The World Bank...Guna Raj Shrestha Water and Sanitation Specialist 977-9851051095 (Mobile) Kathmandu, Nepal Andrew Robinson Water and Sanitation Specialist 33 457 372492 (O) 33 612

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 81863-NP

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 32.4 MILLION (US$50 MILLION EQUIVALENT)

AND PROPOSED GRANT

IN THE AMOUNT OF SDR 14.3 MILLION (US$22 MILLION EQUIVALENT)

TO

NEPAL

FOR A

RURAL WATER SUPPLY AND SANITATION IMPROVEMENT PROJECT

April 28, 2014

Sustainable Development Department Urban, Water & Sanitation Unit South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective - March 31, 2014)

Currency Unit = Nepal Rupees (NRs) NRs 95.86 = US$1 US$ 1.546 = SDR1

FISCAL YEAR

July 16 – July 15

Regional Vice President: Philippe H. Le Houerou Country Director: Johannes C.M. Zutt

Sector Director: John Henry Stein Sector Manager: Ming Zhang

Task Team Leader: William D. Kingdom

iii

ABBREVIATIONS AND ACRONYMS

CLTS DDC DOLIDAR DTCO DTO DWSS EA ED ERR ESMF FM GAAP GoN GSF IDA JMP LSGA MIS M&E MOF MoUD NEWAH NGO NMIP NPC NPV O&M ORAF PMU PSC RWSS RWSSFDB SA SO SSR UGDP-ETP UNICEF VDC VHP VMW WASH WaterAID WSSUC WSUG WTSS

Community Led Total Sanitation District Development Committees Department of Local Infrastructure Development and Agricultural Roads District Treasury Controllers Office District Technical Officer Department of Water Supply and Sewerage Environmental Assessment Executive Director Economic Rate of Return Environmental and Social Management Framework Financial Management Governance and Accountability Action Plan Government of Nepal Government Sanitation Fund International Development Association Joint Monitoring Program Local Self Governance Act Management Information System Monitoring and Evaluation Ministry of Finance Ministry of Urban Development Nepal Water for Health Non-Government Organization National Management Information Project National Planning Commission Net Present Value Operation and Maintenance Operational Risk Assessment Framework Project Management Unit Project Steering Committee Rural Water Supply and Sanitation Rural Water Supply and Sanitation Fund Development Board Service Agency Support Organization Sector Status Report Urban Governance and Development Program-Emerging Town Project United Nations International Children's Emergency Fund Village Development Committees Village Health Promoter Village Maintenance Worker Water and Sanitation and Hygiene Water Agency for International Development Water Supply and Sanitation Users Committee Water Supply and Sanitation Users Group Women’s Technical Support Services

iv

NEPAL

RURAL WATER SUPPLY AND SANITATION IMPROVEMENT PROJECT

TABLE OF CONTENTS

I. STRATEGIC CONTEXT ......................................................................................................1

A. Country Context ................................................................................................................. 1 B. Sectoral and Institutional Context ...................................................................................... 1 C. Higher Level Objectives to which the Project Contributes ................................................ 4

II. PROJECT DEVELOPMENT OBJECTIVES .....................................................................4

A. PDO .................................................................................................................................... 4 B. Project Beneficiaries .......................................................................................................... 4 C. PDO Level Results Indicators ............................................................................................ 4

III. PROJECT DESCRIPTION ...................................................................................................5

A. Project Components ........................................................................................................... 5 B. Project Financing................................................................................................................ 7 D. Lessons Learned and Reflected in the Project Design ....................................................... 8

IV. IMPLEMENTATION ............................................................................................................9

A. Institutional and Implementation Arrangements ................................................................ 9 B. Results Monitoring and Evaluation .................................................................................... 9 C. Sustainability .................................................................................................................... 10

V. KEY RISKS AND MITIGATION MEASURES ...............................................................10

A. Risk Ratings Summary Table .......................................................................................... 10 B. Overall Risk Rating Explanation ...................................................................................... 10

VI. APPRAISAL SUMMARY ...................................................................................................11

A. Economic Analysis .......................................................................................................... 11 B. Technical .......................................................................................................................... 11 C. Financial Management ..................................................................................................... 12 D. Procurement ..................................................................................................................... 12 E. Social (including Safeguards) ........................................................................................... 13 F. Environment (including Safeguards) ................................................................................ 13 G. Other Safeguards Policies Triggered ............................................................................... 14

Annex 1: Results Framework and Monitoring .........................................................................16

Annex 2: Detailed Project Description .......................................................................................20

Annex 3: Implementation Arrangements ..................................................................................29

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Annex 4: Operational Risk Assessment Framework ................................................................38

Annex 5: Implementation Support Plan ....................................................................................41

Annex 6: Economic Analysis .......................................................................................................43

Annex 7: Governance & Accountability Action Plan (GAAP) ................................................49

vi

DATA SHEET

Nepal

Rural Water Supply and Sanitation Improvement Project (P143036)

PROJECT APPRAISAL DOCUMENT .

SOUTH ASIA

Report No.: PAD680 .

Basic Information

Project ID Lending Instrument EA Category Team Leader

P143036 Investment Project Financing

B - Partial Assessment William D. Kingdom

Project Implementation Start Date Project Implementation End Date

16-July-2014 30-June-2020

Expected Effectiveness Date Expected Closing Date

30-September-2014 30-June-2020

Joint IFC [No]

Sector Manager Sector Director Country Director Regional Vice President

Ming Zhang John Henry Stein Johannes C.M. Zutt Philippe Le Houerou

Borrower: Ministry of Urban Development

Project Financing Data (in USD Million)

[ ] Loan [X] Grant [ ] Other

[X] Credit [ ] Guarantee

Total Project Cost: 90.0 Total Bank Financing: 72.0

Total Cofinancing: 18.0 Financing Gap: 0.0 .

Financing Source Amount

BORROWER/RECIPIENT Communities International Development Association (IDA), Credit/Grant (Recommitted) Total

10.5 7.5

72.0

90.0

Expected Disbursements (in USD Million)

Fiscal Year FY15 FY16 FY17 FY18 FY19 FY20 FY21

Annual 7 15 14 14 12 8 2

Cumulative 7 22 36 50 62 70 72

vii

Proposed Development Objective(s)

(i) Increase sustainable access to improved water services and promote improved sanitation and hygiene practices in rural areas; and (ii) Develop and implement a long-term support mechanism to promote the sustainability of water supply schemes in selected districts. .

Components

Component Name Total Cost (USD Millions)

• Component 1 – Access to Improved Water Supply and Sanitation and Promotion of Improved Sanitation and Hygiene Practices

• Component 2 – District Level Institutional Strengthening

• Component 3 – Technical Assistance/Capacity Building and Project Management

• Component 4: Contingency Emergency Response

73.2

9.6

7.2 0.0

.

Institutional Data

Sector Board

Water .

Sectors / Climate Change

Sector (Maximum 5 and total % must equal 100)

Major Sector Sector % Adaptation Co-benefits %

Mitigation Co-benefits %

Water, sanitation and flood protection Water supply 80

Water, sanitation and flood protection Sanitation 20

Total 100

[X] I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information

applicable to this project. .

Themes

Theme (Maximum 5 and total % must equal 100)

Major theme Theme %

Rural development Rural services and infrastructure 85

Public sector governance Decentralization 15

Total 100

Compliance

Policy

Does the project depart from the CAS in content or in other significant respects? Yes[ ] No [X]

Does the project require any waivers of Bank policies? Yes[ ] No [X]

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Have these been approved by Bank management? Yes[ ] No [ ]

Is approval for any policy waiver sought from the Board? Yes[ ] No [X]

Does the project meet the Regional criteria for readiness for implementation? Yes[X [] No [ ] .

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X

Legal Covenants

Name Recurrent Due Date Frequency

Additional Condition of Effectiveness

90 days after the date of the Financing Agreement

Description of Covenant

The Subsidiary Agreement has been executed by the Recipient and the Project Implementing Entity.


Institutional Arrangements

X CONTINUOUS


The Recipient shall maintain the Project Management Unit with an adequate number of professional staff satisfactory to the Association.


Implementation X CONTINUOUS


The Recipient and the Project Implementing Entity shall carry of their Respective Parts of the Project in accordance with the Project Operations Manual and the GAAP.


Institutional Arrangements

X CONTINUOUS


For purposes of Component/Part 2, the Recipient shall establish and maintain in each Participating District a District WASH Unit.

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Safeguards X CONTINUOUS


The Recipient shall and shall cause the Project Implementing Entity to carry out the Project in accordance with the Safeguards Instruments.


Schemes under Part 1(b) X CONTINUOUS


The Project Implementing Entity shall select Schemes and Support Organizations in accordance with eligible criteria satisfactory to the Association.


Schemes under Part 1(b) X CONTINUOUS


The Project Implementing Entity shall ensure that from Batch XI onward Schemes are part of the respective district’s approved annual program.


Sanitation Sub-grants under Part 1(c)

X CONTINUOUS


The Project Implementing Entity shall make Sanitation Sub-grants available to VDC with eligibility criteria and processes acceptable to the Association.

Team Composition

Bank Staff

Name Title Specialization Unit

William D. Kingdom Lead Water and Sanitation Specialist

Task Team Leader (TTL), Water and Sanitation

SASDU

Shideh Hadian Sr. Infrastructure Economist Co-Task Team Leader (Co-TTL), Economist, Water and Sanitation

SASDU

Silva Shrestha Water and Sanitation Specialist

Water and Sanitation SASDU

Hiramani Ghimire Sr. Governance Specialist Governance SASGP

Drona Ghimire Environmental Specialist Environment Safeguards SASDI

Annu Rajbhandari Extended Term Consultant Environment Safeguards SASDI

Bandita Sijapati Social Development Specialist

Social Safeguards SASDS

Yogesh Bom Malla Financial Management Specialist

Financial Management SARFM

Shambhu Prasad Uprety Procurement Specialist Procurement SARPS

x

Michelle Lisa Chen Program Assistant Administrative Client Services (ACS)

SASDO

Kalyan Nemkul Program Assistant Administrative Client Services (ACS)

SASDO

Miguel Vargas-Ramirez Sr. Water & Sanitation Specialist

Peer Reviewer AFTU2

Yitbarek Tessema Lead Water & Sanitation Specialist

Peer Reviewer AFTU1

Soma Ghosh Moulik Sr. Water & Sanitation Specialist

Peer Reviewer TWIWA

Non-Bank Staff

Name Title Office Phone City

Guna Raj Shrestha Water and Sanitation Specialist

977-9851051095 (Mobile) Kathmandu, Nepal

Andrew Robinson Water and Sanitation Specialist

33 457 372492 (O) 33 612 355801 (Mobile)

Le Fey, France

.

Locations

Country First Administrative Division

Location Planned Actual Comments

Nepal VDC National level

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I. STRATEGIC CONTEXT

A. Country Context

1. Nepal is divided into five development regions, 75 districts, and 58 municipalities. Nepal is also divided into three ecological regions based on altitude - Mountains, Hills, and Terai - which are quite diverse in terms of climate, topography and socio-economic conditions. Census 2011 estimated the population of Nepal at about 27 million, with a growth rate of 1.4% per annum. About 50% of the population lives in the Terai belt, followed by Hills with 43%, and the Mountain belt with 7%. Nepal is predominantly a rural society with 83% of its people living in rural areas. However there has been a substantial growth in the urban population in the past decade with an increase from 14% in 2001 to about 17% in 2011. 2. Nepal is still emerging from a 10-year armed conflict that ended in 2006 and is in a political transition phase. Despite the decade long conflict that shook the foundations of many established systems, Nepal’s economy experienced sustained GDP growth at a rate of 3.9% per annum on average over the past 10 years, above the rate of demographic growth of 1.4% per annum. The percentage of people living below the international line for extreme poverty (people earning less than US$1.25 per day) has halved in only seven years, from 53.1% in 2004 to 24.8% in 2011. At the same time inequality has also reduced and the country’s overall GINI coefficient (based on expenditures)1 declined from 41 to 35 between 2004 and 2011. 3. The prolonged political transition has overshadowed economic and social issues. As a result, inadequate attention has been given to reforms that could further improve and stimulate inclusive growth and reduce poverty. The country’s logistical limitations and inadequate infrastructure are the most important bottlenecks for growth. The 2011/12 Global Competitiveness Report ranked Nepal 141 in overall quality of infrastructure.

4. Nepal is among the poorest countries in the World and currently ranks 157 out of 187 countries on the Human Development Index. Poverty is more severe in rural areas (27%) compared to urban areas (15%) and is particularly severe in mountainous areas (42%) with ethnicity a dominant factor in these differences. Thus, despite improving standards of living, the country’s level of human development remains among the lowest in the World.

B. Sectoral and Institutional Context

5. Sector Performance. According to the Nepal Census 2011, access to improved water and sanitation in Nepal are respectively 85% and 61% (see Table 1 below). According to the Joint Monitoring Program (JMP) database, the country has achieved the Millennium Development Goal (MDG) target for access to improved water supply (Actual 2011 = 88%, Target 2015 = 84%) but is off target for access to improved sanitation (Actual 2011 = 35%, Target 2015 = 54%)2.

1 Gini index measures the extent to which income distribution (or, in some cases, consumption expenditure) among individuals or households within an economy deviate from a perfectly equal distribution. 2 The discrepancy with Nepal census figures could be due to the use of different definitions of sanitation and timing of the survey.

2

Table 1: Access to Improved Water and Sanitation

Population Category

Access Estimated Gap in Access Estimated Population

% of people with Access

to Safe Water

% of People with Access to Latrine

People without Access to Safe

Water

People Without Access to Latrines

Urban Population 4,523,820 87 91 585,382 411,668 Rural Population 21,970,684 85 55 3,295,603 9,908,778

Combined 26,494,504 85 61 3,880,985 10,320,446 6. The situation in rural areas may be worse than indicated above, as surveys conducted by the National Management Information Project (NMIP) show that 44% of existing rural water systems are in need of repairs or rehabilitation3 for a number of reasons, including: (i) community capacity constraints to raise revenue for O&M; (ii) water source issues; and (iii) Water Supply and Sanitation User Groups’ (WSUGs) inability to undertake major repairs. The Water and Sanitation and Hygiene (WASH) Sector Status Report (SSR) published by Ministry of Urban Development in May 2011 reinforces this picture and estimates that about 5.5 million people have inadequate water service and 16 million lack adequate sanitation facilities. The national target is for universal access to water and sanitation by 2017. 7. The Bank has been actively supporting the Government in achieving these coverage targets through two previous projects. The First Rural Water Supply and Sanitation Project (an IDA Credit equivalent to US$ 18.2 million) closed in December 2003 and the Second Rural Water Supply and Sanitation Project (an IDA Credit/Grant equivalent to US$ 52.3 million) closed in August 2012. Both these IDA funded projects were rated satisfactory on completion. In addition a recent Bank supported sector study investigated ways to further improve scheme sustainability. The project will draw on this experience to deepen the engagement with Government to address these sector issues, and in particular: (i) continue to expand water coverage, but with an emphasis on less well served districts; (ii) reduce the significant sanitation gap by scaling up sanitation beyond the boundaries of the project’s water supply schemes; and (iii) strengthen institutional support mechanisms in selected districts to enhance sustainability.

8. Policies. There has been an evolution in Government of Nepal (GoN) legislation, policies, and guidelines related to the WASH sector, of which the most important for rural water supply and sanitation (RWSS) are: (i) Rural Water Supply and Sanitation National Policy, Strategies and Strategic Action Plan (2004); (ii) National Sanitation and Hygiene Master Plan (2011); and (iii) the Local Self Governance Act (LSGA, 1999).

9. The Rural Water Supply and Sanitation National Policy, Strategies and Strategic Action Plan is a comprehensive set of policy statements, definitions of service levels, cost sharing principles, inclusion of women and disadvantaged groups in decision making, and roles and responsibilities of different GoN ministries and agencies as well as other stakeholders. It endorses the “demand responsive approach” to provision of RWSS.

10. The Sanitation and Hygiene Master plan has led to improved rural sanitation and includes nine guiding principles which have proved important in galvanizing significant progress in the 3 12% of the schemes need major repair, 9% need reconstruction, 1.6% is not functional, and 21% require rehabilitation.

3

last two years. Key among these guiding principles is that local bodies should lead the process through joint action coordinated by the District Water Supply, Sanitation and Hygiene Coordination Committee (D-WASH-CC).

11. LSGA has been instrumental in the devolution of powers to local levels and defines the duties and powers of Village Development Committees (VDCs) and District Development Committees (DDCs), and in particular entrusts them with responsibility for local level infrastructure, including water supply and sanitation. Until locally elected bodies are in place, and local bodies are capable of shouldering that responsibility, central level agencies will continue to play an important role.

12. Institutions. The Ministry of Urban Development (MoUD) has overall responsibility for water supply and sanitation service delivery across the country. It is responsible for formulating national policy on water supply and sanitation, including service levels, quality standards and technological choices. Under MoUD, the Department of Water Supply and Sewerage (DWSS) and Rural Water Supply and Sanitation Fund Development Board (Fund Board) are the two agencies that provide support to user groups in implementing water supply and sanitation systems in rural communities.

13. At the same time, rural water supply and sanitation is the responsibility of local bodies - DDCs and VDCs - as per LGSA. The Ministry of Federal Affairs and Local Development (MoFALD) provides technical support and develops RWSS schemes for DDCs and VDCs through the Department of Local Infrastructure Development and Agriculture Roads (DoLIDAR).

14. At the macro level, the National Planning Commission (NPC) reviews plans, policies, and strategies, and recommends them for approval and coordinates between ministries on sector financing. The Ministry of Finance (MoF) allocates budgets and releases them to executing/implementing agencies and coordinates with donors to address resource gaps.

15. Service Delivery. Till the early 1990s a top-down and contractor-led service delivery approach was used to construct and operate rural water supply and sanitation systems. Gradually this has been replaced by a demand responsive approach, which adopts an inclusive, community driven approach where local communities play the lead role in planning, design and implementation of schemes, as well as in operation and maintenance. The approach is holistic and integrated, and incorporates water supply, sanitation, health and hygiene. 16. Rural water supply and sanitation is delivered to communities through a variety of channels which reflect the institutional fragmentation in the sector. The main agencies - DWSS, DDCs and VDCs, and the Fund Board - respectively receive 61%, 23% and 16% of the GoN budget allocation. The recently completed Modalities Study4 found general convergence between the main implementation modalities in terms of the adopted approaches used, unit costs, and outcomes achieved.

4 FCG (2013) Nepal RWSS sector study: modalities of service delivery, their features and options to efficiently increase access and sustainability - Draft final report.

4

17. Many Development Partners have been working closely with GoN on specific projects and on overall planning/coordination (e.g., specific sector initiatives like the Joint Sector Review, 2011 and cross-sectoral activities such as the Multi Sector Nutrition Plan). Each partner tends to work through different government agencies although, as noted above, to a reasonably consistent model.

18. The project will enhance and reinforce the on-going convergence of various sector actors and approaches, particularly through the integrated model to be adopted under Component 2. This will provide a solid foundation for Government to consider evolving towards a sector-wide approach in the future.

C. Higher Level Objectives to which the Project Contributes 19. The proposed project is directly aligned with the upcoming Nepal Country Partnership Strategy (CPS), scheduled for Board presentation in May 2014. CPS Pillar II - Promoting Growth in Human Development - promotes growth in human potential through providing, among other things, access to basic needs and services. The project aims to expand access to improved water supply and sanitation services in rural areas and reach out to the under-served population. The project will also promote long term support mechanisms to improve sustainability of Water Supply User Group (WSUG) managed rural water schemes.

II. PROJECT DEVELOPMENT OBJECTIVES

A. PDO 20. The development objectives of the project are to: (i) Increase sustainable access to improved water services and promote improved sanitation and hygiene practices in rural areas; and (ii) Develop and implement a long-term support mechanism to promote the sustainability of water supply schemes in selected districts.

B. Project Beneficiaries 21. The project will implement about 1,450 water supply schemes in rural areas, and retroactively finance an additional 424 schemes from Batch IX under RWSSP II. These schemes are expected to directly benefit an estimated 1.50 million people with improved water supply and sanitation, and an additional 0.9 million people with only improved sanitation. Women and children will benefit significantly from project interventions, as they currently bear the burden of securing the daily drinking water needs of the family and disproportionately suffer the consequences of illnesses associated with poor access to water and sanitation. Beneficiaries will be predominantly from districts which currently have low access to water and sanitation services and higher poverty incidence, thus bringing greater social equity in the sector and improving shared prosperity.

C. PDO Level Results Indicators 22. Achievement of the PDO will be monitored using the following indicators (See Annex 1 for more details):

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i. People provided with access to “improved water sources” (number) ii. VDCs declared Open Defecation Free (number)

iii. Schemes visited by the backstopping facility set up at the district level (number)

III. PROJECT DESCRIPTION A. Project Components

23. The project comprises four components which are described in more detail in Annex 2: • Component 1: Access to Improved Water Supply and Sanitation and Promotion of Improved

Sanitation and Hygiene Practices • Component 2: District Level Institutional Strengthening • Component 3: Technical Assistance/Capacity Building and Project Management • Component 4: Contingency Emergency Response Component 1: Access to Improved Water Supply and Sanitation and Promotion of Improved Sanitation and Hygiene Practices (US$73.2 million) 24. This component will finance carrying out a program of selection, development and implementation of schemes through: (i) promotion of participation of communities in the planning, implementation and management of schemes, including (a) community mobilization activities, (b) conducting information campaigns, (c) provision of non-formal education (focused on dalits and women), (d) health hygiene and sanitation activities, and (e) technical support services for women to improve access to formal credit systems; (ii) development and implementation of Schemes, including construction and minor rehabilitation of gravity flow systems, installation of shallow and deep tube wells, dug wells, lift schemes, rainwater harvesting, and catchment protection; and (iii) provision of sanitation sub-grants to VDCs for the purpose of sanitation promotion activities and construction of toilets in schools, health posts, and other institutions. 25. Villages in the 55 districts covered and prioritized under this project (including the expansion and rehabilitation of schemes in five districts selected for Component 2) can participate on the basis of requests for WASH services through the district’s planning process, subject to meeting the Fund Board criteria for financing.5 Project resources will be weighted towards those districts with lower levels of access to water supply and sanitation, thus addressing current inequities in service provision and building a platform for shared prosperity. For purposes of prioritization under Component 1, districts have been ranked based on their access to improved rural water supply and sanitation (Census, 2011), with 60% weightage given to water supply and 40% to sanitation coverage. A total of 50 districts have been divided in three priority groups: 60% of investment will be directed to 20 districts in Priority 1 group, which has the lowest access; 25% and 15% of investments will respectively be allocated to Priority 2 and Priority 3 groups. The poverty index6 is correlated with the level of access to water and sanitation.

5 The criteria for the selection of schemes are defined in the Fund Board’s manual. 6 Measured by the Human Development Index.

6

26. The project will use the development of water schemes as an entry point to scale up sanitation and help close the current gap between access to improved water services and access to improved sanitation services. When a water scheme is developed in one or more wards within a VDC, sanitation interventions will be implemented across the whole of that VDC. 27. The sanitation approach will follow the successful national model, where no cash or hardware subsidies are provided to build household (HH) toilets, although the project will finance institutional toilets in Health Posts, Schools and other local institutions and will provide grants to VDCs to support sanitation and hygiene promotion. The project aims to achieve Open Defecation Free (ODF) status, as a minimum, in participating VDCs and this will be supplemented by post-ODF (total sanitation) campaigns thereafter. 28. In those districts selected for Component 2, Component 1 activities will expand beyond the construction of new schemes and will develop and establish approaches for demand responsive and sustainable investments in:

i. Water system rehabilitation – where schemes have deteriorated and need investment.

ii. Water system expansion – where increases in the size of a community have not been matched by system expansion.

29. The selection of new, rehabilitation, and expansion schemes to be implemented under Component 2 will be based on schemes that meet the Fund Board's criteria and are within the districts' approved annual program.

30. The project will include a provision to enhance women’s participation in Water Supply and Sanitation User Committees (WSUCs), formed to oversee service delivery in each WSUG, while continuing with the Women’s Technical Support Services (WTSS)/Jeevika program which was developed under the earlier Bank supported projects. This program supports women’s economic empowerment and poverty reduction through orientation and training, and improved access to formal credit systems, thus helping women to develop the skills required to realize the benefits of time saved from fetching water. In addition, to promote social accountability, the Jagaran program, instituted under the previous project, will continue to be implemented as a part of this program. Component 2: District Level Institutional Strengthening (US$9.6 million) 31. This component will promote the long term sustainability of schemes in selected districts through enhancing institutional arrangements and strengthening linkages among key agencies during planning, implementation and post construction of such schemes, including:

• Establishing, in each selected district, a District WASH unit to strengthen and institutionalize WASH planning (for new, rehabilitation, and expansion schemes), support strengthening of the D-WASH-CC, manage WSUG support services, facilitate horizontal learning and coordinate with the WASH coordination committee.

• Implementing a District-wide monitoring and evaluation (M&E) system to routinely collect and compile data from the schemes, and link back to the MoUD’s M&E system.

7

• Introducing a backstopping arrangement to ensure that all schemes are assessed and visited at least once each year in accordance with the criteria.

• Creating a District-wide water market and networking system which would allow WSUGs to share experience, and find service providers to fix problems as they arise.

• Facilitating sanitation marketing to strengthen local supply chains for sanitation goods and services, and to increase household demand for improved sanitation and hygiene.

• Designing and piloting grant eligibility and WSUG grading criteria that create incentives for better management of community water supply services.

• Using a phased approach that gradually increases local bodies operational and financial responsibility for Component 2 activities and institutions.

32. Five districts have been selected to participate in Component 2 on the basis of their institutional capacity (Minimum Conditions - Performance Management scores of the districts for FY 2012/13), size of the districts (excluding districts that were too large or too small), and scale of major rehabilitation requirements (per NMIP) so that rehabilitation and expansion models can be tested in these districts. Component 3: Technical Assistance/Capacity Building, and Project Management (US$7.2 million) 33. This component will finance incremental project management and administration costs for Components 1 and 2, as well as a variety of financial and safeguards audits, miscellaneous capacity building activities and sector studies. Component 4: Contingency Emergency Response (US$0 million) 34. In case of an adverse natural event that causes a major disaster, the government may request the Bank to re-allocate project funds to support emergency response and reconstruction. This component would draw resources from the unallocated expenditure category and/or enable the government to request the Bank to re-categorize and reallocate financing from other project components to partially cover emergency response and recovery costs. This component may also be used to channel additional funds that may become available to respond to the emergency. Annex 2 provides a description of how this component will be used in case of an emergency.

B. Project Financing

35. The project will be funded by an IDA Credit and an IDA Grant, under the Investment Project Financing (IPF) instrument. 36. Project costs and financing are presented in Table 2 below. Community contribution of around 15% of capital costs of the water supply schemes will be in the form of initial cash contribution and/or labor contribution. GoN will provide counterpart funds of about 12% of total project costs.

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Table 2: Summary of Project Cost and Financing, By Component

Components Total Costs

(US$ Million)

% of Total Cost

IDA Financing*

(US$ Million)

Community Contribution US$ Million)

Government Financing

(US$ Million)

Component 1 – Access to Improved Water Supply and Sanitation and Promotion of Improved Sanitation and Hygiene Practices

73.2 81 58.2 7.5 7.5

Component 2 –District Level Institutional Strengthening

9.6 11 9.6 0 0

Component 3 – Technical Assistance/Capacity Building and Project Management

7.2 8 4.2 0 3.0

Component 4 – Contingency Emergency Response

0 0 0 0 0

Total 90.0 72.0 7.5 10.5

* Grant and Credit portions will be used according to the financing percentages in the Financing Agreement. 37. Retroactive financing of up to SDR 2.0 million (equivalent to US$3.0 million) may be utilized for eligible payments made on or after July 6, 2013, but before the signing of the financing agreement.

D. Lessons Learned and Reflected in the Project Design 38. As indicated in paragraph 7, the Bank has supported two rural water supply and sanitation (RWSS) projects in Nepal since 1996, focusing on community driven development that empowers beneficiaries to identify, plan, implement, operate and maintain schemes in line with LSGA. The proposed project has taken into account the lessons from these earlier projects, as well as results from a recently completed study on the various modalities of delivering RWSS services in the country. 39. Regardless of implementation modality, RWSS projects have been completed with limited attention to post implementation support to WSUGs. This explains why a high proportion of existing schemes are not fully functional. The proposed project will address this critical issue under Component 2 and provide support for institutional strengthening that improves sustainability of investments.

40. A second key lesson, both as part of improving sustainability and in order to ensure that schemes meet the needs of the districts in which they are built, is that any scheme, regardless of modality, should respond to district priorities. The project addresses this by strengthening the procedures to ensure that schemes selected for implementation by the Fund Board are a priority to the DDC.

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41. The proposed project will also address the imbalance between water and sanitation coverage highlighted in the coverage figures presented earlier. These imbalances have arisen partly because of the past emphasis on water supply interventions over sanitation interventions. The proposed project will emphasize sanitation by having water supply intervention in a community trigger a VDC-wide intervention to achieve ODF status. 42. Other lessons learnt include the criticality of gender issues in the design of RWSS projects. The project will adopt the approaches developed under RWSSP II and ensure that all water user committees have a minimum of three women members, and will continue the Women’s Technical Support Services (WTSS)/Jeevika innovation which supports women’s economic empowerment and poverty reduction. 43. The proposed project will also benefit from the lessons of the Jagaran Program to promote social accountability. Under the Jagaran program, a local group is formed to monitor scheme implementation to ensure the governance and accountability aspects of the scheme, and provide feedback. The Jagaran group comprises socially responsible individuals not associated with WSUC, who will provide feedback to the WSUC, SOs and SAs on issues of finances and procurement at the community level. The project will continue to promote the innovative Risk Insurance Program piloted under RWSSP II to cover schemes against risks associated with loss of source, landslides and earthquakes.

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

44. MoUD will be the executing agency for the project. A Project Steering Committee (PSC) has been set up at the national level to provide oversight and guidance on both components. 45. Component 1 will be implemented by the Fund Board, under the purview of MoUD, and in close coordination with the local bodies. Component 2 will be managed by a Project Management Unit (PMU) within MoUD, in close coordination with the local bodies (DDCs and VDCs) which are under the purview of MoFALD. Participating districts will establish District WASH units staffed by the Department of Water Supply and Sewerage Division Office and the District Technical Office, and will be supported by project consultants. Coordination between Components 1 and 2 will be through the district and village WASH coordination committees. Component 3 will be managed by both MoUD and the Fund Board for their respective parts.

B. Results Monitoring and Evaluation 46. Monitoring and Evaluation (M&E). Project monitoring will be enhanced by updating the existing Management Information System (MIS) of the Fund Board, which was used under RWSSP II. Sector monitoring will be addressed through Component 2, where District level monitoring will be implemented by using information, communication, technology (ICT), particularly mobile technology, to collect and record data on all aspects of project implementation. Component 2 will link this information to national systems at MoUD and will also form a part of the proposed WSUG incentive system which relies on field data for implementation.

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47. Project Implementation Progress. The Results Framework Indicators (Annex 1) will be routinely monitored and measured during project implementation against base line data and targets.

C. Sustainability 48. The project will address sustainability in four key ways by: (i) engaging systematically and continuously with beneficiaries at all stages of the process – thus building support for schemes, and an understanding of the role of the communities in operations and maintenance; (ii) giving women a key role in the design and subsequent oversight of schemes; (iii) allocating adequate resources under Component 2 to specifically design and implement an institutional arrangement to promote long term sustainability in five districts; and (iv) having DDCs play a central role in scheme identification, thus creating ownership at the district level.

V. KEY RISKS AND MITIGATION MEASURES

A. Risk Ratings Summary Table

Risks Rating

Project Stakeholder Risks

- Stakeholder Risk Moderate

Implementing Agency Risks

- Capacity Moderate

- Governance Substantial

Project Risks

- Design Moderate

- Social and Environment Moderate

- Program and Donor Low

- Delivery Monitoring and Sustainability Substantial

Overall Implementation Risk Moderate

B. Overall Risk Rating Explanation

49. The detailed Operational Risk Assessment Framework (ORAF) and risk management measures are presented in Annex 4. The overall implementation risk of the project is rated moderate. The key risks are: (i) sector and institutional coordination risks among multiple agencies for planning and long term support to WSUGs; (ii) unforeseen challenges in working in more remote areas; and (iii) political risks arising from sectoral evolution and the degree of decentralization. Project preparation brought the multiple agencies participating in the sector together to design the project. This inclusive approach is expected to lower implementation risks through greater participation in, and understanding of, the design by the various parties. The establishment of the multi-departmental Project Steering Committee will further help reduce this

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risk. Unit costs were adjusted to reflect possible additional challenges in the more remote areas. The project’s Governance and Accountability Action Plan (GAAP) is presented in Annex 7.

VI. APPRAISAL SUMMARY A. Economic Analysis

50. The project provides significant direct, indirect, short and long-term benefits with wide ranging social and economic impacts at the individual, community, and national levels. Health and environmental benefits, cost savings from medical and health related expenses, and general well-being of society will be the largest benefits of the project (as in other water supply and sanitation projects). 51. A quantitative and qualitative analysis has been undertaken to demonstrate the socio-economic impacts of the project through access to safe water, promoting sanitation and hygienic practices, and the construction of latrines in public places. A benefit-cost framework using a “with” and “without” project methodology has been used to calculate the Economic Rate of Return (ERR) and the Net Present Value (NPV) of the project, using conservative assumptions. When the stream of net benefits is discounted at 12 percent cost of capital for 20 years of project life, the NPV amounts to Rs. 8.90 billion, with an ERR of 30.20 percent and a benefit/cost ratio of 3.01. Expected net benefits are robust: a risk analysis of 20 percent cost overrun (hardware and software) or 20 percent reduction in total benefits yields an ERR of 25.65 percent and 24.73 percent, respectively. Annex 6 provides details of the economic analysis.

B. Technical 52. A range of appropriate, cost effective, and community manageable technical options will be provided to communities as part of the demand driven approach. These technology options were developed in the two previous Bank supported projects in Nepal, and will continue to be used under this project, with adjustments as necessary. Technical options to be offered under the project are:

• Gravity Water Supply System • Surface lift system • Shallow Tube Well (STW) for Ground Water • Dug Well (DW) for Ground Water • Deep Tube Well (DTW) for Ground Water • Rain Water Harvesting.

53. Specifications for most common construction works and quality of local and non-local materials for community rural water supply schemes are detailed in the technical manuals of the Fund Board. Standard test requirements and inspection procedures are institutionalized in the Fund Board’s procedures. Whenever appropriate, simple on-site tests will be carried out and arrangements will be made for laboratory tests. In addition, communities will be advised and motivated to follow the specifications and maintain the quality of local construction materials.

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C. Financial Management 54. The Fund Board has implemented RWSSP II and the financial management (FM) system was found satisfactory. The MoUD PMU is a new entity and will hire a dedicated and qualified accounts officer, who will be supported by a financial management consultant on a part time basis. An FM capacity development program will be implemented for project teams of both components. Policy oversight arrangements through PSC will also help manage FM risks. 1. IDA Funds will flow through two separate Designated Accounts, one each for the Fund Board and the MoUD PMU. An effective monitoring and oversight system, including ex-ante and ex-post reviews, will be put in place to monitor the use of funds disbursed for various activities to ensure that funds are used for intended purposes. The implementing agency for this proposed project - the Ministry of Urban Development - is also one of the implementing agencies for the IDA funded Urban Governance and Development Program-Emerging Town Project (UGDP-ETP). As required by the World Bank, the audit report of the existing projects implemented by an agency have to be submitted before another project within the same agency can be negotiated and/or presented to the Board. The FY2012/2013 audit report for UGDP-ETP is overdue. Bank Management granted an exception allowing this proposed project to proceed to negotiation and World Bank Board submission notwithstanding the overdue audit, as audits of all 10 implementing entities have already been completed for the audit of consolidated accounts by the Office of Auditor General.

D. Procurement 55. Procurement for goods, works and non-consulting services under the project will follow the World Bank’s “Guidelines: Procurement of Goods, Works and Non-consulting Services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers,” (2011)7. For consulting services, the project will follow the World Bank’s “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers,” (2011)8. Procurement of goods, works and non-consulting services under National Competitive Bidding (NCB) will be carried out as per the Public Procurement Act (2007), Public Procurement Rules (2007), and additional IDA prescribed modifications. Procurement of all NCB contracts will follow model bidding documents reviewed by the Bank. 56. The Borrower has prepared a procurement plan, acceptable to the Bank, for the first 18 months of the Project. The procurement plan will be updated at least annually or as required to adjust for performance, improved capacity, unforeseen risks, or other implementation realities. Contracts not subject to prior review will be subject to post review by the Bank. Where appropriate to the size and number of contracts, post review will follow a sample-based approach. 57. The results of a Bank procurement risk assessment of the Fund Board and MoUD, including risks, mitigation measures and risk ratings, are given in Annex 3. The Bank-supported RWSSP II operation has strengthened procurement capacity in the Fund Board and at the community level. Procurement capacity of MoUD remains relatively weak. There is a need to 7 Hereafter “ Procurement Guidelines” 8 Hereafter “Consultant Guidelines”

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build and enhance procurement capacity of staff involved in procurement processing, reviewing and decision making. A dedicated procurement consultant will be engaged at the MoUD PMU to support procurement activities during the initial phase of the project and then intermittently thereafter, as required.

E. Social (including Safeguards) 58. The project has been specifically designed to benefit communities living in areas that currently have low access to water and sanitation services. However, experience in RWSSP II indicates that a number of social concerns need to be taken into consideration. These include land requirements for the construction of drinking water schemes, public consultations, gender impacts, inclusion of indigenous people and other vulnerable groups, social accountability, and grievance redress mechanisms. 59. The Fund Board has prepared an Environmental and Social Management Framework (ESMF) as a decision making tool to ensure that activities supported under the project are socially responsive. The ESMF recognizes the need for identifying, assessing and mitigating adverse social consequences that could result from the project, while at the same time maximizing project benefits to women and other vulnerable groups. The ESMF complies with GoN regulatory/policy requirements and the World Bank’s Operational Policy 4.10 (Indigenous Peoples) and describes procedures for consultation, social screening of schemes, land acquisition (if necessary), and grievance redress. It also details the institutional arrangements for monitoring and budgeting, and includes a timetable. 60. As was the case in RWSSP II, responsibility for planning and implementation of the ESMF will lie with WSUGs, with assistance from Support Organizations (SOs). Outcomes and compliance will be monitored by the Fund Board (for Component 1) and the PMU at MoUD (for Component 2). The Fund Board has experience in the areas of social inclusion, equity, indigenous people, land acquisition and social accountability; these will be further strengthened through technical support under Component 3. The PMU at MoUD, which does not have substantive experience in social (including safeguards) issues, will be provided initial technical support, with a gradual phase out plan to develop its own capacity.

F. Environment (including Safeguards) 61. The project triggers Bank environmental safeguard policies on Environmental Assessment (OP/BP 4.01) and Natural Habitats (OP/BP 4.04). As the project supports small scale demand driven water supply schemes using surface sources (such as small spring, stream or ground water with some impacts on existing water quantity, quality, catchment area and stability of the terrain) it triggers OP/BP 4.01, and is classified as an environmental Category B project. Pragmatic mitigation measures will be prepared and implemented to address these adverse impacts. As the sites of the schemes are not known, the possibility of schemes being located in protected areas or sensitive natural habitat cannot be ruled out, and hence OP/BP 4.04 has been triggered as a precautionary step.

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62. Sub-projects with water sources inside core protected areas or in critical natural habitats will not be eligible for implementation. The ESMF has a screening provision for natural habitat and provides guidance for avoidance and mitigation of adverse impacts as per Bank policy requirements. If the alignment of the distribution line traverses the buffer zone or is adjacent to the boundary of a protected area or a sensitive natural habitat, the screening process will highlight potential risks. Required safeguard documents and mitigation measures will be prepared, and permits from the competent authority will be obtained.

63. Environmental safeguard issues will be applicable only to Component 1 of the project, which includes investments in new water supply systems, improved sanitation units for individual households at the community level (health facilities, schools, etc.) and rehabilitation of existing water supply schemes. The ESMF (see discussion above) is a generic guideline for incorporating environmental concerns in project implementation, as the locations of schemes are not yet known. The ESMF has identified the key environmental issues and has outlined mitigation for the distinct regions (terai, hills, and mountains). The ESMF includes generic baseline conditions of project areas, policies, legislation, and guidelines applicable to project implementation, likely impacts, pragmatic mitigation measures, and the institutional set up for implementation of mitigation measures and monitoring. During project implementation site specific environmental management action plans (EMAP) will be developed for each scheme, and water quality, sanitation conditions, and compliance with scheme specific mitigation measures will be monitored as stipulated in the ESMF. 64. Scheme planning and development will consider emerging issues like source depletion and natural hazards (e.g., landslides and floods) which will particularly affect the sustainability of rural water supply schemes. Stakeholder consultation was organized as part of ESMF preparation. The Executive Summary of the Final Draft ESMF has been translated into Nepali. The entire ESMF was disclosed and uploaded for public viewing before project appraisal (www.rwss.org).

65. The project is not anticipated to cause significant detrimental impact on the ambient environment as the environmental issues of these small schemes are site specific. The likely environmental concerns of water schemes under the project include water quality, pollution of water sources, source depletion, induced small scale erosion and landslides due to scheme activities, lowering of groundwater table, groundwater contamination (arsenic, fluoride), and microbiological contamination. Sanitation activities under the project could impact drainage around taps and wells, personal hygiene, household environment and sanitation issues, improper and indiscriminate disposal of household solid waste, garbage and cow-dung, problems and issues related to attitudes and habits regarding environmental health and sanitation, and mosquitoes/disease-vector breeding due to improper waste water disposal.

G. Other Safeguards Policies Triggered

66. Projects on International Waterways OP/BP 7.50. The project triggers the Bank safeguard policy on Projects on International Waterways OP/BP 7.50, because rural schemes will make use of small water sources that will ultimately contribute to flows in bigger streams and rivers which flow to India and Bangladesh. However, possible impacts on water quality and quantity going to neighboring riparian states would be insignificant. As required under OP 7.50,

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the World Bank submitted (on behalf of, and at the request of, the Government of Nepal) a notification on December 24, 2013 to the governments of the riparian states of the Ganges international waterway system, i.e., to the Governments of India and Bangladesh as lower riparian states, and to the Government of China as an upper riparian state. The notification requested comments and response to the proposed project activities be conveyed by January 31, 2014. The Government of Bangladesh provided positive response on January 21, 2014 in which it noted that the Joint Rivers Commission, Bangladesh is of the opinion that the withdrawal of about 25 cusec of water (about 0.05 per cent of minimum availability of about 50,000 cusec) at Farakka by the said project from the sub-tributaries of the Ganges Basin in Nepal will have little effect in the dry season flows availability of the Ganges at Farakka. No response has been received from the other two riparian states, and the World Bank has moved forward with processing this operation. 67. Relevant treaties and agreements. China and India are riparians to the main rivers flowing through Nepal into India. Whilst there is no treaty between Nepal and China, India and Nepal have signed two agreements and a treaty that are currently in force: (i) Agreement on the Kosi Project, signed in Kathmandu on April 25, 1954; (ii) Agreement on the Gandaki Irrigation and Power Project, signed in Kathmandu on December 4, 1959; and (iii) Mahakali Treaty, signed in Delhi on February 12, 1996. The first two of the above agreements are silent on any obligation requiring notification prior to carrying out any activity/work in Nepal, except when the activity will directly affect the specific Projects covered by the agreement. Article 8 of the Mahakali Treaty confirms that the treaty does not preclude planning, survey, development and operation of any work on the tributaries of the Mahakali River, to be carried out independently by each party in its own territory without adversely affecting the natural flow and level of the waters of the Mahakali River. These agreements have no provision that would require Nepal to notify India on these small scale works. Nevertheless, based on World Bank Safeguards Policies, a notification regarding the project was sent to the riparian countries.

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ANNEX 1: RESULTS FRAMEWORK AND MONITORING

NEPAL: Rural Water Supply and Sanitation Improvement Project

Project Development Objective (PDO): Increase sustainable access to improved water services and promote improved sanitation and hygiene practices in rural areas; and (ii) Develop and implement a long-term support mechanism to promote the sustainability of water supply schemes in selected districts.

Results Indicators C

ore Unit of

Measure Base line

Cumulative Target Values Frequency

Data Source/ Methodology

Responsibility for Data

Collection Description

YR 1 YR 2 YR 3 YR 4 YR 5 YR 6

PDO Level Results Indicators

Indicator 1: People provided with access to improved water points; of which, female (percentage).

Number

(000) 0

290 (female

%)

628 (female

%)

932 (female

%)

1,198 (female

%)

1,426 (female

%)

1,502 (female

%)

Every 6 months

Project MIS, Beneficiary Assessment, Social Audits.

Fund Board

Includes 424 schemes in Batch IX retroactively financed.

Indicator 2: Number of VDCs declared ODF by the Districts.

Number 0 83 193 290 372

400

Every 6 months

Project MIS, Beneficiary Assessment, Social Audits.

Fund Board

Target is 400 VDCs

Indicator 3: Number of schemes visited by the backstopping facility at the District level; of which (percentage of schemes non-functioning).

Number 0 0

(50%) 660

(45%) 1,650 (40%)

2,970 (30%)

3,300 (20%)

Every 6 months

District Level MIS

D-WASH Unit, PMU-

MoUD

There are 3,300 schemes in 5 districts; half is non- functional.

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ore Unit of

Measure Base line






Intermediate Results (Component One): Access to Improved Water Supply and Sanitation, and Promotion of Improved Hygiene Practices

Indicator 4: Improved community water points constructed (new, expansion, rehabilitated under the project).

Number 6,000 14,400 22,480 29,480 35,480 37,400 Every 6 months

Project MIS, Beneficiary Assessment, Social Audits

Fund Board

On average 20 water points per scheme

Indicator 5: Number of water supply schemes completed and in operation; of which (Jagaran Committee established).

Number 300

(50%) 724

(50%) 1,124 (60%)

1,474 (60%)

1,774 (70%)

1,874 (80%)

Every 6 months

Project MIS, Fund Board

Includes 424 schemes from Batch IX retroactively financed.

Indicator 6: Number of WSUCs formed; (those with at least 3 women members).

Number 300

(100%) 724

(100%) 1,124

(100%) 1,474

(100%) 1,774

(100%) 1,874

(100%) Every 6 months

Project MIS, Fund Board Includes 424 schemes from Batch IX.

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ore Unit of

Measure Base line






Indicator 7: Improved public latrines constructed under the project (number) in institutions (schools, health posts, etc.)

Number 248 579 869 1,117 1,200 Every 6 months

Project MIS Fund Board

On average 3 public toilets are built in each VDC.

Indicator 8: People trained on improved hygiene behavior, and sanitation practices; of which, female (%) and school children (%).

Number

(000)

290 (Female

%) (student

%)

813 (Female

%) (Student

%)

1,366 (Female

%) (Student

%)

1,848 (Female

%) (Student

%)

2,262 (Female

%) (student

%)

2,400 (female

%) (student

%)

Every 6 months

Project MIS, Beneficiary Assessments, Social Audits.

Fund Board

Number of people in VDCs aiming for ODF, inclusive of schools.

Intermediate Result (Component Two): District Level Institutional Strengthening

Indicator 9: Water and Sanitation units (D-WASH Unit) formally established under the DDC with defined functions.

Number 0 2 5 5 5

Every 6 months

Project MIS, PMU-MoUD

Only for 5 districts in component 2

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ore Unit of

Measure Base line






Indicator 10: District level M&E system established.

Number 0 2 5 5 5

Every 6 months

Project MIS, PMU-MoUD

Only for 5 districts in Component 2

Indicator 11: Annual report prepared by D-WASH Unit capturing results of M&E plans for subsequent year, and sections on scheme performance & sustainability.

Number

0 2 5 5 5

Project MIS D-WASH-CC/ V-WASH-CC

Only for 5 districts in Component 2

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ANNEX 2: DETAILED PROJECT DESCRIPTION

NEPAL: Rural Water Supply and Sanitation Improvement Project The project will have three main components. Component 1: Access to Improved Water Supply and Sanitation and Promotion of Improved Sanitation and Hygiene Practices (US$ 73.2 million) 1. This component will improve WASH services in rural Nepal through: (i) physical investment in infrastructure for new water supply systems; (ii) improved sanitation at community level (health facilities, schools, etc.); and (iii) hygiene education and awareness building to complement physical infrastructure and improve health outcomes. In the five districts selected to participate in Component 2, the project will also include investments in system rehabilitation and expansion, which is included as part of Component 1 activities. 2. Water Supply Schemes. Component 1 will support the construction of some 1,450 water supply schemes in an estimated 55 districts, plus 424 retroactively financed schemes, on the basis of demand from communities. New piped water schemes will be based on community stand-posts, but could also include yard connections provided there is adequate water source and communities are willing to contribute the additional costs. Minor rehabilitation of existing schemes can be supported provided they are part of the district’s approved annual program. Based on the experience of RWSSP II the scheme cycle for new schemes, excluding the post-implementation phase, will span between 20 - 36 months, depending on geographical location, technology used and type of community. This includes the following three phases: Pre-Development Phase – community request, needs assessment and scheme feasibility; Development Phase – formation of WSUG and constitution of WSUC, design, appraisal, collection of user contributions and opening of a Bank account; and Implementation Phase – purchase of materials and construction. The length of the scheme cycle may not fit well with the varying degrees of awareness, empowerment and organization among different communities in the country. Hence activities within each phase may vary with the situation in a given community (scheme size, community capacity to organize), and the contracts will be awarded accordingly. The provisions for minor rehabilitation will be as defined in the Project Operational Manual. This component provides funding for Community Development (software) as well as hardware (construction and minor rehabilitation of water supply and sanitation facilities). 3. This component is open to communities across the country, although activities will be weighted towards relatively under-served districts. Scheme selection prioritized districts based on lack of access to improved water supply (60% weightage) and sanitation (40% weightage), and will assign them into three groups, reflecting the access gap. The level of access is highly correlated to the Poverty Index (HDI). Project resources will be allocated across these groups, with a higher proportion assigned to groups with the lowest access (60% to the group with lowest access, 25% to the group with middle access, and 15% to the group with highest access).9

9 The HDI on average is 34.2% for priority group 1, 47.9% for priority group 2, and 86.7% for priority group 3, indicating a high correlation between access to water and sanitation and poverty level.

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Within these groups, allocation of resources will be demand responsive; in the event of excess demand, priority will be given to those districts with higher levels of poverty (HDI/MPI). Within a district, schemes will be proposed by the District Development Committee (DDC) and selected on the basis of need, with reference to the Disadvantaged Group (DAG) ratings. Schemes will be confirmed by the Fund Board based on their meeting project eligibility criteria. 4. In those districts selected for Component 2, Component 1 activities will expand beyond the development of new schemes and will test approaches for the development of demand responsive and sustainable investments in:

• Water system rehabilitation, where schemes have deteriorated and need investment. The project will assess the range of non-functionality, need for rehabilitation, selection of rehabilitation and what constitutes rehabilitation, upper limit of budget allocation, community participation, and community contribution.

• Water system expansion, where increases in the size of a community have not been matched by system expansion. Little support is currently provided to WUSCs (or other CBOs) to expand and improve their water supply systems. The project will assess the extent of needed expansion, budget allocation, village profile, demands of new settlers, existing capacity of RWSS, etc.

5. Sanitation. Sanitation planning has improved under the country’s Master Plan, and many districts have now prepared sanitation and hygiene strategy (to work towards 100% ODF status) but the bulk of the effort is focused on a short-term push to achieve ODF status rather than a long-term process to develop and improve sustainable sanitation and hygiene services. Community-Led Total Sanitation (CLTS) was introduced in Nepal in 2004 and has now become one of the mainstays of the ODF movement. CLTS is being implemented by almost all of the major sanitation stakeholders (UNICEF, Finnida, WaterAID, NEWAH, Plan). 6. Under the project no cash or hardware subsidy will be provided to build household toilets. However, VDCs and local communities may generate funds to support ultra-poor households in the community. The project would also facilitate linking needy households with local financing groups such as women’s savings and credit, individual donors, local youth groups, etc. This is a departure from the previous project which had used a “revolving fund” model, but this change will bring the new project in line with the Government’s approach. 7. The project will use the development of water schemes as an entry point to scale up sanitation and help close the current gap between access to improved water services and access to improved sanitation services. When a water scheme is developed in a ward(s) within a VDC, the project will implement sanitation interventions across the entire VDC. Under this VDC-wide sanitation program, declaration of VDC level ODF will be the minimum target as stipulated in the Sanitation and Hygiene Master Plan 2011. Adoption of the VDC-wide sanitation program is a major departure from the approach followed under RWSSP II, which confined sanitation only to the water supply scheme areas. 8. To support sanitation activities, the project will provide a sanitation grant to participating VDCs. The sanitation grant will be disbursed from the Fund Board to the WASH Fund of DDCs and a Memorandum of Understanding (MOU) will be signed among the Fund Board, DDC,

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VDC and the concerned SO designated for the district. Each VDC will be entitled to a US$2,500 sanitation grant. However, this amount will be disbursed to the VDCs (through the respective DDCs) in two installments. The first installment (US$1,000) will be released immediately after the MOU is signed; the second installment (US$1,500) will be released only after declaration of the VDC’s ODF status by the District Authorities. 9. The sanitation grant may be used for at least the following activities:

i. Developing, printing and dissemination of V-WASH-CC strategic plans, IEC/BCC materials ii. Mobilization of sanitation triggers/facilitators

iii. Monitoring of sanitation campaign iv. Prizes and awards to outstanding performers at the ward and school levels v. V-WASH-CC meetings and workshops

vi. Communication/logistics management vii. Support to ultra-poor (V-WASH-CC will define ultra-poor criteria and support mechanism)

viii. ODF declaration ceremonies. 10. Minimum indicators for VDC level ODF declaration will be as follows:

HH level: 100% HHs have permanent toilet Institution level: At least health post, schools and VDC office have toilets No Open Defecation at any time Public ODF declaration after formal verification by D-WASH-CC.

11. Project financing for sanitation under Component 1 will comprise the following:

• Support agencies mobilization. To the extent possible local NGOs will be hired to support VDCs in carrying out ODF and total sanitation campaigns. NGOs will be the SOs selected for implementing water supply schemes in the community within the VDC, but they will additionally be assigned to help implement the sanitation program at the VDC level10.

• Institutional toilets. The project will support the building of school and health posts and other institutional toilets, provided they form part of the district and VDC level WASH strategic action plan. Menstrual hygiene and hand washing facilities will be ensured in institutional toilets.

• Sanitation grants to VDCs. The project will provide the sanitation grant in two tranches as outlined above and as described in detail in the Project Operations Manual.

12. Other activities under Component 1. Gender equity will continue to be a core feature of the project, given its importance to system sustainability and to the introduction of effective hygiene practices for families and the community as a whole. The project will facilitate monitoring and/or evaluation of gender impact and gender analysis along the lines of RWSSP II. (In RWSSP II all water user committees had a minimum of three women members, and the Women’s Technical Support Services, WTSS/Jeevika Karyakram innovation supported 10 One SO is expected to execute the sanitation program in about 8 VDCs (minimum Fund Board batch size) on average, but each VDC will have a dedicated team working with them.

23

women’s economic empowerment and poverty reduction.) RWSSP II demonstrated that combining livelihood support activities with RWSS delivery greatly enhances positive impact on gender equity. 13. In addition, the following innovations which were piloted under RWSSP II, will continue: • Risk Insurance Program, to promote insurance to cover schemes against risks associated

with damage to structures due to floods, landslides and earthquakes. About 36 WSUGs have obtained insurance cover in RWSSP II, however, no claim has been filed to date.

• Social Accountability Program (Jagaran Karyakram), to promote social accountability over and above the checks and controls required during scheme implementation. A local group will be formed to carry out monitoring of scheme implementation in order to assure governance and accountability aspects of the scheme, and provide timely feedback. The Jagaran group, which comprises socially responsible individuals not associated with the WSUC, will provide feedback to the WSUC, SOs and SAs on finances and procurement at the community level. This program could be linked to a Grievance Redress Mechanism (GRM) to be established and V-WASH-CC/D-WASH-CC to promote transparency, address grievances and improve governance at village and district levels.

Component 2: District Level Institutional Strengthening (US$ 9.6 million) 14. Few examples of effective and long-term post-construction support are to be found in RWSS schemes in Nepal. UNICEF has supported functionality surveys and support to WSUGs through the Federation of Water and Sanitation Users of Nepal (FEDWASUN), but these appear to be largely project-driven interventions. In 2012, SNV commenced a project in the Karnali zone to support the development of functionality mapping and post-construction support units, but no clear model or lessons have yet emerged. Most sector stakeholders agree that post-construction and long term support is required, but there is little consensus on the form this should take. 15. Component 2 is designed to address these challenges by developing district-wide models for long-term institutional support to community-managed water supply services. Component 2 will be implemented in five districts, but will aim to develop models that are replicable across Nepal through:

• District WASH units (D-WASH-Unit) established to strengthen WASH planning, manage WSUG support services, facilitate horizontal learning and coordinate with/support strengthening of the D-WASH-CC.

• District-wide monitoring and evaluation systems that routinely collect and report data on the sustainability of services, and link with the MoUD M&E system.

• Long-term support mechanism to ensure that all schemes are visited at least once a year and assessed for water service and user committee functionality, adherence to maintenance schedules, and training needs.

• District water market and networking system that shares information and experience across user committees, suppliers and service providers, and encourages rapid response to service problems.

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• Sanitation marketing to strengthen local supply chains for sanitation goods and services, and increase household demand for improved sanitation and hygiene.

• Creation of a grant eligibility and WSUG grading criteria that creates incentives for better management of community water supply services.

• Phased approach that gradually increases local bodies’ operational and financial responsibility for Component 2 activities and institutions, thus mainstreaming the approach into government systems.

16. Participating districts will establish D-WASH-Units staffed by the Department of Water Supply and Sewerage Division Office (DWSS-DO) and District Technical Office (DTO) of DOLIDAR, and will be supported by project consultants. The D-WASH unit will be the central institution for management of the sustainability component and coordination with D-WASH-CC and DDC. Consultants within the D-WASH-Unit will be managed by the Project Management Unit attached to the Ministry of Urban Development (MoUD) in Kathmandu. See figure below.

Figure 1: Institutional Arrangement at the District Level

17. The D-WASH unit will have the following roles and responsibilities:

• Preparation of the District WASH plan • Management of the District Support Organization for Sustainability (D-SOS) • Reporting on sustainability status and progress • Organization of annual reviews and learning forums • Coordination with D-WASH-CC.

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18. The District Support Organization for Sustainability (D-SOS) will provide additional outreach and capacity to the D-WASH unit, acting as an intermediary to bridge the large gap between district institutions and user committees. See Figure below.

Figure 2: District Support Organizations for Sustainability

19. The D-SOS will be contracted for an initial 2 to 3-year period and tasked with developing support systems and procedures, tackling the backlog of repairs and rehabilitation that has built up, and building capacity amongst project partners. Support and monitoring tasks will thereafter be gradually devolved to strengthened D-WASH-CCs and V-WASH-CCs, FEDWASUN, D-WASH unit, and associated sector agencies. 20. Key functions of the D-SOS will include:

• Sustainability monitoring (including annual grading of WSUG performance) • Support to WSUGs for system management (including administration and finance) • WASH network support (including quick response system) • Establishment and monitoring of system maintenance programs • Provision of refresher training to WSUCs, Village Maintenance Workers (VMWs) and

other stakeholders • Assessment of need for rehabilitation (including reasons for failure) • Monitoring of rehabilitation works • Horizontal learning (capture & sharing of best practices, lessons, innovations).

21. A sustainability financing and incentive framework will be developed as part of Component 2 to: clarify liability for repairs, rehabilitation and replacement costs; generate incentives for WSUGs to manage schemes and sanitation facilities better; and encourage regular

26

and reliable monitoring of scheme performance and sustainability. Grants for expansion and improvement will be made available to well managed WSUGs, with steadily lower incentives and finance provided to less well managed WSUGs. Lower grade WSUGs will be assessed to determine why the scheme is non- or part-functional, with more stringent conditions required of WSUGs and communities whose schemes have failed because of a lack of investment in routine operation and maintenance. 22. FEDWASUN is a national umbrella organization for WSUGs, with active chapters in 55 of the 75 districts, and has 4,000 registered WSUG members. The 2004 Rural Water Supply and Sanitation National Strategy stated that a WSUG Federation should be established for “independent monitoring and social auditing” of WSS systems, and that district federations should facilitate knowledge sharing and cooperation among user groups. The D-WASH unit and D-SOS are expected to strengthen the local FEDWASUN district chapters through training of trainers and involvement of FEDWASUN in social accountability, WASH network support, refresher training and horizontal learning activities. 23. To complement the above activities, Component 2 will develop a WASH network that establishes, extends and deepens district markets for rural water supply goods and services, and provides strong linkages between user committees, suppliers and service providers. This will allow WSUGs to help themselves in solving challenges to service delivery. These networks should encourage the frequent exchange of information on costs, product ranges, product and service quality, product and service availability, best practices and innovations. Rapid response mechanisms (such as SMS text-based alerts) to link service providers with WSUGs will reduce the ‘days out of service’ or ‘days of low service’ in each area. 24. In the absence of subsidy and material support from external agencies, sanitation marketing will be important as a way to strengthen supply chains, promote improved sanitation and hygiene. Under Component 2 the project will introduce sanitation marketing components to enhance the supply chain, and enable the private sector to provide products and services for easy and cost effective access. Sanitation marketing strategies recently developed by Global Sanitation Fund (GSF) will form the basis for sanitation marketing approaches and will be revised and updated as appropriate for the project. This will include:

• Identifying market chains and stakeholders at regional, district, and VDC levels • Orientation to DWASHCC/VWASHCC and SOs • Capacity building of market stakeholders • Creating an enabling environment for Sanitation Marketing • Establishing at least one “one-stop” sanitation shop in each strategic market center • Organizing sales events in each VDC • Activating local finance groups to support financing of toilets • Home delivery services after sales events • Supporting construction of toilets at the household level.

25. Component 2 will also address shortcomings in the lack of accountability between service users, service providers, service authorities and implementing agencies. There is evidence that 10%-20% of rural water supply schemes develop problems related to poor design, construction or implementation during the first 1-2 years of operation. As a result, district authorities are often

27

reluctant to accept liability for major repairs or rehabilitation to schemes built by other agencies. Options will be explored during the detailed design phase. 26. An M&E system will be implemented, which includes sector indicators for functionality and sustainability, and will link to existing national systems, such as NMIP. The system will include mobile phone monitoring systems that are simple and cost-effective, so that district authorities, D-SOS, village authorities and user committees will be able to use, sustain and improve mobile monitoring systems on completion of the project. The mobile monitoring system will learn from the on-going work by WaterAID Nepal, which is piloting the Field Level Operations Watch (FLOW) smartphone monitoring app developed by Water for People, and from other WASH mobile monitoring projects in Nepal. This component will also assess the relative impact of the long-term institutional support model through baseline and end line surveys that assess the functionality of user committees and district rural water supply services over the life of the project. 27. The selection of the districts to participate in Component 2 was based on institutional capacity at the district level (as revealed by the Minimum Conditions - Performance Management scores of the districts for FY 2012/13), size of the districts (districts that were either too large or too small were excluded), and at least 30% or more major rehabilitation requirements (per NMIP) so that rehabilitation and expansion models can be tested in these districts. Thereafter consideration was given to the location of the district and the presence of a champion in the district. Component 3: Technical Assistance / Capacity Building and Project Management (US$ 7.2 million) 28. This component will finance incremental project management and administration costs for both components and capacity building and technical assistance activities. The latter will include the preparation of District WASH Annual Plans in participating Districts. In addition there will be a variety of financial and safeguards audits, miscellaneous capacity building activities and sector studies. Component 4: Contingency Emergency Response (US$ 0 million) 29. Following an adverse natural event that causes a major natural disaster, government may request the Bank to re-allocate project funds to support response and reconstruction. This component would draw resources from the unallocated expenditure category and/or enable the government to request the Bank to re-categorize and reallocate financing from other project components to partially cover emergency response and recovery costs. This component could also be used to channel additional funds should they become available as a result of an eligible emergency. 30. Disbursements would be made against a positive list of critical goods or the procurement of works and consultant services required supporting immediate response and recovery needs. All expenditures under this component, should it be triggered, will be in accordance with paragraph 11 of OP 10.00 and will be appraised, reviewed and found to be acceptable to the Bank before any disbursement is made. In accordance with paragraph 11 and 12 of OP 10.00, this component would provide immediate, quick-disbursing support to finance goods (from a positive list agreed

28

with Government), works, and services needed for response, mitigation, and recovery and reconstruction activities. Operating costs eligible for financing would include incremental expenses incurred for early recovery efforts arising as a result of the impact of major natural disasters.

31. Goods, Works and Services under this component would be financed based on a review of satisfactory supporting documentation presented by the government, including adherence to appropriate procurement practices in an emergency context. All supporting documents for reimbursement of such expenditures will be verified by the Internal Auditors of the Government and by the Project Director, who will certify that these expenditures were incurred for intended purposes and to enable a fast recovery following the damage caused by adverse natural events. This verification should be sent to the Bank together with the Application. 32. Specific eligible expenditures under the category of Goods include: (i) construction materials; (ii) water, land and air transport equipment, including supplies and spare parts; (iii) school supplies and equipment; (iv) medical supplies and equipment; (v) petroleum and fuel products; (vi) construction equipment and industrial machinery; and (vii) communications equipment. 33. Specific eligible expenditures under the category of Works may include urgent infrastructure works (repairs, rehabilitation, construction, etc.) to mitigate risks associated with the disaster for affected populations. Specific eligible expenditures under the category of Services may include urgent studies (technical, social, environmental, etc.) necessary as a result of the effects of the disaster (identification of priority works, feasibility assessments, delivery of related analyses, etc.).

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ANNEX 3: IMPLEMENTATION ARRANGEMENTS


Project Institutional and Implementation Arrangements 1. The Ministry of Urban Development will be the executing agency for the project. A Project Steering Committee (PSC) will be set up at the national level to provide guidance on both components, in particular where cross-Ministry support and coordination will be essential. There will be a partnership with local bodies, civil society, NGOs, and private sector (service providers), both for scheme implementation support as well as coordination at the district level for long term backstopping support.

Figure 3: Project Institutional and Implementation Arrangements

2. Component 1 will be implemented by the Fund Board, in close coordination with the local bodies under the purview of MoFALD. The project will build on the strengths of the Fund

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Board and address improvements identified in a completed RWSS modality study, including the need to: (i) improve its outreach to un-served and poorer areas; (ii) strengthen its linkage and integration with GoN-led coordination and planning systems that identify priority areas; and (iii) build closer relationships and linkages with local body agencies for project implementation, including clear working relations to better integrate the Fund Board into existing country systems. Accordingly, Fund Board has updated its Project Operations Manual (POM) to reflect these improvements, and also on scheme selection. 3. The Fund Board will implement RWSS schemes through Water Supply and Sanitation User Groups (WSUGs) and will provide technical support through Local Support Organizations (SOs), consisting of NGOs, Community Based Organizations (CBOs), private firms, and institutions which have sufficient proven capacity to help mobilize and assist communities and implement schemes. Communities will participate at all stages of the decision making process. Most training, monitoring and auditing will be sub-contracted to Service Agencies (SAs). However, the Fund Board would have overall oversight responsibility for these activities. 4. The Fund Board would carry out the following functions directly: (i) setting up eligibility criteria for both SOs and Schemes; (ii) identification, selection and contracting of SOs and Schemes; (iii) selecting and recruiting SAs to carry out certain functions (i.e., training, monitoring, audit); (iv) day to day management and monitoring of its portfolio (including all contracting and related disbursements); (v) preparation and implementation of annual work programs and budgets; (vi) overall management of operations (including personnel, long term and short term consultants); and (vii) selecting consulting firms to carry out selected studies. In addition, during implementation there will be a review of the internal management of the Fund Board, including the current structure, selection/appointment criteria of Board members, and personnel (competency, performance evaluation, and contract issues). 5. The issue of the potential role of the Fund Board as a regular sector institution and its ownership within the GoN structure will be revisited during implementation in light of the direction in which the sector is heading, once federal and ministerial structures become clearer. Under the project the Fund Board will build closer relationships and linkages with local body agencies and this will help to better integrate the Fund Board into country systems. 6. Component 2 of the project will be managed by a unit within MoUD. The financing mechanism for Component 1 activities will be through the Fund Board and that for Component 2 will be through the PMU in MoUD. Financial Management 7. Adequacy of Financial Management Arrangements. The Financial Management assessment rates the overall FM risk as Substantial. 8. Responsibilities and duties of key Fund Board staff are defined clearly to ensure that financial transactions are initiated, approved and executed at different levels. Staffs in the finance department are conversant with Bank FM policies and procedures. The Financial Administration Rules of Fund Board are adequate to ensure appropriate controls over project transactions. The Financial Management Information System (FMIS) is robust and automated. The Fund Board will prepare Operational Guidelines for disbursement of sanitation grants to

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VDCs, detailing out the funds flow mechanism, monitoring, reporting and roles & responsibilities of each stakeholder. There will be a MoU between each DDC, VDC, SO and Fund Board. The FM risk of the Fund Board is rated “modest”. 9. The MoUD PMU will have an accounts officer to manage the books of account. Government Financial Rules and financial management system will be adopted to manage the financial aspects of this component. A financial management consultant will be hired to support the PMU in accounting and reporting. The FM risk of the MoUD PMU is rated Substantial. 10. Planning and Budgeting. The proposed operation will follow Government planning and budgeting procedures. The Fund Board and MoUD PMU will prepare Annual Work Programs and Budgets (AWPBs) for their respective components. After approval of the AWPBs by the National Planning Commission (NPC), the Ministry of Finance will release the budget. Approved project budgets for Fund Board and MoUD PMU will be indicated in the public sector Estimates of Expenditure, commonly referred to as the Red Book, under separate budget headings.

11. Fund Flow. The approved budget will be authorized to the Secretary of MoUD, who will authorize release to the Fund Board. In the case of sanitation grants to VDC, the operational guidelines will state the fund flow mechanism by way of MoU between each DDC, VDC, SO and the Fund Board. The Fund Board will provide sanitation grants to VDCs through DDCs in two tranches. 12. District Treasury Controllers Office (DTCO) will make payments for expenditures incurred by MoUD on recommendation of the PMU. IDA will reimburse eligible expenditures either directly to the Government Treasury or replenish the Designated Account. In the case of the Fund Board, a two trimester advance will be provided to the Designated Account on the basis of the cash forecast and submission of an acceptable implementation progress report. 13. Project Financial Accounting, Reporting and Internal Controls. Fund Board and MoUD PMU will maintain required ledgers, including Main Grant/Credit Ledger, Subsidiary Grant/Credit Ledger, and Designated Accounts Ledger. Internal control processes described in the respective Financial Regulations will be applied to monitor project progress. 14. Progress Reporting and Monitoring. Fund Board and MoUD PMU will submit separate Implementation Progress Reports (IPR) on a trimester basis. The financial monitoring report will report investments by specific category and/or component. The project IPR will be prepared from the outset, and will comprise the financial monitoring report, output monitoring report, procurement management report, and narrative progress report in formats agreed with IDA. The IPR will be produced on a trimester basis and will be submitted within 45 days from the end of the preceding trimester. The financial monitoring report will include: (i) sources & uses of funds; (ii) designated account reconciliation; (iii) expenditure statements against component/category/budget head, according to the chart of accounts and as agreed with IDA; and (iv) any other report, as required. The Fund Board will also account for and indicate community contributions in its financial reports. 15. Internal Audit. The Fund Board will appoint a qualified accounting firm for internal audit. It will prepare the Terms of Reference for the internal auditor and share it with IDA for

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review. The internal audit of MoUD PMU will be as per the Government system, and will be conducted by the District DTCO. 16. External Audit. The Office of the Auditor General will audit the accounts of the Fund Board and MoUD PMU. The following audit reports will be monitored in PRIMA.

Implementing Agency

Audit Auditors Audit Due Date

The Fund Board Project Financial Statements

Office of the Auditor General (OAG)

6 months after the end of fiscal year (January 15)

The Fund Board Entity (Fund Board) Financial Statements



MoUD PMU Project Financial Statements



17. Financial Management Action Plan. Action plans to strengthen the financial management capacity of the implementing agencies were agreed between the Fund Board/MoUD PMU and IDA and are summarized below.

Financial Management Action Plans

Action Responsibility Completion Date

1. Prepare program and budget for FY2014/15 and identify a separate identifiable budget code.

Fund Board and MoUD PMU

Within one month of signing the Agreement

2. Agree on the internal audit TOR for the audit of this Project.

Fund Board Before start of the fiscal year

3. Prepare guidelines for valuation and accounting of community contributions.

Fund Board As part of Project Operational Manual

4. Recruit Financial Management Consultant MoUD PMU By Project Signing

5. Prepare and finalize Operational Manual, including specific guidelines for sanitation sub-grants.

Fund Board By April 30, 2014

18. Disclosure of Information and Corporate Governance. Fund Board and MoUD PMU will post in their websites all available guidelines, procedures, and other key project information. Fund Board and MoUD PMU will disclose the following through their websites: Budget Allocation by Activity and Budget Line; Implementation Progress Reports for each trimester (approved versions); and Annual Audited Financial Statements. Disbursement 19. Allocation of financing proceeds. Disbursement from loan/credit proceeds will be made as indicated in the following table.

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Allocation of Financing by Expenditure Category

Expenditure Category

IDA Financing Credit Allocation (US$ m)

IDA Financing Grant Allocation (US$ m)

Government Financing (US$ m)

Community Contribution (US$ m)

Total Financing (US$ m)

IDA Percentage Financing

Fund Board - Component 1

(1) Goods, Works and Services

(a) Development Phase 5.31 2.02 0.00 0.00 7.33 (a) 100%

(b) Implementation Phase 24.27 9.22 7.55 7.50 48.54 (b) 70%

(c) Institutional Toilets 4.56 1.73 0.00 0.00 6.29 (c) 100% (2) Consulting Services, Trainings, Goods under parts 1 and 3 6.48 2.46 0.00 0.00 8.94 100% (3) Incremental Operating Costs under part 3 1.16 0.44 2.50 0.00 4.10 40% (4) Sanitation Grants under part 1 0.75 0.29 0.00 0.00 1.04 100%

MoUD PMU - Component 2

(5) Consulting Services, Trainings, Goods under parts 2 and 3 7.26 2.76 0.00 0.00 10.02 100% (6) Incremental Operating Costs under part 3 0.21 0.08 0.45 0.00 0.74 40% Refinancing of Project Preparation Advance 3.00 3.00 Total Financing 50.00 22.00 10.50 7.50 90.00 80% Percentage of Total IDA Financing 56% 24% 12% 8% 100%

20. Disbursement Arrangements. Project expenditures will be pre-financed from the Government’s consolidated fund. IDA will reimburse eligible expenditures from the Designated Account to the Government’s consolidated fund. Disbursements to the Fund Board will be report based, as in RWSSP II. Disbursements to MoUD PMU will be based on Statement of Expenditures. Disbursement methods applicable to this component include: Direct Payment, Advance and Reimbursement. 21. Designated Accounts. Two separate Designated Accounts in USD will be established at Nepal Rastra Bank: one will be managed by the Fund Board and the other by MoUD PMU for their respective components. The Fund Board and MoUD PMU will ensure that bank/cash books are reconciled with bank statements every month. Supporting documentation will be maintained by the Fund Board and MoUD PMU for at least one fiscal year after the year in which the last disbursement from the credit/grant takes place, and will be available for review by IDA and independent auditors.

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22. Retroactive Financing. Retroactive financing will be provided for Category 1 b and 2, up to one year prior to the signing of the Financing Agreement, but not before July 16, 2013, and for a total amount not exceeding SDR 2.0 million (equivalent to US$ 3.0 million.) Procurement 23. Procurement Guidelines. Procurement for goods, works and non-consulting services under the project will follow the World Bank’s “Guidelines: Procurement of Goods, Works and Non-consulting Services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers,” (2011)11. For consulting services, the project will follow the World Bank’s “Guidelines: Selection and Employment of Consultants under IBRD Loans and IDA Credits and Grants by World Bank Borrowers,” (2011)12. Procurement of goods, works and non-consulting services under National Competitive Bidding (NCB) will be carried out as per the Public Procurement Act (2007), Public Procurement Rules (2007), and additional IDA prescribed modifications indicated in the Financing Agreement. Procurement of all NCB contracts will follow model bidding documents reviewed by the Bank. 24. The Borrower and the Bank have agreed on the Project Procurement Plan for the initial 18 months of implementation, which defines: (i) procurement or consultant selection methods; (ii) estimated costs; (iii) prior review requirements; and (iv) envisaged procurement timelines. The Procurement Plan will be updated at least annually or as required to adjust for performance, improved capacity, unforeseen risks, or other implementation stage realities. Contracts not subject to prior review will be subject to post review by the Bank. Where appropriate to the size and number of contracts, post review will follow a sample-based approach. 25. Implementation of civil works will be through Water Supply and Sanitation User Groups (WSUGs) or local communities through a Tri-partite contract between the Fund Board, the community and the Support Organization. 26. Fund Board Assessment. The Fund Board will implement Component 1, which involves planning, design and implementation of small water supply schemes to be carried out through a community driven procurement approach. The Fund Board has a good project implementation manual (which was used to implement RWSSP II) with detailed procedures for community driven procurement.

27. Major procurement risks associated with the Fund Board implementing Component 1 are: (i) management of thousands of sub-projects to be implemented by community level organizations; (ii) management of increased volume of procurement at the central level; and (iii) management of community driven procurement. The procurement risk rating of Fund Board has been assessed to be “moderate”.

28. The following risk mitigation measures will be taken for enhanced procurement management by the Fund Board:

• Deputing a dedicated Fund Board procurement officer to coordinate overall procurement management for central and community level procurement support.

11 Hereafter “ Procurement Guidelines” 12 Hereafter “Consultant Guidelines”

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• Hiring a procurement consultant to provide regular inputs at the beginning of the Project to expedite procurement and then with intermittent inputs, as per need.

• Updating current program implementation manuals/guidelines and enforcing their implementation.

• Planning and organizing procurement training and refresher courses for project staff involved in procurement processing on a regular basis.

29. MoUD Assessment. MoUD PMU will implement Component 2 and a small part of Component 3. This will mainly involve procurement of consulting assignments, goods for office logistics, and equipment needed to establish the networking/M&E system at the district level. MoUD has not been directly involved in Bank financed procurement management and there is a need to build and enhance procurement capacity of staff involved in procurement processing, reviewing and decision making. 30. Procurement risk rating of MoUD has been assessed to be “Substantial”, and the residual risk “Moderate” after preparation and finalization of a checklist for procurement processes, preparation of procurement plan, and mobilization of a procurement advisor/consultant (intermittent) to support project staff in procurement management. A dedicated procurement officer (MoUD staff) will be deputed to coordinate overall procurement management. Environment 31. The Fund Board has prepared an Environmental and Social Management Framework (ESMF) for the project based on relevant GoN and World Bank requirements. The ESMF has identified and assessed key environmental issues relevant to the project and schemes, as well as generic mitigation measures for typologies of schemes and issues (e.g., gravity scheme, ground water, etc.) The ESMF requires environmental screening of each scheme, and indicates the necessary level of assessment, preparation of scheme specific mitigation plan as part of Community Action Plan, and capacity building of implementing partners, including SOs, SAs, and WSUG. Environmental management steps and procedures are integrated with scheme-cycle steps and procedures. 32. The main environmental issues associated with scheme implementation are water quality and pollution at source (surface runoff, animal waste, etc.) microbiological contamination, arsenic in ground water sources, drainage around tap stands (risk of vector-breeding), seepage around wells (which in turn may pollute groundwater), damage to scheme intakes and/or other components by landslides or erosion in the hills and/or by floods, non–point sources of pollution in catchment areas, possibility of agricultural and surface runoffs (including those due to human activities, and especially during the rainy season), and depletion of the source, especially in the dry season.

33. Sanitation and hygiene issues will be mainly related to latrine/septic tank effluents and biological water pollution due to leaves, insects, algae, etc., in scheme components. Environmental issues relevant to water supply schemes in the terai region will mainly be contamination of groundwater from toilets (in cases of tube wells and shallow wells), water logging, high level of arsenic and iron in water sources, flash floods, micro biological contamination at various points of the scheme, hygiene conditions at the tap and tube well areas,

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including drainage management and contamination in tube wells and dug wells. Washing/bathing and other domestic activities around water supply sources and water points also have potential for causing contamination. Depletion of water sources and sustainability of schemes will also be important considerations.

34. The Fund Board will be responsible for implementing the ESMF. It will further strengthen its capacity for environmental and social management by appointing an Environment and Social Manager, who will guide and oversee implementation of the ESMF. At the scheme level, the environmental persons of SO and SA will support the community in implementing the ESMF. Environmental and social supervision will be done by the Fund Board through SA and SO, and safeguard implementation reports will be prepared on a regular basis. The Fund Board will carry out a series of environmental capacity building activities, including training of WSUGs, SOs, & SAs, as well as local bodies, on environmental issues and their mitigation. In addition, the Fund Board will commission independent annual monitoring of safeguard implementation, and commission special studies as needed. It will also explore the establishment of a dedicated environmental and social unit within the Fund Board to ensure compliance with safeguards requirements during the operation of schemes after project closure. Social 35. Gender. The project will build on the successful experiences of RWSSP II in enhancing gender impacts. Women will be given a key role in the design and subsequent oversight of schemes by reserving at least three posts for women in WSUCs. The project will benefit women by reducing the amount of time they would have spent collecting water from distant locations. The Women’s Technical Support Services/Jeevika program, an important project activity, will provide orientation, training, business development support, and micro-finance services to support women in using the time saved from water collection to earn additional income and enhance their livelihoods. 36. Indigenous People and Vulnerable Communities. The ESMF lays out a set of actions to ensure that the project does not adversely affect the rights of indigenous groups, and that indigenous people and other vulnerable groups like Dalits, female-headed households, ultra-poor, etc., get equitable access to project benefits, as required by both Bank OP 4.20 and GoN policies. These actions include: translation of project communication materials into the main IP languages for dissemination by SOs working on the project; NGO selection criteria that include having staff with the ability to speak the relevant local IP language; inclusion of indicators in the MIS to track the percentage of households from indigenous groups and vulnerable communities getting access to drinking water and sanitation facilities.

37. In addition, priority will be given to districts with the lowest access to improved water supply and sanitation facilities, and higher levels of poverty based on the Human Development Index/Multi-dimensional Poverty Index. Further, within a district, scheme selection will be on the basis of need, but with reference to Disadvantaged Group (DAG) ratings. The Fund Board has the institutional capacity to implement these provisions.

38. Resettlement and Rehabilitation. Experience of RWSSP II suggests that it is highly unlikely that there would be any cases of involuntary resettlement under this project. Land acquisition was also not an issue in RWSSP II, and any requirements for land were managed

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through voluntary donation or mutually agreed sale. To formalize such voluntary land donations or sale, and to ensure that the donation is completely voluntary and does not cause loss of livelihood to the donating household, the project will continue with the current practice of transferring the donated land in the name of WSUG through a memorandum of understanding. Monitoring & Evaluation 39. The project will utilize the existing Fund Board scheme level system established under earlier Bank supported projects to monitor implementation performance in line with the results framework. Under Component 2 a monitoring system will be developed to capture information on scheme performance/functionality and sustainability. This will be used to drive the proposed incentive based management system (to be developed under Component 2) to support RWSS management & planning by DWASH Units (established in Component 2 districts), and to link it to the existing NIMP database managed by MoUD.

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ANNEX 4: OPERATIONAL RISK ASSESSMENT FRAMEWORK Nepal Rural Water Supply and Sanitation Improvement Project

1. Project Stakeholder Risks

1.1. Stakeholder Risk Rating Moderate

Description: Community capacity constraints to operate and maintain schemes, to keep

the schemes financially sound and operationally functioning.

Lack of commitment of Local Bodies to effectively coordinate with the Fund Board and help the communities and program implementation.

Risk Management: Training and capacity building support will be provided to the communities during project implementation. Mechanisms for technical, operational and managerial support will be developed and piloted to ensure continued support to the communities to keep the schemes functional.

Resp: Client

Stage: Implementation

Recurrent:

Due Date: Frequency: Status:

Risk Management: The manuals of the Fund Board will be revised to ensure greater coordination with local bodies. There is commitment from the stakeholders for sector coordination through initiatives at the local level. Component 2 will develop and operationalize mechanisms in select districts that enable local bodies to work closely with multiple agencies to plan and program water supply and sanitation at the local level through the community driven approach.

Resp: Client/ Bank


Recurrent:


2. Implementing Agency Risks (including fiduciary)

2.1. Capacity Rating Moderate

Description: The Fund Board has demonstrated the ability to perform even during the very difficult country situation, mostly due to its community centric approach and well defined manuals. However, the Fund Board’s capacity to continue to perform effectively in the fluid political environment could be an issue. Lack of availability of local Support Organizations (SOs) and NGOs with adequate capacity, lack of outreach in un-served areas and capacity constraints. More remote and vulnerable groups may not have adequate capacity to absorb the project. In particular, achieving ODF at the VDC level could be difficult.

Risk Management: Fund Board capacity and ability to implement this project has been further strengthened during project preparation and the adequacy of its capacity will be monitored on an on-going basis.

Resp: Client/ Bank


Recurrent:


Risk Management: Planning for water supply and sanitation schemes (which will define the area of work for SOs and NGOs) will be done at the district level to capture the needs of remote communities. Implementation of the updated Fund Board manuals will be carefully monitored to ensure that Support Organizations reach out to remote areas, including through proper incentive mechanisms. Enhancing capacity of communities, better information sharing, closer attention to effective mobilization, and more frequent training of WSUGSs.

Resp: Stage: Recurrent: Due Frequency: Status:

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Client/ Bank Implementation Date:

2.2. Governance Rating Substantial

A detailed GAAP is presented in Annex 7

Lack of effective grievance redresses mechanism.

Risk Management: Risk management and mitigation measures for the GAPP are presented in Annex 7.

The strengthened Grievance Redress system will be used for Component 1. The communication campaign will raise the awareness of communities about this mechanism. Such a system will also be implemented for the district-wide intervention under Component 2.

Resp: Client/ Bank


Recurrent:

Due Date:

Frequency: Status:

3. Project Risks

3.1. Design Rating Moderate

Description: Establishing and institutionalizing a backstopping support system for WSUGs at the district and local level.

Risk Management: Efforts will be made to increase WSUGs’ ability to seek and procure services through improvement in their financial situation, as well as the ability to identify the type of support required. Support will be provided to higher level institutions at the district level to improve their capacity to be able to respond to backstopping support from WSUGs.

Resp: Client


Recurrent:


3.2.Social and Environmental Rating Moderate

Description: Issues on water quantity and quality are expected to be more critical if more schemes are implemented in more remote and vulnerable areas.

Risk Management: Enhance identification of water resources, and introduce rain water harvesting where feasible, as back up for other services. Regular monitoring of water quality and training of WSUGs to do so after completion of their schemes.

Resp: Client

Stage: implementation

Recurrent: Due Date: Frequency: Status:

3.3. Program and Donor Rating Low

Description: Coordination between donor partners for WASH could be an issue, especially on support for developing long term institutional support to WSUGs to ensure sustainability of schemes, irrespective of the source of donor funding.

Risk Management: There is convergence among sector stakeholders on the need to provide long term support to WSUGs for sustainability of schemes. Through discussions with donors during the design of Component 2 (which will be continued during implementation) the project will foster coordination amongst agencies.

Resp: Client/Bank


Recurrent:

Due Date:

Frequency: Status:

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3.4. Delivery Monitoring and Sustainability Rating Substantial

Description: Possible technical and operational issues in water supply schemes may render the schemes unsustainable.

Risk Management: Schemes selected under the project will undergo a rigorous process of pre-feasibility, design check and monitoring during implementation to ensure technical viability. A mechanism will also be developed as part of project to provide technical and operational support to communities post-implementation.

Resp: Client/Bank


Recurrent:


4. Overall Implementation Risk Rating: Moderate

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ANNEX 5: IMPLEMENTATION SUPPORT PLAN


Strategy and Approach for Implementation Support 1. Component 1 is to be implemented across the country on a demand responsive basis. The project will build on good experience from previous projects, working through the Fund Board. The Fund Board will routinely prepare standard progress reports using the project MIS system and will also compile and consolidate project implementation progress reporting in advance of missions. This will enable the Bank to identify possible bottlenecks to timely project completion. These progress reviews, which will take place in the Fund Board office in Kathmandu, will be supplemented by field visits to ensure that ground level realities are being captured. 2. For Component 2, since a new PMU will be established, Bank missions will pay particular attention to the adoption of Bank procedures by the new PMU – and in the early missions it is likely that some capacity building of the PMU will be required. The Bank will work closely with the PMU on detailed component design and implementation issues. There will be significant learning as the project proceeds and a need to be flexible in responding to that learning. Missions will be supplemented by expert consultants in the early years; these consultants will work with the PMU on a wide range of design and implementation issues. The need for such close support may become less over time. There will be an intense review and refinement of the Component 2 model around the Mid Term Review, at which point Bank supervision resources may need to be temporarily enhanced. 3. Project implementation progress will be closely monitored by the Fund Board, MoUD PMU and IDA. IDA will supervise project implementation on fiduciary aspects, i.e., procurement and financial management. The Fund Board and MoUD PMU will report on project implementation progress through the IPR. The agreed action plan will be closely monitored to ensure that appropriate actions are being implemented. Key FM fiduciary work includes: (i) review of implementation progress reports and audit reports, and preparing summaries of such reports; and (ii) participating in implementation support missions and addressing FM issues as required. Implementation Support Plan 4. Bank implementation support missions will be undertaken at least twice a year. These twice yearly supervision missions will include the TTL, Co-TTL, other water and sanitation specialists, procurement and financial management staff, environmental and social safeguards staff, and technical and institutional specialists and consultants, as appropriate. A team of Specialist Consultants will also be recruited to support the Bank in reviewing implementation of Component 2, and other technical and operational areas, as and when required. In addition, interim implementation review missions will be undertaken, as required. The major areas to be covered in Implementation Support Missions are expected to be:

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(i) Implementation Progress of Water Supply and Sanitation Schemes. The Bank will review progress in implementation of schemes with the Fund Board and will address related issues (if any). (ii) Institutional Arrangements for Long Term Sustainability. The Bank will review implementation of Component 2, including roles and responsibilities of the different actors, and lessons being learned from on-going design and implementation. If necessary the Bank will work with the Component 2 PMU, and with the District DWASH units, to adjust the program to reflect feedback from the field.

(iii) Safeguards. Supervision of safeguard aspects will entail verification that ESMF provisions and scheme specific Environmental Management Plans are being appropriately implemented and adjusted as deemed necessary, and the Project’s features designed to enhance social development outcomes are similarly being adequately implemented and adjusted as appropriate. (iv) Procurement. Implementation support will include: (a) ex-ante and ex-post reviews of Project procurement; (b) review of the Procurement Plan and procurement performance; and (c) providing information on training resources, preparation of training material and modules, and need-based training on Bank procurement guidelines to implementing agencies. In addition, guidance will be provided as necessary on any necessary revisions to the Procurement Manual, the Procurement Plan, and bidding documents.

(v) Financial Management. In-depth and intensive implementation support would be provided in the initial years, especially to ensure successful implementation of the agreed FM arrangements. Implementation support will also include the review of periodic IFRs as the basis for disbursements and reporting expenditures, and review of audit reports, including verifying the adequacy of the resolution of major audit observations.

(vi) Monitoring and Evaluation. Implementation of the M&E System would be reviewed through reports furnished and discussions to confirm that it is effective in monitoring processes, inputs, outputs and outcomes, and captures physical implementation progress, disbursement and delivery against the project’s Results Framework. The Bank would also confirm that M&E data and information are transparently disclosed. 5. Mid-Term Review. A comprehensive mid-term review would be conducted to review implementation of all aspects of the Project, and to discuss, agree and take any mid-term course corrections necessary.

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ANNEX 6: ECONOMIC ANALYSIS


1. Background. Improving access to water and sanitation services is a development priority for Nepal, given the Government’s target of reaching national coverage by 2017. The project is expected to bring sizable economic and social benefits to the targeted population and communities, who are underserved with respect to access to safe water and improved sanitation facilities. Component 1 aims at increasing access to improved water supply and sanitation in 55 (out of 75) districts, with priority given to those who suffer from low access to water and sanitation. The project includes investment in new schemes across the country (subject to meeting project selection criteria), and in rehabilitation and expansion of existing schemes in five districts that participate in Component 2. The project will also retroactively finance 424 schemes from RWSSP II.

2. Water supply and sanitation investment cost in 55 districts (50 districts in Component 1 and 5 in Component 2) is about 89% of total project costs (including hardware and software), and will be included in the ex-ante economic analysis. The project will bring direct benefits to an estimated 1.50 million people who will have access to safe water supply and sanitation. With an estimated population increase of 1.35% per annum, the number of direct beneficiaries will be over 1.9 million in the 20 years of expected project life.

3. Sanitation programs are expected to benefit an additional 0.9 million people (in about 400 VDCs) with improved sanitation in reaching ODF and/or post-ODF programs for total sanitation. In the five districts in Component 2, sanitation marketing will further develop the sector for sustainable solutions. On the supply side, this component aims to strengthen the market for sanitation facilities by augmenting the capacity of private entrepreneurs/sanitation suppliers to participate in the supply chain. On the demand side it will support and promote sustainable hygienic sanitation practice and use of improved latrines.

4. The project will provide significant direct, indirect, and short and long-term benefits with many positive spillover and wide ranging social and economic impacts at the individual, community, and national levels. Health and environmental benefits, cost savings from medical and health related expenses, and general well-being of society are the largest benefits of this project (as in any water supply and sanitation project), but they are difficult to quantify in their entirety. The full range of economic impacts include: (i) direct benefits, which consist of access for underserved people to safe water and hygienic sanitation; (ii) indirect benefits, that are additional economic activities resulting from linked businesses and suppliers of goods and services, additional employment opportunities in the service sector (transport, sales, construction, monitoring, etc.); and (iii) induced benefits, which measure consumption expenditures of those who have been involved in investment activities directly (contractors, NGOs) and indirectly (suppliers, service providers) which further stimulate the local economy. The summary of the number of people expected to benefit from the project is presented in Table 1 below.

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Table 1: Number of Estimated Direct Beneficiaries from Water Supply and Improved Hygiene Practices

Scheme/Coverage Areas No. of Schemes

Average Population per Scheme

Total Population (5.5

Persons/HH) Component 1 - Rural Piped Water Supply and Improved Sanitation and Hygiene Practices (New Schemes)

1,300 760 988,000

Component 1 - Rural Piped Water Supply and Improved Hygiene Practices in 5 districts in Component 2 (New, Rehabilitation, and Expansion)

150 760 114,000

Water supply schemes retroactively financed 424 943 400,000

Total Water Supply HH Beneficiaries 1,502,000

Additional Beneficiaries of Improved Sanitation and Hygiene Practices at VDC level

900,000

5. Methodology. This Annex presents a quantitative and qualitative analysis to demonstrate the socio-economic impacts of access to safe water and hygienic sanitation that will be provided under this project. A benefit-cost framework using a “with” and “without” project methodology has been used to calculate the Economic Rate of Return (ERR) and the Net Present Value (NPV) of the project. Without project situation is what would have prevailed without the project vis-a-vis factors such as population increase, continued low access to water or to polluted water, and economic growth. The full range of economic benefits derived from this project cannot be measured due to incomplete and/or lack of adequate data. To the extent possible, selected meaningful quantifiable benefits have been estimated and/or taken from government documents, discussions with GoN officials, and secondary data.

6. Combined with very conservative assumptions used, the quantified results and net benefits presented here are an underestimation of the true impacts and full benefits of the provision of water and sanitation to individuals as well as communities. The Economic Analysis covers a project life of about six years and that of assets created for 20 years; cash flow is discounted at a rate of 12%, which is a very conservative estimate of the cost of capital.13 Design capacity is considered to account for population increases over 20 years at a rate of 1.35%. Inflation is estimated at 7% per annum. For purposes of calculating the NPV, the stream of financial costs was adjusted for impacts of taxes, subsidies, and externalities to arrive at the economic value, using an estimated Standard Conversion Factor (SCF) of 0.90.

Sector Issues: Without Project 7. Low Access to Water and Sanitation in rural areas is a serious sector issue. With over 83% of population living in rural areas, the 2011 census reported that only 85% of rural population has access to safe water, which leaves over 3.3 million people with no access to safe

13 Foreign borrowing is highly concessional with average interest rate of about 1 %, and together with domestic public debt, the cost of government borrowing should be less much than 10%. For cash flow analysis a very conservative 12 percent discount rate is used.

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water. The true situation, however, may be worse than reported, as surveys conducted by NMIP show that 44% of existing rural water systems are in need of repairs or rehabilitation, leaving many more people without access to safe drinking water. Sanitation coverage is much lower, as only 55% of rural population has access to improved latrines, leaving 10 million persons with inadequate or no access to sanitation facilities. Therefore, meeting GoN’s target of national coverage by 2017 is a challenging task. Arsenic problem in Nepal, in particular in the Terai zones, is becoming a serious sector issue. Water-borne disease and possible Chronic Arsenicosis (skin lesions, cancers, vascular diseases, ischemic heart diseases, etc.) have significant adverse effects on individuals, productivity, and cost the economy as a whole. 8. Water-borne diseases are prevalent in rural areas. The Department of Health Services, Epidemiology and Disease Control Division (EDCD) in Nepal reports that every year diarrhea breaks out in many districts of the country.14 It reported that 26 of 75 districts are highly prone to diarrhea outbreaks (up to three times a year) and are at high risk. Another 33 districts are at medium risk of diarrhea outbreaks (up to twice a year). The remaining 16 districts are at low risk, but outbreaks can happen once a year. 12 out of 20 districts in the project’s High Priority Group fall in high risk, and eight districts fall under medium risk categories. Therefore, 4.4 million rural people in this group are at high risk of contracting diarrhea. In a sample survey, EDCD reported that in May-July 2009 close to 69,000 people were affected by diarrhea (with close to 2% deaths) in 18 districts, and in one district, out of 275 cases of diarrhea reported, close to 50% was in the age group of 16-60, which is considered the core age of the labor force. Table 2 below shows the number of cases that were reported; actual figures could be many times higher. According to EDCD, the direct treatment cost for a mild diarrhea case per patient is about Rs. 350 for doctor visits and medicine, but added costs of transporting medicine supply to Health Posts in the rural areas is high and cost per treatment reportedly may reach Rs. 1,000. This cost is mostly borne by Nepal’s Public Health System. Direct and indirect costs to patients are also added costs that have negative impacts on their social and economic well-being.

Table 2: Diarrhea Cases Reported and Treated

Year of outbreak No. of Districts affected 1/ No. of cases reported

and treated Number of Deaths

2009 27 71,341 378

2010 23 3,325 54

2011 18 1,524 15

2012 12 3,526 31

Total of 4 years 79,716 478

1/ Some districts are affected every year. 9. Willingness to Pay for Safe Water and Improved Sanitation. Lessons from IDA funded RWSS Projects I and II over the last 15 years reveal that Willingness-to-Pay (WTP) is established in rural Nepal, as these projects were implemented through “Demand-Responsive” and “Participatory” approaches, and there was more demand for safe water than the projects

14 The 11-05-2010 EDCD Report; Health Case Presentation.

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could accommodate.15 In the “without project” scenario, women have to walk about 3.4 hours per day on average to collect a limited amount of water from water sources located some 1 to 4 kilometers from their houses. Water from shallow wells or surface sources is likely to have contamination and other impurities and/or could get contaminated through the use of unhygienic buckets. Therefore, households have to apply water purification techniques (cotton cloths at taps for filtering, boiling drinking water, use of water filter, and use of chlorination techniques), which are coping costs for daily water use. 10. Use and Pricing of Water. Under the project, the flat tariff that people will pay, plus the initial 15% towards capital costs, indicates their WTP for safe water and factors in their opportunity cost of time (cost of labor), and other costs (health related, loss of output) associated with consuming poor quality and unsafe water, and other ripple adverse impacts on social and economic life. Under RWSSP I and II, over 82% of schemes were gravity fed, while 15% were shallow and/or deep tube-wells and rain water harvesting (RWH), where people pay a nominal monthly tariff of Rs. 10-20 for O&M costs. There is no metering, and tariff is charged at a flat rate. Very few schemes (3%) use lift techniques where households pay Rs. 50-70 per month for O&M. The proposed project will have a similar approach, depending on geographical conditions and source availability. With Project: Economic Benefits of Water Supply and Sanitation 11. The project will support the construction of 1,450 piped water schemes through investments in infrastructure for new water supply systems (1,350 schemes) and expansion & rehabilitation of existing system (100 schemes), construction of improved sanitation units at the community level (health facilities, schools) in about 400 VDCs (including soft programs), and hygiene education and awareness building on improved sanitation to complement the physical infrastructure and improve health outcomes. The project will also retroactively finance 424 schemes from RWSSP II, which are at the implementation phase. 12. The project will particularly focus on poverty affected and un-served areas. With more funds allocated to poor and unreached areas with no or low access, the project will provide even greater benefits to poor individuals and communities. Incremental costs include investment costs (about 89 percent of total cost, after adjustment by the Standard Conversion Factor) and Operations and Maintenance (O&M) costs during the life of the project. Quantifiable gross benefits of water supply and sanitation, as well as the main assumptions considered for calculation of NPV, are:

i. Health benefits. Health benefit is the ‘avoided cost’ of treating people with water-borne (and related) illnesses (lower expenditure on treatment of diarrheal disease, lower expenditure on transport in seeking treatment, less time lost to seek treatment, etc.) as well as savings in government public healthcare expenditures due to reduction in incidence of water-borne diseases. Health care costs can fall on both patients and the public health system, which would impact the entire population and the national economy. People affected by these diseases incur expenditure on medicines, consultations, and suffer financially due to loss of

15 The First Rural Water Supply and Sanitation Project (RWSSP I) funded 900 schemes, and closed with a satisfactory rating in December 2003. The Second Project (RWSSP II) funded 1,465 schemes and closed in August 2012 with a satisfactory rating.

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direct and indirect person/work days. Water-borne diseases, such as diarrhea, jaundice and gastroenteritis, are reduced with an improvement in the quality of drinking water and improved sanitation.16 Health benefits as a result of safe water have two dimensions: (i) decrease in medical expenditure, and (ii) economic value of days of ill-health saved. The health related impact used here (direct medical expenditures) is highly conservative. Other costs such as long term hospitalization, long term financial loss, lost work days, and premature death are difficult to measure and quantify, and are not included in the analysis. The cost to individuals is factored in their willingness to pay for water. The avoided cost is assumed to be a 70% reduction in diarrhea treatment costs to the economy, which is an incremental benefit/gain from the project, with ripple social and economic benefits to individuals and the country as a whole. The treatment cost of diarrhea and similar water related diseases is estimated at Rs. 350 per case in 2013 prices.

ii. Potential time cost saving for collecting water from a distance. One of the significant benefits from a water supply project is the time saved by bringing the source of water closer to households. Without the project, the rural population reportedly spent about 3.4 hour per day, on average, to collect a limited amount of water from a distance, which could get contaminated through the use of unhygienic buckets.17 The economic value of time saved is estimated by using the opportunity cost of labor or income foregone from income generating activities.

iii. Reduction in coping costs/time due to better water supply. These include reduction in expenses, such as storage vessels, material and time spent on water purification, accessing latrines, etc.

13. Economic Benefits of Water Supply Schemes and Sanitation. Using conservative assumptions and partial benefits of the intervention, the project will still yield a significantly positive NPV, and an ERR above the cost of capital for the base case and under sensitivity analysis, as presented in Table 3 below.

Table 3: Net Present Value and Economic Rate of Return

Net Benefit Measure NPV @ 20 Years

Discounted at 12% (Rs. Million)

ERR (%)

Benefit/Cost Ratio

BASE CASE ANALYASIS Total Benefits (Health Benefits + Time saved + Avoided coping cost)

8,902 30.20 3.01

Health Benefits only 896 14.33 1.41 Time Saved only 1,835 15.58 1.51

SENSITIVITY ANALYSIS Total Net Benefits (Cost Overrun by 20%) 7,846 25.65 2.51

Total Net Benefits (Benefit Reduction by

20%) 6,066 24.73 2.41

16 The Immediate Impact Study of each Batch funded under RWSSP II and survey of the project areas reveal that prevalence of diarrheal disease morbidity in the community was reduced by 86.4% as a result of the project. 17 Lessons and surveys under RWSSP II.

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14. An Affordability Analysis reveals that where households want to have house connections and are willing to pay more than the average of Rs. 20 for O&M cost, their monthly water tariff would still be nominal, ranging from 0.67% to 0.92% of household income. This is within the range of the accepted international norm for affordability threshold of 2.5% for rural and small scale water systems.

Table 4: Affordability Analysis for Rural Water

Income Level Monthly Average HH Income (Rs.)

Estimated Monthly Average Tariff Rate (Rs.)

Water Bill as % of Income per Month

High Income Group 8,500 65 0.76 Middle Income Group 6,000 55 0.92 Low Income Group 4,200 30 0.67 15. Qualitative Social and Economic Analysis. The quantitative analysis above includes only benefits which could be measured or estimated using available data or benefit proxies. Access to safe water, use of improved sanitary latrines, and practicing hygiene have far reaching and wide-ranging social and economic benefits that include significant improvements in: (i) health; (ii) well-being of children and their education/school performance; (iii) diet and nutrition; (iv) household income and livelihoods; (v) family life and welfare; and (vi) women’s lives (benefits to girls and time for other productive activities). According to studies by WaterAID International, a simple act of hand washing with soap and water can reduce diarrheal diseases by over 40%.18 16. Fiscal Impact of IDA Financing. The long-term fiscal impact of IDA financing for the project is negligible. About 31 percent of the US$72 million equivalent of IDA financing is a grant to Nepal. The remaining 69 percent is a credit, with a 10-year grace period, a maturity of 40 years, zero interest, and a 0.75 percent service charge on the outstanding amount. With the credit disbursing in about 6 years, discounting at 12 percent, the grant element of the IDA credit is 83 percent. The Net Present Value of the credit disbursed in five years is US$35.56 million, and that of the total debt service payment over 40 years is US$6.02 million. Debt service payments (about US$1.43 million per year on average) as a result of the project are relatively small and are not expected to be a burden for Nepal.

18 Water Aid International Website, An Impact Study of Water Aid Projects on Water and Sanitation.

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ANNEX 7: GOVERNANCE & ACCOUNTABILITY ACTION PLAN (GAAP)


1. The GAAP seeks to ensure good governance, conflict-sensitivity, transparency and accountability, and inclusion in the management of project activities. It will achieve these objectives by helping:

• Ensure that resources allocated by GoN and the Bank are spent for intended purposes and are directed to the beneficiaries of the project;

• Develop mitigation measures to address risks related to conflict, governance, accountability, and inclusion;

• Strengthen coordination between different GoN agencies and other stakeholders; and • Improve feedback mechanisms between beneficiaries and service providers.

2. Accordingly, the Action Plan includes measures/actions to be taken under each of the issues identified above, namely, conflict, governance, accountability and inclusion; timeline for each action; and responsible agency for implementation. These actions are based on Nepal’s existing governance and policy framework; in addition, elements of World Bank social, governance and access to information policies have been incorporated into this document. 3. The GAAP is envisaged to be a living document and will be strengthened, as necessary, based on lessons learned during project implementation. Key governance issues in the project 4. Institutional arrangements. The key agencies involved in implementing this project are the Rural Water Supply and Sanitation Fund Board (Fund Board), Ministry of Urban Development (MoUD), local bodies, civil society organizations, NGOs and private service providers. MoUD will be the executing agency providing government oversight, and will also be responsible for Component 2. Component 1 will be implemented by the Fund Board. Inter and intra-agency coordination and collaboration is likely to be a major challenge, including at the local levels where the project will require cooperation between local body institutions, multiple line agencies of government, local Support Organizations (SOs), Service Agencies (SAs), Water Supply and Sanitation User Groups (WSUGSs), and new district WASH units established at the district level, which would be staffed by the Department of Water Supply and Sewerage Division Office (DWSS-DO) and District Technical Office (DTO) of DOLIDAR, and supported by project consultants. 5. Transparency and accountability. The project will rely primarily on community organizations to operate and maintain the schemes, thus raising concerns about increased risks of misappropriation of funds, especially in light of the limited supervision and monitoring capacity at project management and field-levels. Improved transparency is also needed for the project to be consistent with the World Bank's access to information policy. This is particularly important since there is a risk of communities either not being consulted adequately or not being informed about the benefits of the project, its implementation modality, and the expected roles and responsibilities of communities.

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6. The Right to Information Act 2007 requires GON agencies to disclose information on their businesses except for pre-defined 'sensitive' transactions. Enforcement of the Act has remained weak, primarily due to three basic challenges: (i) public officials tend to be cautious in disclosing information within their jurisdiction; (ii) there are skill gaps in terms of handling information; and (iii) logistical problems (e.g., physical facilities) stand in the way of effective management of information. These challenges need to be addressed to improve enforcement. 7. Conflict and peace-building. The experience of RWSSP II suggests that the Fund Board model was successful in averting conflict-related risks during the insurgency and the subsequent period of transition. However, owing to the current context of political uncertainty, risks such as delayed decisions on policies and programs and frequent rotation of project civil service staff, may hamper project implementation. It will thus be important to develop measures to ensure that the project performs effectively, despite the political environment that is likely to continue to be in flux. 8. In an environment where local bodies are absent, justice mechanisms are weak and law enforcement is ineffective, it is important that community groups are able to get their grievances addressed effectively and in a timely manner. Past experience of RWSSP II suggests that issues of land, and in particular concerns relating to right to private property, emerge as one of the key issues of conflict. Hence, developing clear guidelines for acquisition and donation of land, and mechanisms where project-related concerns can be resolved locally, would be essential. 9. Gender and social inclusion. The project has been designed to benefit communities living in areas that currently have low access to water and sanitation services. Measures such as reserving a certain number of positions in WSUCs for women and those from marginalized communities and the livelihood-support initiative through the Jeevika Program are interventions designed to maximize project benefits to women, the poor and the marginalized. However, there is a risk that SOs and NGOs face constraints in reaching un-served areas in an effective manner. Similarly, it is possible that people in more remote areas and vulnerable groups might not have adequate capacity to absorb project support and the grants allocated to them. 10. This will require enhanced efforts to improve the capacity of communities concerned and effective guidelines on outreach efforts for SOs and NGOs. Past experience from RWSSP II also suggests that developing water supply and sanitation schemes that can be easily accessed by differently abled people is an important concern that needs to be considered to achieve inclusive results. Monitoring arrangements 11. The GAAP will be monitored regularly against agreed actions through the project’s periodic progress reports and aide-memoires. This will be a joint responsibility of the Fund Board, MoUD, SOs, WSUGs, and the World Bank. The GAAP matrix will be used widely for monitoring purposes. If a ‘red flag’ is triggered, the Fund Board and MoUD will initiate enhanced supervision through specific third-party audits, reviews by sector experts, training workshops, and joint interim missions with the Bank. If the investigation confirms corrupt, fraudulent or collusive practices at any stage of the project, appropriate sanctions will be applied by the relevant agency, depending on the nature of the case.

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GAAP Matrix

Issues Focus areas Actions Responsible agency

Timeline

Cooperation and coordination between different agencies.

Enhancing cooperation and coordination between agencies during implementation.

• All agencies participating in the project will carry out a self-assessment on how procedures and systems could be strengthened for improved coordination and cooperation.

• Revise manuals of the Fund Board and develop mechanisms for greater coordination between multiple agencies and stakeholders.

• PMU and the Fund Board

Development and building of systems will be an on-going process during the project.

• Regular meetings of the Fund Board, PMU and PSC with arrangements to follow up on minutes.

• MoUD and Fund Board

First meeting held after one month of effectiveness.

• Select all project schemes from the district development plans finalized by DDCs.

• PMU Four months for revision of the manual.

• Under Component 2, establish District WASH units to strengthen WASH planning, manage WSUG support services, facilitate horizontal learning and\coordinate with D-WASH-CC.

• PMU, D-WASH-CC, DDC

Within three months of effectiveness.

Access to information.

Improving people’s access to information on project activities.

• Review and revise the existing Communication Plan prepared under RWSSP II.

• PMU and Fund Board

Within two months of effectiveness.

• Make available all project information on project website.

• Publicize project-related information through various media, including newspapers and electronic media.

• Assess RTI-consistency of project operations on a regular basis.


Within three months, with regular updating and monitoring thereafter.

Effective project monitoring.

Establishing a robust monitoring mechanism to monitor progress.

• Develop a monitoring and reporting system with linkage to the central systems (pilot) in five selected districts.


District level monitoring and reporting system ready within one year.

• Update the existing Fund Board Management Information System (MIS) used under RWSSP II for monitoring purposes.


Four months for updating of the MIS.

• PSC will provide oversight and guidance and evaluate

• PSC Every six months.

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Issues Focus areas Actions Responsible agency

Timeline

achievement of PDO, Results Framework and Implementation Progress.

• Form Jagaran groups to carry out third-party monitoring of schemes and provide timely feedback.

• Fund Board, V-WASH-CC/D-WASH-CC

Development phase.

Delays in policy support, especially while introducing important reforms.

Establishing and strengthening the Project Steering Committee (PSC) so that it is able to enter into policy discussions and dialogue.

• PSC will provide guidance on Components 1 and 2 and engage with various stakeholders on policy issues and timing considerations.

• PSC, MoUD, Fund Board

Within one month of effectiveness.

Effective and timely redress of grievances.

Establishing an effective grievance redress mechanism to ensure local resolution of project-related complaints.

• A grievance redress mechanism that is linked to the Jagaran Program will be instituted so that complaints are handled locally/at the district level.

• A tracking system will be in place to follow up on grievances registered with authorities at all levels of the project.

• PSC/PMU/ Fund Board

• Fund Board

Within one month of effectiveness. Within six months.

SOs and NGOs experience challenges while seeking to reach marginalized groups and un-served areas in an effective manner.

Streamlining outreach efforts of SOs and NGOs and enhancing their capacity to reach out to unreached areas.

• Selection of schemes under the project will be based on the districts’ planning process.

• Manuals of the Fund Board will be reviewed and revised, and an incentive structure will be built in for SOs and NGOs to focus on unreached areas.

• Water User Committees will include at least 33% women, and WSUCs will be encouraged to nominate women as Treasurers.

• Guidelines for the design of water supply and sanitation schemes will incorporate technical design elements that are disability-friendly.

• PMU, PSC

• Fund Board, MoUD

• Fund Board

Planning process on-going. Four months for revision of the manual.

Communities in remote areas and those from vulnerable groups lack adequate capacity to absorb project funds allocated to them.

Developing absorptive capacity of community groups, including women.

• Measures to strengthen capacity of community organizations will be introduced in the form of better information sharing, effective mobilization and frequent training.

• Fund Board, MoUD

Within six months.

Documents

The World Bank...Guna Raj Shrestha Water and Sanitation Specialist 977-9851051095 (Mobile) Kathmandu, Nepal Andrew Robinson Water and Sanitation Specialist 33 457 372492 (O) 33 612