Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 50766-NP

PROJECT PAPER

ON A

PROPOSED ADDITIONAL CREDIT

IN THE AMOUNT OF SDR 15.70 MILLION (US$24.75 MILLION EQUIVALENT)

AND

PROPOSED ADDITIONAL GRANT

IN THE AMOUNT OF SDR 12.80 MILLION (US$20.25 MILLION EQUIVALENT)

AND PROPOSED RESTRUCTURING OF

THE RURAL ACCESS IMPROVEMENT AND DECENTRALIZATION PROJECT

TO

NEPAL

NOVEMBER 20,2009

Sustainable Development Unit Nepal Country Unit South Asia Region

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

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CURRENCY EQUIVALENTS (Exchange Rate Effective September 30,2009)

EOP

ESMF

GAAP GTZ HDM-4

Currency Unit = Nepalese Rupee NPRs.76.68 = US$1 US$1.58437 = SDR 1

End o f Project SNV Netherlands Social Development

Environment and Social Management SPAF Severely Project Affected Family Framework Governance and Accountability Action Plan S R N Strategic Road Network German Technical Cooperation SWAP Sector Wide Approach Highway Development and Management VCDF Vulnerable Communities Development

Organization

FISCAL YEAR January 1 - December31

HMGN IDA ILO I M P

- Model Framework H i s Majesty’s Government o f Nepal VDC Village Development Committee International Development Association VRCC Village Road Coordination Committees International Labor Organization WFP World Food Program Integrated Rural Accessibility Planning

Vice President: Isabel M. Guerrero Country Director: Susan G. Goldmark

Sector Director: John H. Stein Sector Manager: Michel AudigC

Task Team Leader: Marianne KilpatricWSurendra G. Joshi

.. 11

FOR OFFICIAL USE ONLY

NEPAL Additional Financing for and Restructuring of

Rural Access Improvement and Decentralization Project

CONTENTS Page

A. Introduction ........................................................................................................................... 1

I . Partnership Arrangements. ................................................................................................... 1

Background and Rationale for Additional Financing ....................................................... 1

Project Background ............................................................................................................. 1

111 . Changes Introduced During Project Implementation ......................................................... 3

Rationale for Additional Finance and Restructuring .......................................................... 4

Additional Finance Components., ....................................................................................... 6

B . I . I1 . Project Implementation 2 .......................................................................................................

IV . C . Proposed Changes for Additional Finance ......................................................................... 5

. . I . D . E . F . G . R i s k s and Mitigation ........................................................................................................... 13

H . Financial Terms and Conditions for The Additional Financing .................................... 14

Annex 1: Draft Implementation Plan ........................................................................................ 15

Annex 2: Results Framework and Monitoring ........................................................................ 16

Consistency with I S N ............................................................................................................ 9 Appraisal o f Additional Finance .......................................................................................... 9 Expected Outcomes and Benefits ...................................................................................... 11

Annex 3: Project Risk Worksheet ............................................................................................. 20 Annex 4: Financial Management and Disbursement Arrangements ..................................... 25

Annex 5: Procurement ................................................................................................................ 31 Annex 6: GAAP for RAIDP Additional Financing .................................................................. 33

Annex 7: Community Infrastructure ........................................................................................ 43

Annex 8: Economic Analysis ...................................................................................................... 46 Annex 9: Safeguards Appraisal o f Scaled-up Project Activities ............................................ 53

Annex 10: Project Map NEP36742 ............................................................................................ 55

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

NEPAL

ADDITIONAL FINANCING FOR and RESTRUCTURING OF RURAL ACCESS IMPROVEMENT AND DECENTRALIZATION PROJECT

PROJECT PAPER

SOUTH ASIA

SASDT Basic Information (Original Project)

Project ID: PO83923

Team Leader: Marianne Kilpatrick Environmental category: Partial Assessment Joint IFC:

Project Name: Rural Access Improvement and Decentralization Project Expected Closing Date: 20 1011 2/3 1 Lending Instrument: Specific Investment Loan

Joint Level: I .~ --

Basic laformation (Additional Financing) Date: November 20,2009 Country Director: Susan G. Goldmark Sector ManagedDirector: Michel Audige

Team Leader: Marianne Kilpatrick Sectors: Roads and highways (1 00%) Themes: Rural services and infrastructure (60%); Decentralization (30%); Other social development (1 0%)

Project ID: P107853 Environmental category: Partial Assessment Lending Instrument: Specific Investment Loan Additional Financing Type: Scale Up,

Restructuring, Cost Overrun Joint IFC: Joint Level:

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

For Loans/Credits/Others: Total Bank financing (US$m.): 45.00 Pronosed terms: Standard IDA Credit with 40 vears maturitv and Grant

Financing PIan (USSm) Source Local Foreign Total

BORROWEWRECIPIENT 9.00 0.00 9.00 IDA Credit/Grant 36.00 9.00 45.00 Total: 45.00 9.00 54.00

Recipient: Nepal Responsible Agency: Department o f Local Infi-astructure and Agriculture Roads Narayan Bhawan, Jawalakhel

iv

GPO Box 89 Nepal Tel: (977-15) 546-268Fax: (977-15) 531-850 dgOdolidar.wlink.com.np,infoOdolidar.nov.np

TY 4nnual Sumulative

- v v - Estimated disbursements (Bank FYIuS$m)

10 11 12 13 14 3.00 6.00 10.00 12.00 14.00 3.00 9.00 19.00 31.00 45.00

Project description Ref. Section C: Proposed Changes for Additional Finance The additional financing supports the upgrading o f approximately 550 km o f rural roads to al l weather standard and 140 km o f rural tracks to dry season standard in 30 Districts. When combined with the original grant, this will result in 1,165 km and 21 1 km, respectively. The project wi l l also support 4,500 km o f maintenance, the construction o f trail bridges as part of the national program, some river crossings and community infrastructure. I t will continue to support the capacity building o f Districts and DOLIDAR through training, implementation support, implementation o f the Human Resource Development Plan, and revision o f some District Transport Master Plans. Which safeguard policies are triggered, if any? Re$ Section Appraisal of Project Activities Environmental Assessment (OP/BP 4.0 1) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntarv Resettlement (OP/BP 4.12)

V

A. INTRODUCTION

1. This Project Paper seeks the approval o f the Executive Directors to provide an additional US$45 mill ion o f combined IDA credit o f SDR 15.70 million (US$ 24.75million) and grant of SDR 12.80 million (US$ 20.25million) to Nepal Rural Access Improvement and Decentralization Project (RAIDP) (Project ID: P083923, Grant Number: IDA-H1710). This Project Paper also seeks their approval on a revision o f the Project Development Objective. In reviewing the results framework during preparation o f this additional financing, it was recognized that the PDO language related to benefits from social services and economic opportunities went beyond the scope o f RAIDP interventions and would also be very difficult to measure. Therefore a refinement to the Project Development Objective has been proposed to make it consistent with the scope o f RAIDP project activities and improve measurability o f the impact o f improvements in accessibility.

2. The proposed additional finance would respond to the Government o f Nepal’s request that the World Bank support the completion o f the remaining works in the existing project districts’ and scale-up the project to ten additional districts. The financing would also contribute to the national trail bridge program, some river crossings and community infrastructures. It i s proposed that IDA participate in a Sector Wide Approach (SWAP) for the national trail bridges program in due course, following the assessment o f proposed arrangements during implementation. Given the continued commitment o f both the Bank and Government o f Nepal to improving infrastructure and enhancing accessibility, additional financing i s believed to be the most appropriate way to deliver tangible results to a significant number o f inhabitants o f Nepal in the short and medium term. In view o f the scale up o f project activities, the project closing date would be extended by three years.

I. Partnership Arrangements

3. The Department o f Local Infrastructure Development and Agricultural Roads (DOLIDAR) has a department-wide Institutional Strengthening Action Plan (ISAP), which i s financed by both the ADB Decentralized Rural Infrastructure Development and Livelihood Project (DRILP) and RAIDP. A Memorandum o f Understanding between the Government o f Nepal (GON) and the donors to prepare a Rural Transport Infrastructure (RTI) SWAP has been agreed and the strategy for developing this further has been formulated by the UK’s Department for International Development (DBD). Work i s underway with a preliminary SWAP launch target o f 201 1/12.

B. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING

I. Project Background

4. In line with the Government o f Nepal’s Tenth Plan and the Country Assistance Strategy (2004-2007) RAIDP was prepared and subsequently approved in June 2005. The total project cost was estimated at approval as US$44.04 million, with IDA providing about US$32 million under Grant terms; GON and participating District Development Committees (DDCs) are

’ These works will not be able to be completed due to cost overruns.

1

providing about US$9.94 million and the Swiss Agency for Development and Cooperation (SDC), in a parallel financing arrangement, providing US$2.10 mill ion for the Trail Bridges subcomponent. The project became effective in August 2005 and the current closing date i s December 3 1 st, 20 10.

Component

5. The existing project has two components: (a) Rural Transport Infrastructure (RTI) improvement in participating districts and (b) Capacity Building and Advisory Services (CBAS):

Physical Progress Financial Progress

(a) The RTI component comprises: (a) rehabilitation and upgrading o f about 800 km of existing dry-season rural roads to all-season standard; (b) upgrading o f about 200 km o f existing rural trails and tracks to dry-season standard in remote hill districts; (c) maintenance o f about 3,500 km o f rural roads, covering routine and recurrent maintenance; (d) construction o f 350 short-span trail bridges; and (e) development of small community infrastructure*.

The CBAS component comprises: (a) implementation o f training-related activities; (b) provision o f technical assistance and advisory services; (c) preparation o f a GIS-based transport master plan; (d) undertaking a rural transport study; (e) undertaking a socio- economic impact study; and ( f ) provision o f project implementation support, including logistics and operations costs, to the DOLIDAR and the DDCs.

(b)

All season roads Dry season Roads T ra i l Bridges Community Infrastructure Rural Road Maintenance

11. Project Implementation

(US$ million) 508 km 10.03 (IDA) 38km 1.28 (IDA) 102 2.9 (IDA) 116 0.61 (IDA)

3554 km 4.1 (GON)

6. During the Mid-Term Review (MTR) in late 2008/early 2009, progress towards achieving the PDO was judged as satisfactory. The Quality at Entry Assessment gave the project a rating o f Highly Satisfactory saying that i t was a well designed and sharply focused project. The recent Quality Assessment o f Lending Portfolio review rated the likelihood o f achieving the Development Objectives as Likely (a rating o f two) and commended the team for creating a flexible approach to adjust physical outputs according to the prevailing situation in different districts.

7. Overall implementation performance i s rated as moderately satisfactory, with project management, financial management, and procurement execution all on an improving trend and steps being taken to strengthen capacity for safeguard management. Details o f implementation progress as o f August 2009 are given in the table below:

Table 1: Implementation Progress

* These comprise structures such as market sheds, irrigation channels, trail roads, restoration o f community sheddtap stands, health centre buildings, etc. The expected community contribution for this construction i s about ten percent, however, the actual community contribution has been found to be higher in some districts.

2

Disbursement 18.32 (IDA)

Under the CBAS component the following outputs have been achieved:

Human Resource and Organizational Development Plans have been developed under Institutional Strengthening Action Plan (ISAP). Implementation o f these plans will be jo int ly supported by ADB and World Bank.

Implementation o f Local Infrastructure Development (LID) policies for various sectors are ongoing - norms and specifications for a l l LID sectors were drafted by D O L I D A R in 2005.

The rural transport study started in June 2009 and will be completed by December 2010. This will provide comprehensive data on the provision o f rural transport services and indicative policy options, some o f which will be piloted during the study.

The baseline survey for the socio-economic impact monitoring study has been completed and the follow-up survey i s due to be carried out over the next year. This will continue in the additional finance.

The GIS consultant has started work with the Project Coordination Unit (PCU) to collate and manage al l available GIS accessibility data with a v iew to supporting updates to District Transport Master Plans (DTMPs). The DTMPs will be developed with the support o f DfID and the World Bank.

As per the agreement under the project, the districts are carrying out maintenance work to a value o f at least 20 percent o f the R A I D P funding for that district each year.

10. The estimated project beneficiaries3 at appraisal numbered 1.2 million, and the end o f project target i s for these beneficiaries to enjoy a 20 percent increase in motorized and non- motorized trips and 20 percent reduction in travel time.

11. A survey o f five completed first-year roads (three in hi l ls and two in the Terai) has found a more than 20 percent increase in motorized and non-motorized trips by the beneficiaries. Similarly, travel time for these road beneficiaries has been reduced from an average trip time of 2.6 hours to 32 minutes, i.e. a 79 percent reduction against the project target o f 20 percent reduction.

111. Changes Introduced During Project Implementation

12. Technical Specifications. During implementation, the Government and IDA agreed to change the technology employed for upgrading gravel roads to an all-season road standard by using low-cost otta sealing. This change was introduced because otta seal was providing a cost effective way o f delivering longer lasting pavement and avoiding gravel washouts which are a cause o f road degradation, particularly in the hills. A consequence o f this design change was an increase in cost o f US$3,688 per km.

Using a memure o f two hours and four hours walk to an a l l season road in the Terai and Hill districts, respectively. 3

3

13. Performance-based funding mechanism. During the course o f the project, the performance evaluation criteria4 by which funds would be allocated to Districts were found to be unsuitable given the prevailing conflict, unstable political conditions, lack o f elected officials within the DDCs and overall lack o f D D C capacity. The criteria were simplified to financial and physical progress and quality o f the works carried out. These criteria have been in use since 2006 and experience has been satisfactory as an indicator o f District performance and hence future budget allocation.

14. Trail Bridge Component. During implementation o f the project, the GON requested that this component be extended to 16 districts outside the originally targeted 20 because only 12 RAIDP districts had need for trail bridges, whereas the 16 identified had a more urgent need.’ Implementation o f the trail bridge component has been successful, although it suffered particularly f rom increases in steel prices.

IV. Rationale for Additional Finance and Restructuring

15. Financing Gap. The additional finance will fill a financing gap that has occurred due to both a change in technical specification (moving from gravel to otta seal, all-season roads) and cost increases fiom input price rises over the course o f project implementation. The modification in specification resulted in a change in the average price per km o f US$3,688 while the price o f inputs more than doubled between 2005 - 2007 with reinforcement bars and cement increasing by an average o f 130 percent. Since the.2007 peak, prices have dropped by about 25 percent but remain high. O n average, these increases led to a 36 percent cost increase per km during project implementation. O n a cost-effectiveness basis the project remained justified since average per capita expenditure remained wel l under US$1006 and the revised Economic Rate o f Return (ERR) i s 29 percent. The project originally aimed to provide 1.2 mi l l ion beneficiaries with access to al l season roads. Due to the cost overruns only about 900,000 people would be able to benefit f rom project activities in the 20 project districts, if the financing gap i s not filled.

16. Scale-up. Out o f 75 districts in Nepal, 20 are covered under the existing RAIDP and a further 45 under the Rural Reconstruction and Rehabilitation Sector Development Project (RRRSDP) which is being supported by ADB, DfID and OPEC Fund for International Development (OFID). I t i s proposed to scale up the RAIDP geographic area to include the ten remaining districts7 as wel l as increase the number o f kilometers o f upgrading in the existing districts. It is estimated that the additional finance will benefit approximately 1.5 mi l l ion people. In total, the original project and the additional financing will benefit approximately 2.4 mi l l ion people. A map showing the Districts proposed for the scale-up i s contained in Annex 10.

17. Preparation for a Sector-wide Approach (SWAp) in the Rural Road Sector. Donors and GON are committed to develop a strategy for a Sector Wide Approach (SWAp) for the Rural Transport Infrastructure (RTI) sector by FY2011. DflD has prepared a strategy for its development and al l stakeholders will be involved in i t s appraisal. As the trail bridge sub-sector

As per Annex 6, paragraph 139 o f the PAD which shows how the performance based support was designed. ’ These districts are: Dharchula, Bajhang, Bajura, Himla, Mugu, Jumla, Kalikot, Jajarkot, Dolpa, Rukum, Mustang, Manang, Solukhumbu, Khotang, Shankhuwashava and Bhojpur

’ Dang, Surkhet, Kanchanpur, Tanahu, Gulmi, Argakhachi, Pyuthan, Bara, Parsa, and Saptari. The average per capita expenditure was $21.5 in the Hill districts and $10.8 in the Terai districts.

4

i s the most advanced sub-sector within RTI, it was decided that trai l bridges should lead the SWAP effort. To this effect, after a wide consultation process, a framework for operationalising the SWAP in trails and trail bridge building has been drafted and i s under final discussion.

18. Growth and Peace. The infrastructure deficit, particularly the lack o f roads, and the lack o f employment opportunities have been seen as a cause o f conflict. Thus, the ability to deliver much needed all-season roads to these districts in the current instability i s vital. People, particularly those in rural areas, have been affected by the conflict and there are high expectations for sustained peace and an increase in access to economic opportunities. The government has also identified the need to create employment as a means o f reducing poverty and preventing the potential for a return to conflict. T o address these aspirations and increase economic development, the Government budget for FY2010 took an expansionary approach with a 55 percent increase in budget for local roads over the previous year. Overall the support for local government resources has more than doubled.

19. Refinement of the Project Development Objective. The current Project Development Objective (PDO) i s “to assist the residents of participating districts of the Recipient to utilize improved rural transport infrastructure and services, and benefit f rom enhanced access to social services and economic opportunities”. In reviewing the results framework during preparation o f this additional financing, i t was recognized that the PDO language related to benefits from social services and economic opportunities went beyond the scope o f RAIDP interventions and would also be very difficult to measure. Therefore a refinement to the Project Development Objective has been proposed to make it consistent with the scope o f RAIDP project activities and improve measurability.

C. PROPOSED CHANGES FOR ADDITIONAL FINANCE

20. Implementation arrangements for investments under additional finance will continue in the same manner as for the on-going RAIDP in as much as the implementation agency will remain the same and the Districts will continue to be responsible managing contracts. However building on lessons learnt and incorporating some new initiatives, there are some modifications, details o f which are provided below:

21. Project Development Objective. The Project Development Objective (PDO) i s to be revised to “for residents o f participating districts to utilize improved rural transport infrastructure and services in order to have enhanced access to social services and economic opportunities”. This refinement ‘of PDO language i s consistent with the scope o f the scaled-up project. The monitoring and evaluation framework for RAIDP has been improved through the addition o f an outcome indicator to measure use o f rural transport services, and socio-economic surveys will measure accessibility to social services and economic opportunities made possible by RAIDP interventions. The refined PDO and outcome indicators will apply to both the original project (IDA Grant No. H171-NEP) as wel l as the proposed Additional Finance Gradcredi t .

22. Trail Bridge Component. In advance o f the Trai l Bridge SWAP planned for later this fiscal year, a National Trai l Bridge Directory and Three-Year Interim Plan (2007-20 10) were prepared by the Government, which prioritises trail bridge investments. The RAIDP Trai l Bridge component will become part o f the SWAP once the arrangements are agreed upon and

5

necessary system i s put in place. Until this i s adopted, the existing system will continue with a flexibility to allow funding o f trail bridges in any part o f the country based on approved work program. The present procurement and monitoring arrangements will remain until the SWAP i s agreed.

23. Governance and Accountability Action Plan (GAAP). The GAAP has been formulated within Nepal’s existing governance legal framework, including the revised Anti-Corruption Act, Right to Information Act 2006, Public Procurement Act 2007, and additional procurement rules. A governance risk assessment o f the rural road sector was undertaken within the framework o f the on-going RAIDP to identify the strengths o f the existing governance framework and major governance failures, issues and possible risks that the project should address to ensure the successful accomplishment o f i t s development objective. DOLIDAR shall be responsible for overall G M P monitoring. In addition, the Procurement Officer at the Project Coordination Unit shall follow-up on G M P with the DDCs and PCT, and submit the report to DOLIDAR management periodically. The Trimester Report submitted to IDA should include the implementation status on GAAP. The GAAP including the G M P Matrix i s attached in Annex 6 and will apply to the on-going project activities as well as those to be supported through the Additional Financing.

24. years to December 3 1

In light o f the proposed scale-up, the closing date o f the project wi l l be extended by three 20 13.

I. Additional Finance Components

25. The additional finance will continue to have two components: Rural Transport Infrastructure (RTI) and Capacity Building and Advisory Services (CBAS). The total additional finance will be $54 million with $45 million being provided by IDA and $9 mill ion by GON and DDCs.

26. RTI . The RTI component includes: upgrading to all weather standard o f approximately 550 km rural road and approximately 140 km o f tracks to dry season standard in 30 districts. The completion o f 4,500 km o f maintenance plus approximately ten key river crossings, 150 short span, trail bridges and community infrastructure. Details o f changes under these individual items are below.

(a) River Crossing Structures. About ten river crossing structures are planned to be built under the project based on a priority plan for the project districts. The Terms o f Reference (TOR) o f the Project Support Consultant shall include carrying out screening and feasibility studies o f the river crossing requests received from project districts, preparing a priority plan, and survey, design and supervision o f the structures.

(b) Community Infrastructure and Support. The average size o f each community infrastructure project i s very small. Therefore, formal guidelines have been prepared as to what constitutes community infrastructure and how they should be implemented in order to reduce the potential for disconnect with other World Bank projects that might provide similar infrastructure. Details on these guidelines are attached in Annex 7. Skill building

6

training will be provided to people displaced by the Project under Resettlement and Rehabilitation (R&R).

(c) Independent Technical Inspection. A Technical Inspector (TI) shall be appointed for each cluster o f districts to inspect quality o f works carried out by the contractor. Before the quarterly submission o f the Monthly Statements (bills), a contractor shall submit a Request for Inspection (RFI) o f the completed works to the Project Manager o f the District. A TI shall visit the site and inspect the works carried out by the contractor ascertain whether laboratory tests and works have been carried out as per specification, witness the sample f ield tests o f the finished works, thickness o f embankment and gravel laid and general dimension o f the structures. The T I shall submit a report o f his findings to the D T O immediately with a copy to the PCU. Each interim payment shall be accompanied with the report f rom the TI.

(d) District Participation Framework (DPF). Under the DPF each project district shall establish a material testing laboratory and appoint a dedicated laboratory technician for the test o f construction materials and works.

27. CBAS. The support to this component shall continue. The Institutional Strengthening support will be limited to developing an IT based data system within D O L I D A R and the DDCs including road asset management, and some support to implement the Institution Strengthening Action Plan o f D O L I D A R agreed by other development partners. Support will also be provided to update 10 District Master Plans (DTMPs). The project will continue to support the Rural Transport Service study and policy recommendations contained therein. The project implementation support will include the cost o f office equipment, vehicles and consulting services. Support will also be extended for measures aimed at ensuring effective application o f the Environment and Social Safeguard Framework (ESMF), and also the implementation o f the social action plans and timely completion o f the Remedial Action Plan.

28. Maintenance Planning Development under CBAS. There has been a noticeable weakness in planning and effective execution o f road maintenance by DDCs. All project DDCs are to allocate and spend a minimum o f 20 percent o f the project costs f rom their own resources for the maintenance o f the district roads. To build capacity and experience, the project will provide necessary support for effective maintenance planning and execution including establishment o f a simple road asset management systems and an IT based road inventory system under CBAS component. Project DDCs will report on the planning and execution o f the maintenance works each trimester in an approved format to the PCU. One additional Maintenance Engineer shall be appointed at the P C U by DOLIDAR for frequent f ield monitoring, collection o f data, and consolidation o f the report.

7

29. The tables below show the breakdown o f project costs.

Description of Works

8

Total

D. CONSISTENCY WITH I S N

30. Linkage to the Interim Strategy Note (ISN). This project forms an integral part of the I S N which was presented to the Board in June 2009. It supports two o f the three ISN Pillars: enhancing equitable access to services and social inclusion and creating an environment conducive to sustainable private-sector led growth and employment generation. RAIDP and additional finance increases accessibility across districts while also encouraging and developing the private sector contractor market.

E. APPRAISAL OF ADDITIONAL FINANCE

31. Technical Specifications. Based on the lessons learned in the existing project, otta seal pavement i s found to be more suitable for roads where the existing gravel pavement has stabilized. Otta seal surface i s considered problematic where the road embankment or gravel i s freshly laid. Ravelling has been found on the roads in the plain areas o f the Terai and the turning and steep gradient areas in the hills. Therefore, because most o f the roads in the additional financing are not subject to these conditions, they will have only gravel surface, and otta seal surface will be l imited to specific roads with good traffic and pavement strength. Also, gravelling may be carried out in later phases o f the project, when fresh hill cuts or embankment preparation are required, which are vulnerable to settlements and washouts during monsoon.

32. Economic Evaluation: For the economic evaluation, the project road works were classified into two categories: (a) road works that will improve a track or road to provide basic all-season road access and (b) road works that will provide a higher level o f service than basic all-season road access, for example, with otta seal. All roads were subject to a Cost- Effectiveness Analysis (CEA) and the roads that will be improved to provide otta seal were subject to a Cost-Benefit Analysis (CBA) using the Road Economic Decision Model (RED). Annex 8 provides details o f the economic analysis.

9

33. The Cost-Effectiveness Analysis shows that (a) the average number o f beneficiaries per kilometer i s around 2,960 persons; (b) al l roads have an investment per beneficiary population ratio below the maximum o f US$lOO per person; (c) the average investment per beneficiary population is US$15.4 per person; and (d) the average investment costs are around US$42,000 per km. (US$30,000 per km in the Terai and US$50,000 per km in the hills). The Cost-Benefit Analysis for the otta seal roads showed an overall Economic Rate o f Return (ERR) o f 29 percent with a total Net Present Value o f US$1.84 million, based on a 12 percent discount rate. The ERR would fa l l to 25 percent with a 20 percent increase in investment costs, and to 24 percent if benefits were 20 percent lower than estimated. The above results indicate a satisfactory economic justification for these roads meeting the ERR criteria.

34. Financial Management. The overall financial management r isk in the rural sector i s “substantial” but the proposed additional finance will continue to build upon the existing system by adopting a strengthened government financial management system which will be incorporated into the GAAP. Issues that are observed in the sector include poor budget outturns, weak capacity o f DDCs which contribute to weak internal controls, weak internal audit capacity, staffing constraints at the D D C level, and delay in follow-up to audit observations. The strengthening includes third party monitoring, periodic fiduciary reviews by development partners and performance audits as wel l as stronger anti-corruption measures as mentioned in the GAAP . 35. The financial management system in RAIDP i s closely aligned to the government’s financial management procedure. The financial management system in districts will be managed through District Development Funds (DDFs), which will be maintained by the DDCs. DDCs play a key role in financial management under the Government’s decentralized financial management model. There is a need to enhance the capacity o f district staff in financial management. The PCU will have to closely monitor and provide technical support to those DDCs which are part o f the additional financing. The budget authority procedure will be consistent with the financial management system o f the Government. The M O L D i s delegating the authority for RAIDP program to DOLIDAR which will make D O L I D A R accountable for issuing budget authorization and collecting expenditure statements.

36. World Bank‘s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated M a y 2004, revised October 2006 and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated May 2004 revised October 2006. There has been an extensive review o f procurement and procurement risk as part o f the preparation o f this additional finance. A summary o f this assessment is contained in Annex 5. Arrangements to mitigate the risks include:

Procurement. Procurement under the Project would be carried out in accordance with the

(a)

(b)

The qualification o f the contractors may be relaxed based on the security condition in the project districts for better competition in bidding.

In order to mitigate against some o f the r isks identified in procurement such as intimidation o f bidders, it has been agreed that where appropriate, bid submission might take place in a nearby District thought to be less risky or alternatively, at D O L I D A R Headquarters where policing o f bid submission might be easier. It has been agreed that this will be reviewed on a case by ‘case basis in order to be able to respond to changing conditions within Districts.

10

(c) Building on the successful implementation o f e-Bidding in the Department o f Roads, e- submission o f bids will be piloted in nine Districts and the DOLIDAR Headquarters. I t i s hoped that this will not only help to combat the potential for intimidation o f bidders but create greater opportunities for competition. Further details o f the DOR experience i s contained in the GAAP.

37. Safeguards. All roads to be upgraded under additional finance are small stretches and works will cause minimal environmental and social negative impacts. The sub-projects selected for additional financing are required to be demand driven in the sense that the request for improvement o f the road must have come from the local residents, residents in the new right-of- way must have expressed willingness to donate the land voluntarily, and the land donation must be limited to the road corridor width only. Based on the implementation experience to date, the Environment and Social Management Framework (ESMF) has been updated to reflect the new requirements and has since been disclosed. On the environment side, the updates include: (i) compulsory screening; (ii) a Site-Specific Management Plan for each construction package; (iii) compliance auditing through an independent agency; and (iv) provisions for compensation in case o f tree loss, as well as measures for protected areas or protected species. On the social side, the updates include: (a) the creation o f a “Voluntary Land Donation Impact Mitigation Fund”, (b) limiting land donation to the corridor o f impact; (c) completion o f the land donation process prior to the award o f contracts; (d) strengthening voluntary donation principles and proposing a supporting mechanism for unavoidable impacts beyond voluntary donation; (e) strengthening mechanisms for land transfers for the lands obtained through voluntary donations; and (0 institutional capacity building and coordination for effective management o f social safeguard issues. The “Voluntary Land Donation Impact Mitigation Fund” will be part o f counterpart funds to be earmarked under additional financing. The OP7.50 (International Waterways) policy i s not triggered because the project financing will only support investments for abstraction o f water f iom locally confined aquifers or small streams and springs and hence will not have any impact on international water.

38. During the implementation o f the existing project, a Remedial Action Plan was developed to provide assistance to Project Affected Families (PAFs) and Severely Project Affected Families (SPAFs). Thus far nearly 70 per cent o f SPAFs have received assistance although, due to a delay in the approval o f the annual budget by Parliament, there are some fami l ies which have yet to receive funds. As such a covenant has been added which requires all agreed payments to be made by 3 1 March 2010.

F. EXPECTED OUTCOMES AND BENEFITS

39. Project Outcome and Benefits. The additional financing supports the upgrading of approximately 550 km o f rural roads to all weather standard and 140 km o f rural tracks to dry season standard in 30 Districts. When combined with the original grant, this will result in 1 , 165 km and 211 km, respectively. The project will also support 4,500 km o f maintenance, the construction o f trail bridges as part o f the national program, some river crossings and community infrastructure. It will continue to support the capacity building o f Districts and DOLIDAR through training, implementation support, implementation o f the Human Resource Development Plan, and revision o f some District Transport Master Plans. Upgrading o f this infrastructure i s expected to increase ease o f travel as measured in travel time and number o f trips for over 2.4

11

mill ion people. It i s also expected to stimulate the development o f rural transport services as measured by increased annual average daily traffic (AADT) on project roads in the categories o f microbus, bus, truck and jeep.

40. Project beneficiaries. An estimated 1.5 million people will benefit under RAIDP additional financing, including approximately 450,000 in the new districts and roughly 1.05 mill ion in the original districts. Since 900,000 people are expected to benefit under the original RAIDP grant, the total number o f beneficiaries under RAIDP and RAIDP AF i s estimated at 2.4 mill ion people.

41. Results Framework. An updated results framework has been prepared that i s consistent with the expanded scope o f the RAIDP (original project combined with additional financing); this i s presented in Annex 2. Outcome indicators and intermediate indicators have been more closely linked to the PDO elements, and targets have been scaled up as appropriate. As the original results framework did not explicitly measure utilization o f rural transport services, a new outcome indicator has been added. As this was not an indicator in the original project, the baseline will be taken from the 2009 traffic counts for project roads.

42. Monitoring and Evaluation Arrangements: The existing monitoring and evaluation arrangements will apply. However, what wi l l be reported on will expand: in addition to the key performance indicators, data will be collected on IDA 15 Core Indicators, the GAAP indicators, and employment generated by the project, broken down by gender, ethnicity, caste, etc. Information on the GAAP indicators will be included in the Trimester reporting, and employment data will be collected by contractors and reported to DOLIDAR. An interim, stock- taking mission wi l l take place mid-way through implementation o f the extended project period (circa September 201 1).

43. IDA 15 Core Indicators. Three o f the IDA 15 road sector core indicators are applicable to this project: Kilometers o f roads rehabilitated, the share o f rural population with access to an all season road, and the percentage o f roads in good and fair condition.

44. With respect to the f i rst indicator, data on the kilometers o f road to be rehabilitated i s included in this project and i s an output indicator. The accessibility indicator refers to the share o f rural population with access to an all-season road. This i s defined as the proportion o f rural people in the project area who live within two kilometers o f an all-season road (typically equivalent to a 20-minute walk and in view o f the varying terrain in Nepal, the 20 minute indicator will be used.). The most reliable way to determine how many people live within two kilometers o f the classified road network i s by utilizing GIS analysis to estimate population density per square kilometer and the walking time o f populations to the nearest all-season road based on distance, slope, hurdles such as rivers and the availability o f bridges. This method has been used in the same manner in the 30 project districts to estimate the population density within a two hour walking distance in the Terai and four hour walking distance in the Hill districts as per the Government standard. Since the GIS analysis for this indicator has not been completed yet, the current baseline indicator i s based on 30 minutes walking distance data (as this data exists) and will be updated as data consistent with the IDA 15 definition (20 minute walking distance) becomes available.

12

45. Similarly, there i s currently no formal data collection o n road condition. The project districts lack the means and capacity to collect the necessary data o n a routine basis. As discussed in paragraph 28 o f this paper, part o f the CBAS component implementation process under RAIDP additional financing will provide support for effective maintenance planning and execution including the establishment o f a simple asset management system and an IT based road inventory system. This approach will potentially provide the necessary data for the IDA-1 5 indicator on the road condition o f the District classified roads for the 30 project districts although the exact level o f data coverage will depend on the practicality o f data collection in each district.

G. R I S K S AND MITIGATION

46. The project team, in collaboration with the Bank team, has carried out significant risk assessment to update the picture f rom the situation prevailing when the project was originally appraised in 2005. The summary o f sector and project level risks i s attached as Annex 3 to this project paper. Specific areas o f risk include the following:

47. Implementation Risks. L a w and order remains problematic with variances throughout the country. The absence o f an effective form o f decentralized governance and delays in local level elections are major risks to peace-building and to creation o f a platform for delivering law and order and public services to the poor and marginalized groups outside o f Kathmandu.

48. This environment i s creating security risks in some Districts. Therefore the security situation in each district will be monitored on an ongoing basis. Based on these reviews and the timing o f project activities, the method o f engagement in each place will be adjusted with a scaling back o f engagement to community based approaches if security or implementation risks are deemed very high. Total withdrawal will only take place as a last resort. If engagement i s scaled back to community based approaches, management costs o f the user groups will be paid on the basis o f actual cost incurred as per G O N guidelines.

49. In terms o f the rural roads sector, the need-based selection o f project roads i s an additional concern, since political processes influence decision making which can be a source o f conflict in communities. I t is therefore essential to start the process o f ratifying existing DTMPs in each project district. With the help o f the donors, D O L I D A R plans to update DTMPs which prioritize need-based investments for the districts o f Nepal. Where it comes to light that controversial or non-priority roads have been selected, further justification f rom the districts will be required.

50. Procurement Risks. The World Bank’s engagement in a number o f sectors in Nepal has highlighted procurement risks: intimidation o f bidders and collusion between bidders are two o f the most common problems experienced. Alongside further examination o f the procurement environment for the road sector in Nepal, some specific solutions will be piloted in this additional finance: e-submission o f bids will be piloted in those Districts with adequate I C T infrastructure, enhancement o f security to allow bidders to place bids unmolested, further training to contractors o n procurement procedures, raising awareness as to the Bank’s sanctions arrangements, and increasing the role o f the Public Procurement Monitoring Office (PPMO).

5 1. Peace Filter. The task team applied the ISN-recommended peace f i l ter to the proposed Additional Financing activities, and the findings have been incorporated into the project design

13

through changes in implementation arrangements, the GAAP and the procurement plan. The project will build o n existing good practice and support the social mobilizers and NGOs working in the districts to interact with communities and pre-empt potential difficulties. It i s expected that, with the support o f various trust funds (such as the Japanese Social Development Fund), the project will strengthen social accountability mechanisms, including enhanced grievance mechanisms, increased independent monitoring, and improved communication in communities.

H. FINANCING

FINANCIAL TERMS AND CONDITIONS FOR THE ADDITIONAL

52. The Additional Financing will be provided o n standard IDA terms for credits and grants.

14

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Annex 2: Results Framework and Monitoring

Results Framework

(a) 20 percent increase in motorized and non- motorized trips by beneficiaries by End of Project (EOP).

PDO l o r residents o f participating districts o f the Recipient to utilize improved rural transport infrastructure and services in order to have enhanced access to social services and economic opportunities.

Intermediate Res u I ts Improvement in accessibility in participating districts.

Output from each Component Component One:

A. Rural Transport Infrastructure (RTI) Improvement Component

1. Rehabilitation and upgrading o f existing dry-season rural roads to all-season standard. Upgrading o f existing rural trails and tracks to dry-season standard.

3. Maintenance o f rural roads. 4. Construction o f Trail bridges.

2.

(b) 20 percent reduction in travel t ime by beneficiaries by EOP.

(c) 30 percent increase in annual average daily traffic (AADT) within the project districts in the categories bus, truck, microbus and jeep.

Results Indicators (a) 15 percent increase in the number o f people in participating Hill districts live within four hours o f walking to an all-season road.

(b) 10 percent increase in the number o f people in participating Terai districts that live within two hours o f walking to an all-season road.

Output Indicators Component One:

1. Rehabilitation and upgrading approximately 1,165 km o f existing dry- season rural roads to all-season standard.

2. Upgrading approximately 2 1 1 km o f existing rural trails and tracks to dry- season standard.

3. Maintenance o f 4,500 km o f rural roads (in aggregate each year).

4. Construction o f 3 17 trail bridges. 5 . Creation o f new jobs.* 5. All seriously affected land owners due to

voluntary land donation are provided assistance in accordance with ESMF provisions.

Low level o f traffic and travel-time reduction can indicate that subproject selection and prioritization needs to be more rigorous; or other complimentary interventions are need to be stimulate economic activities and generate trips in project roads.

- Use of Results Monitoring Benchmark against national accessibility targets.

~~

Component One:

Indicator o f project implementation.

16

Component Two: ’

B. CaDacity Buildinp and Advisory Services (CBAS) ComDonent

Support to DOLIDAR and DDCs in institutional development:

1. Update DTMPs 2. Implementation support 3. Training 4. eBidding 5. Asset management 6. IT modules/ MIS

Component Two : Component Two:

2.1 10 districts have updated DTMPs and use it for investment and maintenance prioritization and budgeting.

2.2 E-bidding i s piloted in 9 districts and DOLIDAR and assessment of its operation i s carried out.

Management Systems

MIS modules

2.3 Preparation and implementation o f Asset

2.4 Development and implementation o f 5

Indicator of increased capacity within organization to plan and manage the asset base on a more sustained basis.

17

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Annex 4: Financial Management and Disbursement Arrangements

A. Background

1. Lessons on Financial Management learned during the implementation o f the RAIDP, will be applied to the proposed additional financing with an overall objective to prepare the rural road sector to operate in a sector-wide approach. Learning from the implementation experience of RAIDP, heightened attention will be given to the governance and accountability agenda. Given the high fiduciary risk country environment, the Governance and Accountability Action Plan (GAAP) (see Annex 6) has been discussed and agreed by the government. The GAAP includes an agreement on the broader framework with an agreed timeline on organization arrangements and procedures, project preparation and selection procedure, ensuring safeguard measures, ensuring a good procurement management system both on contract documents and contract execution and monitoring, ensuring an improved financial management system and a strengthened monitoring and evaluation system. The government has committed to ensure adequate resources through the project to implement the GAAP. Implementation o f the GAAP i s expected to mitigate the high risk environment in the sector. In order to mitigate the current risk level in the area o f procurement, financial management and quality assurance (including M&E), three development partners viz., the Asian Development Bank, the DfID and the World Bank have been closely reviewing the risk factors and have broadly agreed with the government on the minimum risk assurance arrangements in the sector, which have been duly incorporated into the GAAP .

2. During the implementation o f the RAIDP, periodic preparation o f Implementation Progress Reports measuring implementation progress o n outputs, with detailed analysis of financial information and procurement management, has now been internalized. This has not only improved transparency in reporting, but i s also being used as a management tool. The Project has also designed and put in place a financial management information system (FMIS) which i s able to generate financial reports satisfactory to the Association. Reports are prepared and submitted relatively within the agreed time frame. At the time o f assessment for additional financing, there are no outstanding implementation progress reports or the audit reports.

3. There are, however, a number o f challenges that affect financial management which need to be addressed. The most serious issue which has been raised during the past few supervision missions i s the need to make an arrangement for defining a clear line o f accountability to the D O L I D A R through transfer o f program and budget authority by the Ministry to the Department. This has now been added. D O L I D A R will need to continue to put high emphasis in instituting a good supervision system to monitor field expenditures and obtain statement o f expenditures on a timely ’ basis. Minimum assurance arrangements such as follow-up on audit irregularities, third party monitoring o f program and financial performance, and performance audit arrangements, will need to be instituted. The recent review o f the ongoing project and an assessment of financial management arrangements in the ongoing project has rated Financial Management as “Moderately Satisfactory”. Issues raised by the Auditors in the FY2007/08 audits have been satisfactorily resolved.

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B. Country Fiduciary Environment

4. The Nepal Country Financial Accountability Assessment (CFAA) that was conducted joint ly by the Government o f Nepal (GON) and IDA in 2002 and subsequently updated in 2005, concluded that the failure to comply with the impressive legal and regulatory fiduciary framework makes the fiduciary risk in Nepal “High”, but the risk i s similar to that in most developing countries. The situation has not significantly changed. The Public Financial Management (PFM) Review (May 2007) has reaffirmed that the PFM system in Nepal i s well designed but unevenly implemented. The P F M benchmarks established in 2008 based on the Public Expenditure and Financial Accountability (PEFA) framework led by the government with technical assistance o f the World Bank have endorsed the continuing “high” fiduciary risk with several PFM indicators rated at l o w scale. Joint DFID and World Bank progress reviews carried out in September 2008 and later in February 2009 have revealed little progress on implementation of the PEFA Action Plan. Some o f the prevailing country level r isks include a deteriorating control environment, insufficient monitoring, increasing threat o f collusion and intimidation o f bidders, and weakening oversight agencies with the absence o f institutional leaders, which include the Auditor General and the Chief Commissioner o f the CIAA, have a wider impact on the country’s accountability environment including at the sectoral or project level.

5. While these challenges prevail, improving the overall financial accountability framework remains a high priority o f every government in transition. Frequent transition o f political leadership in the government has been the main cause o f slow movements in accelerating PFM reforms as envisaged by the PEFA Action Plan. Some o f the actions undertaken during the challenging transition period such as promulgation o f the Public Procurement Act and Public Procurement Regulations in 2007, amendment o f the Financial Administration Regulations in 2007, and the self-assessment o f various PFM Indicators as per PEFA Guidelines in 2007, are some examples o f the Government’s continued commitment. Implementation o f these frameworks in the form o f an integrated P F M reform package that is based o n a set o f mutually supportive actions that are realistic and can generate positive impacts is critical to mitigate fiduciary risks. Such a package has been reflected in the PFM Strategy Document prepared by the Government. A high level steering committee chaired by the Finance Secretary provides a necessary forum for close monitoring o f implementation with continuation o f collaborative support from development partners.

C. Adequacy o f Fiduciary Arrangements

6. Experience gained through the implementation o f the RAIDP for almost three years, increased the focus on governance and accountability both by the Government and the Bank, increased demand for alternative assurance arrangements such as third party monitoring, disclosure practice at the community level, arrangement for performance audit through the Supreme Audit Institute and arrangements for third party verification f rom time to time by the Bank on specific technical areas, and close monitoring on procurement management are the basis for increased comfort o n fiduciary arrangements. Further, the proposed GAAP i s expected to deeply embed the governance and accountability agenda into the sector program. With al l these

26

initiatives, the proposed financial management arrangements will be adequate to manage the additional financing.

7. Implementation arrangements will remain unchanged except for the trail bridge construction; and the government’s proposal to finance this program on a pilot SWAP basis will be reviewed. Following the review o f the proposed arrangements, the Bank will undergo the necessary preparations to make a gradual transition to the proposed harmonized approach. Through successful implementation o f the RAIDP, the sector has gained a number o f strengths that have a positive impact on financial management: (i) high-level government commitment for the rural roads sectors; (ii) incorporating lessons learnt from the RAIDP to the implementation design o f the proposed additional financing; (iii) an effective harmonization approach being explored for the trail bridge operations; (iv) a central focus to the governance and accountability agenda through integrating GAAP into the work program; and (viii) oversight arrangements through the country system as well as minimum assurance arrangements agreed with the government.

D. Additional Financing Costs, Financial Management, and Disbursement Arrangements

8. Additional Financing Costs. The total expected cost o f RAIDP additional financing for three years i s estimated at US$54.0 mill ion o f which the government i s expected to finance about US$ 9.0 mill ion and IDA’S contribution i s expected to be equivalent to US$45.0 million. The possibility o f IDA participating in the pooled funding arrangement for the government’s planned trail bridge SWAP will be decided after the proposed framework (detailed work program, results framework, and joint management arrangement) i s finalized and reviewed for consistency with IDA operational policies (including FM, procurement, safeguards, and GAAP).

9. Financial Management Arrangements. Financial management arrangements as described in Annex 6 o f the Project Appraisal Document o f the RAIDP will also prevail for the additional financing. The only possible change that could occur i s the proposed arrangements to gradually transition to a sector-wide approach on a pilot basis for trail bridge operations. The government’s proposed framework will need to be reviewed and necessary arrangements will need to be put in place before transition to this approach. Until this happens, the current procedure that i s applied to trail bridge operations will continue with a step forward to the harmonization efforts. Eligibility o f districts to be funded will now be open to all 75 districts based on the approved work program o f the trail bridge section. Current staffing arrangements are adequate. The current staff strength facilitated by the consulting services has enabled to improve the quality o f information system and reporting. For the purpose o f additional financing, following the financial management improvement plan has been agreed upon:

27

10. Financial Reporting. As part o f progress reports, DOLIDAR will continue to submit the Implementation Progress Report (IPR) on a trimester basis which will also include the “Financial Monitoring Report”. Expenditures incurred under the additional financing will also be integrated into the current agreed format o f the IPR and will be submitted within 45 days o f the end o f each trimester.

Implementing Agency

DOLIDAR

11. Disbursements. Total RAIDP disbursements as o f September 30, 2009 i s about US$20.70 million, which i s about 62 percent o f the allocated amount. Based on anticipated expenditures and outstanding claims to be incurred during FY2008/09, about 71 percent of the allocated funds have been utilized, and the remaining balance has been fully committed. Disbursement arrangements under additional financing will remain the same as in the ongoing RAIDP that is, based on full documentation for contracts above the Prior Review threshold or SOEs. SOE thresholds wi l l also remain unchanged. The same special designated accounts will be used, and no additional funds will need to be provided in the current special designated account threshold o f US$2.0 million. There will be no retroactive financing requirement.

Audit Auditors

Financial Statements o f RAIDP including General (OAG). additional financing.

Office o f the Auditor

12. ExternaZAudit. An annual audit report o f the RAIDP including additional financing will be submitted within six months after the end o f the fiscal year. The audit report o f FY2007/08 has been submitted and there are no outstanding issues. The next audit report due for RAIDP i s for FY2008/09 which i s due on January 15, 2010. The following audit reports will be monitored in the Audit Report Compliance system (ARCS):

Audit Due Date

6 months after the end o f each fiscal year (January 15’).

28

13. Allocation of Financing Proceeds. Disbursement under proposed financing will be made as indicated in the following table, which shows the percentage o f financing for different categories o f expenditures o f the project. Total financing is at the proportion o f 55 percent credit and 45 percent grant proceeds. I t i s expected that IDA funds will be disbursed over a period of three years. The Closing Date o f the financing i s December 3 1 , 201 3.

Expenditure Category

(1) Works

(a) related to dry season rural roads, road maintenance, small community infrastructures, and key

Credit Grant Financing

million million % Amount in US$ Amount in US$ Total Financing

20.46 10.74 3 1.20 90

motorable river crossings (b) related to rural trail bridges (2) Goods

3.30 2.70 6.00 100

0.0 1.43 1.43 100

Standard FM related Covenants

(3) Consultants’ Services and Training (4) Incremental Operating Costs (6) Unallocated Total Bank Financing

14. statements, and (ii) submission o f trimester FMRs.

There are two FM-specific covenants: (i) submission o f annual audited financial

0.0 3.97 3.97 100

0.0 0.60 0.60 100

0.99 0.81 1 .so 24.75 20.25 45.00

Supervision

15. Intensive supervision o f financial management will be undertaken by the Bank which will include follow-up on the implementation o f the agreed Action Plan for financial management improvement. The FM rating will be reviewed periodically to assess the progress. Implementation o f financial management actions contained in the GAAP will be closely monitored.

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Attachment 1

Table 4.3: Risk Rating Summary

Risk I Previous Risk Assessment

Risk Mitigating Measures Residual Risk

INHERENT RISKS I H H Country level

- Quality o f PFM institutions (see PEFA-PMF, CFAA, CPAR, CPIA & other diagnostics), standard o f fmancial accounting, reporting and auditing, quality o f FM mofession.

Implementation o f PEFA Action Plan; PFM sector dialogue and implementation o f actions.

Entitv level Implementation of GAAP and minimum assurance arrangements

S - Independence of entity’s management, appropriateness o f the organizational structure, impact o f civil service rules Project level - Relative size o f the Bank loan, type o f lending instrument, complexity o f the project (e.g. sectors involved, number o f implementing and sub- implementing entities, multi- donor etc.) OVERALL INHERENT RISK

Implementation o f GAAP and minimum assurance arrangements

M Implementation of GAAP and minimum assurance arrangements

1. CONTROL RISKS Budget M Inclusion o f additional

financing program and budget in the revised work program for FY2009l10 Continuation o f :xisting team o f accounts staff and use 3 f consulting services; :lose monitoring SAAP implementation

Accounting M

Internal Controls Fundsflow ,

Financial Reporting Auditing OVERALL CONTROL RISK

S M M M M

Same as in Accounting Same as in Accounting

RESID UA L RISK RA TING

H - High S - Substantial M - Moderate L - Low

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Annex 5: Procurement

1. Procurement Plan. Procurement under the Project would be carried out in accordance with the World Bank‘s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated M a y 2004, revised October 2006 and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated M a y 2004 revised October 2006 and the provisions stipulated in the Legal Agreement. Contracts shall be procured in accordance with the Procurement Plan (PP) as agreed and finalized during negotiations for the “Additional Financing”. Annual procurement plans shall be prepared as on an ongoing basis and cleared with the Bank before implementation. Bank’s prior and post review decisions shall be in accordance with the PP. However, in exceptional cases depending upon the location o f project sites, assessed procurement capacity of procuring entities and local construction industry, and the general law and order situation, the Bank may require procurement decisions to be subjected differently.

2. Procurement Risks Mitigation. In addition to the measures described in Para 47 - Procurement Risks o f the Project Paper, the fol lowing matrix o f problem analysis and probable mitigation measures, in this regard, shall be adopted to reduce the associated risks:

Assumptions:

0

That the project i s designed to build local capacity and that some form o f capacity building should take place even if the submission o f bids has to happen centrally. That monitoring o f procurement in each district i s necessary in order to adjust approach as necessary. No sing

Problem

Intimidation o f bidders

solution i s D(

Occurrence

No complaints received in RAIDP but known to exist in other projects and Government procurement

sible.

Procurement Mitigation

E-submission of bids

Centralized/regionalized bid submission with DDC participation in evaluation where necessary

WhenMow

Pilot in 9 Districts and DoLIDAR

Comments

Will need to monitor performance and infrastructure availability

Must not overload central procurement capacity

Training for contractors, DoLIDAR and DDCs should be supported

Do not want to penalize/constrain good performing districts hence flexibility in application

Consider having someone from the Centre or an external (NGO, community leader) person on the evaluation committee in the Districts

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Collusion

Implementation problems

Suspected in RAIDP (and across the board)

Occurred in RAIDP: no single cause found. Different Districts had different problems

Encourage greater competition through appropriate slicing and packaging

Training in WE3 procedures and particularly in sanctions procedures

Revision of qualification requirements to encourage more smaller contractors

Slicing and packaging to allow greater participation by both local and non-local contractors

Community participation in works by breaking down into labor intensive works

Increased ;ommunication with ;ommunities on procurement (what will happen when, what they should look out for, zommunity Tepresentation?, grievance mechanism improvements etc)

Procurement Plan

In advance of procurement and throughout project

In advance o f procurement with RPM approval

As and when problems occur

Unlikely to solve collusion issue as very hard to prove and even e-submission o f bids i s not a deterrent. However, careful monitoring and building awareness within the contractor industry will help.

Requires monitoring by WJ3 as well as making use o f DFGG (JSDF) funds for improving grievance mechanisms and project info.

Concern that bid prices might rise on the basis o f perceived risk in some districts. Bid prices to be monitored.

Complete disengagement only to be considered as a last resort

3. This approach has been discussed and agreed with the 3ank and the Borrower’s representatives involved in project implementation.

4. Option discussed but not suggested: The possibility o f use o f a Procurement Agency was discussed but not suggested as being counter to the aims o f capacity building both at central and local Government level and has not been proven to reduce procurement problems.

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Annex 6: GAAP for RAIDP Additional Financing

1. The Governance and Accountability Action Plan (GAAP) developed for the proposed additional financing o f RAIDP is designed to reflect the jo int responsibility o f the implementing agencies, and the Bank in ensuring good governance and cost effectiveness in project implementation. The GAAP is a living document and will be adjusted and modified to reflect emerging governance issues and suggest new appropriate solutions during project implementation. It wil l be monitored regularly through appropriate indicators which will be reflected in the GON’s monthly progress reports and WB supervision missions’ aide-memoires.

A. Methodology of the Preparation of the GAAP

2. The GAAP has been formulated within Nepal’s existing governance legal framework, including the revised Anti-Corruption Act, Right to Information Ac t 2006, Public Procurement Act 2007 and additional procurement rules. It also incorporates lessons learnt from the on-going RAIDP which became effective in 2005; other Bank-funded projects in the country and South Asia region and includes recommendations o f the Transport Sector GAAP Guidance Note developed by the WB for transport projects.

3. A governance risk assessment o f the rural road sector was undertaken within the framework o f the on-going RAIDP to identify the strengths o f the existing governance framework and major governance failures, issues and possible risks that the project should address to ensure the successful accomplishment o f i t s development objective. The governance assessment exercise was carried out through consultations with a wide number o f stakeholders, including implementing central and local government bodies (DOLIDAR, DDCs, VDCs), contractors, consultants, communitiesheneficiaries/Local Road Users Committees (LRUCs), social mobilizes, representatives o f political parties, other donors active in the road sector or working with rural communities.

B. Key governance-related accomplishments in Nepal’s road sector

4. In addition to the enactment o f the above mentioned legal acts, there have been several other initiatives undertaken in Nepal’s road sector which have been contributing or could contribute to strengthening o f the sector level governance in the longer term. This GAAP i s not only built upon these existing good practices, but it also takes on board lessons learnt from the previous experiences to improve their implementation under RAIDP Additional Financing. These good governance practices include:

e Well-developed and defined procedures for a transparent and inclusive road selection process in rural areas. The road selection process, including the process for stakeholder participation, is clearly described in the “Approach” Manual, developed and implemented by Nepal’s government since 1999. The APPROACH Manual served as guidance for developing current District Transport Master Plans (DTMPs) for each district in the country. However, many DTMPs were developed more than five years ago and priorities may need to be revised in districts where substantial development programs have been carried out.

33

Successful piloting of e-bidding Department of Roads @OR). Under the Bank-funded RSDP, changes have been made to e-procurement procedures. It now allows the electronic submission o f bids. The piloting o f e-bidding in DOR has proved to be successful in increasing competition. Contractors’ support of e-bidding. During meetings with the WB staff, many contractors have expressed their willingness to participate in e-bidding as they clearly see i ts potential advantage in preventing the intimidation o f interested bidders f rom outside of a concerned district and reducing chances o f collusion. They acknowledge that e-bidding should open more opportunities for them outside their respective districts and, subsequently, enable them building their capacity and experience. DOR ’s strong commitment to good governance. During RSDP implementation, D O R has demonstrated a strong commitment to prevent collusive, fraudulent and other corrupt practices through reporting to C I A A suspicious cases for further investigation and recommendation o f contractors involved in corrupt practices to PPMO for blacklisting. Experience sharing by D O R could encourage D O L I D A R to take steps in building good governance in the rural road sector and foster strong partnership with D O R to create a more conducive environment for a healthy competition in the construction industry. Community-Based Performance Monitoring/ Social Audit (CBPM). The Community- Based Performance Monitoring has been found especially successful in districts which are not affected by frequent violent or criminal activities - mostly Hill districts. LRUCs have been trained to understand technical standards and are able to adequately monitor the quality o f c iv i l works contractors which upgrade dry-season roads to al l season roads.

*

5. The governance assessment exercise carried out within the framework o f the on-going RAIDP has revealed a number o f governance inadequacies and issues that need attention in order to ensure successful implementation o f M I D P Additional Financing and successful achievement o f i t s development objective. These include (i) collusiordcartelling among contractors; (ii) intimidation o f contractors during the bidding and execution o f works; (iii) frequent cost variations and contract extensions; (iv) weak capacity o f contractors leading to poor quality of works; (v) frequent and/or substantial variation orders; (vi) poor performance by some contractors; (vii) unequal payment or delayed payment to unskilled labor hired by contractors; and (viii) delayed payment to some contractors by the government agencies. In addition, it has been recognized that some o f the governance-related activities that have been used in the on- going RAIDP need either improvement or strengthening, which include (i) accountability within the concerned central and local governments; (ii) the capacity o f government agencies to produce quality designs and accurate cost estimates in some o f the road contracts; (iii) transparency in procurement decision-making process; and (iv) the selection process o f proj ect roads.

C. Main Goal and Objectives o f the GAAP

6. The main goal o f the GAAP is to contribute to strengthening of governance mechanisms in the rural roads sector and increase in the demand for transparency and accountability at the local government level.

34

7. The GAAP will pursue the following objectives to:

(i)

(ii) (iii)

(iv)

Ensure resources allocated by the WB and G O N are spent for the intended purposes and directed to the beneficiaries o f the project, Strengthen feedback mechanisms between users and suppliers, Increase the participation o f communities and road users in monitoring and evaluation of the project implementation, and Strengthen the Bank’s attention to and mitigation o f fiduciary risks in (a) project design and (b) project supervision.

D. Implementation and monitoring arrangements of GAAP

8. It has been recognized that al l concerned stakeholders - implementing central and local government agencies, contractors, consultants, communities, road users and the Bank - will have to be part o f the implementation o f the GAAP to ensure the successful accomplishment o f i t s objectives and i t s contribution to strengthening o f governance at the rural road sector level as well as local government level. Since governance i s a corporate responsibility, the key person in charge o f this project’s GAAP will be Deputy Director General (DDG). The overall responsibility for implementation and monitoring o f the GAAP will remain with the PCU housed in D O L I D A R who will report to DDG. Each concerned D D C will be responsible for implementation and monitoring o f G A A P progress at the local level and reporting o n this to PCU.

9. Implementation o f GAAP will be monitored through alert indicators as specified for each governance failure, issue or risk in the GAAP Matrix. If any red flag is triggered, enhanced thematic or district supervision will be initiated by D O L I D A R through specific third party audits, reviews by industry experts, training workshops and joint interim missions by the WB, D O L I D A R and M O L D . If issues are resolved, red flags will be removed. If they persist, a detailed investigation will be carried out by D O L I D A R and WB. If the investigation confirms corrupt, fraudulent or collusive practices at any stage o f the project, appropriate sanctions will be applied by the WB and/or D O L I D A R and/or CIAA, depending on the nature o f the case.

E. Structure of GAAP

10. The GAAP presents the entire value chain analysis o f project implementation cycle starting f rom design and planning through execution and monitoring. Several areas for governance improvement have been identified, namely organizational arrangements, project selection and preparation, procurement, contract management and execution, financial management, safeguards implementation, and monitoring. The GAAP proposes actions for each governance failure, issue or possible risk found in each o f the above mentioned areas, timeline for each o f the actions and responsible party for their implementation, and alert indicators to monitor each failure, issue or risk. The detailed action plan is presented in the GAAP Matr ix below, while the Draft Information Disclosure Policy for RAIDP Additional Financing i s attached in Appendix 1.

35

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GAAP Appendix 1: Draft Information Disclosure Policy for RAIDP Additional Financing

1. The joint RAIDP team has drafted the following Information Disclosure Policy in compliance with the Right to Information Act (RTIA) o f 2006 and the WB Information Disclosure Operations Policy. As per RTIA, each public institution i s required “to provide information to every citizen demanding information on any matter o f public importance, except legally provisioned things to keep secret and thereby to make public activities transparent and accountable.”

2. The implementing government agencies - DOLIDAR and concerned DDCs - will continue using RAIDP’s website to disseminate the information related to RAIDP additional financing and will ensure regular updating o f the relevant information as per requirements given in Chapter 2 Section 4 o f RTIA. In addition, a clear description o f procedures (e.g., timing, fees, and further steps in case o f denial in the provision o f requested information) over information application will be provided on this website. Information published on the RAIDP website will remain available online and brochures with a summary o f this information will be made available at Information Dissemination Centers o f concerned DDCs throughout the project implementation period and for at least one year after project completion. The information will be updated regularly. The implementing agencies will make all audit reports and all formal responses from the government publicly available promptly after their receipt.

Subjects

Project’s governance structure.

PlanningiRoad Selection.

Engineering

Maintenance

Procurement

Table 6.1.1: R4IDP Informatio:

Information/Documents to be disclosed

Description o f project’s implementation arrangements, organizations involved, responsibilities, key personnel, their names, contact information and job descriptions; decision-making process; current and completed activities. “Approach” Manual and DTMPs o f concerned districts.

Physical and financial progress o f each contract.

Contact information o f the concerned DDC, contractors and consultants.

DDCs annual maintenance plans.

Road Condition Surveys (only for all-season roads).

The Overall Project Procurement Plan.

Disclosure Policy

Frequency

As and when the revisiodupdate i s available.

As and when updatehevision i s made. Continuous

As and when updatelrevision, if any, i s made. Annually

Annually

As and when the revisiodupdate i s made available.

Media

RAIDP website, DDCs Information Centers.

RAIDP website, respective D D C Information center. RAIDP website, respective DDC Information center. RAIDP website, respective D D C Information center. RAIDP website, respective DDC Information center. RAIDP website, respective D D C Information center. RAIDP website, DDCs Information Centers, WE3 site, UNDB as per agreed procurement procedures with WB.

41

Subjects

Procurement Plan (regularly updated); List o f contractors who purchased bids Basic contract data, e.g., name o f the

Safeguards

As and when the revisiodupdate i s made available.

Information/Documents to be disclosed I Frequency

ESMF ( English and Nepali version) Immediately after approval by the Government.

' Immediately after approval of VDIMP.

Lists of land and structure donors and eligible for assistance to be provided; will be disclosed at the hamlet (Tole), VDC, and DDC level with participation of the LRUC and VRCC. VCDP.

Immediately after approval.

Periodically Progress Report on implementation of the VDIMP and VCDP including the payment o f R&R assistance.

Media

RAIDP website, DDCs '

Information Centers, local and national newspapers, andor UNDB/WB InfoShop website; sign boards (for contract data only) at each contract site. RAIDP web site and DDCs.

RAIDP website, Display Boards in Hamlet (Tole), DVC and DDC.

DDCs

RAIDP website, Display Boards in Hamlet (Tole), DVC and DDC.

42

Annex 7: Community Infrastructure

A. Background

1. Under the Road Transport Infrastructure (RTI) component o f Rural Access Improvement and Decentralization Project (RAIDP), there i s a sub-component which i s designed for “development o f small, community infrastructure, including construction o f markets and community trails and roads”. The principle behind this sub-component i s to enhance the valuehti l i ty o f a road built under the project by providing some additional amenities to the community that has provided i t s resources (voluntary donation o f land, labor, etc.) for the construction o f the road.

B. What i s Community Infrastructure (CI)?

2. The Community Infrastructure Component in the RAIDP promotes access to the target communities, empowering and helping them to develop social and economic community infrastructures. Such infrastructures will be implemented, managed and maintained by the beneficiaries themselves. Grants will be provided for the construction, repair and improvement o f small scale infrastructure sub-projects identified by proponent communities, and community groups. Recipient communities contribute partially-paid labor, local materials and other in-kind contributions. Project Development Engineer (PDEs) and Social Development Consultants (SDCs) based in the DDCs assist communities in technical plans preparation, construction supervision, equipment use, and provide other assistance needed.

C. What can be included in Community Infrastructure?

3. Proposals o f the community infrastructure sub-project are prepared by the Village Road Coordination Committees (VRCC) and Local Road User Committee (LRUC) and are submitted to RAIDP through D D C for approval and funding.

4. The proposals can include:

(i) Infrastructures that enhance social and economic well-being o f the community such as training halls, market centers, community buildings, repair and maintenance o f health posts, schools, etc. Minor augmentation o f infrastructures that contribute to improving basic health conditions such as drinking water, sanitation facilities, community-based irrigation, link roads etc.

(ii)

D. What will be the process for selection o f CI?

5. The project will fol low the same procedure as followed for the other community infrastructure work under the District Development Committee’s (DDC) direct funding. The process i s as follows:

43

VRCC and L R U C are formed for each road PDE sends a letter to VRCC and L R U C to conduct a mass meeting o f the user groups and to hear demands for community infrastructure. The long list o f demands from the community i s recorded and prioritized through consensus, first at the VRCC level and then at the L R U C level. LRUC sends its priority l i s t to the DDC. The D D C reviews the recommendation o f the L R U C and makes an estimate o f the cost o f such infrastructure proposed. The Local Development Officer (LDO) has the authority to approve the funding for community infrastructure. The community enters into an agreement with the D D C and i s responsible for the completion o f the works. Usually, the community infrastructure i s constructed through local participation but in some cases contractors are also engaged for bigger works. The community has to contribute at least 20 percent o f the cost o f the infrastructure either in cash or local labor and local materials. In most o f the cases, this is covered through contribution o f labor and local materials. The most common demand from the community is for addition o f classrooms in schools, multi-purpose community buildings, access road, minor maintenance o f schools and boundary walls, and for enhanced environmental management measures. In selecting the proposals for CIS preference will be given to demands coming from vulnerable and marginalized groups and communities including dalits and women.

Before approval o f proposals for implementation o f sub-projects, technical and social appraisal will b e carried ou t to veri fy eligibility criteria and requirements through site visits and checking o f technical reports o f the sub-projects. Similarly, environmental and social assessment o f al l subprojects are carried out through environmental and social screening by completing environmental and social check-list format and mitigation measures are suggested with management action plan for adverse environmental and social impacts. Since al l sub-projects require contributions from the communities, the cash and kind contribution from the community would form part o f the criteria for sub-project selection. Eligible contribution in kind would include local materials (sand, stones, wood, etc.), valued labor contribution o f proponent communities, use o f equipment already available with the community that would otherwise have to be procured hired, and other forms o f in-kind contributions. These contributions shall be in l ine with the provisions o f the local government guidelines for similar works.

E. What will be the basic principles for inclusion under CI?

7. The basic principles for the selection o f a sub-project to be financed under the C I component o f RAIDP will be equity to the beneficiaries and optimum utilization o f resources allocated to the D D C under the project. The proposals made by the L R U C will be evaluated by the D D C sub-committee/ PDEI SDC in terms o f their conformity to the objective o f this sub- component to “provide some additional amenities to the community that has provided its resources (voluntary donation o f land, labor, etc.) for the construction o f the road.” I t should be ensured that the sub-projects are spread throughout the entire stretch o f the road and the communities are receiving the benefits and the multiple sub-projects are not clustered in one or two areas. Even the spread o f sub-projects has to be ensured to avoid “capture o f benefits” by a certain the area by including a provision in the project recommendation format stating clearly

44

whether other sub-projects are proposed in the same location. Adequate justification should be provided in case there is clustering o f sub-proj ects within close proximity.

8. While the menu for sub-projects remains flexible depending upon the demand from the communities, the following will not be included as part o f C I but rather covered as part of the RTI component o f the project:

0

0

Damage to utilities (drinking water pipedtapstands, small irrigation canals, etc.) and monuments (places o f religious significance, etc.) Minimum engineering requirements identified as part o f the detailed design of the road being upgraded constructed

9. To ensure that the same infrastructures are not receiving funds from other sources and reported accordingly, a mechanism o f cross-verification will be instituted at the D D C level. For example duplication in the funding o f school buildings/ additional class rooms/ boundary walls, construction/ augmentation o f small water supply system, irrigation canals, etc. However, sharing o f cost o f the sub-project f rom different sources i s possible in which case the source of funds have to be explicitly mentioned in any reporting to D D C as well as RAIDP.

F. How much funding will be available for each sub-project?

10. A specific amount o f grant assistance shall be allotted by the P C U to target districts and the roads funded therein. The funds shall be released after approval o f the sub-project by the PCU upon the recommendation o f the DDC. The Recipient communities may withdraw the funds from the local branch o f the bank where they will have opened an account specifically for the purposes o f operating the sub-project funds. A statement o f progress and an expense report will have to accompany fund release requests f rom communities. The general rule for release o f the funds will be in three tranches, 20 percent - 50 percent - 30 percent. Communities that request for less than three tranches or request for bigger percentage in the init ial tranche will have to submit strong justification along with recommendation f rom PDE and DDC.

G. Community Infrastructure Subproject Grant Agreement

1 1. In order to provide a Community Infrastructure Grant to a community, the relevant D D C shall enter into a written agreement with the community (Community Infrastructure Subproject Grant Agreement), pursuant to which the D D C shall obtain rights adequate to protect the interests o f the DDC, G O N and the Bank. The agreement should include, inter alia, objective and scope of the infrastructure, design and estimated cost, duration o f the contract, payment schedule, reporting requirements, details on cost sharing (DDC’s RAIDP budget, V D C budget, community contribution, others, etc.), roles and responsibilities o f the D D C and the road user group, and any other special provision as required. A format o f such agreement will be shared with al l DDCs by the PCT.

45

Annex 8: Economic Analysis

A. Introduction

1. Rural roads in Nepal provide basic access to market centers, social services l ike health, education and cultural activities, and help open up wider opportunities for gainful employment to a vast amount o f rural population. Furthermore, rural roads help rural areas integrate with the national and global economy by providing access to a strategic road network and other long- distance traffic facilities. These are the main reasons why rural roads contribute to national development goals, are highly demanded and have become high priority infrastructure in Nepal.

2. Some 60 out o f 75 districts in Nepal have road network access through a primary road in addition to a vast network o f poorly engineered rural roads. It i s estimated that as much as 14,000 km o f rural roads exists in Nepal and it i s believed that hardly ten to 15 percent i s in all- weather operational condition. Therefore, one o f the profound current needs is to improve these earth tracks or non-operable roads to an all-weather standard and to institutionalize a maintenance system for making them operable throughout the designed l i fe span.

3. The main beneficiaries o f the project will be the population living in the area o f influence o f the roads to be improved to all-weather standard. Currently these isolated rural populations do not have reliable access to social services and markets and will also benefit from new services and economic opportunities that will be generated, resulting in lower costs o f basic necessities. Some o f the roads may also be used to carry long distance traffic, reducing vehicle operating and travel time costs o f road users. Reliable access and lower transport costs will also benefit service providers since improved roads will make it easier to engage in economic activities.

B. Economic Evaluation Methodology

4. The Strategic Road Network (SRN) in Nepal comprises o f highways and feeder roads, interlinking district headquarters and main commercial centers. Therefore, the S R N planning perspective i s to provide a transport access to a region or to a particular point o f importance, therefore minimizing the total transport cost f rom an economic standpoint. Rural roads differ from the S R N since their planning perspective i s to provide access to services on a household level. Therefore, opening up a basic access track or providing an all-weather road may be considered as a basic social service and less as an economic investment.

5. Conventionally, while performing an economic evaluation o f road works, benefits are estimated on the basis o f likely savings in transport costs. Development o f a road causes a change in the mode o f travel and transport costs making it possible for motorized and non- motorized vehicles to operate andor for vehicle operating costs to reduce significantly. These changes also result in significant reduction o f productive time allotted for commuting. Thus, transport costs savings accrue mainly through savings in vehicle operating costs and travel time costs. However, the benefits o f rural roads that are primarily providing basic access to the remote communities are rather complex and not fully captured by this assessment approach since it only considers savings in transport costs or producer’s surplus benefits. The host o f social benefits that the basic access rural road generates for rural communities cannot be fully quantified within “pure economic” benefits. Therefore, to judge investment decisions covering

46

rural roads, a simpler socio-economic screening with some kind o f threshold criteria may be preferred, for example, by limiting the investment per population served.

6. For the project economic evaluation, the project road works were classified into two categories: (a) road works that will improve a track or road to provide basic all-weather road access and (b) road works that will provide a higher level o f service than basic all-weather road access, for example, with black-toping. All roads were subject to a Cost-Effectiveness Analysis (CEA) and al l roads that will be improved to provide a higher level o f service were subject to a Cost-Benefit Analysis (CBA). The C E A will ensure that al l project roads have an investment per population served ratio no greater than US$lOO. The C B A will ensure that the economic rate o f return o f the investments will be higher than 12 percent.

,

C. Cost-Effectiveness Analysis

7. All roads were subject to a Cost-Effectiveness Analysis evaluating the minimum investment needed to provide all-weather access to the beneficiary population. Based o n the available budget and the rural population density in Nepal, a maximum o f US$lOO per person was defined as the threshold point, above which road works would not be financed.

8. The estimation o f the beneficiary population considers that development o f a road system basically depends upon the topography and pattern o f settlement therein. In the given geographical and topographical setting the settlements in the Terai and valley plains tend to be clustered. The households in a single settlement are closely spaced forming a cluster and the different settlements are not apart. In the hills, cluster settlements are l imited to commercial and/or administrative centers and generally the settlements are widely disbursed. The mountains, in turn, are characteristic o f small clusters located relatively far from each other. The number o f households within the zone o f influence o f a road was estimated and the beneficiary population was computed considering that a household size is 5.33 in the hills and mountains and 6.08 in the Terai and valley plains as per the Nepal Living Standards Survey Report 1996, CBS, HMGN. The households within the zone o f influence o f a road were computed for different average walking times to a main road. In the Terai and valley plains a maximum walking time o f two hours was considered and in hi l ls and mountains a maximum walking time o f four hours was considered.

9. A Cost-Effectiveness Analysis was done for the additional financing program consisting of road works on 60 road sections in 29 districts. Table 8.1 shows the beneficiary population, which indicates that the average number o f beneficiary population per kilometer i s around 2,960 persons.

47

5 6 7 8

48

Dudejhari - Tikapur Terai 7.2 4.0 63,000 Bardiya Mainapokhar - Basgadhi Terai 5.0 4.0 12,500

Bholagauri-Danphe Terai 5.0 4.0 12,500 Khairapur-Taratal-Pragatinagar Terai 5.0 4.0 11,300 Chama - Samjhanachowk - Khajura -

52

10. Table 8.2 shows the Cost-Effectiveness Analysis, which indicates that (i) all roads have an investment per beneficiary population ratio lower than,US$100 per person; (ii) the average investment per beneficiary population i s US$15.4 per person; and (iii) the average investment costs are around US$46,600 per km (US$36,300 per km in the Terai and US$53,400 per km in the Hi l ls) .

Devpura - Ghodghas - Fulgama - Mahuwa - Khaiuri - Jaddukwaha -

Dhanusha Tulshiyahi Terai 5.0 4.0 19,100

Total Investment Investment per Km

Road Section Road Work (M US%) (US$/km) Suspension Bridge - Kutiyakavar Upgrade to Gravel 0.36 0.0358 Red Cross - Baghphanta Upgrade to Gravel 0.36 0.0358 Parasan - Tribhuvanbasti - Laxmipur -

49

Investment Per

Population ($/person)

8.17 12.45

Total Investment Investment per Km

I I UparadetoOtta I I I I

Investment Per

Population

I I Upgrade toOtta I I I I

50

D. Cost-Benefit Analysis

Service Life (years)

Percent of Time for Private Use (%)

Number of Passengers

Gross Vehicle Weight (tons)

11. The three roads that will be improved with otta seal to provide a higher level o f service than basic all-weather access were subject to a Cost-Benefit Analysis using the Road Economic Decision Model (RED) developed by the World Bank for the economic evaluation o f investments and maintenance alternatives for unpaved roads. The RED model adopts the consumer surplus approach to estimate project benefits that are comprised o f road user costs (vehicle operating costs, passenger time costs, and accident cost) savings, which are estimated using road user costs relationships from the Highway Development and Management Model (HDM-4). The RED Model i s customized to the characteristics and needs o f unpaved roads, such as the high uncertainty o f the assessment o f the model inputs, the importance o f speeds for model validation, and the need for a comprehensive analysis o f generated and induced traffic. The investment on each project road should yield an Economic Rate o f Return (ERR) higher than 12 percent to be considered acceptable.

10.00 15.00 10.00 10.00 12.00 10.00 12.00

100.00 100.00 0.00 0.00 0.00 0.00 0.00

0.30 1.20 2.00 5.00 10.00 7.00 16.10

1.00 3.00 2.00 20.00 40.00 0.00 0.00

12. Road user costs were estimated for seven motorized vehicle types. Table 8.3 presents the average vehicle fleet characteristics and unit costs. Table 8.4 below presents typical road user costs, in US dollars per vehicle-km, for different roughness levels.

51

12 14 16

13. The evaluation was based o n a 15 year time span, with current traffic data, assuming a six percent traffic growth rate and a price elasticity o f demand equal to one. Table 8.5 present the summary results o f the Cost-Benefit Analysis. The evaluation showed that the three roads would have an Economic Rate o f Return (ERR) o f 29 percent with a total N e t Present Value of US$1.8 million. The ERR would fal l to 25 percent with a 20 percent increase in investment costs, and to 24 percent if benefits were 20 lower than estimated. The switching value analysis shows that for the ERR to fa l l to 12 percent, costs would need to be 2.2 times higher, or benefits 55 percent lower than estimated. The above results indicate a satisfactory economic justification for these investments.

0.066 0.19 0.23 0.3 0.39 0.28 0.49 0.071 0.21 0.25 0.33 0.43 0.3 0.54 0.076 0.23 0.27 0.35 0.46 0.32 0.58

Table 8.5: Cost-Benefit Analysis Summary I Investment I Motorized Traffic (AADT) 1

Road Section Bansgadi - Gajedi - Suryapura Aryabhanj yang-Rampur Kulekhani-Phakhel- Humanebhanj ang Total

per Km Car/Bus NF'V ERR (M US$/km) Motorcycle /Truck Total (M US$) (YO)

0.05 17 258 52 3 10 0.52 32 0.0688 108 48 156 0.06 14

0.0688 170 206 376 1.26 42 0.0638 173 103 276 1.84 29

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Annex 9: Safeguards Appraisal o f Scaled-up Project Activities

1. Safeguards. The project experience shows that there are l imited adverse impacts in comparison to the benefits that the people have been able to realize at large. Community members observed several tangible benefits due to road improvement. These include sudden appreciation in the land value, enhanced access to motorable roads, reduction in travel time and transport costs, and employment opportunities and income generation f rom the construction works. The negative impacts identified are loss o f small parcels o f land and structures to the project in some sections where improvement works required additional land strips for widening.

2. In order to address gaps in implementation o f mitigation plans in accordance with the entitlement matrix for on-going activities, the client has prepared a Remedial Action Plan and proposed onetime cash assistance to al l those who have lost parts o f their property up to less than minimum economic land holding size and those who have lost more than 25 percent of their structures. In case o f those who have lost petty shops, rehabilitation assistance i s proposed. This remedial plan was endorsed by the Bank and approved by GON with a budget provision o f US$210,000 and is currently being implemented. Thus far nearly 70 per cent o f SPAFs have received assistance although, due to a delay in the approval o f the annual budget by Parliament, there are some families which have yet to receive funds. As such a covenant has been added which requires al l agreed payments to be made by 3 1 March 2010.

3. Land for road widening is acquired through voluntary donation since the projects are demand driven and the local people will benefit f rom the increased access and mobil i ty resulting from the road upgrading. A landowner i s permitted to donate up to ten percent o f their total productive land. The land owners losing more than ten percent o f their productive land will be offered assistance. Similarly, the affected non title holders will also be offered assistance for the loss o f assets. An entitlement matrix which will provide assistance to those who loose land beyond ten percent o f productive land and houses has been prepared by the project authorities.

4. The ESMF also presents pol icy guidance to ensure compliance with the objectives o f OP4.10 o n Indigenous Peoples. A Vulnerable Communities Development Framework (VCDF) has been prepared to define the pol icy and implementation framework to ensure that meaningful consultations with indigenous, tribal, minority and vulnerable groups are carried out throughout project preparation and implementation, that they benefit f rom project activities, and that adverse impacts o n these people are avoided or appropriately mitigated. As part o f social screening, the need for preparation o f VCDP will be determined for each district and the plans will be prepared prior to award o f contracts. The VCDP will propose measures for ski l l upgrading and promotion of income generation activities and implemented over a period o f about one year.

5. Assessment of Impacts. Within the zone o f influence, the improvement to the project roads will increase land prices; the cost o f local products will decrease and wages o f the local people will rise, directly benefitting the local poor. The land required for these road improvements will be acquired though voluntary donations. I t is estimated based o n social screening results that about 1,200 land owners will donate part o f their lands. Around 80 percent o f them will donate only a small proportion (less than ten percent) o f their land holdings. The remaining land owners who lose more than ten percent o f their land holdings will be provided assistance in l ine with voluntary donation mitigation principles. About 336 households will also lose part o f their houses. The vast majority o f those households will lose less than 25 percent of

53

their structures and they will be assisted by the project for undertaking repairs as needed. About nine percent o f the affected households will receive assistance based on the extent o f impact for undertaking repairs or reconstruction. In addition, about 90 community facilities will be affected which will be reconstructed by the project authorities. The mitigation measures for impacts beyond voluntary donation thresholds (more than 10 percent loss o f their productive assets) will be proposed in road specific Voluntary Donation Mit igation Plan (VDMP) prior to the issue of bids and the mitigation measures will be implemented prior to the award o f a contract. The baseline socio-economic characteristics o f a l l seriously affected land owners will be collected while preparing VDIMP. These baseline values will become basis for measuring the changes in the living standards in the post assistance period.

6. G O N has done environmental screening for 59 roads proposed under additional financing. The screening reveals that the environmental issues related to upgrading works are minor and vary from road to road depending o n location and terrain (hilly or plane). Issues identified in the hilly terrain include slope instability/mass movement, erosion, risks from riverbank cutting, forest loss, impacts on water body, relocation o f community infrastructures, degradation or encroachment into cultural sites, loss o f open land, and risks from flooding as wel l as degradation o f aesthetically important areas such as viewpoints. In the plane terrain (Terai) relevant issues/problems are often related to river floods, water impoundment and drainage, forest degradation and loss, and potential impacts o n cultural sites, open land and community infrastructures. These issues are, however, relatively small in scale (not highly significant) which can be managed/ mitigated through good and responsible engineering practice. Therefore, no separate EIA or IEE i s required; a site specific Environmental Management Plan as per approved ESMF would be sufficient.

7. Recipient’s capacity to implement safeguards. The capacity o f the recipient, especially at lower levels, i s weak in addressing environmental and social impacts. Recognizing this, provision has been made for additional human resources including an Environmental Specialist at the centre as part o f PSC, and environmental specialists for a cluster o f districts, SDCs and NGOs. O n the social side, NGOs/social development consultants will be appointed at the district level to support DDCs to plan and mitigate the social impacts associated with the project implementation. At P I U level, the social development capacity has been strengthened with the appointment o f a full time consultant to assist the Project Coordinator and oversee the NGOs and consultants placed at the districts to manage the social devolvement impacts.

54

FARWESTERN

MIDWESTERN

WESTERN

CENTRAL

EASTERN

Mt. Everest

To Muzaffarpur

To Ghazipur

To Purnia

ToDinajpur

To Gangtok

SE

TI

BH

ER

I

R A P T I

K A R N A L I

L U M B I N I

G A N D A K IDH

AWA

LA

GI R

I

SA

GA

RM

AT

HA

JA

NA

KP

UR

B A G M A T I

NA

RA

Y AN

I

ME

CH

I

KO

SH

I

MA

HA

KA

LI

DADELDHURADOTI

ACHHAM

BAITADI

DARCHULA

BAJHANG

BAJURA

HUMLA

MUGU

JUMLAKALIKOT

DAILEKH JAJARKOT

RUKUM

DOLPA

ROLPALAMJUNG

MUSTANG

MANANG

MYAGDI

BAGLUNG

CHITWAN

GORKHA

PARB

AT

ILAM

JHAPA

SINDHULI

KAVRE

TERHATHUM

RAMECHHAPPALANCHOK

KATHMANDU

BHAKTAPUR

LALITPUR

OKHALDHUNGA

KHOTANG

DHANKUTA

SUNSARI

MORANG

SANKHUWASABHA

BHOJPUR

TAPLEJUNG

PANCHTH

AR

SOLUKHUMBU

KAILALI

RUPANDEHINAWALPARASI

KAPILBASTU

SALYAN

BANKE

BARDIYA

SYANGJA

DHADING

SARLAHI

SIRAHA

KASKI

PALPA

RA

UTA

HA

T

DH

AN

USA

MA

HO

TTA

RI

MAKWANPUR

NUWAKOT

RASUWA

UDAYAPUR

SURKHET

DANGDEUKHURI

KANCHANPUR

TANAHU

GULMI

ARGHAKHANCHI

PYUTHAN

BARA

PARSA

SAPTARI

Mah

akal

i

Narayani

Marsyangdi

Kali

Gan

daki

MuguKarnali

Humla Karnali

Babai

Bheri

Trisu

li

BudhiGandaki

Tama

Koshi

Sapt

a Ko

shiSun Koshi

Arun

Koilabas

Raxaul

Jogbani

Jaynagar

Siliguri

Chainpur

DipayalDadeldhura

Mahendranagar

Kailali Birendranagar

Kohalpur

Nepalganj

Tulsipur

Libang

Pyuthan

Baglung

Tamghas

Sandikharka

Taulihawa BhairahawaParasi

Butwal

Tansen

Pokhara

Mugling

Besishahar

Bharatpur

Bhikhathori

Jumla

Num

Taplejung

Phidim

Dhankuta

Dharan

Damak

Ilam

Bhadrapur

Biratnagar

Bhojpur

GaighatLahan

Rajbiraj

Siraha

Sindhulimadi

Janakpur

Jaleswar

Malangwa

Gaur

KalaiyaBirganj

Hetauda

Bhimphedi

Bidur

Naubise

Gorkha

LamosanguJiri

Kodari

Darchula

Saifaidi

Achham

Ataria

Jajarkot

Chisapani

Gulariya

Salyan

Tribhuuvannagar

Barhabise

Dhunche

Bhaduare

Dholkebar

Ramechhap

Chandragadhi

Dhangadhi

KATHMANDU

Lalitpur BanepaBhaktapur

Dhulikhel

Inaruwa

INDIA

I N D I A

CH

IN

A

BAN

GLA

DESH

80˚ 82˚ 84˚ 86˚ 88˚

80˚ 82˚ 84˚ 86˚ 88˚

30˚

28˚

30˚

28˚

26˚26˚

0 40 80

0 20 40 60 80 100 MILES

120 160 KILOMETERS

DISTRICTS FOR ADDITIONAL FINANCING UNDER RAIDP2

PROJECT DISTRICTS UNDER RAIDP

PRIMARY ALL-WEATHER HIGHWAYS

GRAVELLED/EARTHEN ROADS

INTERNATIONAL AIRPORTS

DOMESTIC (PAVED) AIRPORTS

SELECTED TOWNS AND VILLAGES

MUNICIPALITIES

NATIONAL CAPITAL

DISTRICT BOUNDARIES

ZONE BOUNDARIES

DEVELOPMENT REGION BOUNDARIES

INTERNATIONAL BOUNDARIES

IBRD 36742

AUGUST 2009

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

NEPALRURAL ACCESS IMPROVEMENT AND DECENTRALIZATION PROJECT

Additional Financing

NEPAL