Nepal - Urban Water Supply and Sanitation Rehabilitation Project

Document of THE WORLD BANK FOR OFFICIAL USE ONLY Report No. 20606 INTENSIVE LEARNING MODEL IMPLEMENTATION COMPLETION REPORT (IDA 2239-NEP) ON A CREDIT IN THE AMOUNT OF SDR 45.5 MILLION (US$60.0 MILLION EQUIVALENT) TO THE KINGDOM OF NEPAL FOR THE URBAN WATER SUPPLY AND SANITATION REHABILITATION PROJECT June 15,2000 Infrastructure South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Nepal Rupee (NR) US$1.00 = NRs.68 at closing US$1.00 = NRs.30 at appraisal WEIGHTS AND MEASURES Metric System FISCAL YEAR OF BORROWER July 16 to July 15 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank CDP Comprehensive Development Program FYDP Fifteen Year Development Program DWSS Department of Water Supply and Sewerage GoF Government of France GTZ Deutsche Gesellschaft fur Technische Zusammenarbeit GmbH (Federal Republic of Germany's Agency for Technical Cooperation) HMGN His Majesty's Government of Nepal JICA Japan International Cooperation Agency ICB International Competitive Bidding ILO International Labor Organization KoN Kingdom of Norway MC Management Contract MHPP Ministry of Housing & Physical Planning MSC Management Support Contract MST Management Support Team MTR Mid Term Review NCB National Competitive Bidding NRs. Nepali Rupees NWSC Nepal Water Supply Corporation OAP Operational Action Plan OED Operations Evaluation Department PQ Pre-qualification PSPC Private Sector Participation High Level Committee SAR Staff Appraisal Report SIMS Service Improvements and Management Support UfW Unaccounted for Water UNDP United Nations Development Program WSP-IV Urban Water Supply and Sanitation Rehabilitation Project Vice President: Mieko Nishimizu Country Manager/Director: Hans M. Rothenbilhler Sector Manager/Director: Jonathan Kamkwalala Teamn Leader: Tashi Tenzing Task Team Leader: Tashi Tenzing i  FOR OFFICLIL USE ONLY CONTENTS Page No. 1. Project Data 1 2. Principal Perforrnance Ratings 1 3. Assessment of Development Objective and Design, and of Quality at Entry 2 4. Achievement of Objective and Outputs 6 5. Major Factors Affecting Implementation and Outcome 9 6. Sustainability 11 7. Bank and Borrower Performance 12 8. Lessons Learned 14 9. Partner Comments 17 10. Additional Information 18 Annexes Annex 1A. Key Physical Indicators 20 Annex lB. Key Physical Indicators 21 Annex 1C. Operational Indicators 22 Annex ID. Financial Indicators 22 Annex 1E. Water Supply Production and Coverage 24 Annex 2A. Project Costs and Financing 25 Annex 2B. Project Costs by Procurement Arrangement 26 Annex 2C. Project Financing by Component 27 Annex 3. Economic Costs and Benefits 28 Annex 4A. Bank Inputs - Missions 29 Annex 4B. Bank Inputs - Staff 30 Annex 5. Ratings for Achievement of Objectives/Outputs of Components 31 Annex 6A. Ratings of Bank and Borrower Performance 31 Annex 6B. Changes in Government (1990-1999) 32 Annex 6C. Changes in NWSC General Manager 33 Annex 7. List of Supporting Documents 34 Annex 8. Beneficiary Survey Results 35 Annex 9A. Stakeholder Workshop Results 36 Annex 9B. Stakeholder Workshop Process 37 Annex 9C. Newspaper Clipping on the ICR Stakeholder Workshop 38 Annex 10. Borrower's Contribution to the ICR ii This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.   1. Project Data Report date June 15, 2000 Name Nepal Urban Water Supply & Sanitation Rehabilitation Project LIC Number Credit No.2239-NEP Country/Department Nepal/Infrastructure Operations Unit Region South Asia Sector/Sub-sector WU KEY DATES Original Revised/Actual Draft IEPS August 1988 Appraisal : March 1989 November 1989 Approval : May 7, 1991 July 5, 1991 Effective : January 11, 1992 October 15, 1992 MTR : November 18, 1996 November 18, 1996 Closing : March 31, 1999 March 31, 1999 Borrower : His Majesty's Government of Nepal Implementing Agency Nepal Water Supply Corporation Other Partners (i) United Nations Development Program; (ii) Japan International Cooperation Agency (JICA); (iii) Government of France; and (iv) Government of Norway Ltaff Current At Appraisal Vice President Ms. Mieko Nishimizu Mr. Attila Karaosmanoglu Country Director Mr. Hans M. Rothenbuhler Mr. Shinji Asanuma (Director, AS 1DR) Sector Director Mr. Jonathan Kamkwalala (Acting) Mr. Martin J. Staab (Division Chief, AS IN) Team Leader Mr. Tashi Tenzing Mr. Chandra Godavitame ICR Primary Authors Mr. Tashi Tenzing & Messrs. Tejbir S. Phool and Terry Hall (Consultants) 2. Principal Performance Ratings Outcome : Unsatisfactory Sustainability : Unlikely Institutional Development Impact Unsatisfactory Bank Performance . Unsatisfactory Borrower Performance : Unsatisfactory Quality at Entry - QAG Unsatisfactory Quality at Entry - ICR Unsatisfactory Project at Risk at any time Yes 1  3. Assessment of Development Objective and Design, and Quality at Entry 3.1 Original Objectives: 3.1.1. The Bank and HMGN agreed that the Urban Water Supply and Sanitation Rehabilitation Project (WSP-IV) would finance a time slice of the FYDP, with the Borrower and other donors picking up the remaining parts. Consequently, the WSP-IV was designed to help HMGN strengthen the NWSC to meet the sector's future demands. The project's objectives were to: (a) strengthen NWSC's technical, managerial, financial, and operations/maintenance capability; (b) increase utilization of existing systems through rehabilitation and extensions; (c) improve public health through; (i) consumer education programs; and (ii) improved quality and increased quantity of water to consumers. 3.1.2. The objectives were timely, clear, and important to the sector. The technologies proposed were appropriate at the time and it was believed that the NWSC had the technical and administrative capacity to oversee physical components with the assistance of the Management Support Team (MST) and design supervision consultants. Accordingly, the Bank incorporated a substantial technical assistance component to strengthen the management capacity of NWSC. The Bank further required that a suitable contract be signed with the MST before Credit effectiveness. Further, the Staff Appraisal Report (SAR page 26, para. 4.09) recognized that the operational and financial targets were demanding on the Borrower and that there was a risk that the "HMGN and the NWSC will deviate from agreed operational and financial targets, especially tariff increases". 3.1.3 Later developments showed that this project design contained a major flaw. It proposed that the institutional issues affecting NWSC would be addressed by creating a new public sector institution (NWSC) to replace the existing one (a similar approach to that adopted by previous IDA projects, which had created WSSC and WSSB). The SAR indicated: "the NWSC Act will provide NWSC with greater autonomy and authority compared to those of its predecessor agencies. It will have the ability to revise and implement tariffs and charges without HMGN approval, and also to prosecute defaulters and terminate services, if necessary." The risk that this autonomy would not be realized in practice was recognized, as was the likelihood that this approach would not provide an adequate basis for institutional reform, but the proposed mitigation strategy was inadequate. The Bank intended to address these risks only through sector work and supervision. 3.1.4. Furthermore, the Bank incorrectly assessed the risk of HMGN and NWSC deviating from operational and financial targets. This risk was considered manageable was because the Government was believed to recognize that the ambitious FYDP goals could not be attained without greater resource mobilization. 3.1.5. At the mid-term review (MTR), several components had suffered from delays and it became clear that the institutional component had largely failed. Many remaining components could not be completed in the remaining Credit schedule and consequently it was proposed that the objectives be revised as follows: (a) to assist the Borrower to prepare a Management Contract (MC) in order to transfer the responsibility for managing NWSC's operations to a qualified and experienced private sector firm and thereby increase the efficiency and service delivery of NWSC; 2  (b) to increase the availability of water in Kathrnandu Valley and Outside Valley Towns; and (c) to improve sewerage operations. 3.1.6. After some discussion, it was concluded that there was really no need to revise the project objectives as the proposed objectives could be operationalized within the original objectives. However, the Development Credit Agreement and the Project Agreement were amended to reflect the restructuring of the project through revision to project components and down sizing of the Credit. 3.2. Revised Objective: 3.2.1. The objectives were not revised. 3.3. Original Components: 3.3.1. The components designed at appraisal may be classified into three groups. The first group of components was designed to provide institutional strengthening to the NWSC. The second group was designed to increase utilization of the physical infrastructure in Kathmandu and to improve the health of its residents. The third group was similarly designed to increase utilization of the physical infrastructure of towns outside the valley. Specifically, the components were as follows: (i) For NWSC as a whole: (a) Management support, training, project design and supervision assistance (US$10.1 million) to be implemented via a Management Support Contract (MSC); (ii) For Kathmandu Valley Towns (US$51.9 million in three towns): (a) New source detailed design (US$3.9 million); (b) Water supply rehabilitation (US$24.3 million); (c) Ground water treatment (US$11.0 million); (d) Rehabilitation of sewer system, sewer connections, and sanitation (US$9.2 million); (e) Central facilities and plant (US$3.5 million). (iii) For Towns Outside Kathmandu Valley ($8.8 million in nine towns): (a) Water supply rehabilitation (US$5.8 million); (b) Sanitation (US$1.6 million); (c) Facilities and plant (US$1.4 million). 3.3.2. The physical components were generally related to the stated objectives. The institutional strengthening component envisaged the recruitment of a management support team from a reputed foreign utility and hence was a slight improvement over the previous approach that had focussed largely on providing technical consultantsl. Further, the WSP-IV sought to overcome the procurement problems that had plagued previous IDA-financed projects by increasing the value of packages of contracts to attract internationally reputed contractors. While the WSP-IV proposed these procurement changes, the SAR did not discuss mechanisms for managing any weaknesses in their implementation and assumed that the design consultants and the MST would address them. Unfortunately, this did not happen. 1 Ref.: Project Completion Report (PCR) 9/29/89, page 24, para. 5.07 3  3.4. Revised Components (following mid term review): 3.4.1. At the MTR, the original project components were scaled down. Two small components funded by bilateral agencies were added. Project components after restructuring are described below. It was believed that only these components could be reasonably completed in the remaining credit period. (i) For NWSC as a whole: (a) Technical assistance, including finance to assist the Borrower prepare for a MC (US$14.42 million) (ii) For Kathmandu Valley Towns (US$13.62 million): (a) Wells: new and rehabilitation (US$4.81 million) (b) Rehabilitation of Surface Water Sources (US$11.95 million) (c) Operational Materials, Plant and Equipment (US$3.26 million) (d) Sewer System Rehabilitation (US$3.60 million) (iii) For Towns Outside Kathmandu Valley (US$3.25 million in three towns): (a) Water supply rehabilitation (iv) Grant funding of approximately US$2.0 million was obtained from the Kingdom of Norway to finance programs for leak detection and sanitation services. Funds were also obtained from the Govemment of France to develop a pilot computerized billing system. 3.5. Quality at Entry: 3.5.1. Quality at Entry is rated unsatisfactory because of design failure. The Bank failed to design a project that would consolidate the limited institutional gains made in the first three projects and provide a vehicle to carry out the needed broader institutional reform. Instead, it focussed on creating a new public institution with capacity strengthening through a twinning arrangement with a Management Support Team. This approach tumed out to be inadequate. 3.5.2. The need of the hour was to address the following issues (PPAR page VII, para. 17): (a) lack of autonomy caused by extensive and tight govemment controls including appointment of senior staff; (b) inadequate tariff increases; and (c) weak NWSC managerial and operational capabilities. 3.5.3. Increased autonomy within the then-existing political environment in Nepal was addressed during project preparation as a condition of appraisal by creating NWSC in 1989 through a revision of the WSSC Act. However, this did not provide a vehicle for needed institutional reforms. This lapse was serious for two reasons. First, such an approach for autonomy had been promoted by the Bank with very limited success as part of WSP-III, and it was crucial at this stage for the Bank to adopt a stronger approach2. Second, it was clear that HMGN was not showing the required leadership, and it was 2 "IDA pushed for WSSB to be transformed into a Corporation, the aim being to free the Board from some of the bureaucratic constraints which constrain govemment agencies. This objective has been partially achieved, and major decisions are still subject to HMG approval." (WSP-IlI, PCR, page 28, para. 6.05.) 4  important either for the Bank itself to provide it or for the Bank to delay project appraisal.3 Lack of adequate autonomy later affected the project adversely in many ways. 3.5.4. Tariff increases were required as conditions of appraisal and of effectiveness. However, HMGN would later persuade the Bank to waive the condition of effectiveness. Inadequate tariff increases would later contribute to poor financial performance and to the project closing with non-compliance on several financial covenants. 3.5.5. The institutional strengthening issue was addressed by providing a team of utility management experts, with the experts expected to work side by side with NWSC and to exercise some limited line responsibilities. A suitable contract with a water utility was required as a condition of effectiveness. However, this component, funded by UNDP, saw changes in executing agency and in design following Board approval and ended up with the experts acting only as advisors. The problems faced by the NWSC were far greater than could be solved by installing highly skilled advisers. These advisers had little say in pushing through changes internal to the NWSC. Further, they had no say in persuading external agencies such as HMGN to take concrete steps such as timely payment of dues or providing stability in the NWSC management structure. The failure of this component created the risk that physical investments would take precedence over institutional strengthening and that NWSC would not have developed the capacity to manage the assets to be created. 3.5.6. The preparation of the project had tried to consider the lessons of past experience and a study "Service Improvements and Management Support" was undertaken in the course of preparation. The use of "twinning" for institutional strengthening at the time of appraisal in 1989, was reasonable for the Bank team and the client to consider as one of the few options then available to improve the performance of a public utility. PSP alternatives had little track record or acceptance in developing countries, and had only recently been piloted in a first Bank-supported project (the Guinea lease), and twinning had some favorable reviews in Bank-wide literature -- although its effectiveness in improving performance had not been measured conclusively. Experience under the project clearly shows that twinning or TA can help build up skills and knowledge in specific operational activities, but will not address broader performance issues rooted in the governance, regulation and incentive framework of a utility. 3.5.7. In addition, other aspects of the institutional analysis were also weak. The notion that NWSC would become able to approve its own tariffs was not only unrealistic -- no public utility in the Bank's experience has been granted that authority -- but would have been inappropriate (monopoly service providers, public or private, should be distinct from regulators). A better design, and probably more acceptable to the client, would have been to set up a "tariff board" distinct from both NWSC and the Cabinet, and map out clearly during preparation the processes and criteria by which this entity would review and approve NWSC's tariff adjustment proposals. A multi-year, formula-based tariff adjustment process could also have been introduced not requiring further government approvals. 3.5.8. Likewise, appraisal emphasized the importance of having some non-government members sitting on NWSC's Board. Similar things have been attempted in other utilities and are not proven to have had any impact -- the presence of a few people, invited by Government even if they are not civil servants, in a minority position on a public enterprise's board can hardly be expected to change its incentive framework. However, the preparation of the project failed to assess the implementation difficulties, or 3 "The Bank has repeatedly given in to the Govemment's tactics in frustrating the institutional and financial development of the sector agency, essentiall)' preempting the efforts of the sector staff to bring forth improvements" (WSP-1II PPAR, page ix, para. 29). 5  the lack of ownership and commitment to meeting the objectives on the part of HMGN and NWSC. In hindsight, it seems that while the issues were recognized, the solutions proposed were unrealistic and lacked widespread discussion even within NWSC. Had there been a more realistic approach, it may have resulted in a different project design, a different design of the institutional component, better risk management approaches, the articulation of an exit strategy if institutional improvements were not forthcoming, or perhaps even termination in the design stages. 3.5.9. The Quality Assurance Group has also rated the Quality at Entry as "Unsatisfactory" with the following criticisms underlying their conclusion: * "The project concept and design is not embedded in any coherent sector strategy discussed and agreed with the borrower" (Memorandum from Prem Garg, 8/15/98, para. 11); and * "The appraisal assumed full borrower ownership of and commitment to this objective. Unfortunately, this assumption was misplaced, as demonstrated by the subsequent inability or unwillingness of the government to take agreed actions".... (Prem Garg, 8/15/98, para. 12). 4. Achievement of Objectives and Outputs 4.1. Outcome/achievement of objectives: 4.1.1. The project outcome is rated as unsatisfactory because it failed to achieve most of its major objectives and is not expected to yield substantial development results. This finding is consistent with the 1998 finding of the Quality Assurance Group. 4.1.2. The project objectives were mostly unmet. Largely because the NWSC was subject to tight government controls, it was affected by highly detrimental turnover at the Board and in senior most management. The objective of strengthening NWSC's institutional capability was not met, even though two different approaches were tried. Physical objectives were also largely unmet, as most physical components could not be concluded by Credit closing. Utilization of the existing system has improved only marginally. Water production has increased, though less than anticipated at the MTR. 4.2. Outputs by Component: 4.2.1. There were significant shortcomings in each one of the major components. 4.2.2. Despite two attempts, the NWSC was only marginally strengthened by the project. The first approach at institutional strengthening was the Management Support Contract. The International Labor Organization (ILO), the agency designated by the United Nations Development Program (UNDP) as the executing agency in August 1991, redrafted the Project Document and proposed a changed approach to the MST (which was not agreeable to HMGN or IDA) and introduced a Chief Technical Advisor (CTA) in the MST. After several months of preparation, ILO withdrew without having recruited the team. In compliance with their policy that UNDP-funded projects be executed locally, the NWSC was appointed as executing agency. Following international competitive bidding, an overseas utility was awarded the contract. Problems continued however. For example, key staff became unavailable two weeks after negotiations were completed and the winning bidder insisted that their staff would maintain 6  office hours followed in its home country and not those followed in Nepal. Though these developments caused concem among HMGN and the donors, the contract was awarded and the MST finally started about a year behind schedule. During its shortened tenure, the MST made several recommendations. Those adopted included a new departmental structure, new personnel rules and simplified financial procedures. However, soon after the team was installed, concerns with the perceived skills of some team members and their lack of experience in an Asian setting emerged. Furthermore, the roles and responsibility of the CTA vis-A-vis the leader of the utility team created an environment not conducive to teamwork. The MST was terminated early after a HMGN/UNDP joint evaluation concluded that the design of this component was flawed, implementation was ineffective and inefficient, and that the relationship between the NWSC and the MST was not conducive to continuing the collaboration. * The second approach at institutional strengthening, the proposed transfer of operations to a private sector operator, also suffered delays. Preparation for recruitment of a contractor began in July 1997. This process was guided by a government-appointed Private Sector Participation High Level Committee (PSPC), working to a tight schedule, to recruit a private operator by March 31, 1999. Although the process started well, progress was delayed due to: (a) a lag in processing key policy and issues related to the MC by HMGN; (b) differing donor views; and (c) a wait for the outcome of Melamchi stakeholder discussions on the finalization of policy legislation and on the recruitment selection criteria for the MC. Transfer of operations to a private operator has yet to be accomplished, even some 14 months after Credit closing. 4.2.3. Of the physical works proposed in the Kathmandu Valley, only the works for rehabilitation of tube wells and construction of new wells were completed as projected at MTR. The achieved production increase of 23 mld (Annex IA) was less than half appraisal estimates. Central facility rehabilitation was partly achieved through procurement of plant, vehicles, and repair materials. Operational improvements were supported through provision of 80,000 consumer meters (compared to 52,000 estimated at appraisal). Other works were cancelled due to delays associated with postponed effectiveness, Credit suspension and procurement problems. Project effectiveness was initially delayed by about a year awaiting recruitment of the MST contractor by the donor community. After effectiveness was declared and as the NWSC was preparing to sign contracts for physical works, non-compliance with covenants led to Credit suspension for ten months. After the suspension was lifted, additional delays were caused by procurement problems in part because losing bidders contested the qualifications claimed by the winning bidders. It took several months to verify these claims and to take remedial steps. As a result of all these delays, many components were cancelled and anticipated benefits could not be achieved. 4.2.4. Outside the valley works were also delayed by postponed declaration of Credit effectiveness and by subsequent Credit suspension. Works proposed in six outside the valley towns were cut out at the MTR. Rehabilitation was achieved partially at Dharan and Hetauda and fully at Pokhara. Other project outputs were not achieved (Annex IB). 4.2.5. Grant funds obtained from the Kingdom of Norway (KoN) were used to carry out programs for unaccounted-for water (UfW) management and sanitation services. These programs were executed by the Bank during 1993-1995. The UfW program was very successful, partly due to a performance-based incentive structure for NWSC counterpart staff, and NWSC's capacity for UfW management has been enhanced. However, despite the success of this demonstration, the UfW unit has received inadequate financial support from NWSC management and faces funding shortfalls that prevent it from effectively conducting similar programs in additional areas experiencing high water losses. The on-site sanitation 7  component was not successful, due to a lack of receptivity by NWSC and because Credit suspension prevented the approach developed by the consultants from being scaled up for other areas. Grant funds of US$0.7 million equivalent obtained from the French Government were used to computerize billing operations. A pilot program was completed, but there has been little progress since. 4.2.6. The Japan International Cooperation Agency (JICA) provided grant funds for the groundwater treatment works which were satisfactorily constructed. Though originally included in the SAR, it was not necessary to fund this sub-component from the Credit. 4.2.7. NWSC continues to be a weak institution unable to arrive at decisions vital to its own future. Though water production has increased, average daily hours of service to Kathmandu Valley households has dropped from 6 hours at project inception to 4.5 hours at completion. During the dry season in March 1999, water was being provided only on alternate days. A consumer survey conducted in 1997 concluded that only 32 percent of customers were satisfied with the water pressure and 58 percent reported that water quantities delivered were inadequate. About 31 percent of consumers reported using supplementary water sources and less than 6 percent paid their dues on time. The average collection period ranged between 8 and 11 months. While the rehabilitation program in three towns outside the valley has increased production somewhat, water availability has declined from 10 hours to 8 hours per day. 4.3. Net Present Value/Economic Rate of Return: 4.3.1. The economic rate of return estimated at appraisal was 9.5 percent on components for which benefits were quantifiable. These components accounted for 31 percent of project costs. At project closing, the economic rate of return was not recalculated because of the following practical and methodological considerations. * The consumer surplus related assumptions used at appraisal could not be replicated at project closing. The appraisal assumption that consumer surplus is twice the revenue to the NWSC cannot be validated for the ICR because the rationale used in the SAR is not explained. Further, economic data with which to make new assumptions was not collected during project implementation. Also the consumer data collected by the NWSC does not provide adequate information with which to estimate the demand curve and to develop a fresh estimate of the consumer surplus. * Cancellation and delays on most water improvement components resulted in production increases far below projections. High system-wide UfW rates ensured that consumption increases were even lower than production increases.. Consequently, realized benefits are far below projected benefits. * At neither appraisal nor closing was it possible to compute benefits associated with major project components such as consumer education, water quality improvements, customer billing improvements, facilities and plants etc. * The institutional component that represented about 39 percent of total costs at Credit closing failed, yielding little economic benefit. Since the project failed to provide significant benefits, and the realized benefits cannot be readily quantified, a mathematical exercise at generating numbers using inappropriate or weak assumptions was not attempted. 8  4.4. Financial Rate of Return: 4.4.1. The NWSC's financial performance has improved slightly, but falls far short of projections at appraisal. Compliance with financial covenants was a persistent problem and the Credit closed with NWSC out of compliance with several financial covenants. A financial rate of return was not calculated for the SAR or for this document. Several important financial ratios are presented in Annex 1D and are summarized here. NWSC increased water tariffs from NRs.3.5 per cubic meter to approximately NRs.7.0 albeit with some delays in obtaining HMGN approval. The tariff increases served to improve cash flow somewhat. Though operating surpluses increased from NRs.12.0 million in 1992 to NRs.59.0 million in 1998, these surpluses were lower than the NRs. 178.0 million projected at appraisal. 4.4.2. The net deficit, after allowing for depreciation, interest and doubtful debt, of NRs.6.0 million in 1992 became a net surplus of NRs.22.0 million. While at first the net surplus appears to have exceeded the target of NRs.13.0 million, a more careful analysis indicates that this has been achieved by understating the doubtful debt. Though collection efficiency has ranged between 76 percent and 99 percent of annual billings and the total arrears and debt collection period have grown significantly, the allowance for doubtful debt is only around 1 percent of annual revenues. The allowance for doubtful debt would only have to increase to about 7 percent of annual revenues to wipe out the net surplus. In fact, the actual debt collection period has increased from 148 days in 1992 to over 200 days in 1998 supporting the assertion that even a 7 percent allowance for doubtful debt is inadequate and that the current net surplus is misleading. 4.5. Institutional Development Impact: 4.5.1. The Institutional Development Impact is negligible. While the institutional objectives were relevant to the Borrower's sector needs, commitment to change was mis-read during preparation. Lack of NWSC autonomy (in practice) was always as major issue. During implementation, HMGN and NWSC failed to achieve either timely or effective implementation. The country's regulatory environment and policy environment are now changing, but again, much slower than anticipated. The NWSC's capacity is still too weak to effectively plan and manage water operations efficiently or fully execute sector investments. This weak capacity has been further stretched as NWSC has undertaken the responsibility to serve additional towns before responsibilities for Kathmandu are devolved to an MC. 5. Major Factors Affecting Implementation and Outcome 5.1. Factors outside the control of government or implementing agency: 5.1.1. The donor community contributed to a one-year delay in commencing the MST. The UNDP initially insisted for this component to be executed by the ILO, and delays in the time taken to process the MSC partially affected achievement of objectives. After several months of efforts the ILO finally withdrew from its execution responsibilities and UNDP appointed the NWSC as the executing agency. Since the WSP-IV effectiveness was initially contingent on signing of the MST, other components were also delayed for many months. 9  5.2. Factors generally subject to government control: 5.2.1. Several factors contributed to the shortcomings of the WSP-IV. Most important were the weak borrower commitment to institutional change and delays caused by various factors. 5.2.2. The Government's influence on several aspects of NWSC management had undesirable impact. The political situation led to seven government changes between 1990-1999 with each successive Government unable to stay in office for long (Annex 6B). These changes in government eroded the already weak HMGN commitment to institutional strengthening. They also caused a crippling turnover in the individuals that comprised the NWSC Board, the Chairman of the Board, and the General Manager (Annex 6C). The average tenure of the Chairman has been under one year and of the General Manager about seven months. The Board members and their numbers were also changed with each change in government. The suitability of some of the individuals appointed to these positions was questionable. The frequent government changes also led to constant shifts in political pressure on the NWSC, and to pressure to award contracts to favored contractors. As a result, the NWSC management was unable to take key strategic decisions. 5.2.3. Further, even though HMGN agreed to a condition to increase tariffs prior to Credit effectiveness, tariffs were not increased and HMGN successfully negotiated a credit agreement revision to that effect. This decision adversely affected revenues and cash flows, and just as the NWSC geared up its procurement efforts to initiate signing of several key contracts, covenant lapses led to Credit suspension. 5.2.4. Finally, HMGN repeatedly delayed payment of its dues to the NWSC and showed a lack of commitment towards strengthening NWSC's financial operations. 5.2.5. At the same time, the following positive steps taken by the Government prevented the situation from becoming worse: * iThe Government raised tariffs somewhat and therefore was partially successful in alleviating NWSC's precarious financial situation. Since the tariff structure existing before appraisal did not cover the cost of providing water and sanitation, successive tariff increases were agreed upon as conditions for negotiation and for effectiveness. Only the preliminary rounds of tariff increases were achieved as scheduled and benefited NWSC by increasing cash flow enough to alleviate crippling cash shortages. * The government provided representation by a broad and generally representative group of stakeholders to the NWSC Board. Unfortunately, such broad representation contributed little to the achievement of project objectives. * The Government's decision to go ahead with private sector operation of the NWSC was welcome. The PSPC was successfully established to steer key policy discussions and decisions. 5.3. Factors generally subject to implementing agency control: 5.3.1. Overall, the NWSC lost an opportunity to improve its management and to achieve other project objectives: * It failed to exercise the autonomy granted under the law. Since for many years the position of Chairman of the NWSC Board was held by the secretary of the MHPP, the NWSC was very 10  susceptible to ministerial pressure. From May 1996 to April 1997 the Chairman's position was replaced by that of an Executive Chairman cum General Manager. However, since this appointment was a political one, it too was susceptible to political pressure. NWSC's reluctance to exercise the given autonomy had a substantially negative impact on achievement of project objectives. * Procurement processes incurred substantial delays that later led to cancellation of project components. * The NWSC was slow to take key decisions, partly because of its weakened decision-making capacity. At a critical juncture, when the Bank observed severe weakness in covenant compliance and threatened suspension, the NWSC did not take timely action to correct the identified defaults. NWSC's inability to correct key deficiencies at this crucial time resulted in Credit suspension that substantially curtailed achievement of physical objectives. 5.3.2. The following three relatively minor areas saw successful capacity building at NWSC but such partial improvements in institutional capacity falls short of the capacity required to manage the sector. * The leak detection program was a positive intervention that built substantial capacity in this specialized skill area at the NWSC. However, it has not been expanded system-wide thereby limiting the transfer of a lasting capacity for leak detection in NWSC. * Consumer education and community participation programs were successfully conducted and resulted in partially improved consumer contact and improved service. However, in the later years of the project, when donor support ended, NWSC support for these activities diminished significantly The NWSC has developed the capacity to design and build small works and distribution systems, and several small projects were successfully undertaken. 5.4. Cost andfinancing: 5.4.1. The project was appraised to cost US$71 million equivalent. At the MTR, the estimate was reduced to $41 million, as several components were cancelled (Annex 2A), others were reduced in scope, and groundwater treatment facilities as well as UfW reduction were financed by other donors. The final cost was $23 million as several rehabilitation works were scaled down due to procurement problems. As a result of these changes, the proportion of the largely unsuccessful institutional support component including customer billing and UfW reduction grew from about 14 percent at appraisal to 30 percent at the MTR, to over 39 percent of total cost at closing. At appraisal, Bank, Government and Co-financier contributions were projected to be $60 million, $7.6 million and $3.4 million respectively. Instead, at closing the contributions were $16.1 million, $1.8 million, and $4.9 million respectively. 6. Sustainability 6.1. Rationale for sustainability rating: 6.1.1. Sustainability is rated as unlikely because the desired institutional improvements have not materialized and the financial and institutional capabilities of the existing organization are seriously inadequate to undertake sector management. The facilities constructed are of generally good quality and the impact of the UfW control program in a small part of the distribution system is highly satisfactory. However, the NWSC's past record of poor maintenance, its poor financial performance and still weak 11  management structure raise the issue of whether adequate routine and preventive maintenance will be provided for the facilities constructed. Further, key institutional improvements such as the MC are still to materialize. 6.2. Transition arrangement to regular operation: 6.2.1. HMGN sector plans include a major investment entailing inter-basin transfers of water with an MC to improve inside-the-valley operations while the NWSC undertakes responsibilities of 12 additional towns outside the valley. These plans are currently delayed because the MC has not been recruited. In the mean time, the institutionally weak NWSC has already assumed responsibility for these towns. 6.2.2. It is anticipated that the PSPC will develop performance indicators by which performance can be monitored in the future. This monitoring system will be put in place along with the MC. The Bank's current strategy is to develop plans for further sector lending only after institutional improvements in the form of the MC are in place. 7. Bank and Borrower Performance Bank 7.1. Lending: 7.1.1. Bank performance in lending operations is rated unsatisfactory because of poor design of the institutional component. The Credit and project size was not reasonably set at a level commensurate with a proven absorptive capacity of the executing agency. Four failed projects in a row suggests over- optimism, doubling the amount each time seems incomprehensive. 7.1.2. The Bank failed to use its influence to affect key institutional changes. It was complacent in agreeing to the modification introduced in the concept of a "twinning arrangement" (by ILO) which resulted in a MST which was perceived to be an appropriate tool for institutional improvement. Had the Bank taken the tough decision of sequencing institutional strengthening and autonomy ahead of major investments (as it is currently doing), WSP-IV shortcomings may have been avoided. Also, after nearly two decades of operations in the sector and country, the Bank failed to recognize and effectively address the weak HMGN and NWSC commitment and ownership to institutional strengthening/reforms, including autonomy. 7.1.3. To the Bank's credit, lending operations were successful in resolving several important issues such as tariff increases and availability of audit reports by making their resolution pre-conditions of negotiations, and of presentation to the Board. 7.2. Supervision: 7.2.1. By waiving processing and legal covenants, the Bank gave the wrong signal. The appraisal team had correctly identified a tariff increase as a key action for the utility to become viable, and as an important test of borrower ownership. At negotiation, this was agreed to be a Board condition. By waiving this condition (which first slipped into an effectiveness condition, then to a dated covenant) the Bank gave a powerful, and wrong, signal that it was not serious about essential conditionality of the project. This signal was later reinforced by the legal finding that, even in the face of prolonged non- 12  compliance with several major financial covenants, the Credit agreement did not offer IDA a legal basis for exiting. 7.2.2. The Bank decided to take a strong stance on institutional improvements only after declaring the Credit effective in 1992. When NWSC's failure to comply with financial covenants indicated that institutional weaknesses were continuing, the Bank debated whether to cancel the Credit or to suspend disbursements. While Credit cancellation would have sent a firmer message to the Borrower, Credit suspension was the only legally acceptable option because an exit strategy had not been developed at appraisal. Credit suspension adversely affected achievement of physical objectives. Unfortunately compliance with covenants improved only temporarily and long-term management improvements are yet to materialize. Consequently, the project was harmed by the lack of risk management strategy at the design stages. 7.2.3. Performance during supervision was unsatisfactory because the Bank management failed to follow up with an effective combination of dialogue and actions that would produce the desired institutional development impact. 7.3. Overall Bank performance: 7.3.1. The Bank's overall performance is rated as unsatisfactory. Borrower 7.4. Preparation: 7.4.1. The performance during preparation was unsatisfactory because steps to ensure institutional development were incomplete. The Borrower seemed to have agreed to legal covenants without realizing the implications of non compliance. Compliance with conditions of Credit effectiveness was unsatisfactory and led to delays. 7.4.2. The Government failed to monitor the performance of NWSC. 7.5. Government implementation performance: 7.5.1. The performance of the Borrower during implementation was unsatisfactory. Throughout, NWSC suffered a lack of continuity, ability and direction from its various politically appointed Chairmen, whose lack of sector experience in many cases proved a major drawback. The Government did not maintain continuity in the Board and General Manager positions of NWSC. 7.5.2. The Government repeatedly delayed payments of NWSC dues and showed a lack of commitment to strengthen NWSC's financial operations. 7.6. Implementing Agency: 7.6.1. The performance of NWSC was unsatisfactory despite willingness and ability by some middle level managers to execute the works in a competent and professional manner. Throughout, NWSC has suffered through lack of continuity, ability, and direction from the various politically appointed chairmen whose lack of sector experience in many cases proved a major drawback. Though the constitution of the Board was widened to include representatives from the private sector, municipalities and consumer groups, the pervasive problem of candidates' sector inexperience persists. 13  7.6.2 While NWSC is, legally, an autonomous body, in practice all policy and major decisions (e.g., on matters of selection of managers, tariffs, and staffing levels) continue to be heavily influenced by HMGN. The NWSC did not take timely and effective implementation decisions. The NWSC's lack of compliance with financial covenants resulted in Credit suspension. At Credit closing, NWSC management capacity remains weak. 7.7. Overall Borrower performance: 7.7.1. Overall borrower performance is rated as unsatisfactory. 8. Lessons Learned 8.1. Some of the lessons learned during this project are enumerated below: * The project suffered from a failure by the Bank to identify key weaknesses and to act decisively to allay them. Given the manifest failure of the central institutional component, the MTR was too late. An earlier exit strategy might have served the interests of the sector better in the long run. * Institutional autonomy was essential to reduce political interference in day-to-day management and to meet development objectives. The NWSC Act provided autonomy on paper, but in practice it was never implemented. This was the single greatest failure of both the Bank and the Borrower. e Frequent changes of the Board and General Manager were very disruptive to continuity, commitment and to meeting development objectives. * Politicization of tariff increases, staff recruitment and other administrative and financial matters undermined the potential for reform and diminished service delivery. * Wide participation and discussions with various stakeholders were essential for ownership and commitment to reforms. The non-acceptance of the MST by NWSC is a case in point. Supply- driven approaches caused implementation difficulties and failure to achieve the needed commitment of stakeholders. * Involvement of implementing agencies at the outset was critical to aligning the project concept from start to finish. Bringing in ILO after the project document had been drafted as the executing agency for the Management Support Component caused delays and modifications, which did not prove successful. * Investment in physical infrastructure needed to be properly sequenced with institutional reform. Trying to achieve reforms in parallel with investment did not prove successful, since the focus of the implementing agency was on meeting physical targets while institutional change was marginalised. * Poor procurement performance inevitably diminished the achievement of project objectives, both physical and institutional. * Appraising projects before any detail design is carried out is not a good practice. Carrying out detailed design after project effectiveness (as in this case), required significant time and resulted in significant start up delays. This was compounded by the performance of the design consultants which was mixed. 14  * There is a tendency for a utility like NWSC to neglect its financial management and thus not have a true and fair picture of its financial health. This area as well as paying heed to audit recommendations and internal control systems need to be emphasized. * For a state-owned corporation like NWSC, it is important to ensure that its accounts are maintained in accordance with international accounting standards and audits are carried out as per international auditing standards by a qualified intemational audit firm. 8.2. In summary, the main lessons learned can be classified into three broad areas. Sequencing of Technical Assistance: Investments in physical infrastructure may provide short- lived benefits unless institutional autonomy and strengthening can be correctly sequenced into the development process. 8.3. Prior sector investments had attempted to promote institutional strengthening alongside capital investments. While some institutional changes were effected, improvements were insufficient to empower NWSC to undertake sector planning and management activities. An OED audit report clearly places the responsibility for this failure on the lack of HMGN commitment to effect capacity building. If a government's reluctance to support capacity building is known, it becomes all the more crucial for the Bank to exercise its influence and to sequence investment in physical infrastructure only after government commitment to institutional autonomy and strengthening are in evidence. It is very important that these improvements are measurable and future Bank investments made conditional to achievement of agreed institutional milestones. The Bank is currently following this approach in its sector dialogue. Procurement: Poor procurement performance can seriously impair achievement of objectives. 8.4. Procurement of consulting services, goods and works proved to be a source of long delay throughout the project life, despite NWSC's experience from three earlier IDA-supported projects. From the start, project effectiveness was delayed by 12 months awaiting the recruitment of the MST. Thereafter, major delays occurred in the procurement cycle for many contracts. These delays contributed substantially to the restructuring of the project in 1997 since by that date, insufficient time remained to construct the major works Inside the Valley. Only one works contract (well field rehabilitation) was awarded under the Inside Valley program but, bidding took 31 months from tender invitation to contract award (including a 10-month Credit suspension). There are many other examples from Inside Valley procurement with elapsed time from bid invitation to contract award in the range of 28 to 38 months. Procurement difficulties experienced by NWSC were compounded by the long lead-time required by NWSC and its consultant to prepare satisfactory bidding documents. Bidding documents for major works contracts were issued only in 1996, five years into the project, although the consultants were recruited in August 1991, before Credit effectiveness. Pre-qualification (PQ) of the contractors for major International Competitive Bidding (ICB) works contracts was mandated in the legal agreements. This process failed because of: (a) difficulty in preparing acceptable PQ application documents in a timely manner; (b) lack of interest by international contractors in works in the range US$5-30 million and unwillingness to provide qualification data in the format required; and (c) difficulty experienced by NWSC and its consultant in evaluating contractors' eligibility. The PQ process was eventually dropped with Bank no-objection, and a post qualification process applied to expedite the procurement progress. This change certainly helped progress. 15  8.5. NWSC was relatively more successful in implementing works in Outside Valley towns compared with the Inside Valley experience. After project restructuring in 1997, NWSC successfully completed rehabilitation programs in Dharan, Hetauda and Pokhara with a total investment of about US$3.3 million. The works were implemented through recruitment by National Competitive Bidding (NCB) procedures with NWSC supplying pipe materials to the contractors. Execution was timely and of good quality. Unaccounted for Water Management: A concerted effort to address physical losses can make immediate and cost effective improvements to the distribution system. 8.6. Using a technique pioneered in India, distribution mains were externally pressurized by a contractor to test, repair, and retest leak flows. In the process the NWSC staff were successfully trained to undertake future responsibilities. 8.7. UfW management is important in Kathmandu where water losses have been subjectively estimated through various studies since 1974, to be in the range of 33-70 percent of supply. A structured program was initiated in Greater Kathmandu and Pokhara during 1993-1995. This technical assistance, executed by Bank, had the following objectives: (a) to put in place a methodology for UfW management; (b) to increase water availability to consumers and generate additional revenue for NWSC; and (c) to train counterpart NWSC personnel. 8.8. The methodology simulated system pressures (in the range 3, 7 and 12 m.) by isolating short sections of distribution mains that were pressurized externally while the leakage tests were done. Identified leaks were repaired and system re-tests undertaken. The initial work in Kathmandu extended to 10.8 square km. covering about 12,000 property connections, two service reservoirs, and about 10 km. of transmission mains. Leak flows originally averaging 50, 117 and 196 liters/hour/connection at 3, 7 and 12 m. head respectively were reduced by about 50 percent after repairs. In Pokhara, using conventional waste zone methodology, 12 zones were tested, covering about 19 percent of the service area, with average leakage reported about 60 1/hr./connection. Leakage was reduced by 70 percent to about 18 - 20 l/hr./connection after repairs. For comparison, it may be noted that in well-maintained systems, leakage figures achieved are in the range between 10 -15 l/hr./connection. 8.9. The programs at Kathmandu and Pokhara both identified the need to replace "cluster" connections concurrently with leakage control operations since they account for about 60 percent of the identified leaks and contribute to the very low pressures at consumers' premises. These programs commenced in 1995. From 1996 to date, NWSC has continued the programs in Kathmandu and Pokhara through "in-house" staff, trained and utilizing equipment provided under the Norwegian funded leak detection program. Of late, progress has been much reduced due to budget constraints and apparently low priority given by HMGN and NWSC. 8.10. This intervention has proved highly successful and cost effective. NWSC staff have been successfully trained in the leakage control technology. Sixty-four persons received on-the-job training and specialist skills upgrading, and NWSC's institutional capacity in this regard has been strengthened. The work programs continue in Kathmandu and Pokhara. In Kathmandu some 35 percent of the service area has now been covered (about 17, 000 connections), UfW has been reduced by about 2.6 mld (over the period 1993 - 1998), providing about 2.5 percent additional water for consumers. The cost of water saved is calculated to be around NRs.20 - 25/1000 liters (US$0.30 - 0.37/1000 liters) and is around half the opportunity cost of providing additional water to Kathmandu Valley by inter-basin transfer. 16  8.11. In Pokhara, during the period 1993-1998, some 49 percent of the service area was covered by UfW management operations. The total water saving from this program is 3.84 mld (about 22 percent of the average daily supply). This already meets the expectations at project appraisal and is satisfactory. Consumers reported immediate benefits in terms of improved system pressures and increased water availability. 8.12. The success of the program demonstrates that UfW can be reduced systematically through a program initiated by external intervention, to build "in-house" institutional capacity to continue the work after the assistance is withdrawn. However, for lasting capacity for leak detection in NWSC, the program needs to be adopted with full commitment within NWSC. 9. Partner Comments (a) Borrower/implementing agency: A stakeholders' workshop with representatives of the Borrower, implementing agency, a co-financier, and other project stakeholders was held on May 26, 2000 in Kathmandu, to discuss the findings of the draft ICR. Their comments are incorporated in the summary of the workshop given below. Written contributions to the ICR by the NWSC are presented in Annex 10. (b) Cofinanciers: None received. (c) Other partners (NGOs/private sector): See feedback from stakeholders' workshop below. Feedback on ICR from Stakeholders' Workshop Some General Comment on Overall Findings on ICR * No use blaming any one agency, the main sufferers are Nepali people, all three actors (the line ministry, NWSC and the Bank) must plan better in future. * Responsibility for failure of the project lies: Line ministry - 60%, NWSC Management - 25%, World Bank - 15%. * Frank admission of the Bank's shortcomings - more experienced Bank staff with Nepal experience needed. * Main findings of ICR are correct and the report seems to be independent. Some Specific Comments on Main Finding of ICR * MST did not complement UWSSRP works execution. * Credit suspension led to lack of physical targets; don't agree. * Project suspended only after a lot of prior warnings over more than one year; series of warnings. Government/NWSC did not heed. * The experience of this project should not be seen in isolation. * Issue of lack of delegation of authority at country level not appropriately emphasized. Some Suggestions for Future Programs NWSC's suggestion that institutional reforms must first be carried out before undertaking any new major projects is commendable. 17  * Donors should not insist on unattainable conditions. The Borrower should take its commitments very seriously. It is better to have no project than to have an unworkable project. * Small size, short duration projects are more appropriate. * Effective monitoring at all stages is vital for successful implementation. * More involvement of local consultant and construction companies should be encouraged. 10. Additional Information 10.1. Background 10.1.1. In the late eighties, an estimated 70 percent of Nepal's urban population of approximately 1.6 million had access to reasonably safe drinking water. However, there were major deficiencies in water quality and in service levels, particularly in urban areas. In Kathmandu, a typical connection received water for about six hours a day. Sanitation coverage was very poor with only about 17 percent of the urban population having adequate sanitation facilities. The physical infrastructure was poorly maintained and water loss estimates ranged from 33 to 70 percent. Outbreaks of water-related diseases such as cholera and gastroenteritis occurred every two or three years. It was feared that reports of water quality problems adversely affected Nepal's main revenue earner - tourism. 10.1.2. These conditions existed despite three earlier IDA credits for urban water supply and sewerage since 1974. The objectives of these three projects were broadly similar: to improve water supply and sanitation services in the principal cities and to help improve the institutional framework. Unfortunately, any physical improvements resulting from these projects were negated by rapidly growing urban populations and did not translate into major service improvements. Further, the greatest shortcoming of these three projects was the poor performance of the sector institution, the Nepal Water Supply Corporation (NWSC). Reasons for NWSC's poor performance included "the extensive and tight controls including of senior staff and consequent lack of autonomy and, perhaps most important, the total lack of a realistic financial base mainly due to totally inadequate tariff increases" (Project Performance and Appraisal Report (PPAR) 11/30/90, page VII, para. 17). 10.1.3. In the mid-80s, His Majesty's Government of Nepal (HMGN) undertook to provide safe and reliable water supply and sanitation to the projected 2.6 million inhabitants that would be served by 12 municipalities in the year 2005. HMGN's objective was to be met by implemnenting a Fifteen-Year Development Program (FYDP)4 that incorporated findings of several studies, including: (a) Service Improvements in Kathmandu, Lalitpur and Bhaktapur and Management Support to WSSC (SIMS), Binnie and Partners January 1990; (b) The Fifteen Year Development Program, WSSC, July 1989; (c) Groundwater Management Project in the Kathmandu Valley; JICA, Sept. 1990; (d) Study of the drainage and sanitary sewage in the Greater Kathmandu area; (e) Future Water Supply from Outside the Valley for Kathmandu-Lalitpur -- Environmental Impact Study; Stanley Associates Engineering Ltd., June 1990; and (f) Pre-feasibility Study: Water Supply from Outside the Valley, Binnie & Partners, 1988. 4 The report was called fifteen year Comprehensive Development Plan (CDP); in the SAR it is referred to the FYDP). 18  The FYDP anticipated large investments to conduct much-delayed maintenance of existing infrastructure and also to expand this infrastructure. The FYDP also acknowledged that the NWSC needed to be strengthened for long-term sector management. 10.2. Financial management, disbursement and audit. 10.2.1. The overall financial management of the Project was unsatisfactory. NWSC's financial management system had weaknesses in the following areas: (a) weak internal control system; (b) untimely reconciliation of accounts; (c) untimely recording and updating of various information systems, particularly the fixed assets records, and (d) inadequate monitoring of the financial management information system. Its audit reports were submitted late; on an average about 12 to 14 months after the end of the fiscal year. NWSC's financial statements and project accounts for FY1998/99 are still due. NWSC always had qualified audit reports with recommendations for improvement. However, the Corporation seldom made serious efforts to implement such recommendations, resulting in compounding of audit qualifications every year. Little attention was paid to improve internal controls and financial accounting including accounting adjustments to the financial statements. As a result, the financial statements of NWSC did not reflect a true and fair picture of the corporation's financial condition. 19  Annex IA: Key Physical Indicators Description Appraisal Mid-Term Actual Review Estimate Kathmandu Valley Towns Tube-Wells Provision of new or replacement wells II no. 10 no. IO no. (16.5 mid) Rehabilitation of existing wells 28 no. 13 no. 13 no. (6.4 mid) Rehabilitation of distribution system Not qualified 340 Ha. area None Meter supply 52,000 80,000 80,000 Surface Source Rehabilitation 53 mid 24 mid None done Rehabilitation of Water Treatment Works 33.9 As appraised None done Groundwater Treatment Works 50.0 48.6 JICA funded 48.6 JICA funded New Distribution Pipelines Not Quantified None done Central Facilities, Plant and Vehicles Not Quantified Procured (US$3.4 m.) Sewer System Rehabilitation Dhobighat Sewage Treatment Works (STW) 15.4 mid As appraised None done Khodku STW 1.1 mid As appraised Temporary repairs in Sewer Rehabilitation 350 m. 5,600 m 1995 Sewer Extension Tukucha Khola not defined - None done Sewer connections 10,000 5,000 None done Sanitation 15,000 units Policy study done in 1995. Work suspended when Credit Interception of old combined sewer 11 no. .11 no. suspended. Nothing done since. None done. 20  Annex 1B: Key Physical Indicators Description Appraisal Mid-Term Actual Review Estimate OUTSIDE VALLEY TOWNS Bhairahawa Repair, replace, and enhance facilities. See SAR Component deleted None Biratnagar Repair, replace, and enhance facilities. See SAR Component deleted None Birgunj Repair, replace, and enhance facilities. See SAR Component deleted None Butwal Rehabilitation of intakes replacement of 20 turbine pumps, Rehabilitation of Well, replacement of transmission main etc. See SAR Component deleted None Dharan Rehabilitation of intakes at Kardhu (5.0 mid), Sardu Kbola Sardu Khola Sardu (6.0 mid) and Pakhuwa (0.1 mid) Kholas 3 sites (6.0 mid) (6.0 mid) Reconstruction of 2 intakes 2 sites Repair of electrical, mechanical and structural works 3 sites Repair of highlift pump (IDA pumping station) I no. Operator's quarters at Sardu and Khardu intake sites I no. Replacement of transmission mains Khardu Khola system -200 mm 1,200 m Sardu Khola system - 200 mm 2,800 m 2,450 m 2,450 m Seoti Khola system - 200 mm 1,000 m Bhalu Khola system - 100 mm 1,000 m Protection of Khardu Khola mains 500 m Repairs to reservoirs 3 units Rehabilitation of sedimentation tanks I unit Rehabilitation of Phusre pressure filter and contact tank 1 unit Chlorination of plant at Phusre reservoir site I unit Distribution system rehabilitation 3,000 m, 1,000 m - Hetauda Rehabilitation of intakes: Bundel Khola (I mid) I unit Samri Khola well (0.3 mid) I unit 8 mid Pumps awaited Guards quarters: Bundel Khola and Karra wells 2 units Pump control panel and pumphouse at Karra I unit Transmission main: 200 mm IDA well #1 to Harigunj 4,500 m 2500 m x 350mm dia 2500 m x 350mm dia 200 mm IDA well # 2 to Kawane 3,000 m Protection of 200 mm transmission main Bundel Khola Lump sum Harigunj reservoir protection, interconnection and repair Lump sum Chlorination plant at IDA tubewell site I unit Distribution system rehabilitation 1,500 m, 3,000 m Janakpur Replacement of pump, rehabilitation of reservoir distribution etc. See SAR Component deleted None Nepalgunj Replacement of existing turbine pump, transmission mains etc. See SAR Component deleted None Pokhara Rehabilitation of intakes: Lump sum As appraised As appraised Guards quarters at Bhote Khola I unit As appraised Not done Construction of new river intake; Mardhi Khola I unit As appraised As appraised Rehabilitation of transmission mains: - 150 mm KI bridge in Bindabaisini 1,300 m Not needed Not needed - 100 mm Baldhara Khola 500 m 390 m 390 m - 200 mm Bhote Khola 3,100 m 3,246 m 3,246 m Protection of Mardhi Khola main (400 mm) 1,000 m 136 m 136 m Extension of Mardhi Khola main to new intake (400 mm) 1,000 m 790 m 790 m Repair of existing reservoirs: - Amia Bisauni (500 m3) 1 unit Deleted - Elindabaisini (2 x 500 m3) 2 units Deleted Distribution system rehabilitation -150 mm 1,500 m 80mm 4792 m 80mm 5194 m -100 mm 3,000 m 100mm 3890 m 100mm 4357 m 150mm 867 m ISOmm 1000 m 200mm 3391 m 200mm 3762 m 250mm 122 m 250mm 430 m Rehabilitation of Guards' quarters and meter repair shop I unit each I unit each Access road to Mardi Khola 1,455 m 1,455 m. 21  Annex 1C: Operational Indicators Mid Actual Description Appraisal Term Estimate5/ Review Program for Reduction of Unaccounted Water KATHMNADU VALLEY Service connections Reduction 10% 10% 2% Distribution System Reduction 4% 4% 0.5% Public Stand-post Reduction 1% 1% 0.5% OUTSIDE VALLEY TOWNS (In nine towns) Service connections Reduction 10% 10% 10% for Pokhara Number of NWSC Staff/1O0O connections Kathmandu Valley Towns 19 16 16 Outside Valley Towns 19 13 12 Annex 1D: Financial Indicators (NRs. in Million) 1992 1993 1994 1995 1996 1997 1998 Appr. Actual Appr. Actual Appr. Actual Appr. Actual Appr. Actual Appr. Actual Appr. Actual Total Revenue 124.2 108.6 137.6 139.6 176.4 179.6 224.7 207.2 249.5 278.1 293.8 304.1 364.6 339.1 Operating Cost 107.2 97.1 119.7 105.3 131.7 114.9 144.3 139.5 158.9 211.3 175.1 242.7 190.8 280.4 Operating Surplus 16.5 11.5 17.9 34.3 44.7 64.7 80.4 67.7 90.6 66.78 118.7 61.38 177.7 58.7 Depreciation 24.6 16.5 24.9 16.1 24.9 14.7 55.8 25 70.5 25.85 71.14 26.5 119.9 33.3 Working Ratio 0.9 0.9 0.9 0.8 0.7 0.6 0.6 0.7 0.6 0.8 0.6 0.8 0.5 0.8 Operating Ratio 1.1 1.0 1.1 0.9 0.9 0.7 0.9 0.8 0.9 0.9 0.8 0.9 0.8 0.9 Collection Efficiency - 90 76 - 84 - 99 91 76 - 89 (percent) I _I_I "' In Kathmandu total saving by Unaccounted for Water (UFW) program = 2.56 mid. Supply volume average 107 mid (varies 85-125 mid) Percentage reduction by UFW program = 2.5 percent based on 4.5 hours/day of supply @ 3m pressure. Supply hours reduced from 6 hours to 4.5 hrs (average) over the past six years. 22  ITariffpercu.m. (NRs.) I- 13.5 1 4.5 - 1 6 1 6.21 1 7.0 1 1 6.61 16.8 I Total Arrears 44.15 77.95 107.43 109.95 136.32 198.67 6.8 | Debt. collection period 148 204 218 194 180 238 204.20 23  Annex IE: Water Supply: Production and Coverage S.N. Item All NWSC Towns Kathmandu Valley Towns Outside the Valley Towns 1992 1993 1994 1995 1996 1997 1998 1992 1993 1994 1995 1996 1997 1998 1992 1993 1994 1995 1996 1997 1998 Population I Total Population ('000) 1420 1486 1554 1625 1699 1910 1994 780 814 849 886 924 1097 1142 640 672 705 739 775 613 852 2 Population Served ('000) 891 927 971 1019 1071 1436 1504 533 551 571 593 617 953 989 358 376 400 426 454 483 515 3 Population Served (percent) 63 62 62 63 63 75.1 75.4 68 68 67 67 67 87 87 56 56 57 58 59 59.4 60.4 Water Supply 4 Total (average) Produced (mld) 1421 1411 149 1511 157 169 170 57 56 85 95 100 107 107 55 55 56 56 50 62 63 5 Total Treatment Capacity (nid) 35.3 35.3 61.8 83.9 83.9 87.9 87.9 35.3 35.3 61.8 83.9 83.9 87.9 87.9 ! - - 6 TotalStorage Capacity (ml) 39.9 40.4 41.5 42.6 42.6 42.6 42.6 27.5 21 29.1 30.2 30.2 30.2 30.2 12.4 12.4 12.4 124 12.4 12.4 12.4 7 Unaccounted for Water (percent) - - - - -40 40 40 40 40 3232 40 40 40 40 40 39 39 8 Per capita Consumption (lcd) = = = - 98 94 89 96 97 76 74 92 88 83 79 77 74 72.3 9 WaterAvailability hrs/day) 6 4.5 4.5 to - - - 8 Connections 10 Total connections 113056 117845 124039 130920 138962 146565 153295 77468 79970 83505 87509 92240 97288 100916 35588 37875 40534 43465 46722 49277 52379 I Total Private Connections 110890 115640 121791 128793 136790 1444370 151097 76092 73555 82071 86239 90970 960133/ 99638 34798 7085 39720 42554 45820 48357 51459 12 Metered 89362 92878 98784 105526 115568 121075 126576 58670 60363 63639 67237 72921 75835 78496 30692 32515 35145 38289 42647 45240 48082 13 Unmetered 21528 22762 23007 23267 21222 23265 24519 17422 18192 18432 19002 18049 20178 21142 4106 4570 4575 4265 3173 3117 3377 14 Standpost 2166 2205 2248 212.7 2172 2195 2198 1376 1415 1434 1270 1270 1275 1278 790 790 864 902 902 920 920 Sewera 15 No. of Connections 32733 32827 32948 33092 33117 33167 33215 32732 32827 32948 33092 33117 33167 33215 No Sewer System Tanker 16 Total Quantity sold (mld) 0.13 0.13 0.16 0.1 0.14 0.14 0.14 0.13 0.13 0.16 0.1 0.14 0.14 0.1 17 UJnit Cost (NRs./1000ltr) 70 70 70 120 1201 1201 120 70 7 0 1201 1201 1201 120 " Database on Consumer Survey. Earlier years' figures do not include floating population. 21 Based on Binnie Thames Water estimate. 31 In 1997 out of total 96,013 private connection in KVT, Domestic 91091; Institutional 2,136; Conmmercial 1,296; Other 906. 24  Annex 2A: Project Costs and Financing Project Cost by Components (in US$ million equivalent) Project Component Appraisal Mid Term Actual/Latest Percentage of Estimate Review Estimate Appraisal Technical Assistance & Training 6.70 10.13 6.59 98.3% Consumer Education & Community Participation"' 0.36 0.28 0.28 77.8% Management Support-" 3.04 2.01 2.01 66.1% Kathmandu Valley Towns New Source: Detailed Design 4.00 . - 0% Rehabilitation: Water Supply 24.40 16.26 5.15 21.2% Ground Water Treatment?' 11.00 NBF4' NBF ' 0%/0 Rehabilitation of Sewers 9.20 3.40 - 0% Central Facilities and Plants 3.50 3.26 3.39 96.9% Outside the Valley Towns Water Supply Rehabilitation 5.80 3.25 1.97 34.0% Sanitation Improvement 1.60 - - Facilities and Plant 1.40 - Other (Taxes, Duties & land) 0.70 0.70 - Total 71.00 39.29 20.09 28.3 Govemment of France-Customer Billing - 0.73 - Government of Norway - Unaccounted for Water & Sanitation 2.00' 2.00 - Total Project Cost 71.00 41.29 22.82 32.1 " UNDP funded. Y Groundwater Treatment and conjunctive use pipeline works subsequently funded separately by JICA grant of US$29.25 million equivalent, IDA loan subsequently reallocated to finance additional distribution rehabilitation under the 15-Year Development Program. ' Amount of NORAD fund to be confirmed. 41 NBF = Not Bank Financed. 25  Annex 2B: Project Cost by Procurement Arrangement (in US$ Million Equivalent) Expenditure Procurement Method Appraisal Estimate Procurement Method, Mid-Term Estimate _______ ___._._. Procurement Method Actual/Latest Estimate ICB NCB Other ' NBF Total ICB NCB OtherY NBF Total ICB NCB Other 1' NBF!Y Total 1. Works 40.29 9.47 49.76 17.46 3.75 - 21.21 3.70 2.07 - 5.77 2. Goods 5.44 1.00 6.44 4.26 - 0.70 4.96 3.78 - 0.96 4.74 3. Services - - 10.60 3.40 14.00 - 10.13 4.29-' 14.42 - 6.59 5.02S' 11.61 4. Misc. - - 0.80 0.80 - - - 0.70 0.70 - - - 0.70 0.70 Total 45.73 10.47 10.60 4.20 71.00 21.72 3.75 10.83 4.99 41.29 7.48 2.07 7.55 5.72 22.82 6 Includes technical assistance and training procured in accordance with the World Bank Guidelines for "Use of Consultants by World Bank Borrowers and by the Worl Bank as Executing Agency" dated 1981, and equipment and materials procured under shopping procedures. 7' Includes: $2.19m UNDP grant; $2.00m NORAD grant; and $0.1 Om HMG/N. " Includes: $2.19m UNDP grant; $2.00m NORAD grant; $0.73 m GovL of France grant; and $0.1 Om HMG/N. 4 NBF = Not Bank Financed. (NBF items include UNDP, NORAD, Govt. of France grants for technical assistance, HMG/N counterpart funds and HMG/N funded taxes and duties ($0.70m). 26  Annex 2C: Project Financing by Component (in US$ Million Equivalent) Cor onent Appraisal Estimate Mid-term Review Actual/Latest Estimate Percentage of Appraisal Bank Govt. Co- Total Bank Govt. Co- Total Bank Govt. Co- Total Bank Govt. Co- Total financier finander . financer financier Technical Assistance & 6.70 - 6.70 10.13 - 10.13 6.59 - - 6.59 98.40 - 98.4 Training _ _ Consumer Education & - . 0.36 0.36 - 0.28 0.28 - 0.06 0.22 0.28 . 61.10 61.1 Community Participation Management Support . _ 3.04 3.04 -_ 2.01 2.01 - 0.04 1.97 2.01 . 64.80 64.8 Kathmandu Valey Towns . New Source: _ ._. Detailed design 4.00 _ . 4.00 - 0.00 - - 0 - - 0.00 Water Supply Rehabilitation 21.46 2.94 - 24.40 14.14 2.12 16.26 4.55 0.6 5.15 21.20 20.40 - 41.60 Ground Water Treatment 9.75 1.25 - 11.00 . - 0.00 0 - 0.00 Rehabilitation of Sewers 8.16 1.04 - 9.20 3.04 0.36 3.40 0 - 0.01 Central facilities & Plans 3.11 0.39 - 3.50 3.06 0.20 3.26 3.39 - 3.39 91.70 - - 91.70 Towns Outside the Kathmandu Valley Water Supply Rehabilitation 4.50 1.30 - 5.80 2.63 0.62 3.25 1.60 0.37 1.97 35.60 28.50 - 64.10 Sanitation Improvement 1.24 0.36 - 1.60 - - 0.00 0- - - 0.00 Facilities an Plants 1.08 0.32 - 1.401 0.00 0 - 0.00 Customner Billing - - - 0.00 0.00 0.73 0.73 - 0.00 Unaccounted for water & - 0.00 2.00 2.00 2 2.00 - 0.00 sanitadion___ Miscellaneous : - - 0.00 - 0.70 - 0.70 - 0.70 - 0.70 _- 0. Total 60.00 7.60 3.40 71.00 33.00 4.00 4.29 41.29 16.13 1.77 4.92 22.82 27.90 23.30 144.70 32.10 27  Annex 3: Economic Costs and Benefit An economic analysis was not conducted at project Completion - Please see text. 28  Annex 4A: Bank Inputs - Missions Stage of Project Cycle Month/ Specialized Staff Rating Rating Develop. Year Skills and Number of Impl. Status Impact Persons Preparation 3/89 EN-4 Pre-Appraisal 6/89 Leg, EN-3, FA, Con.-2 Appraisal 11/89 Leg, Con-4, EN-4 Post Nego./Supervision 4/90 FA, EN-2 Post Nego../Supervision 6/90 EN-3 Post Nego../Supervision 9/90 FA Post Nego../Supervision 1/91 EN-2, FA, Con. Post Nego../Supervision 5/91 FA-2, EN-2 I 1 Supervision 9/91 Con, FA, En 1 1 Supervision 3/92 FA, EN I I Supervision 6/92 CP, FA, EN 3 2 Supervision 11/92 FA, EN 3 2 Supervision 3/93 CP, FA, EN 3 2 Supervision 6/93 FA, EN 2 2 Supervision 11/93 CP, FA, EN 2 2 Supervision 3/94 CP, FA, EN 3 3 Supervision 9/94 CP, FA, EN U U Supervision 3/95 EN, FA U U Supervision 7/96 Proc Supervision 11/96 FA, Con, EN-2 U U Supervision 5/97 EN-3, Proc U U Supervision 3/98 PS, EN-3, FA U U Supervision 7/98 TTL,EC U U Supervision 11/98 TTL, FA-2, WSA, S U ___________ __________ __________Proc Supervision 12/98 PS, EN-2 U U Staff Skills Performance Ratings Con - Consultant I - Minor or No Problems EC - Economist 2 - Moderate Problems EN - Engineer 3 - Major Problem FA - Financial Analyst S Satisfactory TTL - Task Team Leader HS Highly Satisfactory CP - Community Participation Specialist U Unsatisfactory MF - Municipal Finance Specialist PS - Private Sector Specialist SA - Social Anthropologist WSA - Water & Sanitation Advisor 29  Annex 4B: Bank Inputs - Staff Stage of Project Cycle Actual/Latest Estimate Staff weeks US$ (000) Identification/Preparation 31.3 81.5 Appraisal 30.5 83.5 Negotiation 22.7 68.9 Supervision 300.5 934.3 Completion Not available in new System Not available in new System Total 385.0 1,168.2 Through May 12, 2000 SOURCE: REPORT COSR2 AND SAP 30  Annex 5: Ratings for Achievement of Objectives'/Outputs of Components2 Objectives/Outputs Highly Satisfactory Unsatisfactory Highly Not Applicable Satisfactory Unsatisfactory Macro Policies x Sector Policies x Physical X Financial X Institutional Development X Environmental X Social X Poverty Reduction Gender Other (specify) Private Sector Development X Public Sector Management x Other (specify) Annex 6A: Ratings of Bank and Borrower Performance Highly Satisfactory factory Unsatisfactory Highly Unsatisfactory Bank Performance Lending X Supervision __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _X_ _ _ _ _ _ _ _ _ _ _ _ _ Overall _ X Borrower Performance Preparation X Govt. Implementation x Imp. Agency. Perf. x Overall _ _ _ _ _ _ _ __x 3 1  Annex 6B: Changes in Government from 1990 - 1999 SN Prime Ministers Cabinet Composition From To Duration (in Month approx.) 1 Mr. Krishna Prasad Bhattarai Coalition interim government of Nepali April 19, 1990 May 28, 1991 13.5 (Nepali Congress) Congress (NC), United Marxist-Leninist (CPN-UML), Royal Nominees, Independent 2 Mr. Girija Prasad Koirala Nepali Congress Government May 29, 1991 November 28, 1994 42.6 (Nepali Congress) 3 Mr. Manmohan Adhikari CPN-UML Government November 29, 1994 September 10, 1995 9.5 (CPN-UML) 4 Mr. Sher Bahadur Deuba Coalition government of NC, Rastriya September 11, 1995 March 9, 1997 18.2 (Nepali Congress) Prajatantra Party (RPP) and Nepal Sadvawana Party 5 Mr. Lokendra Bahadur Chand Coalition government of RPP-Chand, March 10, 1997 October 5, 1997 7.0 (RPP-Chand) CPN-UML and Nepal Sadbhawana Party 6 Mr. Surya Bahadur Thapa Coalition government of RPP-Thapa, NC October 6, 1997 April 11, 1998 6.2 (RPP - Thapa) and Nepal Sadbhawana Party 7 Mr. Girija Prasad Koirala Nepali Congress April 12, 1998 August 25, 1998 4.5 (Nepali Congress) 8 Mr. Girija Prasad Koirala Coalition government of NC and Marxist- August 26, 1998 December 22, 1998 3.9 (Nepali Congress) Leninist _ 9 Mr. Girija Prasad Koirala Coalition government of NC, CPN-UML December 23, 1998 May 26, 1999 5.1 (Nepali Congress) and Nepal Sadbhawana Party 32  Annex 6C: Changes in NWSC Chairman and General Manager S.N. | Name Date of Appointment Date of Departure Duration (Month) | Remarks I from Office I_I (A) Secretaries, Ministry of Housing & Physical Planning/Chairman, NWSC Board 1 Mr. Tej Prasad Upadhyay October, 1991 November, 1992 14.2 2 Mr. Shiv B. Pradhananga December, 1992 October, 1994 23.3 3 Mr. Varun Prasad Shrestha November, 1994 April, 1995 6.0 4 Mr. Shambhu S.P. Kayastha May, 1995 November, 1995 7.1 5 Mr. D.B. Bhattarai November, 1995 March, 1997 17.2 Chairman from Nov., 95 to May, 96 6 Mr. Khagendra Basnyat April, 1997 September, 1998 17.3 Duration Average* 11.9 (B) Executive Chairman/General Managers, Nepal Water Supply Corporation 7 Mr. G.R.S. Kharel December, 1990 December, 1992 25.4 8 Mr. P.R. Bista January, 1993 December, 1994 24.3 9 Mr. N.M. Pradhan January, 1995 April, 1995 4.0 Acting for General Manager 10 Mr. N.M. Pradhan May, 1995 August, 1995 4.1 Acting General Manager 11 Mr. D.B. Shrestha September, 1995 April, 1996 8.1 12 Mr. M.B. Karki May, 1996 April, 1997 12.1 Executive Chairman cum General ____________ _ ___Manager 13 Mr. A.K. Ranjitkar May, 1997 March, 1998 11.1 14 Mr. K.N. Bhattarai April, 1998 Duration Average* 7.6 (C) Project Manager for inside the Valley Towns 15 Mr. Gautam Bahadur Amatya 19911 December, 1992 14.0 16 Mr. Madan Shankar Shrestha January, 1993 September, 1998 69.0 Duration Average* 69.0 (D) Project Manager for Outside the Valley Towns 17 Mr. Noor Kumar Tamrakar January, 1993 February, 1995 26.3 18 Mr. Gyanesh Bajracharya March, 1995 September, 1995 7.1 19 Mr. Noor Kumar Tamrakar October, 1995 February, 1997 17.2 20 Mr. M.N. Vaidya March, 1997 September, 1998 18.3 Duration Average* 17.2 Note: * Duration average is only calculated from January 1, 1995 onward. 33  Annex 7: List of Supporting Documents (i) Staff Appraisal Document - April 17, 1991 (ii) Development Credit Agreement - October 10, 1991 (iii) Project Agreement - October 10, 1991 (iv) Pre-appraisal Mission Reports (v) Appraisal Mission Reports (vi) Supervision Mission Reports (vii) Mid-term Review Mission Reports (viii) ICR Mission Reports (ix) Quality Assurance Group's Report (x) Nepal Water Supply Corporation Act, 1989 34  Annex 8: Beneficiary Survey Results A survey of beneficiaries is not anticipated. 35  Annex 9A: Stakeholder Workshop Results Assumptions Barriers Recommendations To understand and assess how the participants perceived To understand the types of, and reasons for the barriers The exercise resulted in the following recommendations. and interpreted the context and the environment within the executives faced, the participants were asked to which the project was designed and executed, they were identify them. This exercise helped to understand the asked to list the assumptions. actions taken. NWSC will exercise its autonomy: Political: Partnership in the development process: * The Government and NWSC executives assumed that * The executives faced political pressure; there was a * The Government, NWSC and the World Bank need to NWSC will be allowed to exercise autonomy and lack of political climate conducive for the work together on the institutional reform measures before institutional capacity building will happen through the management to work smoothly. Government's implementing such programs. To design and implement management support contract. This would help to commitment to ownership of the project seemed to organization development programs effectively, the real execute the project effectively. The institutional be lacking. Constant change of government and its organizational capacity of the institution be assessed. building process would specifically address the consequences on the change in management of technical, financial and operational capacity of NWSC NWSC plagued the process of preparation and Consensus building on programs and activities: which would have ripple effects on its other activities. implementation. It is important to build consensus among all stakeholders, NWSC would address its role & jurisdiction: Institutional change: especially staff and other executing agencies, on the programs to support management of such institutions. A * The NWSC would in the process of its institutional * The Management Support Program faced many legal framework (specifying the terms and conditions capacity building would address its identity, role and unforeseen challenges and affected the smooth including terms of appointment of Board Chairman and jurisdiction and management issues such as execution of other components. General Manager) should be established for a conducive delegation, decision making, financing, contracting institutional environment and then be committed to stick etc. Exercise of autonomy & authority: by it. Rehabilitation works would be effectively executed: * The management of NWSC in the wake of the Institutional capacity & responsibility sharing: constant political influence and change of * Where the funding and the project size are large, ways * The rehabilitation of the age old water supply and leadership was unable to take a firm stand; make should be sought to share the responsibility of the main sewerage system could be improved drastically within decisions and exercise the authority vested on it. executing agency so as to avoid the failure of one project the allocated budget and human resources assigned to Hence, during implementation, NWSC was unable activity obstructing the progress of other activities. it. to address questions raised on its role and jurisdiction. It therefore had to search for solutions Assessment and use of local resources: Institutional change would improve execution: which did not meet its intended objectives and * For the development of the country, assess the quality and which were time consuming. availability of local manpower and expertise so as to make * The process of institutional capacity building would the fullest use of available local resources. be welcomed by the management and staff ofNWSC, and that it would ease the process of institutional reform. 36  Annex 9B: Stakeholder Workshop Process A stakeholder workshop was held in Kathmandu on May 26, 2000 to discuss the findings of the draft ICR. The Workshop was attended by 38 participants. The process was facilitated by three facilitators as the participants divided into three groups - one per the three project objectives: * Strengthen NWSC's technical, financial, managerial and operations/maintenance capability; * Increase utilization of existing systems through rehabilitation and extensions; * Improve public health through: - consumer education programs; and - improved quality and increased quantity of water to consumers. After the presentation of the findings in the draft ICR, the following processes took place. Individual Work 1: "Reflection, drawing on our experiences" As per the objective assigned to each group, individual participants were asked to reflect and answer the following questions: 1 . What were the assumptions9 underlying the above objectives? (List at least two assumptions for the "project objective" assigned to the group.) 2. What barriers", were faced during implementation and how did they affect the achievements of the objectives? (List at least two barriers for the "project objective" assigned to the group.) Individual Work 2: "Feedback on Main Findings of ICR" On the cards provided, participants were asked to write individual feedback by providing overall and specific comments on the findings of the ICR. Group Work: "Discussion on the Reflections and Suggestions for Future" After the individual exercises, the participants congregated in their respective groups to list the assumptions and barriers, and to discuss and prioritize them. Each group came up with suggestions and recommendations for the future. Group Presentations: On completion of the group exercises, each group presented the outcomes in the plenary session. 9Assumption: Important events, conditions or situations which are necessary for project success, but which are largely or completely beyond the control of the project. 0 Barriers: Blocks or contradictions that obstruct the realization of objectives. Barriers are existing realities, not absences or vacuums. 37  Annex 9C: Newspaper Clipping on the ICR Stakeholder Workshop The Kathmandu Post Daily WB admits its mistake By a Post Reporter KATHMANDU, May 27 - World Bank has shared blame with the government for the failure of Nepal Drinking Water Supply Corporation (NDWSC). World Bank had been providing technical and financial assistance to NDWSC since the last 34 years. Implementation Completion Report prepared by the World Bank which was made public at a programme yesterday has pointed out that the government's failure to grant autonomy to the corporation, change of Board members with the change in government and the provision of keeping secretary at the Ministry of Housing and Physical Planning as the chairman of the Board as the factors for the failure of the bank funded project. The report which was presented by Tashi Tenzing of the World Bank states that the Bank with its two decades of experience should have used its influence to make some institutional changes. The report also states that the Bank failed to realise that the government's commitment towards autonomy is weak. World Bank has been providing assistance to Kathmandu and other cities drinking water and sanitation projects since 1974. Tenzing said the places which used to get six hours daily supply of water before the implementation of the project receives water in alternate days now. Koushalnath Bhattarai, General Manager of NDWSC, said "We have learnt many things from the project which will help us in future endeavours". 38  Annex 10: Borrower's Contribution to the ICR NEPAL WATER SUPPLY CORPORATION URBAN WATER SUPPLY AND SANITATION REHABILITATION PROJECT Implementation Completion Report This report has been written as a part of the Implementation Completion Report (ICR) to be prepared by the World Bank. Some of the information on the project covered by the Bank are not duplicated in this report. 1. Source of Funding AT APPRAISAL The World Bank credit = SDR45.5 million (US$60.0 million) UNDP grant = US$3.4 million HMG = US$7.6 million RESTRUCTURED PROJECT WB credit = US$33.0 million UNDP grant = US$2.29 million NORAD grant = US$2.0 million IHMG = US$4.0 million Loan agreement signed: 10/10/91 Loan effective date: 15/10/92 Final Disbursement date: 31/03/99 Although the project was started with the arrival of the consultant in August 1991, the project was suspended during the period Feb. 1995 to Dec. 1995 by the Bank due to non-compliance of covenants, in reality all the project work stopped from Sept. 1994 in view of the looming project suspension. The project was restructured in May 1997 and March 1998 WB mission and the credit amount was reduced to US$33.0 million in May 1997 due to reduction in the scope of works. 2. Project Objectives: The objectives of the UWSSRP has been: (i) to assist the borrower in strengthening NWSC's financial, technical, managerial and operations and maintenance capabilities; (ii) to increase utilization of existing water and sewerage systems through rehabilitation and extension; and (iii) to improve public health through consumer education and improved quality and increased quantity of water to consumers. The objectives of the UWSSRP were revised during mid term review to: (i) transferring the responsibility for managing NWSC's operations to a qualified and experienced private sector firm through a management contract; (ii) increasing the supply of water in Kathmandu Valley and outside valley towns; and (iii) improving sewerage operations, at the time of mid-term review of the UWSSRP.  3. Achievement of Objective and Outputs The objectives of the UWSSRP has been: (i) to assist the borrower in strengthening NWSC's financial, technical, managerial and operations and maintenance capabilities; (ii) to increase utilization of existing water and sewerage systems; (iii) to ensure the efficient delivery of good quality water to consumers; and (iv) to improve public health. The original project objective as mentioned above could only be met partially at the end of project completion. The objective No (i), remained incomplete as the management support program which primarily focused to address this objective was terminated by the UNDP in 1995. However, NWSC has carried out many activities in consultation with the Bank to improve its functioning. Some of the major activities are: (a) introduction of new organization structure as recommended by the Management Support team; (b) implementation of new personnel regulation which provided more autonomy to NWSC in terms of recruitment, promotion, punishment and incentive provision; (c) implementation of new financial regulation which simplified the financial procedures and gave more authority to NWSC to make new simplified and practical procedures; (d) establishment of management information system; (e) preparation of retrenchment plan and its phase wise implementation; and (f) implementation of new water connection policy, sewer connection policy and vehicle policy which established norms for operational activities. Some of the major institutional improvements and capacity building achieved during the project period are as follows: (i) Reduction of staffing ratio: The number of staff per one thousand connection at the start of the project was 25, which has reduced to 15 in 1998 and is expected to reduce further to 9 by the year 2002. (ii) Auditing of accounts: NWSC had 3 years audit overdue at the time of appraisal. The status of audit is upto date at present. (iii) Operation ratio: NWSC increased water tariff three times during the project period. Due to increase in tariff and collection ratio, the operating ratio has improved from 1.1 in 1992 to 0.8 in 1998. (iv) Trained manpower: As a result of involvement of NWSC staff with the consultants and the project activities and also the trainings (in country and foreign) provided to the NWSC staff in design and construction supervisions many staff have been trained and have become experienced to carry out project execution and management activities in future. (v) Enhancement of UFW management capability: NWSC completed successfully the program on UFW management funded by Norwegian grant in 1995. The staff trained under the program is continuing UFW management program with the funds from NWSC and HMG. The success of this program has established the capability of NWSC to execute such program. (vi) Computerized billing: The computerization of the billing has been initiated on a pilot basis in one of the branch office of Kathmandu. Objection No. (ii) has been partially fulfilled as utilization of existing wells will increase water supply in dry season by about 23 mld in Kathmandu and the water sources at Pokhara, Dharan and Hetauda are increased by about 8 mid, 4 mid, and 7 mid respectively due to rehabilitation/extension works carried out. 2  The rehabilitation/extension works of existing distribution system in Pokhara has improved the efficiency of the system to deliver water. Objective No. (iii) have also been partially met due to some improvement in public health (unquantified) with the increased volume of water supplied. The revised objective No. (i) of the project have been partially met with the preparation of RFP for bringing in the management contractor. NWSC has done its best to achieve this objective by providing necessary budgets and information. The private operator was supposed to be in place by April 1999, but this did not happen. NWSC has no control in bringing in the private sector. This has put some degree of uncertainty in the modality of operations of the Kathmandu Valley facilities in near future. Revised objective No. (ii) have been partially met with the increase in quantity of water in KVT and OVT at the end of the project. Revised objective No. (iii) could not be met as the sewerage package was cancelled. 4. Major Factors Affecting Implementation and Outcome Some of the factors affecting implementation and outcome of the UWSSRP are mentioned below: 4.1 Restriction on NWSC autonomy: Although the NWSC Act allowed NWSC to raise tariff as is when necessary, the proposal for tariff had to be cleared from the government as it had some political implication. Without increasing the tariff, it was difficult to meet the financial covenant of the credit agreement. Like wise NWSC did not have full authority to revise its personnel and financial regulations as felt necessary. 4.2 Frequent changes in NWSC management: Due to frequent changes in the government during the project period, the Chairman and the General Manager also changed consequently. These changes caused delays in decision makings related to the project. 4.3 Non-payment of Government arrears: Some of the covenants in the credit agreement are not practical and it led to non-compliance of the covenants at all time of the project life. As per the covenant in the credit agreement, the government agencies were required to clear their dues within one month of billing. This covenant was not practical as the NWSC financial rule allowed consumers to pay their dues paying some penalty even after 6 months from the due date. 4.4 Difficulties in implementing pre-qualification and post qualification processes: During the early stage of the project, it was planned to pre-qualify the contractors for bidding as per the World Bank guidelines. In most cases the contractors failed to give the required information sought by us adequately. As sufficient number of contractors could not meet the pre qualification criteria, pre qualification process was abandoned and to expedited the work, post qualification process was adopted. The post qualification process was also not very much productive, as the bidders were lodging complains against each other about the validity of post qualification information provided. This led to serious delay in bid evaluation. 4.5 Limited response during bidding by international contractors: The bidding packages under the project were packaged allowing high volume of work to attract large international contractors. Although the initial pre-qualification process attracted some non-Asian bidders, during bidding only Chinese and Indian bidders participated. The limited response may be due to inappropriate packaging in which material supply, new construction and rehabilitation works were all grouped into one package. 3  4.6 Project/component restructuring at inappropriate time: Project/component restructuring was carried out when the bids were already under evaluation for most of the packages of work. As the scope of works were curtailed, these bids had to be cancelled and fresh bids called for the revised scope of work, for which fresh bidding had to be prepared. This led to serious delay and loss of credibility with the contractors. 4.7 Project procurements linked to institutional development: The World Bank team often linked the progress of procurement activities to institutional improvement. As the institutional improvement is not always in control of NWSC only in most cases, these could not be implemented as desired by the Bank on time and the Bank delayed giving no-objection to procurement activities leading to slow disbursement. 4.8 Restricted/limited use of local contractors/consultants: Initially the project was designed to attract international contractors and consultants. As the project size was reduced for the OVT, local consultants and contractors were involved for the OVT works. These works were completed on time and at a significantly low cost. Had the project been designed inviting greater participation from local consultants/contractors much physical works could have been completed. 4.9 Complains lodged by unsuccessful bidders: Valuable project implementation time was lost due to complains lodged by unsuccessful bidders and consultants. These type of complaints are quite common in other projects as well. The time lost could have been minimized by screening the complaints by the Bank and NWSC. 4.10 Bank-NWSC relationship: The Bank-NWSC relationship has not been very smooth during the implementation of the project. It is evident from the various Aide Memoires that the Bank did not allow NWSC to proceed with the physical works for some unknown reasons. 4.11 Difficulties in interpreting covenants: The World Bank noted in several of their Aide Memoire that the management and operations of NWSC was not progressing as required by the Project Agreement (PA). As the indicators clearly defining these requirements were not mentioned in the PA, there was always difference in opinion between the Bank and NWSC regarding meeting these requirement. 4.12 Consultants performance: The consultants performance have generally been satisfactory. However, the performance of some consultants have been less than satisfactory contributing to delay in project implementation. The design of major works of the project in Kathmandu Valley have been delayed significantly which contributed to the delay in issuance of bids. 4.13 Contractors performance: The civil works contractors performance have generally been satisfactory. The foreign inside valley contractor completed all their contractual works and some additional works timely. The local contractors for the outside the valley towns civil works performed satisfactorily completing all the works within the short contract period. However, the performance of some suppliers were not satisfactory leading to cancellation of contracts. 4.14 Project suspension, no time extension covering the suspension period: The project implementation time was over seven years from the date of signing of credit agreement to the final disbursement date. All design works were planned to be completed in the first year, with the target to complete the bidding and work execution in the remaining time. However, due to 4  extension of the design period, due to project suspension, due to repeated bidding and project restructuring, significant amount of time was lost. The project suspension came at the most inappropriate time of the project life when the work should have been in full swing. The Bank's refusal to extend the project period forced curtailment of the project works. 4.15 Duty exemption: As agreed by the Bank and the Borrower, all the goods imported for the project is exempt from custom duty and local taxes. As this has not been specifically mentioned in the creditlproject agreement, NWSC had a difficult time in getting duty exemption leading to some delay in receiving goods. 5. Sustainability The project may be rated as sustainable as the works incorporated in the project are sustainable based on the present NWSC's institutional and financial capability. 6. Bank Performance The Bank performance during project implementation has generally been satisfactory. NWSC's project performance could have been significantly better had the Bank given adequate emphasis in meeting the physical targets and the Bank not suspended the project. 7. Borrower Performance The performance of NWSC during project implementation has generally been satisfactory. Although the NWSC's performance was less than desirable during the earlier phase of the project period, it improved significantly at a later stage. NWSC's performance would have improved if it would have been given the opportunity to work in an environment of full autonomy and the NWSC Board have been small and stable. Similarly, the NWSC management should have been given more authority to complement the size of the project. 8. Lesson Learned 8.1. Prioritizing institutional improvement: As the institutional development in parallel with the execution of physical works has not been successful due to various reasons, it is desirable that the institutional development as agreed between the Bank and Borrower take place before the execution of physical works. Once the institutional improvement is in place the progress of physical works should not be disturbed by the Bank or the Borrower. 8.2. Adequate autonomy to NWSC: The NWSC Board should be fully autonomous and have full authority to appoint personnel, to fix salary, to provide incentives and punishments, to appoint the General Manager and to revise the tariff. The General Manager should be given full authority related to the execution of the project. 8.3. Defining institutional improvement indicators: The institutional improvement requirement and indicators should be clearly defined at the project appraisal stage. There should not be any confusion about the indicators during execution of the project. 8.4. Generous use of local contractor/consultants capability: As the capability of local contractor/consultants have increased significantly in recent years, generous use of these local 5  capability should be encouraged in the future projects in order to save time and money and also to encourage the local construction industry. 8.5. Contract packaging more rather than few: The contracts should be packaged in such a way that there are more contractors involved during execution. If few number of large packages are involved the non-performance by a contractor would affect a very large chunk of physical work. The separate packaging of materials supply and civil works would have been a better option specially in case of rehabilitation works. 8.6. Pre-qualification and post qualification process, if post-qualify use two envelope system: The pre qualification process in the UWSSRP was not successful due to poorly designed pre-qualification criteria and the cancellation of first pre qualification attempt. Post qualification process was adopted at a later stage without much success mainly due to complains lodged by unsuccessful bidders. It is desirable that pre-qualification documents are properly designed and adopted. In case the post qualification process is followed two envelope procedure (opening of financial bids of successfully post qualified bidders only) be adopted. 8.7. Short duration project life more appropriate: The duration of the UWSSRP turned out to be very long. In case of rehabilitation project where the works are mainly deferred maintenance and requires quick action, the duration of project should be short. In future, such project should be of short duration so that the project could be timely completed. As the project would be smaller in size, the period of non-utilization of credit money would be very much less. Such project even if cancelled due to unforeseen seasons would have a very small impact on the performance of NWSC. 8.8. Project objectives should not be too rigid (rehabilitated well vs. new well): The project was designed during the appraisal stage in such a way that rehabilitation of existing works only be carried out during the execution stage. This restriction lead to uneconomic execution of some components. In future it is desirable that the project works/components are flexible for timely and economic execution of the works. 8.9. Design and supervision of the project works: The design and construction supervision period for the consultants should be defined clearly in the contract agreement. The construction supervision phase should start only after successful completion of all design works by the consultants. It should be mentioned clearly in the contract that the employer would have full authority to cancel the consultancy contract, if the good quality design work is not completed timely. 8.10. WB supervision mission team: The team members of the Bank supervision mission should consist of personnel with previous experience in similar projects in the region. The positive attitude of the Bank mission members will have positive impact on the progress of the project works. 8.11. Nature of covenants: Covenants which are not practically achievable should not be included in the credit/project agreement. 6