabilization process for 14 MLD is almost the same as for 11 MLD and is, therefore, a logical investment, but underutilized aeration equipment would result in unnecessary investment and power consumption until flows increase to 14 MLD several years after the WWTP is built. Aerators can readily be added as inflow to the plant gradually increases. 20. The bridge in Phuentsholing Municipality has been designed with a central pier in the stream bed.35

This is a lower cost option than doing it as a full span or as a suspension bridge. There is a minor risk of erosion or scour around the pier, which will be mitigated by a gabion buffer. The water system rehabilitation in SJM will include refurbishing two water intakes, treatment plants and storage reservoirs, and replacement of most of the existing water trunk mains and distribution system, including service connections. The work will be done on existing facilities and road rights-of-way. Suitable specifications for pipe materials and construction techniques will be used. O&M of the refurbished system will be easier than for the existing damaged system, and the water quality will be improved to potable standards.

B. Economic and Financial

21. Economic analysis was undertaken for the WSS and mobility outputs of the project. The economic internal rate of return (EIRR) for the base-case scenario varies from 14.0% to 18.5%. The EIRR is higher than the economic opportunity cost of capital estimated at 12.0%. A sensitivity analysis was also undertaken with the following scenarios: (i) capital costs increased by 10%, (ii) O&M costs increased by 10%, and (iii) benefits reduced by 10%. Under all scenarios, the EIRRs remain above 12%. 22. The financial internal rates of return (FIRRs) for the water supply and wastewater components were calculated with the following assumptions: (i) a weighted average cost of capital is 2.04% for the water supply and wastewater components; (ii) a 25-year projection period, including a construction period of 5 years; and (iii) constant 2011 prices. The FIRR is 9.1% for the water supply component and 2.3% for the wastewater component. A sensitivity analysis was also undertaken with the following scenarios: (i) capital costs increased by 10%, (ii) O&M costs increased by 10%, (iii) revenues reduced by 10%, and (iv) completion of component delayed by 1 year. The FIRR varied from –0.6% to 9.1% for the water supply component, and from a negative value to 2.3% for the wastewater component.36

Affordability analysis shows suggested tariffs to be less than 5% of household income.

33 Consumers are currently charged for water and 50% of the water bill is for wastewater treatment. 34 Financial Analysis (accessible from the list of linked documents in Appendix 2). ADB is also providing TA to help

modernize Thimphu Municipality’s financial management and revenue generation. 35 The bridge comprises 46.0 meters (m) effective span, with 6.6 m approach slabs and 10.0 m approach blocks on

each side. It will also include a new approach road of 90.0 m, and improvement of 200.0 m of associated roads. 36 The sensitivity analysis indicates that a reduction of project benefits, particularly non-implementation of required

tariff increases, is the most sensitive risk factor.

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C. Governance

23. A financial management assessment was undertaken for the executing agency and the implementing agencies. Fiduciary risks were assessed as low at the country level. At the entity level, control risks for the executing agency and three implementing agencies, currently implementing UIDP, were also assessed as low. Adequate training will be provided for the two implementing agencies (Nganglam Town and SJM) lacking experience in ADB-financed projects. In addition, ongoing TA37 is providing support to the Royal Audit Authority of Bhutan to increase the accountability and transparency of public accounts. A governance assessment for the interim country partnership strategy is also under preparation. Its objective is to formulate risk assessments and risk mitigation plans for public financial management, procurement, and anticorruption risks at the country level and for the urban and energy sectors. Other than ADB, the World Bank is providing assistance to two implementing agencies38

to increase revenues and improve financial management. Procurement will be undertaken by the executing agency and implementing agencies. The executing agency and three of the five implementing agencies have experience under the UIDP; and have developed capacity to issue tenders, evaluate bids, and prepare bid evaluation reports. Newly formed project implementation units (PIUs) will be trained through twinning arrangements, providing on-the-job training from the project management unit (PMU) and the design, monitoring, and supervision consultant. Further capacity will be built for all implementing agencies through the PMU and involving the executing agency and implementing agencies in annual in-country procurement seminars of ADB. Procurement accountability is provided through the tender opening, tender evaluation, and tender award committees. Each committee has to make a declaration of no conflict of interest. The three-tier system provides due diligence. All government staff and consultants are subject to group and individual audits.

24. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the Ministry of Finance, the Ministry of Works and Human Settlement (MOWHS), the Department of Urban Development and Engineering Services (DUDES), and the implementing agencies. The specific policy requirements and supplementary measures are described in the PAM.39

D. Poverty and Social

25. The project supports the government’s poverty reduction program and contributes to the achievement of Millennium Development Goal 7 by providing both the poor and non-poor continuous access to basic services including safe drinking water and adequate sanitation facilities in Thimphu Municipality and SJM, and improved urban environment through bypass road development in Phuentsholing Municipality. A health and hygiene awareness campaign under the project will also enhance public participation and improve the health of poor families through improved hygiene behavior, as well as provide jobs for those involved in the sanitation business and services, the majority of whom are from poorer households. The project is categorized “effective gender mainstreaming” as it addresses specific gender issues, which include ensuring continuous access to safe drinking water and adequate sanitation facilities for households headed by women (49.6% of total households in the project areas). A consultation and participation plan and gender action plan have been prepared. The gender action plan will be implemented and monitored by the PMU in coordination with the Gender and Social

37 ADB. 2010. Technical Assistance to the Kingdom of Bhutan for Strengthening Audit Resource Management.

Manila. 38 Thimphu Municipality and Phuentsholing Municipality, under World Bank. 2010. Second Urban Development

Project. Washington, DC. 39 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

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Inclusion Management Team formed under the project, and includes the National Commission for Women and Children. E. Safeguards

26. Environmental safeguards. The project is classified category B for environment. Three initial environmental examinations (IEEs), including environmental management plans (EMPs), were prepared and disclosed in accordance with ADB’s Safeguard Policy Statement (2009) and government laws. Subprojects are not located in or near sensitive or protected areas, and the IEEs conclude no significant adverse impacts are anticipated from proposed locations, designs, and construction activities. The EMPs provide adequate mitigation measures to ensure impacts are limited and of short duration. The net environmental benefits will be positive and large, including (i) improved river water quality from sewerage treatment in Thimphu Municipality, (ii) improved air quality and pedestrian safety from road bypass and bridge works in Phuentsholing Municipality, and (iii) improved drinking water quality and quantity from water supply improvements in SJM. Implementation arrangements in the PMU and PIUs build on previous experience gained from the UIDP, and adequate capacity is ensured to manage environmental impacts through consultant support and additional capacity building. The IEEs and EMPs will be updated during detailed design as necessary and will be incorporated into bidding and contract documents to be implemented by contractors and monitored by the PIUs and PMU. Environmental reporting to ADB from the PMU will be done on a semiannual basis. An environmental assessment and review framework was prepared to guide planning studies and detailed design of future investments in preparation for possible additional financing.40

27. Social safeguards. The project is classified category C for involuntary resettlement and category C for indigenous peoples. The project is designed to avoid land acquisition, resettlement impacts, and social risks. A resettlement framework was prepared and disclosed in accordance with ADB’s Safeguard Policy Statement and government laws41 to guide planning studies and detailed designs of future investments (for possible additional financing not financed under the project).42

Implementation arrangements build on previous experience gained from the UIDP, and ensure that the PMU and PIUs have adequate capacity to understand and prepare resettlement plans, if necessary, through consultant support and additional capacity building. Considering the urban locations of these subprojects, no impacts to indigenous peoples are expected. Meaningful, widespread consultations will continue with all communities in the project area during implementation.

F. Risks and Mitigating Measures

28. Major risks and mitigating measures are summarized in Table 4 and described in detail in the risk assessment and risk management plan.43

40 Environmental Assessment and Review Framework (accessible from the list of supplementary documents in

Appendix 2). 41 Resettlement Framework (accessible from the list of supplementary documents in Appendix 2). 42 Based on field visits and discussions with the government, no significant resettlement impacts are envisioned

under possible future investments. 43 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

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Table 4: Summary of Risks and Mitigating Measures Risks Mitigating Measures Insufficient technical capacity to operate WWTP in Thimphu Municipality

A design–build–operate contract will be used for the WWTP to ensure proper O&M after commissioning. Monitoring by Thimphu Municipality will ensure the contractor is meeting all O&M parameters, including preventive maintenance.

Essential sewage tariff increases in Thimphu Municipality are not undertaken.

Thimphu Municipality will assure the required increase in tariffs in accordance with the tariff plan. Thimphu municipal government will undertake all administrative requirements to make the tariff increase effective. Public awareness campaign will be undertaken well before commissioning.

Essential water tariff increases in Samdrup Jongkhar Municipality are not undertaken.

Samdrup Jongkhar Municipality will assure the required increase in tariffs in accordance with the tariff plan. Samdrup Jongkhar municipal government will undertake all administrative requirements to make the tariff increase effective. Public awareness campaign will be undertaken well before commissioning.

River pollution during the construction of the WWTP in Thimphu Municipality

The existing WWTP will not be fully decommissioned until the new WWTP is commissioned, and Thimphu Municipality working with the National Environment Commission will ensure effluent is monitored.

O&M = operation and maintenance, WWTP = wastewater treatment plant. Source: Asian Development Bank.

IV. ASSURANCES

29. The government and DUDES, MOWHS have assured ADB that implementation of the project shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the PAM and loan documents. 30. The government and DUDES, MOWHS have agreed with ADB on certain covenants for the project, which are set forth in the loan agreement and project agreement.

V. RECOMMENDATION

31. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan in various currencies equivalent to SDR12,727,000 to the Kingdom of Bhutan for the Urban Infrastructure Project, from ADB’s Special Funds resources, with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; for a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and project agreements presented to the Board.

Haruhiko Kuroda President

2 November 2011

Appendix 1 11

DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance Targets and Indicators with

Baselines

Data Sources and Reporting

Mechanisms

Assumptions and

Risks Impact Assumptions Sustainable access to urban services in Chukha, Pemagatshel, SJM, and Thimphu districts (dzongkhags)

Urban households with access to safe drinking water increases from 78% in 2000 to 100% in 2018.

Population with access to sewerage and sanitation increases from 88% in 2000 to 100% in 2018.

Government statistics including data from the Living Standards Measurement Survey and MDG statistics

Government statistics including data from the Living Standards Measurement Survey and MDG statistics

Government commitment to sector development and reforms Improvements are made in other urban infrastructure not covered by the project.

Outcome Assumptions Phuentsholing, SJM, and Thimphu municipalities (thromde), and Nganglam Town (throm) provide improved urban infrastructure to its residents.

Nonrevenue water in SJM reduced from 50% in 2011 to 35% in 2018.

Sewerage coverage increases from 17% in 2011 to 80% in 2018 for Thimphu’s southern local areas and core area.

Residents’ perception of road connectivity/mobility improves by 2018.

Planning, design, and monitoring of urban services based on an improved database by 2018

Municipality or town urban services statistics; baseline and post-project data including service delivery and service quality

Municipality or town urban services statistics; baseline and post-project data including service delivery and service quality

Socioeconomic and perception survey

Municipality or town urban services statistics

Adequate O&M arrangements established for project outputs

Continued commitment of municipality/town to necessary institutional and financial reforms to improve service delivery

Outputs Assumptions 1a. Water supply infrastructure is rehabilitated in SJM.

16 km of water supply pipes upgraded by 2016

Annual municipal reports (including reports submitted to the Ministry of Health)

Government clearances obtained prior to scheduled construction

Contractors perform competently and on time and budget

Proper O&M

12 Appendix 1

Design Summary


Baselines


Mechanisms

Assumptions and

Risks 1,000 households

served with improved quality and quantity of water by 2018 (Target: at least 40% are households headed by women)

Annual municipal reports (including reports submitted to the Ministry of Health)

Risk Insufficient resources for O&M

Five public schools and one general hospital served with improved quality and quantity of water by 2018

Annual municipal reports (including reports submitted to the ministries of health and education)

1b. Sanitation infrastructure is rehabilitated and expanded in Thimphu Municipality

10 MLD of treated wastewater capacity by 2018

18,000 additional households served by sewerage network by 2018 (Target: at least 40% are households headed by women)

13 public schools and 6 health centers served by sewerage network by 2018

Annual municipal reports (including reports submitted to the Ministry of Health) Annual municipal reports (including reports submitted to the Ministry of Health)

Annual municipal reports (including reports submitted to the ministries of Health and Education)

2. Mobility improved in Phuentsholing Municipality

0.17 km of roads and one bridge built and 0.2 km roads upgraded by 2016

Annual municipal reports

Assumptions

Government clearances obtained prior to scheduled construction

Contractors perform competently and on time and budget

Proper O&M

3. Urban management is strengthened.

Two organized and climate-change responsive urban plans prepared by 2016

20 staff trained on urban management and O&M of urban infrastructure by 2018 (Target: at least 25% are women)

DUDES monitoring/progress reports

DUDES training monitoring/progress reports

Appendix 1 13

Design Summary


Baselines


Mechanisms

Assumptions and

Risks 4. Capacity strengthened for public awareness in health and hygiene; project management and implementation is strengthened

Public awareness campaign with clear socially inclusive and gender-sensitive messages is undertaken by 2016

Achievement of yearly contract award and disbursement targets

140 staff trained on project planning, design, and implementation by 2018 (Target: at least 25% are women)

Monitoring and evaluation systems populated with sex-disaggregated data by 2018



DUDES training monitoring/progress reports


Activities with Milestones Inputs 1. Water Supply and Sanitation 1.1 Rehabilitate water supply infrastructure in SJM (Q4 2015) 1.2 Construct and commission wastewater treatment plant in Thimphu

Municipality (Q1 2017) 1.3 Deliver O&M equipment (Q3 2014) 1.4 Set up O&M arrangements (Q1 2017) 2. Roads and Bridge 2.1 Construct roads and bridge (Q4 2015) 2.2 Deliver O&M equipment (Q4 2013) 2.3 Set up O&M arrangements (Q1 2017) 3. Urban Management 3.1 Develop local area and structure plans for SJM and Nganglam

Town (Q3 2014) 3.2 Complete detailed designs for future urban infrastructure for SJM

and Nganglam Town (Q3 2014) 3.3 Develop mobility and drainage plans for Phuentsholing

Municipality (Q1 2014) 4. Capacity Building 4.1 Conduct public awareness campaign (Q3 2016) 4.2 Conduct training (Q1 2017)

Loan ADB (ADF): $19.87 million Item Amount

($ million) Civil works 13.42 Equipment 0.18 Consulting services 2.07 Contingencies 3.52 Financing Charges 0.68 Government: $3.51 million Item Amount

($ million) Taxes and duties 2.47 Incremental administrative Costs 0.40 Environmental and involuntary resettlement costs 0.01 Contingencies 0.63

ADB = Asian Development Bank, DUDES = Department of Urban Development and Engineering Services, km = kilometer, MDG = Millennium Development Goal, MLD = million liters per day, O&M = operation and maintenance, Q = quarter, SJM = Samdrup Jongkhar Municipality. Source: Asian Development Bank.

14 Appendix 2

LIST OF LINKED DOCUMENTS (http://adb.org/Documents/RRPs/?id=44240-013-3)

1. Loan Agreement

2. Project Agreement

3. Sector Assessment (Summary): Water Supply and Other Municipal Infrastructure and Services

4. Project Administration Manual

5. Contribution to the ADB Results Framework

6. Development Coordination

7. Financial Analysis

8. Economic Analysis

9. Country Economic Indicators

10. Summary Poverty Reduction and Social Strategy

11. Gender Action Plan

12. Initial Environmental Examination

13. Risk Assessment and Risk Management Plan

Supplementary Documents 14. Environmental Assessment and Review Framework

15. Resettlement Framework

16. Procurement Capacity Assessment Report and Recommendations

17. Institutional and Capacity Building Strategy

18. Public–Private Partnership for the Urban Sector