Nepal - Rural Infrastructure Project

Document of The World Bank Report No: 19171-NEP PROJECT APPRAISAL DOCUMENT ON A PROPOSED LEARNING & INNOVATION LOAN (LIL) IN THE AMOUNT OF US$5 MILLION EQUIVALENT TO THE KINGDOM OF NEPAL FOR A RURAL INFRASTRUCTURE PROJECT May 12,1999 Infrastructure Sector Unit (SASIN) South Asia Region  CURRENCY EQUIVALENTS (Exchange Rate Effective December 20, 1998) Currency Unit = Nepalese Rupee (NR) NR 1 = US$0.015 US$ 1 = NR 68.0 FISCAL YEAR July 16 -July 15 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank APP Agricultural Perspective Plan CBMP Community-based Performance Monitoring DDC District Development Committee DOLIDAR Department of Local Infrastructure Development and Agricultural Roads DOR Department of Roads DTMP District Transport Master Plan DTU District Technical Unit FCGO Financial Comptroller General's Office GTZ German Technical Cooperation HMG/N His Majesty's Government of Nepal LIL Learning and Innovation Loan NGO Non-Govemmental Organization MLD Ministry of Local Development MOF Ministry of Finance PCU Project Coordination Unit PIP Priority Investment Plan PLRP Pilot Labor-based District Road Maintenance and Rehabilitation Project PMR Project Management Report RMRP Road Maintenance and Rehabilitation Project RUC Road User Committee SA Social Assessment SOE Statement of Expenditure TAC Technical Assistance Consultant VDC Village Development Committee Vice President Mieko Nishimizu Country Director Hans M. Rothenbuhler Sector Manager Frannie Humplick Task Leader Guang Zhe Chen  NEPAL RURAL INFRASTRUCTURE PROJECT TABLE OF CONTENTS Page No. A. Project Development Objective ................................................................ 2 1. Project development objective and key performance indicators .................................................................2 B. Strategic Context ................................................................ 2 1. Sector-related CAS goal supported by the Project .................................................................2 2. Main sector issues and Government strategy ..................................................................2 3. Sector issues to be addressed by the Project and strategic choices ...........................................................4 C. Project Description Summary ................................................................ 4 1. Project components .................................................................4 2. Key policy and institutional reforms supported by the Project ................................................................. 5 3. Benefits and target population .................................................................5 4. Institutional and implementation arrangements .................................................................6 D. Project Rationale ................................................................9 1. Project alternatives considered and reasons for rejection .................................................................9 2. Major related projects financed by the Bank and/or other development agencies ....................................... 10 3. Lessons leamed and reflected in proposed project design ................................................................ 11 4. Indications of borrower commitment and ownership ................................................................ 11 5. Value added of Bank support in this Project ................................................................ 11 E. Summary Project Analyses ........................... 12 1. Economic ............................12 2. Financial ............................12 3. Technical ............................13 4. Institutional .......... ..13 5. Social ..........14 6. Environmental assessment ....................... 15 7. Participatory approach .......................... ; 16 F. Sustainability and Risks .......................... 17 1. Sustainability .......................... 17 2. Critical risks .......................... 18 3. Possible controversial aspects .......................... 19  Page No. G. Main Loan Conditions ................................................... 19 1. Effectiveness conditions ................................................... 19 2. Other ................................................... 19 H. Readiness for Implementation ................................................... 19 I. Compliance with Bank Policies .......................... 19 ANNEXES Annex l Project Design Summary .20 Annex 2 Project Description .22 Annex 3 Estimated Project Costs .23 Annex 4 Cost-Effectiveness Analysis Summary .24 Annex 5A Financial Summary .28 Annex 5B Community-Based Performance Monitoring Summary ................................................... 32 Annex 6 Procurement and Disbursement Arrangements .34 Table A: Project Costs by Procurement Arrangements .36 Table B: Thresholds for Procurement Methods and Prior Review .37 Table C: Allocation of Loan Proceeds .38 Annex 7 Project Processing Budget and Schedule .39 Annex 8 Documents in the Project File .40 Annex 9 Status of Bank Group Operations in Nepal .41 Annex 10 Nepal at a Glance .43  Nepal Rural Infrastructure Project Project Appraisal Document South Asia Region Infrastructure Sector Unit Date: May 12,1999 Task Leader: Guang Zhe Chen Country Director: Hans M. Rothenbuhler Sector Manager: Frannie Humplick Project ID: NP-PE-45053 Program Objective Category: PV Sector: Transportation Program of Targeted Intervention: [/] Yes f ] No Lending Instrument: Learning & Innovation Loan (LIL) Project Financing Data [ ] Loan [v] Credit [ ] Guarantee [ 3 Other [Specify] For Loans/Credits/Others: Amount (US$m/SDRm): US$5.0 million/SDR3.7 million Proposed Terms: [vi Multicurrency [ ] Single currency Grace period (years): 10 [ Standard Variable [ ] Fixed LI 3 BOR-based Years to maturity: 40 Commitment fee: 0.50% Service charge: 0.75% Financing plan (US$m): Source Local Foreign Total Government 0.8 0 0.8 IDA 4.1 0.9 5.0 Total: 4.9 0.9 5.8 Borrower: Kingdom of Nepal Guarantor: N/A Responsible agencies: Ministry of Local Development and Selected District Development Committees Estimated disbursements (Bank FY/US$M): 2000 2001 2002 Annual 1.3 2.0 1.7 Cumulative 1.3 3.3 5.0 Project implementation period: 3 years Expected effectiveness date: 07/15/1999 Expected closing date: 07/31/2002 OSD PAD Form: July 30, 1997  NEPAL: Rural Infrastructure Project Page 2 Project Appraisal Document A: Project Development Objective 1. Project development objective and key performance indicators (see Annex 1): The development objective of the project is to strengthen the institutional capacity of a decentralized local governance system in its planning and managing capabilities to improve the quality, efficiency and sustainability of rural roads in the selected districts with active participation of project beneficiaries. This objective will be monitored by the following indicators: (i) average travel time and transport costs reduced by 20% on project roads; (ii) non-passability duration of project roads reduced by 2 months per year; (iii) roads maintained or rehabilitated under the project will remain in operation 3 years after project completion; (iv) district transport master plans prepared in the selected districts using participatory process and endorsed by people's representatives; (v) 80% of the project civil works expenditure remain with the local economy; and (vi) completion of preliminary appraisal of a follow-on operation that encompasses the knowledge base developed under the project. B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): CAS document number: Report No: 18578 Nep Date of latest CAS discussion: December 15, 1998 The project supports the two-prong strategy of the CAS of bringing resources closer to the beneficiaries and fostering strong governance in both central and local level. It also supports the CAS sector objective of improving rural road maintenance and rehabilitation using labor-based technology through beneficiary and community participation. By improving rural access to marketing centers and social services, the project will help promote broad-based agricultural growth and reducing poverty in rural areas. The project supports the decentralization policy of His Majesty's Government of Nepal (HMG/N) and explores new approaches to improve the effectiveness of the Bank's assistance to the country. The project will help improve government implementation capacity, channel Bank resources and assistance more directly to a few selected local government entities that have modest capabilities in project planning and implementation, and strengthen the central government agency responsible for rural infrastructure development to improve its role in project monitoring, coordination and policy guidance. The experience of the piloted approach will be monitored and evaluated during implementation, and if deemed successful, expanded to more districts in a larger scale follow-on project. 2. Main sector issues and Government strategy: The decentralization policy and weak capacity of local government entities. In Nepal, rural development through local initiatives has been emphasized by successive governments. These initiatives are based on the observed experience that local communities are more responsive to their own needs, and thus are more effective in undertaking development projects to reduce poverty as compared to the Central Government. The policy of decentralization, which was promulgated under the District Development Committee Act of 1992, provides the legal framework for the local governance system in Nepal. Under the Act, district governments are legally self-regulating and autonomous bodies responsible for all development activities, including the construction and maintenance of rural infrastructure facilities in all 75 districts of Nepal. The local user groups are to act as the main agents for undertaking development projects. However, the adoption of decentralization policy has not been supported by the strengthened capabilities of local government entities in the planning and managing of development projects, nor in mobilizing local user groups who will undertake the works. Consequentially, the ineffective use of scarce resources and a lack of accountability at the local level threaten to undermine public support for the decentralization policy. In view of the expanded responsibilities and augmented resources, there is an increasing need to strengthen the technical and managerial capabilities of District Development Committees (DDCs).  NEPAL: Rural Infrastructure Project Page 3 Project Appraisal Document Inadequate central support mechanism for local development. Under Nepal's decentralization policy, the Ministry of Local Development (MLD) has the mandate to monitor, assist and guide the development activities of DDCs and Village Development Comnmittees (VDCs) from the central government level. The MLD has not been able to carry out this mandate effectively because of insufficient capabilities and the lack of technical skills. Although the MLD is supposed to provide one engineer and several technical staff to each DDC, the DDCs have had difficulties retaining these staff, partly due to the lack of an established career development path for engineering staff in DDCs and MLD. In the road sector, since 1993, the Department of Roads (DOR) of the Ministry of Works and Transport has gradually transferred its responsibilities for the construction and maintenance of district and village roads to the respective DDCs, while retaining the responsibility for managing the strategic highways and feeder roads network. However, most DDCs do not have the technical nor managerial capability to manage these responsibilities. As a result, DDCs often use their local influence to gain ad hoc access to technical assistance from the divisional offices of the DOR, which in turn makes it difficult for the DOR's field offices to concentrate their resources on maintaining the strategic network. Finally, an inadequate central monitoring system to manage the application of funds transferred from the Central Government to the DDCs and VDCs also constrained the effectiveness of the decentralized development in the country. The evolution of a national strategy for rural infrastructure development. Recognizing the capacity constraints in the MLD and DDCs and the problems with the prevailing system for rural infrastructure development, in October 1997, the Government approved a National Strategy for Rural Infrastructure Development. The strategy reaffirmed the decentralization framework for local development and the distribution of responsibilities among various government institutions for rural infrastructure development. While reconfirmiing MLD's central role in resource mobilization and planning rural infrastructure, the strategy proposed to establish a Department of Local Infrastructure Development and Agricultural Roads (DOLIDAR) within the MLD with branches in the districts to provide engineering and other technical support to DDCs in planning and implementing rural infrastructure projects. The strategy also reaffirmed that DDCs will be the focal points of planning and implementation of district infrastructure development. The key function of DOLIDAR is to provide coordination and monitoring support to the districts. Although the DOLIDAR was formally established in September 1998, it is not yet fully staffed nor operational, and the implementation modality of this strategy remains to be worked out. It is important that the DOLIDAR's establishment does not lead to the centralization of planning and managing responsibilities away from the local government entities. It should also be made clear that the DOLIDAR is a coordinating agency that provides guidelines for the preparation of local transport plans, coordinates plans, assists with capacity building and resource mobilization. The lack of appropriate technical skills and inefficient use of limited resources at the rural road sector. Despite the aforementioned issues, the DDCs and VDCs have the authority, responsibility, and a certain amount of financial resources for managing district and village roads. Due to the strong demand (both local and political) for promoting rural access roads, the Central Government earmarks a total annual budget of about NRs.200 million (US$3.2 million) for rural road construction and maintenance in the forrn of annual block grants of NRs.3-4 million to each DDC. In addition, it is estimated that 50% of the block grants of NRs.500,000 allocated to each VDC from the Central Government are spent on rural roads. Thus, a total of about US$20 million per year of HMG/N resources are currently being utilized for rural road works. However, these resources have not been put into effective use in the sector, and the outcome of these investments has been much less than satisfactory. The main problems with rural road maintenance and construction are: (i) appropriate construction practices do not parallel political incentives for road works, which favor conventional (mainly mechanical) construction methods for fast results. In some cases, mechanized construction of low-volume rural roads with little technical supervision has caused severe environmental damage. Experience shows that maintenance works on district and village roads can be achieved using labor-intensive methods which are more sustainable and environmentally friendly; (ii) inadequate road maintenance. In the Terai (plain area) districts, where the road network is relatively more  NEPAL: Rural Infrastructure Project Page 4 Project Appraisal Document extensive and maintenance activities are easier to complete than in the hill districts, most of the district and village roads are in a state of disrepair. Part of this problem stems from limited resources, but it is primarily related to the lack of capability in managing maintenance work, and a strong political preference for constructing new roads as opposed to maintaining the existing network; and (iii) inadequate accountability and transparency in the use of funds at the central and especially at the local levels. Support for the road sector strategy. In February 1997, with assistance from the IDA, the Government developed an overall road sector strategy, the Priority Investment Plan (PIP). The PIP identified priority projects for the sustainable development of the strategic and rural road network for the period of 1997- 2006. For the rural transport network, the PIP emphasized the need for balanced investment for the maintenance and rehabilitation of existing assets complemented with cost-effective and environmentally - sound construction and maintenance approaches. The PIP also provided guidance and thresholds for undertaking the cost-benefit assessment of rural roads investment, which was followed during the preparation of this project. This project also supports the strategy outlined in the PIP for the development of the rural road network by promoting the adoption of labor-based technology and a decentralized local governance system for effective management of road maintenance and rehabilitation. 3. Sector issues to be addressed by the project and strategic choices: The project will assist HMG/N in implementing its decentralization policy and rural infrastructure development strategy in three ways. First, the project will strengthen the institutional capability of the DDCs and DOLIDAR in their planning, management, monitoring, and coordinating roles through the provision of project management support and advisory service. Secondly, the project will promote labor- based technology for road maintenance and rehabilitation and involve project beneficiary participation in project preparation and implementation. The use of mechanical construction methods will be minimized. Thirdly, the project will promote the concept of planned maintenance and rehabilitation through the preparation of a district transport master plan (DTMP) that prioritizes the need for maintaining existing road assets. The project will only support the maintenance and rehabilitation of existing roads or trails. It will not support new road construction. In the future, support for viable new road construction and upgrading in a follow-on operation may be considered for districts that demonstrate an enhanced capability in managing road maintenance and rehabilitation under this project. C: Project Description Sumnuary 1. Project components (see Annex 2for a detailed description and Annex 3for a detailed cost breakdown): Infrastructure civil works Works 4.2 72.0 3.4 68.0 Supervision and design Consultancy 0.3 5.0 0.3 6.0 Equipment and logistical support Goods 0.2 3.0 0.2 4.0 Technical assistance for management support, monitoring & evaluation, and Consultancy 1.1 19.0 1.1 22.0 preparation of a follow-on project Total: 5.8 100.0 5.0 100.0  NEPAL: Rural Infrastructure Project Page 5 Project Appraisal Document 2. Key policy and institutional reforms supported by the project: (i) The project will support the Government's effort to continue its decentralization policy for local development; (ii) The selected DDCs will be the focal points for planning and managing rural roads/trails and other infrastructure projects, and will receive capacity building support from the project. The Government will need to continue providing funding to the DDCs and VDCs to manage district and village roads; and the participating DDCs will need to contribute 20% of the civil works cost of the project from their centrally-allocated block grants and other own resources as their counterpart funds; (iii) The institutional capability of MLD/DOLIDAR will be enhanced so that it can effectively perform its monitoring and coordinating support functions. The main functions of the MLD/DOLIDAR shall be limited to the coordination of DDCs activities and the provision of policy guidance and technical assistance; (iv) The DDCs' capability in planning local infrastructure development will be strengthened through the preparation of DTMPs with active participation of stakeholders as the starting point in their planning process; (v) The project will support the promotion of labor-based technology for maintenance and rehabilitation of district and village roads, through the provision of training to local contractors, user groups, consultants, DDCs and DOLIDAR engineers; and (vi) The project will help establish contracting procedures and public monitoring system in participating project DDCs to enhance accountability and transparency for public works at local level and to fight against corruption. 3. Benefits and target population The project will be undertaken in the following eight districts: Kapilbastu, Rupandehi, Nawalparasi, Syangja, Palpa, Kaski, and Dhading, in the Western and Central regions; and Sankhuwasabha in the Arun Valley. These eight districts are be referred to as the "project districts". The seven districts in the Western and Central regions were selected because they met the minimum criteria as candidate districts for participating in the project. The inclusion of the Sankhuwasabha District in the Arun Valley reflects a long- standing commitment of the Bank and HMG/N to assist the development of rural access roads in the Arun Valley and offers an opportunity to test procedures for cooperation with another donor agency, Gernan Technical Cooperation (GTZ), which has a long experience in the development of environmentally sound rural roads using labor-intensive methods - the "Green Roads Approach" - in Nepal. The likely benefits of the project are: (i) Greater capacity to maintain rural roads in the project districts from the increased availability of trained local contractors and consultants, as well as improved planning and management capability, resulting in more efficient use of public funds, reduced transport costs, and better environmental management; (ii) improved access to district headquarters and markets, which will promote economic and income- generating activities, improve farming practice and help reduce poverty; (iii) improved access to health and social services, which will raise the educational and health standard of the rural population; (iv) more job opportunities created by the project, both temporary and permanent, which will benefit the poor and women to some extent, with the use of labor-based technology for project works; (v) a knowledge base for the Bank and HMGIN to work effectively with local stakeholders in a decentralized development framework; and  NEPAL: Rural Infrastructure Project Page 6 Project Appraisal Document (vi) a knowledge base for the Bank, 14MG/N, and civil society of Nepal to pursue greater accountability and transparency in the use of funds achieved through the experience of community-based performance monitoring in selected DDCs. 4. Institutional and implementation arrangements: Implementation period. The project will be implemented over a three-year period (from FY 2000 to FY2002) to ensure that implementation arrangements and labor-based techniques for civil works will have the opportunity to be tested over at least two working seasons, and to allow adjustments by stakeholders. Implementation arrangements. The MLD will be accountable for the overall coordination of the project. A Project Coordination Unit (PCU) has been created under the DOLIDAR of the MLD to monitor, assist, and coordinate the project preparation and implementation activities of the participating districts. The PCU is currently headed by a Project Coordinator, and consists of two engineers and an account officer. A social mobilization specialist will also be appointed in the PCU to assist the implementation of a Community-based Performance Monitoring (CBPM) of technical and financial aspects of project performance. As a coordinating and advisory unit, the PCU will: (i) facilitate project preparation and implementation, and provide technical support to the districts; (ii) manage day-to-day project coordination and monitoring; (iii) review and approve the annual investment programs under the project proposed by the DDCs; and (iv) coordinate disbursements and consolidate financial infornation for reporting. The PCU will undertake these tasks with the support of a Technical Assistance Consultancy (TAC) under the project. DDC - DTU. The DDCs will be the implementing agencies of the project's civil works component. The existing District Technical Units (DTUs) of the DDCs are the focal points in project preparation and implementation, and responsible for: (i) preparation of the DTMPs and annual road maintenance and rehabilitation plans; (ii) procurement and management of contractors, mobilization of road users' groups, and supervision consultants for civil works under the project; and (iii) financial management and reporting of project activities in the district. A district engineer to be designated by the Local Development Officer will be in charge of project management at the district level. The TAC. To assist the DOLIDAR and DDCs in undertaking their responsibilities and strengthen their capacities, the TAC will provide: (i) project management support, (ii) assistance with project monitoring and evaluation including environmental and socio-economic impact monitoring, (iii) training to DOLIDAR and DDCs staff, local contractors, user groups, consultants and local NGOs; (iv) assistance with stakeholder mobilization in DDCs in planning, implementation, and monitoring; and (v) assistance in the implementation of the community-based performance monitoring system. The PCU will create a temporary Project Office, to be based in Butwal (which is located in the center of the project districts in the Western region), to implement the capacity building activities of the participating DDCs. The Project Office wiil be staffed by the consultants under the TAC and PCU staff. The training activities will be undertaken utilizing the existing Labor-based Training Center in Butwal. This arrangement differs from the previous IDA-supported projects under which the central govemment agency (the MLD) was the executing agency for all project components, and the DDCs had limited roles in project preparation and implementation. Procurement arrangements. The DOLIDAR will be responsible for the appointment of the TAC and of equipment to be procured under the project. The DDCs will be responsible for the procurement of the services of local supervision consultants and of local contractors, and mobilization of users' groups. The DOLIDAR will also be responsible for provision of standard tender documents to the districts and assistance with procurement. Supervision and oversight. The DTUs vvill be responsible for supervision of the maintenance works  NEPAL: Rural Infrastructure Project Page 7 Project Appraisal Document executed by small labor contractors or road users' groups. The DTUs will also be responsible for engaging local consultants to supervise rehabilitation and spot improvement works which will be contracted out to Class C & D contractors, and to provide environmental guidance where necessary to contractors, with the support from the TAC. The design, preparation of bidding documents and supervision of the contractors by the local consultants will be managed by the DTUs under the responsibility of the DDCs. The TAC will regularly monitor the performance and evaluate the progress of the project, including all key project activities. Accounting and Financial Reporting Arrangements. A financial management system review of DOLIDAR was carried out during appraisal (see Annex 5-A). The financial control environment in Nepal has been weakened by the transfer of responsibility of the control and management of accounts staff from the Financial Comptroller General's Office (FCGO) to the Ministry of General Administration (MOGA), and organizational risks are present in the short-term in the context of inadequate capacity of DOLIDAR (which assumes project and financial management responsibility) during the initial phase of project implementation. However, as this is a LIL project, there is adequate scope built in the project for strengthening the technical capacity of DOLIDAR and DDCs. hi order to mitigate institutional development risks, capacity for financial management is being built up in accordance with a time-bound action plan which includes the timely recruitment and placement of key staff. During negotiations, the Government confirmed that: (i) Financial management staff satisfactory to IDA have been appointed, specifically assigned, and are in position to manage the accounts upon the start of project implementation; (ii) HMG/N will not replace key staff in the PCU (Project Coordinator and Accounts Officer) without prior consultation with IDA, and (iii) A computer technician has been appointed to support a computerized system in the DOLIDAR and to operate the computerized Financial Management Information System which will be developed under technical assistance component of the project. The financial management system review concluded that the DOLIDAR does not have the financial management capacity to be eligible for PMR-based disbursements. The action plan outlining further activities that must be undertaken during project implementation in order to strengthen the financial management reporting capacity of the PCU was agreed upon between HMG/N and IDA. Until the PCU has the capacity to deliver the Project Management Reports (PMRs) as per LACI requirements, traditional disbursement procedures will be followed. IDA will review the progress mnade in establishing a strong financial management system after about a year, and will ascertain whether the Project is eligible for PMR- based disbursements. However, the PCU will report to the DOLIDAR and the Bank in the mutually agreed format of PMRs. During the interim period, the PCU will produce the following PMR statements, Financial Statement (Report 1-A) and Procurement Management Reports (Section 3). The recent transfer of responsibility for the control and management of the accounting cadre of staff from the FCGO to the MOGA has created a potential country risk to the project. However, FCGO retains overall responsibility and accountability for public financial management including maintaining central accounts (including donor accounts) and preparing the national accounts for timely external audit by the Auditor General. Unless the responsibility of control and management of accounts staff is reverted back to FCGO, this risk remains. A further risk is the timely submission of accounts by DDCs and compilation of such accounts by the PCU, as well as completion of audit and subrnission of audit report within six months of the end of each fiscal year. The trimester PMRs, to be prepared by the PCU, will be used for progress monitoring and will be subject to close review and supervision by IDA. This will allow prompt follow-up to bring to the Government's attention any ongoing problems in the project's accounting, internal controls and financial reporting. A project completion report will be prepared by the DOLIIDAR with the  NEPAL: Rural Infrastructure Project Page 8 Project Appraisal Document assistance .of the TAC six months before the closing of the project. In addition, the TAC will produce a series of quarterly progress reports on project monitoring and evaluation, and follow-on project preparation. Disbursements. The Ministry of Finance (MOF) will allocate annual budgets to the project as envisaged in the annual work plan and budget agreed between HMG/N and IDA. HMG/N has included this project under the list of core projects, and will commit for timely release of funds. Concerned DDCs will implement the civil works in the districts pertaining to the maintenance and rehabilitation of rural roads. The DDCs will provide their matching funds at 20% of the civil works cost from the DDCs' centrally allocated block grants and their own resources, before the PCU provides the budget authority to DDCs for the 80% of IDA's share. The PCU will directly administer budget for equipment support, training and consultancy services. The PCU will be responsible for overall project administration and management and submission of PMRs to the Government and the Bank. Disbursement will be made on the basis of a percentage of eligible expenditures according to Schedule 1 of DCA. The statement of expenditures (SOE) procedure will be used. Special Account. A Special Account in US dollars will be established at the Nepal Rastra Bank (Central Bank) on terms and conditions satisfactory to IDA. For the interim period, IDA disbursements are based on the PMR, the account will have an authorized limit of US$500,000 and will follow the existing disbursement procedure. The PCU will submit replenishment applications for the Special Account on a monthly basis, or when 25% of the authorized allocation has been used, whichever occurs first. The replenishment applications will be supported by the necessary documentation which include a bank statement and a reconciliation statement. Auditing Arrangements. Project financial statements, prepared in the formats agreed with IDA, will be audited annually by the Auditor General of Nepal who is considered an independent auditor for IDA's purposes. Audit reports will be due within six months of the end of each fiscal year. Expenditures at the district level will be kept open for the purpose of ensuring transparency. All records including contracts, orders, invoices, bills, receipts and other relevant documents evidencing all expenditures will be kept properly and the Bank's representative will have the access to them for the purpose of examination. Monitoring and evaluation arrangements. A project specific monitoring system under the responsibility of the PCU was finalized during appraisal to serve as the key project impact and performance monitoring tool. Regular implementation performance reviews will be undertaken by the TAC. These reviews will allow the MLD and IDA to evaluate the implementation experience and to adjust the investment budgets and the responsibilities of the DDCs. In addition, socio-economic and environmental impacts will be monitored by comparing the baseline data before and towards-the-end of the project. Furthermore, public monitoring of the use of funds at the DDC level (i.e., community-based performance monitoring) will be conducted throughout the project period in the participating districts. The review of the implementation experience will form the basis for deciding whether to proceed with a larger scale follow-on project that mainstreams the learning and piloted methods of this project; or, as an internediate step, to continue a follow-on Learning & Innovation Loan (LIL) that builds consensus and demonstrates project benefits in a different or more elaborate setting. During project preparation, a socio-economic survey was undertaken to establish base line indicators in four project districts. These will be monitored and evaluated during the preparation of the Project Completion Report. Responsibility for distilling the results of LIL activities will lie with the TAC in close coordination with the DDCs and DOLIDAR. They will be based on reports and recommendations from the project performance evaluation, the Labor-based Training Center, and the Project Office. A mid-term review will be held in November 2000 to review implementation progress against agreed schedules and assess the implementation experience.  NEPAL: Rural Infrastructure Project Page 9 Project Appraisal Document D: Project Rationale 1. Project alternatives considered and reasonsfor rejection: Given its predominantly agricultural-based economy, rural area development receives primary attention in the Nepal CAS. In 1995, the Agricultural Perspective Plan (APP) was prepared for the National Planning Commission and has been accepted as the blue print for overall economic development of the agricultural- based areas of Nepal. The APP identifies four integrated key components as priorities: (i) rural access roads, (ii) agricultural technology extension, (iii) water and irrigation, and (iv) fertilizer. The PIP for the transport sector also identified priority projects for sustainable development of the strategic and rural road network for the period of 1997-2006, taking into consideration resource constraints and funding requirements. To date, IDA has directly supported various components of the APP through the Agricultural Research & Extension Project (Cr. 2977-NEP) and the Nepal Irrigation Sector Project (Cr. 3008-NEP). IDA is also in the process of preparing a Road Maintenance and Development Project to continue its support for the institutional strengthening of the DOR and the development of priority strategic roads. The project focuses on capacity building of local government and support of rural access roads as outlined in the APP and PIP. Capacity building at local government level will be a challenging process because of the weak absorptive capability at district level. There are difficulties in adapting Bank and HMG/N disbursement procedures to address the needs of local government entities, small contractors, road user groups, and local consultants. Therefore, there is a need to initially develop an effective modality for IDA to work with the local District governments and to channel IDA assistance to the districts under a decentralization framework. Before such an approach is tested, a full-scale investment faces significant uncertainty and is not justified. Furthermore, a traditional lending instrument would not be responsive to the learning-by-doing and timely- need nature of the project. IDA has initiated its support for the promotion of labor-based road maintenance practices through a Pilot Labor-based District Road Maintenance and Rehabilitation (PLRP) component under an ongoing IDA-financed Road Maintenance and Rehabilitation Project (RMRP), which will be closed in Junel999. There is a need to sustain the momentum initiated under the PLRP. Moreover, the Government requested IDA's support to implement its new strategy for rural infrastructure development. The LIL is an appropriate instrument for achieving the project development objective, and is consistent with IDA's Country Assistance Strategy for Nepal. Under the LIL, an effective modality will be tested by IDA and HMG/N to determine the best course of action in supporting the decentralization of infrastructure development. Using the learning experiences acquired under the LIL, an effective approach for sustainable rural road development may be applied to a larger operation at a later stage. The application of a social fund framework for channeling Bank funds to the local governments was also explored for the project. It was considered inappropriate at this time because of the absence of necessary legal infrastructure in Nepal that would allow an independent entity responsible for administrating the fund. In any case, it was considered desirable to help strengthen the central government agency's capability in planning and coordinating infrastructure development of local governments, rather than bypassing the central government agency. In determining which districts would be included under the project, consideration was given to similar projects being pursued by other donor agencies. Since the Asian Development Bank (ADB) and the British Department for Foreign Development (DFID) have concentrated their efforts in the Central and Eastern regions of Nepal, it was decided that IDA operations would focus in the Western region. Having received prior assistance from IDA and other bilateral donors, most districts selected to participate in the project have modest institutional capacity and have begun to work with stakeholders in rural infrastructure development. Being a LIL, consideration was given for the inclusion of both terai districts and hill districts, as their demand and challenge for rural infrastructure development are quite different. In addition, six project districts in the Western region were included in the Nepal Irrigation Sector Project for  NEPAL: Rural Infrastructure Project Page 10 Project Appraisal Document IDA assistance. The project will complement the irrigation development support to these districts. This will improve the likelihood of achieving the project's objectives, which can lead to expansion of IDA assistance to other less developed districts. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned): Bank-Financed Replacement of bridges, road maintenance First Highway (Cr.223-NEP) N/A N/A Upgrading of roads, feeder road Second Highway (Cr.730- N/A N/A construction, training of mechanics NEP) Highway and feeder roads construction Third Highway (Cr.1515-NEP) S S Emergency rehabilitation and rebuilding of Road Flood Rehabilitation S S roads and bridges (Cr. 1922-NEP) Maintenance and rehabilitation of the core Road Maintenance and S S network (with ODA/SDC/UNDP) Rehabilitation Project (Cr. 2578-NEP) Development of agricultural techniques and Agricultural Research and U U extension Extension (Cr. 2977-NEP) Farmer managed water schemes and O&M Nepal Irrigation Sector Project S S (Cr. 3009-NEP) Development of enabling environment for Multimodal Transit and Trade S S multimodal transport of goods to and from Facilitation Project (Cr. 3008- Nepal NEP) Rehabilitation & maintenance of core Proposed Road Maintenance N/A N/A network, upgrading & construction of feeder and Development Project roads, establishment of a road fund Other External Development Agencies ADB - Maintenance and rehabilitation of the Second and Third Road core network Improvement projects ADB - Rural infrastructure Rural Infrastructure Development Project SDC- Road maintenance and rehabilitation District Roads Support Prog. DFID- Road rehabilitation and maintenance Eastern Region Road Maintenance GTZ - District Road Development, Rural Gorkha, Dhading, Development Sankhuwasabha District and Rural Development Programs Japan - Construction of gravel road Dhulikhel - Sindhuli Road IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)  NEPAL: Rural Infrastructure Project Page 11 Project Appraisal Document 3. Lessons learned and reflected in the project design: In the ongoing RMRP, where labor-based technology and community-participation were introduced for the rehabilitation and maintenance of district roads, project preparation and implementation was centralized and came under the responsibility of MLD; the DDCs' role in project management was limited. Moreover, a clear lesson learned from donor-assisted projects has been that project impacts are generally more effective if they are prepared by stakeholders with beneficiary participation. Based on these experiences, the preparation and implementation of this project have incorporated the following lessons: (i) the preparation of a district transport master plan by DDCs will be used as a tool in strengthening the capacity of DDCs and involving beneficiary participation in project planning, and will be used as the starting point of project preparation by the districts; (ii) the DDCs will be directly responsible in managing the contractors and supervision consultants working on the project roads in their respective districts; (iii) a suitable disbursement and fund flow system will be developed to ensure timely flows of Bank funds to the subprojects; (iv) selected DDCs must demonstrate their interest in participating in the project framework by committing their counterpart funds to the project; (v) appropriate labor-based technology and stakeholder participation must be adopted to ensure sustainability, and road standards adopted have to be compatible with the volume of traffic expected on the roads; and (vi) the MLD/DOLIDAR will focus on coordinating and monitoring project activities. 4. Indications of borrower commitment and ownership: The MLD has prepared a national strategy for the country's rural infrastructure development and established an institutional framework for the sector's development. The DOLIDAR was established to support the decentralization framework for local infrastructure development. The HMG/N is prepared to use credit resources from the project to finance evaluation of the project experience and the preparation of a follow-on project. The MLD has evaluated proposals from the shortlisted consultants for the TAC component under the project. The PCU has been established with dedicated staff in DOLIDAR for project coordination and management. The selected DDCs have agreed to contribute 20 percent of the civil works costs incurred under the project from their own resources. They have already prepared or are in the process of preparing their respective DTMPs using a participatory approach, and have prepared their first-year work programs for the maintenance of priority roads. The MLD has agreed to work with the selected DDCs in developing the implementation arrangements for the community-based performance monitoring system. 5. Value added of Bank support in this project: IDA can provide HMG/N with valuable experience from the preparation and implementation of similar projects in the subcontinent and in other developing countries, especially in the promotion of labor-based technology in road work and in capacity building for decentralization. The Bank will apply its experience in other countries to help promote "best practices" via the establishment of: (i) contracting and accountability procedures; (ii) appropriate supervision of rehabilitation and maintenance works; and (iii) monitoring and evaluation systems to be managed by the central coordinating agency in a decentralization framework. The rural road sector in Nepal has traditionally received much attention from all major multilateral and bilateral donor agencies. Donors have adopted slightly different modalities in their assistance to different districts, depending on their own internal constraints. Road activities require substantial efforts to coordinate donor activities and would benefit from a shared focus of assistance. Using the LIL, IDA may contribute to coordinate donor activities in the rural infrastructure sector, mainstream proven approaches, and develop a common assistance strategy among donors. Specifically, IDA has arranged to collaborate with the GTZ in project preparation in the Sankhuwasabha District. The project will adopt the  NEPAL: Rural Infrastructure Project Page 12 Project Appraisal Document "performance-based user group approach" for work execution in the District. During project implementation, IDA and DOLIDAR will also collaborate with GTZ which is already actively involved in supporting rural road development in the District. The experience of this approach will be monitored and evaluated under this project. E: Summary Project Analysis 1. Economic (supported by Annex 4): [ ] Cost-Benefit Analysis: NPV=US$ million; ERR= % [/] Cost Effectiveness Analysis: A sample of three typical rural roads from the project districts were selected and subjected to a cost- effectiveness analysis to provide an indication of the project's economic viability as a whole. As the project works to be undertaken in eight districts are of similar nature, it is considered sufficient to study a sample of the typical hill and Terai roads with typical nature of works that were proposed under the project. The cost-benefit estimates for the analysis were largely based on the information collected during field survey of the sample roads, supplemented by some threshold estimates from the Priority Investment Plan (PIP). The basic criteria in selecting roads for inclusion in the project is that the investment would result in the provision of the minimum fair-weather motorable accessibility to villages and markets, through either periodic maintenance, rehabilitation, or upgrading, as proposed under the project. Current costs of maintenance, rehabilitation and upgrading were derived on a per km basis from the typical cost estimates of the PIP and were modified from the basic unit rate prevalent at the site and from the ongoing PLRP. The typical costs were estimated on the basis of a minimum service level required for making the road usable for most of the times in a year. The results of the cost-effectiveness analysis showed that the proposed low-cost treatments (maintenance and minimum rehabilitation) of the project roads would be economically viable provided that the treatments proposed were corresponding to the level of traffic and economic activities in the zones of influence of the road. The analysis showed that the project would produce an effectiveness indicator of about 143 persons per one hundred thousand rupees of investment, which was comparable with a similar project in the region. In addition, the unit rehabilitation cost for an earth road adopted in the project was also comparable with the unit cost of a similar project in the region. 2. Financial impact: Adequate financial control and accountability in the DDCs will be one of the main challenges of the project. The project is designed to specifically address this issue. While the DDCs will have the responsibility for managing financial payments to contractors, a project specific financial verification will be undertaken regularly by the TAC to ensure proper payment flows. Training will be provided to DDCs' and DOLIDAR's accountants to familiarize them with HMG/N and IDA's disbursement procedures. Another challenge to a project of this nature is the difficulties associated with administration of many small contracts. Timely disbursement of IDA funds to the project Special Account and speedy payments to small contractors by the project are of critical importance to the success of the project. Adequate provision of counterpart funds and timely release of central government budget allocation to the DDCs are also risks that the project must address. Over a period of three years, assuming all eight districts will progress at a similar pace, it is estimated that the project will generate about NRs. 10 million of civil works per district per year. This will require counterpart funds of about NRs.2 million per district per year from each district, which would amount to about 60-70% of the district's current annual expenditure on rural roads. For districts that are more advanced in their project planning and have more extensive road network, they would be able to absorb more funds from the project, which would also increase the amount of their counterpart funds requirement.  NEPAL: Rural Infrastructure Project Page 13 Project Appraisal Document It is therefore envisaged that the project will help to pool district funds into a planned framework for preserving the existing road assets, thus maximizing the effectiveness of the districts' spending on rural roads. 3. Technical: Civil works under the project will be carried out in different approaches based on the prevailing conditions in the districts. The technically more complicated works (requiring specialized equipment, e.g., road rehabilitation) will be carried out by Class C & D labor-based contractors. Less complicated works (e.g., routine and periodic maintenance) will be contracted out to small labor contractors or user groups. A "performance-based user group approach" through social mobilization of road users could also be adopted. No matter whether contractors or user groups are engaged, a result-based contracting procedure will be developed as the main approach for work execution. No force account work will be undertaken under the project. A technical performance evaluation will be undertaken periodically by the TAC to ensure works are carried out to the standard and quality required by the project. For rehabilitation works, the design of works, finalization of bidding documents and supervision will be undertaken by local supervision consultants to be engaged by the DDCs. The DTUs under the DDCs are directly responsible for contracting out and supervising routine maintenance works. The local supervision consultants will involve DTU staff closely in all aspects of their work and provide on-the-job training to DDC staff. The DDC technical staff will gradually upgrade their capacity in the management of civil works and consultancy contracts. The PCU of DOLIDAR and the TAC will assist the DTUs in the preparation of contract documents and evaluation of supervision consultants' proposals. As part of the capacity building objectives, the project will also help create local capacity in the private sector for the implementation of rural infrastructure works. Local engineering consulting companies and local labor-based contractors will be involved in the implementation of the works. The local consultants will receive training in designing, packaging and preparing bidding documents for works executed with labor-based techniques. The local contractors and user groups will also receive technical and management training. All works under the project will focus on applying labor-based methods with appropriate low- cost standards. 4. Institutional: Executing Agencies. The executing agencies for the project's civil works component will be the respective DDCs, while the DOLIDAR will be responsible for executing the technical assistance component. The approach of the project is to pass the responsibility for the execution of the works to the district authorities from the start of the project, while providing them with training and project management support. To participate in the projects, districts have to demonstrate a commitment to managing their roads development in a more effective way, by meeting the following criteria: (a) preparation, through a participatory process, of a district transport master plan covering both maintenance, rehabilitation and upgrading, and receive approval of the plan by the District Council; (b) hiring of at least one engineer and two overseers under the District Engineer to provide adequate staff to the DTUs; (c) contribution of 20% percent of the cost of works to be carried out under the project from the centrally-allocated block grants and other own resources; (d) agreement to a transparent financial accounting framework, in which budgets, plans, details of works to be undertaken with schedule, costs, payments and progress monitoring indicators would be made available to the public; and (e) agreement to adopt labor-based technologies for rehabilitation and maintenance of district roads. Project management. The capacities of the DDCs will be gradually strengthened during project implementation. The funds available for investment by the DDCs will allow for learning by doing. The DTUs under the DDCs will start with supervising routine maintenance works under the project. As the districts build up and demonstrate their capability in managing road maintenance and rehabilitation works  NEPAL: Rural Infrastructure Project Page 14 Project Appraisal Document under the project, they will be provided with further support and assume more responsibilities in a follow- on project to address more difficult works of road upgrading and construction. The framework for decentralization and capacity building of local governments requires the enhancement of the coordinating and monitoring capabilities at the MLD. In carrying out this responsibility, the MLD has to resist the temptation of taking the full responsibility for the planning and execution of district road projects, given the weak capability of DDCs. A monitoring and evaluation system needs to be developed to allow MLD to effectively monitor the various local infrastructure development programs. There is also a need to clearly define a rewarding career path for technical and engineering staff in MLD/DOLIDAR and DDCs. An effective monitoring capability within MLD/DOLIDAR will be gradually developed so that physical progress, technical standards, environmental and socio-economic impact, and financial expenditure of district road projects can be monitored and correlated through the development of DOLIDAR within MLD. The project will, in this respect, provide assistance to DOLIDAR, in order to ensure its development as a self-operational unit within MLD. As part of the capacity building process in the MLD, information dissemination, training, and regular implementation performance reviews will be undertaken by the TAC with participation of DOLIDAR. In the districts where local advisory bodies such as road users committees (RUCs) exist, the enhanced roles of RUCs will be pursued through their participation in the master planning exercises, monitoring of the maintenance and rehabilitation works under the project, environmental and socio-economic impact monitoring, and in the selected districts, the community-based performance monitoring system will be used to verify the use of funds. The road user committee usually exists per each road and consists of representatives of various stakeholders of district roads including DDC and VDC members of the concerned area, local bus and transport companies, population alongside the alignment, etc. For the DDCs without such a mechanism, the formation of RUCs is required during project preparation and implementation. 5. Social: A Social Assessment (SA) completed in October 1998 and consultations with the MLD and some DDCs have identified the following key social issues and the means to address them: (i) The SA identified mixed impacts of the project on both the poor and women and the difficulties of targeted intervention on these vulnerable groups. In addition, current representation of the poor and women in the decision-making bodies was found to be extremely low. The project will aim at, to the extent possible, maximizing the benefits to the poorer communities, the poorest in each community, particularly women, through the following: (a) participating districts will be required to hold wide consu'tations during the preparation of their transport master plans, whereby separate consultations with women is encouraged; (b) RUCs are required to have broad community and gender representation; (c) local contractors will be encouraged to hire local labor, including female labor gangs; (d) user groups, which by definition use local labor, will be used whenever possible; (e) DDCs are encouraged to combine the works with the roadside tree plantation and other income generation activities so that women's groups will have more incentive to participate; and (f) child labor issues will be closely monitored in terms of current practices and causes, and where observed, measures will be discussed and taken by the community to send children back to school. (ii) To ensure that corrective action can be taken during the life of the project, RUCs will be formed (if not already done) along the roads in each participating district so that the stakeholders' direct feedback w.'l be reflected during the project implementation. (iii) To ensure the sustainability of the capacity built at the district level, participating districts are required to train at least two of the members of RUCs as technicians.  NEPAL: Rural Infrastructure Project Page 15 Project Appraisal Document (iv) To ensure that implementation of road maintenance works is sustainable and broad-based, participating districts will be encouraged to use labor-based techniques for majority of their works, and use either local contractors (historically preferred in the Terai districts, according to the SA) or user groups (preferred in the Hills districts), or both, to implement the works. (v) To ensure that works are technically sound and appropriate, districts are required to hire local contractors to carry out rehabilitation works, and will be subject to supervision by the local supervision consultant and periodic technical audit by the TAC. (vi) To fight corruption, a Community-Based Performance Monitoring System will be piloted in two selected districts, whereby project accounts in each project location, detailed works to be carried out, expenditures and payments are made available to the public. The social mobilization specialist to be engaged by the PCU will be responsible for assisting district-level RUCs in community mobilization to carry out the tasks. (vii) To ensure that the lessons learned through the LIL will feed into a possible follow-on project, a socio- economic survey was conducted in sample districts with beneficiary participation in data collection and impact monitoring. 6. Environmental assessment: Environmental Category []A [ IB V]C The proposed LIL is considered a Category C project from the aspect of environmental assessment. Since the civil works cover only maintenance, rehabilitation and spot improvement (for example, the gravelling of a steep stretch of dirt road or the construction of culverts for proper drainage), no significant environmental degradation is expected. In fact, proper maintenance and rehabilitation works pursued under the project are expected to reduce soil erosion via improving improper drainage and slope instability. Moreover, the dissemination of labor-based techniques is expected to have positive environmental impacts. Various studies have shown that such techniques are most appropriate for local fair-weather roads built in geological stable locations following contours and ridge lines. Land acquisition and resettlement are not expected. All rehabilitation and maintenance works will take place on existing road alignments, and no widening is envisaged. Neither new natural habitats nor cultural property will be affected by the project. Virtually all inhabitants of Nepal can be considered "indigenous", therefore the project has been designed to ensure that its benefits reach the poorest groups. As part of the project preparation and during implementation, a system to screen the environmental and social impacts of road works will be developed in DDCs, with the technical assistance of TAC at national level and local supervision consultants at the local level. The system is expected to identify works which might have moderate impacts and identify mitigation measures, based on the recommendations of the Environmental Assessment (completed in October 1998). The identified mnitigation measures (such as slope stabilization and bio-engineering works) will be incorporated into the Bill of Quantities and the Conditions of Contract in the sample contract documents to be provided by the DOLIDAR. The system will also provide valuable learning on screening criteria and mitigating actions, which will facilitate the preparation of a follow-on operation involving new road construction. DOLIDAR will have at least one environmental specialist to coordinate and facilitate the capacity building of DDCs on environmentally-friendly road management, which will also involve TAC and local supervision consultants. As part of its development plan, DOLIDAR will form an environmental unit to provide technical advice and guidance to the DDCs on environmental matters. In coordination with other donors, the LIL was also designed to assist DOLIDAR to develop an environmental management framework for rural road works, which encompasses assessment, design, contracting, works execution, monitoring and training. All stakeholders including MLD/DOLIDAR, DDC, VDC, contractors and user groups will be involved in the process and provided with training for labor-based and environmentally- friendly techniques under the project.  NEPAL: Rural Infrastructure Project Page 16 Project Appraisal Document 7. Participatory approach: The project envisages a considerable level of stakeholder participation in planning, implementation and monitoring & evaluation, as follows: ey Skhove-nt ' ' Villagers Input in planning Choice of works to be done CON (preparation of Transport Master Plans) Implementation Formation of user groups to COL carry out works; engagement of local contractors to carry out works Monitoring and Evaluation RUCs to monitor progress COUCON indicators; impact evaluation (environmental & socio- economic); Community-based performance monitoring to verify the use of funds General road users Input in planning and Selection of roads; impact CON evaluation evaluation Village elected officials Guide local planning Link local consultations to COL district decisions District technical staff Preparation of Master Choice of implementation COL Plans; management of modalities implementation; district- level supervision District elected officials Approval and Transport Master Plans; COL implementation of allocations to road works Transport Master Plans DOLIDAR technical Technical oversight; Emphasis on need for COL staff monitoring and evaluation national M&E, as well as of district programs technical input MLD/DOLIDAR Project planning and District selection, TAC COL officials preparation selection NGOs Monitoring Community-based CON performance monitoring and local stakeholder mobilization IS (Information sharing): one-way flow of information CON (Consultation): two-way flow of information COL (Collaboration): shared control over decision-making  NEPAL: Rural Infrastructure Project Page 17 Project Appraisal Document F: Sustainability and Risks 1. Sustainabilit: The project's sustainability lies in two areas: the sustainability of rural roads maintained or rehabilitated; and the sustainability of institutional capacity developed under the project. With its emphasis on maintenance and rehabilitation of the existing roads, the project will help demonstrate the value of proper road maintenance to the stakeholders of district roads. By focusing on maintenance and rehabilitation, the project will bring some district roads to a maintainable condition, so that the districts can execute planned maintenance in accordance with their master plans and limited resources. The preparation of DTMPs with emphasis on properly balancing the need of new construction versus maintenance through a participatory process will help ensure ownership of the plans, and the continuity of priorities under the plan. The labor- based techniques to be promoted under the project will help facilitate participation of local labors and project beneficiaries in project implementation, and minimize environmental impact. On the institutional side, the project is designed to assist the district to develop their planning and management capability for district roads. It is expected that the capability developed under the project will be internalized by the DDCs and remains as DDCs' system. As a key measure of their enhanced planning capability, the districts will plan for road development according to its own resources, and set a better balance between maintenance and new construction. In addition, it should be noted that DDCs have been receiving the centrally-allocated block grants of about Rs.3-4 million annually for road development, plus the resources the DDCs have mobilized on their own. These allocations are expected to continue because it has been a politically favorable policy in recent years under the decentralization framework. Indeed, if the institutional and management capability of DDCs for utilizing these funds improve under the project, it would help to ensure such policy will gain greater support. By building up a better institutional system in managing these resources, the project will help enhance the sustainability of road development in the districts. Political instability is a key constraint to sustain the institutional capability developed in the DDCs and MLD/DOLIDAR. However, successive governments have placed decentralization at the core of the national development strategy, which should minimize the impact of political instability on the decentralization policy. The Bank shall leverage its influence for the continuation of decentralization by supporting the implementation of the recently-passed Local Self-Governance Act (currently pending the Royal Seal for formal enactment). It is noted that while the Central Government tends to be unstable in recent years, the local govermment entities (DDCs) appear to be much more stable, which may be a window opportunity for a project of this nature.  NEPAL: Rural Infrastructure Project Page 18 Project Appraisal Document 2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): Annex 1, cell "from Outputs to Objective" Continued Government policy commitment to M Continued policy dialogue with the Government decentralization of district roads management and leverage Bank assistance strategy with responsibility to DDCs and Government fiscal support to Government commitment to decentralization. DDCs. Expected benefits from adopted technology for district M Training and promotion of the labor-based roads development materialized and publicized in the technology have been provided under the project region. to gain wide acceptance of the technology. Continued donor coordination and support for district M Enhanced donor coordination to avoid duplication strengthening and district roads development. of assistance and inconsistency of policy reform agenda, collaboration with GTZ in the project. Institutional capability of the MLD and the selected DDCs H/S Targeted project management & capacity strengthened as a result of the project. building assistance provided by the project Leakage of project funds and corruption as a result of S Enhanced financial monitoring system to be increased decentralization and the lack of central introduced at both district and DOLIDAR, training monitoring and control on financial flows. of accountant staff, financial verification by TAC, and, in the selected DDCs, Community-based Performance Monitoring System in place. FCGO and MOGA roles and responsibilities are defined S Further dialogue and agreement reached and maintained. between the Borrower and the Bank. Annex 1, cell "from Components to Outputs" Counterpart funding available to the selected districts in a S Inclusion of the project in the HMG/N's annual timely manner development budget, Continuity of priority roads in the annual budget plan of S Preparation of the DTMPs through a participatory the selected districts approach; and inclusion in project only roads identified in the DTMPs DDCs opted for major road construction works, instead of S Construction supervision by consultant required focusing on maintenance and rehabilitation of existing for rehabilitation works, technical audit and roads monitoring by TAC, suspension of IDA financing if works carried out are outside the scope as defined in DCA. Incentives are adequate to obtain good performance and S The establishment of DOLIDAR in the MLD has continuity from the DDC engineers created a career path for MLD engineers. Procurement actions are streamlined and completed on S Advance procurement actions are required by the time. DDCs and DOLIDAR prior to project appraisal; and introduction of simplified contract documents. Efficient operation of project accounts by DOLIDAR and S Adoption of simplified fund flow arrangements the selected DDCs to ensure timely fund flows and and undertaking of regular financial monitoring payments under the project. Overall Risk Rating: S Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)  NEPAL: Rural Infrastructure Project Page 19 Project Appraisal Document 3. Possible ControversialAspects: None. G: Main Loan Conditions 1. Effectiveness Conditions: None other than the standard conditions. 2. Other: (i) Counterpart funding for the civil works component. (ii) Adequacy and continuity of staffing in the PCU. H. Readiness for Implementation [VI The combined technical and financial proposals for the TAC component of the project have been evaluated by DOLIDAR. [ ] The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [VJ Not applicable. VI The procurement documents and work plans for the first year's civil works are complete and ready for the start of project implementation. /] The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. [ ] The following items are lacking and are discussed under loan conditions (Section G): I. Compliance with Bank Policies [/] This project complies with all applicable Bank policies. "TaskLeader: Guangzhe Chen S Sector Manager: Frannie Humplick Country T)irector: Hans M. Rothenbuhler  NEPAL: Rural Infrastructure Project Page 20 Project Appraisal Document Annex 1 Annex I Project Design Summary Sector-related CAS Goal: (Goal to Bank Mission) Broad-based economic 1. A well functioning 1. Special studies on the 1. Decentralization of decision- growth and improvement in decentralized local effectiveness of making and capacity government implementation govemance system in place decentralization policy in improvement of local capacity. with enhanced capability of Nepal. governments will reduce managing infrastructure at inefficiencies and increase local level, and with 2. World Bank Country responsiveness of development strengthened coordination Economic Memorandum effort to people's needs. and monitoring capability at and annual updates. the central agency level.. 2. Participatory process in project planning and implementation will 2. Piloted system expands to ensure that the benefits of other districts and sectors. growth will be more equally distributed. Project Development (Objective to Goal) Objective: A strengthened 1. Better quality. average travel 1. Implementation 1. Continued Government decentralized local time and transport costs completion reports. commitment to decentralization governance system that reduced by 20%; non- policy. provides a better quality, passability duration of roads 2. Progress reports from the more efficient and reduced by 2 months per year. Project Coordination Unit 2. Planning of the road sector sustainable rural road of DOLIDAR and technical expenditures govemed by the network while responding to 2. Sustainability roads units of the selected Priority Investment Plan and the communities and project maintained or rehabilitated still DDCs. Agricultural Perspective Plan. beneficiaries' needs. in operation 3 years after project completion; labor- 3. Periodic project 3. Reduction in transport costs are based techniques adopted in performance evaluation passed on to farmers and 80% of rural roads projects. report by TAC under the consumers. project. 3. Responsive to people's needs: 4. Implementation of other district transport master plans 4. Supervision mission complementary components of prepared using participatory reports. the Agricultural Perspective process and endorsed by Plan. district councils; 80% of 5. Project proposals project civil works expenditure submitted by other districts gone to local economy. for financing follow the piloted approach 4. Completion of preliminary developed under the appraisal recommends a project. follow-on operation that encompasses the knowledge base developed under the project. Outputs: (Outputs to Objective) 1. District road planning, 1.1 Selected DDCs developed or 1. DDCs' progress reports. 1. Continued Government policy implementation, and modified their district commitment to decentralization management system transport master plans 2. Supervision mission of district roads management established in project following established reports. responsibility to DDCs and districts. guidelines by end 1999. Govemment fiscal support to 3. Annual financial and DDCs. 1.2 The district technical units technical review reports of adequately staffed by the end sub-projects by DOLIDAR. 2. Expected benefits from adopted of 1999 and the improved technology for district roads contracting and accountability 4. Periodic review of development materialized and procedures implemented in progress reports and publicized in the region. selected DDCs. evaluation reports, and annual review of road 3. Additional districts prepared their 1.3 DOLIDAR/DDCs staff trained sector expenditures and annual budget plans for district according to approved allocations. roads development following the I training program. I _ _ _ project preparation framework  NEPAL: Rural Infrastructure Project Page 21 Project Appraisal Document Natve Summary Key Perfrmanc Indkators Mong and Evaiuatn CrItical Assumptions established under the project. 2. Appropriate labor-based 2.1 At least 50 local 5. Periodic project technology and design contractorsllabor groups performance evaluation 4. Continued donor coordination adopted by the selected trained in labor-based report by TAC under the and support for district DDCs for district roads technology and undertaken project. strengthening and district roads development. project works by end 2000. development. 6. Implementation 2.2 DDCs let 90% of road completion report. 5. Institutional capability of the maintenance and MLD/DOLIDAR and the selected rehabilitation works to locally- DDCs strengthened as a result of based labor contractor and the project. groups. 6. Community-based Performance 3. Management mechanism 3.1 Project coordinating unit Monitoring system established in for monitoring and established in DOLIDAR by the selected pilot districts to evaluation of DDCs appraisal. minimize misuse of funds. established and operational within the MLD/DOLIDAR. 3.2 A small department for local 7. FCGO and MOGA roles and infrastructure development responsibilities are defined and fully staffed and operational maintained regarding public in MLD with the role of financial management. supporting, coordinating and monitoring all district road development by end 1999. 3.3 Project monitoring & evaluation procedures and guidelines established in DOLIDAR by mid-term review. 4. Knowledge base 4.1 About 1300 km of district developed under a roads/trails maintained or decentralized governmental rehabilitated using labor- system that uses community based techniques. participation in district road maintenance and rehabilitation, leading to the formulation of a larger-scale follow-on project. Project Components/Sub- Inputs: (Budget for each (Components to Outputs) components: component) 1. Counterpart funding available to 1. Infrastructure works 1. US$4.2 million 1. Periodic progress reports the selected districts in a timely (Bank financed US$3.4 and disbursement reports. manner. million) 2. Supervision missions' 2. Continuity of priority roads in the 2. Supervision and design 2. US$0.3 million reports. annual budget plan of the (Bank financed US$0.3 selected districts. million) 3. Annual financial and technical review reports of 3. DDCs adhere to undertaking of 3. Equipment and logistical 3. US$0.2 million sub-projects by DOLIDAR. maintenance and rehabilitation support (Bank financed US$0.2 works under the project. million) 4. Reports from the training sessions and workshops. 4. Incentives are adequate to 4. TA for Management 4. US$1.1 million obtain good performance and Support, monitoring and (Bank financed US$1.1 5. Periodic review reports long-term continuity from DDC evaluation, as well as million) from the TAC who engineers. preparation of a follow-on monitors the works. project 5. Procurement actions are streamlined and timely. 6. Efficient operation of project accounts by DOLIDAR and the selected DDCs to ensure timely fund flows and payments.  NEPAL: Rural Infrastructure Project Page 22 Project Appraisal Document Annex 2 Annex 2 Project Description Project Component 1 - Infrastructure Works - US$4.2 million (including contingencies). This component will include routine maintenance, periodic maintenance, rehabilitation and spot improvement of existing district roads/trails and other rural infrastructure in eight selected districts. Over a period of three years, this component is envisaged to provide routine maintenance for about 1,000 km of roads, periodic maintenance of about 240 km of roads, and rehabilitation of about 100 km of roads. It will also support the rehabilitation and spot improvement of about 75 km of major trails. Most of the civil works will be carried out using small labor-based contractors or road user groups in the project areas. About 10% of the civil works expenditure could be used to finance other minor rural infrastructure, such as community marketing structures. The following table gives a breakdown of the component and the indicative allocations of Bank funds for different categories of works. It also provides an indicative per- district budget allocation for different categories of works (figures in italic), assuming all eight districts progress at same rate over a 3-year period. =.7 Based Civil Works Costs 3,800 258 Roads 90% 3,420 233 29.1 2,736 186 Routine Maintenance 20% 760 52 6.5 80% 608 41 Periodic Maintenance 25% 950 65 8.1 80% 760 52 Rehabilitation 45% 1,710 116 14.5 80% 1,368 93 Other Infrastructure 10% 380 26 3.2 80% 304 21 Contingencies 10% 380 26 3.2 80% 304 21 Total 4,180 284 35.5 80% 3,344 227 Project Component 2 - Supervision and design of civil works - US$0.3 million. This component will provide supervision and design of civil works to be undertaken under the project by local supervision consultants to be engaged by the project districts. Consultant supervision and design will be required for the periodic maintenance and rehabilitation works, while the DTUs will be responsible for supervision of routine maintenance works. Because of the unsophisticated nature of the works, the consultant will only need to prepare outline design before tendering, and provide detailed design as the works progress. The consultant will also assist the DDCs in the procurement of civil works contractors. Project Component 3 - Equipment and logistical support - US$0.2 million. Some basic equipment for logistical support to the DDCs and the PCU of DOLIDAR will be procured under the project. These will include 4WD pickups, motorcycles, computers and photocopiers. Some incremental operating costs will also be incurred for the operations of the PCU. Project Component 4 - Technical assistance for management support, monitoring & evaluation - US$1.1 million. This component will fund consultancy services to help strengthen the institutional capacity of the DDCs and MLD/DOLIDAR in planning and managing rural infrastructure, and develop the knowledge base for an expansion of the project approach. It will include: (i) project management advisory services to the districts and DOLIDAR; (ii) training of district and MLD staff, contractors and consultants; (iii) technical, financial, environmental and socio-economic monitoring and verification of road works; (iv) stakeholder mobilization and implementation of a Community-based Performance Monitoring system; and (v) evaluation of the project experience and preparation of a larger follow-on project to be financed by IDA.  NEPAL: Rural Infrastructure Project Page 23 Project Appraisal Document Annex 3 Annex 3 Estimated Project Costs Project Compnents gEnLocal Foreig - al -- --: --- - -' U $ $U million---- Infrastructure civil works 3.6 0.2 3.8 Supervision and design 0.3 0.0 0.3 Equipment and logistical support 0.1 0.1 0.2 Technical Assistance Consultancy 0.5 0.6 1.1 Incremental operating costs 0.1 0.0 0.1 Total Baseline Cost 4.6 0.9 5.5 Contingencies 0.3 0.0 0.3 Total Project Cost 4.9 0.9 5.8  NEPAL: Rural Infrastructure Project Page 24 Project Appraisal Document Annex 4 AnnexI4 Cost-Effectiveness Analysis Summary (NRs. Thousands, 1998) Background The economic assessment of the project was undertaken through a cost-effectiveness analysis of the impact of sample roads on the population served under the project. As the project civil works to be undertaken in eight districts are of similar nature, consisting of labor-intensive and low-cost maintenance and rehabilitation of existing district and village roads, it is considered sufficient to study a sample of the typical roads with typical nature of works that were proposed under the project. The cost and benefit estimates for the analysis were largely based on the data collected during field survey of the sample roads, supplemented by some threshold data from the Priority Investment Plan (PIP), which was completed in early 1997 by the Government with assistance of the Bank. The Sample Roads A sample of three typical rural roads from the project districts were selected and subjected to a cost- effectiveness analyses to provide an indication of the project's economic viability as a whole. These roads are all existing ones and are partially or fully operational, as would be the case for all project roads. The basic criteria in selecting roads for inclusion in the project is that the investment would result in the provision of the minimum fair-weather motorable accessibility to villages and markets, through either periodic maintenance, rehabilitation, or upgrading, as proposed under the project. Two cases from the Terai districts were chosen by studying the district transport master plan and the one from the hill district was selected from the road inventory presented by the DDC. They were considered representatives of the roads to be included in the project. These roads and the districts they are located include: Tilakpur - Manari (6 km), a village road in the Nawalparasi district of gravelled standard that is proposed for periodic maintenance under the project. Bahadurganj - Taulihawa road (23 km), a district road in the Kapilvastu district of earthen standard that is proposed for rehabilitation. Baidam - Pame - Thulakhet road (13 km) in the Kaski district of earthen standard that is proposed for upgrading to minimum gravel standard. The following table provides details and related information gathered during the field survey about the roads studied, as well as the proposed treatment under the project.  NEPAL: Rural Infrastructure Project Page 25 Project Appraisal Document Annex 4 Annex 4 Table 1: Sample Roads and Related Information Sai - P .am. - Tllalcpur - ManaV ROad Bahadwganj Taulihfaa Thulal Terrain Terai (low land) Terai Hills Cases Periodic maintenance: The Rehabilitation: This road Upgrading: This road earth track was upgraded to was once a completed has been evolved all-weather gravel road. Now earth road with good from a fairly leveled the road is provided with embankment and adequate trail, then an earth some routine maintenance cross-drainage structures. It track was opened It is annually by the local VDCs. has deteriorated since and proposed to be only rehabilitation of the graveled to fair- surface as well as the weather road. drainage structures will make the road trafficable. Length 6 km 23 km 13 km Number of 990 1,770 3,150 Households Population 990 households * 6.82 = 1,770 households* 6.82 3,150 household* served 6,752 =12,071 5.36= 16,884 Current Bicycles = 200 trips, 25 % Bicycles = 150 Bicycles = 250 Daily double loaded; Bullock Carts = 200 Buses = 10 Traffic Pneumatic wheeled bullock- Volumes cart = 50 trips 60 % loaded Motorcycles = 80 Trucks = 4 (Trips Both out of the loaded ones 10% Tractors = 60 Cars, Vans = 13 Ways). carry human. Net weight Jeeps = 20 Jeep = 5 carried is up to I ton; Trucks = 2 Tractor = 6 Jeep = 5 trips; Tractors = 25 trips, 60 % Motorcycles =58 loaded, average load 6 tons; Truck = 4 trips, load up to 12 tons; Motorcycles = 30 trips, about 70 % double loaded. Main Assumptions and Methodology Zone of Influence. This was identified by listing out the settlements that would be influenced, fully or partially, by the road alignments where works are proposed under the project. The information regarding settlements and number of households were obtained from local people through the use of participatory rural appraisal tools such as focussed group discussions and key informant interviews. This process was undertaken by walking over the road length and by organizing group and individual interview at junctions. The data gathered from these interviews were cross-checked with secondary  NEPAL: Rural Infrastructure Project Page 26 Project Appraisal Document Annex 4 information available in the DDCs and the PIP. Cost estimates. Current costs (in 1998 prices) of maintenance, rehabilitation and upgrading were derived on a per km basis from the typical cost estimates of the PIP and were modified from the basic unit rate prevalent at the site and from the ongoing Pilot Labor-based District Road Maintenance and Rehabilitation project (PLRP). The typical costs were estimated on the basis of a minimum service level required for making the road usable for most of the times in a year. Typically, the minimum- cost solution consisted of placing simple slab (or pipe) culverts where missing, grading and spreading of 15 cm layer of riverbed materials on the existing 3.5 meter wide carriageway. The financial costs of the maintenance and rehabilitation works included civil works and supervision. While routine maintenance is assumed to be carried out annually, periodic maintenance and rehabilitation works are to be undertaken every six years. The "without" the project case assumed the continuance of the current practice, which provided minimum routine maintenance when funds are available, and was assumed to be 50% of the requirement. Given the relatively minor works to be carried out on the project roads, the evaluation period is limited to 12 years. Cost-effectiveness Analysis. For the purpose of estimating benefits, a participatory rural appraisal method was applied during field survey to find out the number of households served by the road, traffic volumes, land holdings, and various indirect benefits. These data from the field were interpreted in accordance with the thresholds and criteria used by the PIP for screening and the data generated by Nepal Living Standards Survey 1996. Unlike highways and feeder roads, very low volume rural roads generally do not have significant benefits in transport costs savings, as confirmed in the sample analysis. However, rural road projects generate substantial social benefits. The people in the zone of influence revealed that they had better employment opportunity because of the road. The opportunity for better education and health will also be increased as a result of improved access. The road has been found to enhance the general awareness level of the people in the road corridor, relieving the sense of isolation associated with limited road access. It should be noted that the lack of awareness among the rural communities on various issues and prevailing sense of isolation have been identified as the constraints to effective participation in development process in Nepal. Improvement in rural roads and institutional strengthening of local road units are likely to influence the production sectors of the rural economy through their impact on input and output prices, which in turn promote the growth of trade and economic activities. Ideally, investment decisions on rural roads should be made on a composite basis that is comprised of economic and social criteria. Because of the difficulties in quantifying social benefits for project of this nature, the analysis focussed on evaluating the impact of the investment on people living in the zones of influence. The effectiveness of the investment was compared with investment on similar road projects in the region. Summary of the Analysis The results of the sample analysis were shown in Table 2. The average cost-effectiveness of the three sample roads was 143 persons per one hundred thousand (lakh) investment. In comparison, in the Rural Roads component of the India Andra Pradesh Economic Restructuring Project recently approved by the Bank, the average cost-effectiveness was 111 persons per 100,000 Indian Rupees of investment, which translated to about 177 persons in equivalent currency terms. Taking the sample study as the representative of the project, the cost effectiveness of the project is generally comparable with that of the Indian project. In addition, the unit rehabilitation cost for an earth road adopted in the project of NRs.550,000 per kilometer was also comparable with the unit cost of IRs.400,000 per km in the Andra Pradesh project. The sample analysis indicated that the low-cost treatment of district  NEPAL: Rural Infrastructure Project Page 27 Project Appraisal Document Annex 4 and village roads under the project would generate enough benefits to justify the investment even though the traffic volumes were low on these roads. The simplified methodology adopted in the analysis will be followed by the districts in the fonnulation of the District Transport Master Plans which will identify individual roads for maintenance, rehabilitation or upgrading, taking the likely social impact of such investment into consideration. Table 2: Cost-effectiveness Indicators of the Sample Roads Ttal C cost Oie:veniss (Rs. '0 ..) Indicator * or iofPersons) Road I 3,504 193 Road II 15,180 80 Road III 6,180 273 * Number of persons benefit per one hundred thousand rupees of investment.  NEPAL: Rural Infrastructure Project Page 28 Project Appraisal Document Annex 5 Annex 5-A Financial Summary Years Ending June 30 (US$ Million, FY99) 0:, project Cots lX,,,: 20, 200 2002! Investment Costs 0.9 1.2 1.4 Recurrent Costs 0.6 1.1 0.6 Total: 1.5 2.3 2.0 IDA 1.3 2.0 1.7 (85%) (85%) (85%) HMG/N 0.2 0.3 0.3 (15%) (15%) (15%) Total: 1.5 2.3 2.0 Main assumption: The project will be implemented over a three-year period from project approval. Summary of Financial Management Assessment Background. The financial control environment is Nepal has been weakened by the recent transfer of responsibility of the deployment and management of the accounting cadre from the FCGO to the Ministry of General Administration. Organizational risks are present in the short-term in the context that the newly created DOLIDAR under MLD needs strengthening to build up its capacity, and for this purpose adequate resources and budget by HMG/N are required up-front. Furthermore, the MLD and the DOLIDAR has limited experience in implementing IDA funded projects. There were a few integrated development projects implemented by the MLD in the past, but they were not very successful. Since this is a LIL project, adequate steps will be taken during project implementation to build up the capacity of the implementing agency. In order to mitigate institutional development risks, capacity for financial management being built up in accordance with a time-bound action plan which includes the recruitment of key financial management staff. Accounting Process. The Project books of account will be kept on a cash basis. DOLIDAR will take the leadership in coordinating with the DDCs and other central level agencies to formulate the budget,  NEPAL: Rural Infrastructure Project Page 29 Project Appraisal Document Annex 5 obtain the flow of accounting information, and reconcile and audit of such information. A Project Coordinating Unit (PCU) has been established in DOLIDAR to coordinate project preparation and implementation and to provide assistance to DDCs in their project activities. The DDCs are required to submit monthly statements of expenditures to the concerned District Treasury Controller's Offices (DTCOs) and the PCU within seven days of the following month. The PCU will be responsible for consolidating the accounts, and submitting applications to IDA for reimbursement. The PCU will be adequately strengthened through technical assistance to maintain a computerized Project Financial Management Information System (FMIS). Accounting information received from DDCs will be regularly updated in the computerized system to timely generate Project Management Reports (PMRs). The PCU will maintain Loan, SOE and other Ledgers required by HMG/N. Budget and Project Implementation. The Ministry of Finance (MOF) will allocate annual budgets to the project as envisaged in the annual work plan and as agreed between 11MG/N and IDA. I1MG/N has included this project under the list of core projects, and will commit to a timely release of funds. Concerned DDCs will implement the civil works in the districts pertaining to the maintenance and rehabilitation of rural roads. The DDCs will provide their matching funds at 20% of the civil works cost, before the PCU provides the budget authority to DDCs for the 80% of IDA's share. The PCU will directly administer budget for equipment support, training and consultancy services. The PCU will need to be sufficiently equipped and have adequate number of technical, administrative and financial staff. Risks. There is a risk of poor control of project finances due to the recent transfer of the responsibility for deploying and managing the accounting cadre of staff from the FCGO to the Ministry of General Administration (MOGA). The FCGO, however, retains the overall responsibility and accountability for public financial management including maintaining central accounts (including donor accounts) and preparing the national accounts for timely external audit by the Auditor General. A further risk is the timely submission of accounts by DDCs to the PCU and their timely compilation for timely submission of claims to IDA, and for timely audit and submission of project accounts within six months after the end of each fiscal year. Financial Monitoring and Reporting. Through the technical assistance to DOLIDAR, the FMIS in the PCU can be developed as the project is implemented. The FMIS will facilitate timely and reliable project management information, and will be integrated with PMRs in order to map the financial data with physical data to monitor the performance of the project. The PCU will develop the FMIS as required under IDA's Loan Administration Change Initiative (LACI). A financial management systems review was undertaken by the Bank, and it was concluded that the DOLIDAR does not have the financial management capacity to be eligible for PMR-based disbursements. An action plan outlining activities that must be undertaken during project implementation in order to strengthen the financial management reporting capacity of the PCU was agreed upon between HMG/N and IDA. Until the PCU has the capacity to deliver the Project Management Reports (PMRs) as per LACI requirements, existing disbursement procedures will be followed. IDA will review the progress made in establishing a strong financial management system after about a year, and will ascertain whether the Project is eligible for PMR-based disbursements. If qualified, appropriate arrangements will be made to convert to PMR-based disbursements system. The project will produce from the outset the following PMR statements: Financial Statement (Report 1A) and Procurement Management Reports (Section 3) (See Annex 3 of the Financial Assessment Report). In order to match with the government planning and reporting cycle, the PMRs will be produced on a trimester basis and submitted within 45 days from the end of the preceding trimester. They will inform Project Management and the Bank of the project's physical and financial progress,  NEPAL: Rural Infrastructure Project Page 30 Project Appraisal Document Annex 5 and will feature commitment monitoring which will give advance indication of project expenditure status.. Trimester PMRs will be used for progress monitoring and subject to close review and supervision. This will allow prompt follow-up to bring to HMG/N's attention any ongoing problems in the project's accounting, internal controls, financial reporting etc. Project Staffing Arrangements. Against this backdrop, the DOLIDAR and its PCU under the MLD has to be adequately staffed. The Action Plan as agreed during negotiations is expected to result in a sound financial management system for the project. Under the plan, the PCU will include a core of three accounting staff to ensure that financial management capacity will be available by project startup. The financial experts will be expected to maintain a FMIS which will be developed with the TAC's assistance. The PCU will also ensure that there are adequate accounting staff in DDCs. The PCU will take the responsibility to build up the implementing and financial management capacity of DDCs. Auditing Arrangements. Project Financial Statements, prepared in the formats as agreed with the Bank, will be audited annually by the Auditor General (AG) of Nepal who is considered an independent auditor for the Bank's purposes. The terms of reference for the audit will require the AG to provide a separate audit opinion in his audit report on: (i) the project accounts, to ensure that project funds have been spent in accordance with the terms and conditions of the project legal agreements; (ii) the PMRs/SOEs submitted for reimbursement purposes during the year, confirming these are properly supported by formal contracts and documentation checked and verified by the project accounting staff; (iii) the project's Special Account to ensure that this has been operated in accordance with Bank procedures. The PCU will make available to the AG the PAD, project cost tables, legal agreements and such other information and explanations as the AG shall require from time to time to carry out his duties. The Accounts Officer of the PCU will be the main liaison for the AG's office to ensure the audit is carried out in a timely fashion and to formally answer all questions raised by the AG. The PCU and the DDCs will provide the AG with the annual financial statements (project accounts) and all supporting documents required by the AG within 60 days of the end of the fiscal year. The annual project accounts package together with the audit report thereon including the three audit opinions noted above will be submitted to the Bank within 6 months of the end of the fiscal year. The unaudited accounts will be submitted to the Bank within 3 months of the end of the fiscal year. Special Account. A Special Account in US Dollars will be established, on terms and conditions satisfactory to IDA. For the interim period until the disbursement is based on the PMR, an arrangement will be made to have an authorized allocation of US$ 500,000 and will follow the existing disbursement procedure. The PCU will submit replenishment applications for the Special Account on a monthly basis, or when 25% of the authorized allocation has been used, whichever occurs first. The replenishment applications will be supported by the necessary documentation which include a bank statement and a reconciliation statement. The IDA Special Account will be managed under the joint signature of the Project Coordinator of PCU under DOLIDAR and the Accounts Officer of the PCU. As per the government requirement, Special Account will be maintained at Nepal Rastra Bank (Central Bank). The Project will follow the prescribed accounting procedures as per the Financial Administrative Regulations, 1986, and record daily transactions in the ledgers which are self-balancing. The PCU will ensure that the Bank/Cash books are reconciled with bank statements regularly every month. The books of accounts do not record commitment. A separate memorandum of records is maintained to track the procurement under various contract arrangements. Expenditures are categorized and coded under various budget items and accounts are maintained accordingly. Internal audit is carried out by the DTCOs on a regular basis to ensure that the accounting records are accurate. Funds are released following the deposit of 20% counterpart funds in a separate depository accounts by DDCs. Funds are then released from the  NEPAL: Rural Infrastructure Project Page 31 Project Appraisal Document Annex 5 depository accounts following the timely submission of statements by DDCs. When the project qualifies for PMR based disbursements, the amount of the authorized allocation will vary to cover two trimesters expenditures financed by the credit. This authorized allocation of the special account cannot exceed an amount representing 20% of the credit. The Special Account will be replenished at least trimesterly, based on the budget presented in the PMR, to assure liquidity of funds, and all replenishment applications will be accompanied by reconciled statements from the bank in which the account is maintained, showing all transactions in the Special Account. Supporting documentation will be maintained by the PCU and DDCs for at least one fiscal year after the year in which the last disbursement from the credit took place, and will be available for Bank staff and independent auditors review. Statement of Expenditures (SOE). For the interim period until the disbursement is based on PMR, IDA may require withdrawals from the Credit Account to be made on the basis of SOE for expenditure for: (a) civil works under contracts costing less than US$ 50,000 each, (b) goods under contracts costing less than US$ 20,000 equivalent each, (c) consultants' services no more than US$ 20,000 in case of firms, and no more than US$ 5,000 equivalent in case of individuals, (d) all training costs, and (e) incremental operating costs.  NEPAL: Rural Infrastructure Project Page 32 Project Appraisal Document Annex 5 Annex 5-B Community-Based Performance Monitoring (CBPM) Summary Background In supporting the decentralized planning and management of rehabilitation and maintenance of rural infrastructure, it is necessary to strengthen both the technical and financial monitoring systems both at the district level and beneficiary level. As part of technical and financial monitoring measures undertaken in Rural Infrastructure Project (RIP), a Community-Based Performance Monitoring (CBPM), formerly known as 'Public Audit' or 'Community Audit' System, has been proposed to be piloted in two selected districts through extensive community participation, assisted by district-based social mobilizers who will be trained and monitored by an agency/individuals with relevant experience and qualifications. Based on the experience in these two districts, extension of such exercise will be considered in other six project districts. CBPM in RIP draws heavily on existing experiences of Public Audit System having been carried out by other bilateral donor agencies including GTZ and WFP under their grant assistance schemes. Based on such emerging experiences, Helvetas Nepal has produced a report titled A Proposalfor Public Audit System (October 1998), both in English and Nepali, with the assistance of IDA and cooperation of MLD/DOLIDAR and concerned DDCs. CBPM is to complement (and not to replace) the existing 11MG/N regular financial audit and the project consultants' engineering monitoring, which may not be sufficient in terms of sanctioning against poor-performing contractors and those abusing authorities or creating leakage in resources on the ground. Objectives The objectives of the Community-Based Performance Monitoring exercise are, through mobilizing Road User Committees and general public, to: (i) achieve better quality and quantity of works undertaken through either local contractors or user groups under the project; (ii) increase transparency of financial and technical management at local level through public information dissemination; and (iii) generate a sense of ownership of rural roads by the community through enhanced community participation, which will eventually lead to the better management and sustainability of rural infrastructure. Major Components There is no single way of conducting this exercise; innovation and flexibility based upon the demand generated through series of discussions with various stakeholders are essential. Therefore, it is encouraged that lessons learned in the course of implementation be integrated into the further refinement of the system design as well as geographical extension of CBPM under the project. It is envisaged that public consultation meetings at Road User Committees assisted by social mobilizers will be the main forum for the preparation and implementation of CBPM. All the discussions will be recorded in minutes. While detailed activities will be determined through consultations between major local stakeholders such as DDC, VDC, Road Users Committees and general public, major components of CBPM would include, but not limited to, the following: a) Placing sign posts on project roads containing basic project information, such as length of roads to be maintained/rehabilitated, physical scope and duration of works, name of contractor/user group, total value of the contract, minimum wage, etc.  NEPAL: Rural Infrastructure Project Page 33 Project Appraisal Document Annex 5 b) Trimesterly public hearing to invite community members to review project financial transactions whereby district officials and project management are responsible for information disclosure. c) Random checks and on-site verification of wage payments to laborers. d) Information disclosure on bidding procedures. e) Awareness-raising of local norms and standards in terms of wage rates, quality and quantity of works. f) Development and monitoring of simple technical and financial performance indicators by the community. g) Reporting/recommendation on those accountable for poor/good performances to authorized entities for necessary actions for penalty/reward (e.g. identify responsible individuals and charge compensation for losses). Institutional Arrangements Qualified district-based social mobilizers will be hired by the PCU instead of DDCs in order to avoid the potential influence of district officials and maintain independence. The number of mobilizers will be decided between the PCU and the districts, depending on the scale of works. To take advantage of previous knowledge and experiences elsewhere in the country and facilitate social mobilizers' work, a qualified national-level agency/individual(s) with experience in a similar exercise will be also hired. The agency/individual(s) will (i) train social mobilizers in community mobilization; (ii) monitor and supervise their activities; (iii) document and report back to DDCs, MLD/DOLIDAR, Technical Assistance Consultant (TAC) under the project, and the World Bank. The PCU will decide whether this agency/individual(s) could be either sub-contracted by the TAC or directly funded by the project as part of the incremental operating costs. Cost Estimates Approximately US$ 20,000 per district over three years (including fees for trainers, social mobilizers, logistics, etc.) are envisaged to support this activity. Personnel Requirement Social mobilizers must: (i) be based in the concerned districts; (ii) have sufficient experience in community mobilization and participatory monitoring; (iii) be literate; and (iv) be able to communicate effectively with local stakeholders, including socio-economically disadvantage groups such as the poor, women and ethnic minorities. The facilitating agency/individual(s) must have: (i) sufficient networks in the participating districts; (ii) sufficient experience in community mobilization and participatory monitoring; (iii) preferably, experience in previous Public Audit exercise or similar anti-corruption, governance, and auditing work; (iv) preferably, knowledge of and experience in rural infrastructure; and (v) experience in reporting in English. Terms of Reference A draft Terms of Reference for the agency/individual(s) is provided in the annex of the Borrower's Project Implementation Plan.  NEPAL: Rural Infrastructure Project Page 34 Project Appraisal Document Annex 6 Annex 6 Procurement and Disbursement Arrangements Procurement Procurement methods (Table A) Infrastructure civil works: It is envisaged that the project will support a large number of small contracts for civil works. Periodic maintenance and rehabilitation works will be procured through NCB, and will be implemented in three phases with contract packages sized to the capacity of local Class C & D contractors and other labor-based contractors. It is envisaged that the majority of contract packages will be in the range of about US$10,000 to US$60,000. Small works with estimated value less than $20,000 per contract for routine and periodic maintenance will be procured with lump sum or fixed price contracts, awarded on the basis of quotations obtained from the qualified local contractors or user groups in response to a written invitation. Postqualification of bidders may be undertaken. All civil works will be procured using Nepal specific standard simplified bidding documents written in Nepali. Equipment: will be procured by a combination of NCB and International/National Shopping as appropriate based on thresholds. Consulting Services: will be procured following Bank procurement guidelines and will be provided for: (a) supervision and design for the infrastructure civil works: there could either be one consultant per district, or a few consultants, each for a number of districts; (b) technical assistance consultancy for management support, capacity building, training, evaluation and preparation of a follow-on project: 1 consultancy contract; (c) technical assistance for project management, design and supervision, social mobilization, and training for the civil works subcomponent in Sankhuwasabha District; 1 consultancy contract; and (d) individual consultant services for preparation of accounts manual and initial training of accounting staff. Prior review thresholds (Table B) Civil works contracts for maintenance and rehabilitation works under US$ 50,000 will not be subject to prior review, after the first 3 NCB contracts are reviewed and cleared with the Bank. Consultants' contracts with an estimated value of US$ 20,000 and above for firms and US$5,000 and above for individuals. Procurement of goods with an individual contract value of US$20,000 and above. Disbursement Allocation of Loan Proceeds (Table C) The allocation of Loan proceeds is given in Table C. Disbursements against civil works contracts  Nepal: Rural Infrastructure Project Page 35 Project Appraisal Document Annex 6 will cover about 80% of the certified expenditures, with the balance to be financed from counterpart funds. Use of Statements of Expenditure (SOEs): Some withdrawals from the Credit Account may be made on the basis of SOEs under contract each costing less than the equivalent of: (a) US$50,000 for civil works; (b) US$20,000 for the services of consulting firms; (c) US$5,000 for the services of individual consultants; (d) US$20,000 for goods; (e) All training costs; and (f) All incremental operating costs. Special Account: A special account will be established with the Nepal Rastra Bank with an authorized allocation of US$500,000 which meet about four months worth of projected expenditures. Retroactive Financing: Retroactive financing limited to a maximum of US$ 100,000 (equivalent to about 2% of credit amount) for eligible payments after December 20, 1998, but before credit signing, will be provided to cover expenses associated with: (a) initiation of first-year maintenance works contracts; (b) initiation of supervision and other consultancy services; (c) initiation of procurement of goods under project, and (d) applicable incremental operating costs.  Nepal: Rural Infrastructure Project Page 36 Project Appraisal Document Annex 6 Annex 6 Table A Project Costs by Procurement Arrangements (US$ Million equivalent) 1. Works Periodic maintenance of about 1.0* 1.0 240 km of district roads (0.8) (0.8) Rehabilitation of about 100 km of 1.8 1.8 district roads (1.5) (1.5) Routine Maintenance of about 1.0* 1.0 1,000 km of district roads (0.8) (0.8) Maintenance & rehabilitation of 0.4* 0.4 other rural infrastructure works (0.3) (0.3) 2. Goods Equipment and logistical support 0.1 0.1** 0.2 (0.1) (0.1) (0.2) 3. Services Design and Supervision 0.3*** 0.3 consultants for civil works (0.3) (0.3) Technical assistance consulting 1.1*** 1.1 Services and training (1.1) (1.1) Total: 1.9 3.9 5.8 (1.6) (3.4) (5.0) Note: N.B.F. = Not Bank-financed (includes elements procured under parallel cofinancing procedures, consultancies under trust funds, any reserved procurement, and any other miscellaneous items). The procurement arrangement for the items listed under "Other"' and details of the items listed as "N.B.F." need to be explained in footnotes to the table or in the text. Figures in parenthesis are the amounts to be financed by the Bank loan * Will be procured using local shopping among local road user groups and small labor contractors by comparing quotes. **Will be procured using international/national shopping ***Will be procured as per Bank Guidelines  Nepal: Rural Infrastructure Project Page 37 Project Appraisal Document Annex 6 Annex 6 Table B Thresholds for Procurement Methods and Prior Review Expenditure : Contract :Vluef Procurement Method Contracts Subject to - - Category . . T: h - - :s - ---I -)- Prior RevieW (11h$ Thousands) 1. Works Civil works for 20 to under 300 up to an NCB $50,000 or more require rehabilitation and spot aggregate of 2,000 prior review; improvement of district below $50,000 but roads greater than $20,000, review of the first three contracts Civil works for routine Under 20 up to an aggregate of Local contracting No* and periodic240 maintenance and other 2,400 Lump-sum minor infrastructure 2. Equipment Equipment for office 20 to under 200 NCB Yes support and vehicles Under 20 InternationallNational No shopping 3. Services Consulting Services Firms, 20 and above Bank Guidelines Yes Individuals, 5 and above Firms, under 20 Bank Guidelines Individuals, under 5 including single source Yes* Total Value of Contracts Subject to Prior Review: US$2.0 million *The first contract irrespective of its value will be subject to prior review. ** Expect in the case of single source selection.  Nepal: Rural Infrastructure Project Page 38 Project Appraisal Document Annex 6 Annex 6 Table C Allocation of Loan Proceeds (1) Civil Works 3.0 80% (2) Goods 0.2 1 00% of foreign or ex-factory costs and 90% for other items procured domestically (3) Consulting services and 1.4 100% of total expenditures training (net of taxes) (4) Incremental operating costs 0.1 70% (4) Unallocated 0.3 Total: 5.0  Nepal: Rural Infrastructure Project Page 39 Project Appraisal Document Annex 7 Annex 7 Project Processing Budget and Schedule A. Project Budget Planned Actual US$100,000 US$104,800 B. Project Schedule Planned Actual Time taken to prepare the project: 9 months 13 months First Bank mission (identification) 02/10/1998 02/13/1998 Appraisal mission departure 11/16/1998 12/05/1998 Negotiations 12/14/1998 4/11/1999 Planned Date of Effectiveness 07/16/1999 /1999 Prepared by: DOLIDAR and selected DDCs. Preparation assistance: N/A Bank staff who worked on the project included: Name Specialty Guang Zhe Chen Task Leader/Transport Economist Christopher Hoban Highway Engineer Giovanna Prennushi Economist Shyam Ranjitkar Irrigation Specialist Sonomi Tanaka Social Development Specialist Eddy Bynens Consultant - Civil Engineer Ganesh Ghimire Consultant - Rural Transport Specialist Sruendra Joshi Transport Specialist Narayan Sharma Procurement Specialist Hiroko Imamura Legal Counsel Juan Gaviria Transport Economist Paul Martin Environmental Specialist Bigyan Pradhan Financial Management Specialist Robert Saum Financial Management Specialist Kiran Baral Procurement Officer Douglas Gray Program Assistant Kiran Gautam Team Assistant Dieter Shelling Rural Transport Spec./Peer Reviewer Zhi Liu Transport Economist/Peer Reviewer  NEPAL: Rural Infrastructure Project Page 40 Project Appraisal Document Annex 8 Annex 8 Documents in the Project File* A. Project Implementation Plan Draft Borrower's Project Implementation Plan, February 1999 B. Bank Staff Assessments Proposed Rural Infrastructure Project, Review of the financial Management System of the Department of Local Infrastructure Development and Agricultural Roads, January 1999 Proposed Rural Infrastructure Project, Start of Appraisal Mission Aide Memoire, December 16, 1998 Proposed Rural Infrastructure Project, Follow-up Mission Aide Memoire, October 5, 1998 Proposed Rural Infrastructure Project, Preparation Mission Aide Memoire, May 13, 1998 Proposed Rural Infrastructure Project, Identification Mission Aide Memoire, February 14, 1998 C. Other Stakeholder Analysis, Social and Environmental Assessment - in the context of Rural Infrastructure Project, Ministry of Local Development, Nepal and the World Bank, October 1998 Socio-economic Sample Survey of RIP Districts in West Nepal, Ministry of Local Development and the World Bank, February 1999 Priority Investment Plan (PIP) Project, Final Report, Vol. III, Rural Transport, Ministry of Works and Transport, Nepal, February 1997 *including electronic files.  Annex 9 Status of Bank Group Operations in Nepal Operations Portfolio CAS Annex B8 Z Generated: 4116199 3 - _ _ _ _ _ _ _ _ _ _ _ _ _ A)j Prt~etID -r 8O.row.r : Purpose .: . .. . a . ... .... , , . .. . , , ...... : ..iB1U 0 IDA . ( - UWd dWh. Ouig Furn Refd D D ltsq, : . ... , : .: :. :: : . o co Si " b Pmject~~~~~~; A _''''''' '___il10 so 2w Number of Closed Projects: 54 Active Projects - NP-PE-10333 1989 GOVERNMENT OF NEPAL ENGINEERING EDUC. 0.00 11.40 0.00 3.86 3.00 -.31 S S NP-PE-1 0330 1989 HMG, NEPAL HILL COMMUNITY FORES 0.00 30.50 21.52 .31 21.01 -.52 S S C NP-PE-1 0348 1990 HMGN BHAIRAWA LUMBINI IlIl 0.00 47.20 0.00 .53 -4.24 0.00 S S NP-PE-10370 1991 HMG/NWSC URBWATER& SAN REHAB 0.00 60.00 25.45 23.51 46.99 19.89 U S NP-PE-10396 1992 HMGN TELECOMS. V 0.00 55.00 0.00 13,66 11.37 0.00 HS HS NP-PE-10392 1992 HMG/N POWER EFF IMPROVEMEN 0.00 65.00 0.00 14.75 11.66 0.00 U S NP-PE-10395 1992 GOVT OF NEPAL BASIC & PRIMARY EDUC 0.00 30.60 0.00 .72 -.66 0.00 S S NP-PE-10475 1994 HMG ROAD MAINT.& REHAB. 0.00 50.50 0.00 14.09 12.99 0.00 S S NP-PE-10460 1994 GOV. OF NEPAL POPULATION & HEALTH 0.00 26.70 0.00 17.55 14.87 0.00 NA NA NP-PE-10454 1994 MIN OF EDU.& CULTURE HIGHER EDUCATION 0.00 20.00 0.00 13.70 11.31 0.00 U S NP-PE-10516 1997 HMG RURAL WS&SANITATION 0.00 18.28 0.00 15.24 3.77 0.00 S S NP-PE-10509 1998 GOVT OF NEPAL MULTIMODAL TRANSIT 0.00 23.50 0.00 17.86 2.56 0.00 S S n NP-PE-48026 1998 KINGDOM OF NEPAL AGRI RES & EXTENSION 0.00 24.30 0.00 20.62 6.94 0.00 U U A) NP-PE-10530 1998 HMGN IRRIG SECTOR DEVT 0.00 79.77 0.00 77.30 10.52 0.00 S S o Total 0.00 542.75 46.97 233.70 152.09 19.06 Active Projects Closed Projects Total Total Disbursed (IBRD and IDA): 273.96 884.59 1,158.55 of which has been repaid: 0.00 59.11 59.11 Total now held by IBRD and iDA: 495.78 760.07 1,255.85 Amount sold : 0.00 0.00 0.00 Of which repaid : 0.00 0.00 0.00 Total Undisbursed : 233.70 0.00 233.70 .2. a.Intended disbursements to date minus actual disbursements to date as projected at appraisal. 2. b1Following the FY94 Annual Review of Portfolio performance (ARPP), a letter based system was introduced (HS = highly Satisfactory, S = satisfactory, U unsatisfactory, HU = highly unsatisfactory): see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994. V Note: Disbursement data is updated at the end of the first week of the month. C)  NEPAL: Rural Infrastructure Project Page 42 Project Appraisal Document Annex 9 Annex 9 Nepal STATEMENT OF IFC's Committed and Disbursed Portfolio As of 28-Feb-99 (In US Dollar Millions) CAS Annex B8 1975/93 Soaltee Hotel 0.00 .45 0.00 0.00 0.00 .45 0.00 0.00 1994 Himal Power 28.00 0.00 3.80 0.00 14.00 0.00 3.35 0.00 1996 Bhote Koshi 21.00 3.00 0.00 36.00 8.73 1.23 0.00 14.97 1998 Jomsom Resort 4.00 0.00 0.00 0.00 3.00 0.00 0.00 0.00 Total Portfolio: 53.00 3.45 3.80 36.00 25.73 1.68 3.35 14.97 Loan Equity Quasi Partic 1994 KHIMTI KHOLA 0.00 0.00 0.00 5.00 Total Pending Commitment: 0.00 0.00 0.00 5.00  NEPAL: Rural Infrastructure Project Page 43 Project Appraisal Document Annex 10 Annex 10 Nepal at a Glance 9/29/98 POVERTY and SOCIAL South Low- Nepal Asia Income Development diamond' 1997 Population, mid-year (rnillions) 226 1,289 2,048 Life expectancy GNP per capita (Atlas method, US$) 210 390 350 GNP (Atlas method, US$ billions) 4.7 502 722 T Average annual growth, 1991-97 Poputation (%) 2.7 1.9 2.1 Labor force (