Nepal - Municipal Development and Earthquake Emergency Housing Reconstruction Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7413-NEP STAFF APPRAISAL REPORT NEPAL MUNICIPAL DEVELOPMENT AND EARTHQUAKE EMERGENCY HOUSING RECONSTRUCTION PROJECT JANUARY 27, 1989 Infrastructure Operations Division Country Department I Asia Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY AND EQUIVALENT UNITS Nepalese Rupee (NR) - 100 paisa US$l - NRs 24.4 WEIGHTS AND MEASURES 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) - 0.62 mile (mi) 1 hectare (ha) - 2.47 acres (ac) 1 square kilometer (km2) - 247 acres (ac) 1 kilogram (kg) - 2.2046 pounds (lbs) - avoirdupois ABBREVIATIONS ADB - Agriculture Development Bank BOARD - Town Development Fund Board DWSS - Department of Water Supply and Sewerage EAARRP - Earthquake Affected Areas Reconstruction and Rehabilitation Program EEHRC - Earthquake Emergency Housing Reconstruction Component GTZ - Germdn Agency for Technical Cooperation HMGN - His Majesty's Government of Nepal LDO - Local Development Officer MDC - Municipal Development Component MHPP - Ministry of Housing and Physical Planning MPLD - Ministry of Panchayat and Local Development MSTP - Management Support for Town Panchayats MSUD - Management Support for Urban Development NBL - Nepal Bank, Ltd. NGO - Non-Government Organization NRB - Nepal Rastra Bank OPS - Office of Project Services/UNDP RBB - Rastriya Banijya Bank UNDP - United Nations Development Programme WSSC - Water Supply and Sewerage Corporation ZC - Zonal Commissioner FISCAL YEAR July 16 - July 15  FOR OFFICIAL USE ONLY NEPAL MUNICIPAL DEVELOPMENT AND EARTHQUAKE EMERGENCY HOUSING RECONSTRUCTION PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. CREDIT AND PROJECT SUMMARY.................................... i-v I. BACKGROUND ................................................. 1 A. Urbanization and Municipal Trends ...................... 1 B. Institutional Framework ................................ 2 C. Local and Municipal Government ......................... 3 D. Municipal Finances ..................................... 3 E. Government Policies and Actions ........................ F. The Bank's Sector Role and Assistance Strategy in Nepal .................................... 5 G. Earthquake Emergency .................................... 6 H. Earthquake Affected Areas Reconstruction and Rehabilitation Program ................................ 7 II. THE PROJECT ................................................ 8 A. Introduction ........................................... 8 B. Project Objectives ..................................... 8 C. Project Description .................................... 9 III. PROJECT COSTS AND FINANCING ............ .. .................. 14 A. Cost Estimates ......................................... 14 B. Financing Plan ......................................... 16 IV. PROJECT MANAGEMENT AND IMPLEMENTATION ......... ............. 19 A. Municipal Development Component ......................... 19 B. Earthquake Emergency Housing Reconstruction Component ... 24 C. Procurement ........................................5.... 25 This report is based on the findings of an appraisal mission to Nepal in June 1988 for the Municipal Development Component and on the contributicns of His Majesty's Government of Nepal and the Management Support for Town Panchayats Project Unit. Mission members included Messrs. Arnaud Guinard (Mission Leader), Carlos Escudero, Chandra Godavitarne and Patrick McCarthy (IDA). In October 1968 Messrs. Godavitarne, McCarthy and B.N. Singh (consultant) appraised the Earthquake Emergency Housing Reconstruction Component. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  D. Implementation and Disbursements ........................ 26 E. Accounts and Audii ..................................... 27 F. Monitoring and Supervision ........ ..................... 27 V. BENEFITS AND RISKS ................................... 28 VI. ASSURANCES, AGREEMENTS AND RECOMMENDATION .................. 29 ANNEXES 1. Municipal Financial System in Nepal ......................... 32 2. Town Development Fund Board - Formation Order ............... 41 3. Town Development Fund Board - General Policy ................ 45 Statement and Rules and Regulations 4. Town Development Fund Board - Organization Chart ............ 58 5. Town Development Fund Board - Flow of Funds and Proforma Financial Statements ........................ 59 6. Solvency Tests A. Birgunj Town Panchayat .................................. 67 B. Nepalgunj Town Panchayat ................................ 75 7. Disbursement Schedule ....................................... 83 8. Selected Documents and Data Available in the Project File... 84 MAP IBRD 20783R  NEPAL MUNICIPAL DEVELOPMENT AND EARTHQUAKE EMERGENCY HOUSING RECONSTRUCTION PROJECT Credit and Project Summary Borrower: The Kingdom of Nepal Beneficiaries: The Town Development Fund Board (the Board) and town panchayats in Nepal; and the Ministry of Housing and Physical Planning (MHPP) and earthquake affected households. Amount: SDR 30.9 million (US$ 41.5 million equivalent) Terms: Standard, with 40 years' maturity Cofinanciers: The United Nations Development Programme (UNDP) will provide US$5.1 million in the form of grants to fund technical assistance and training requirements. The German Agency for Techrnical Cooperation (GTZ) will provide about US$1.7 million of grant funds for technical assistance and demonstration civil works through the Board. Project Description: The project comprises two distinct streams of investments: (a) the Municipal Development Component (MDC); and (b) the Earthquake Emergency Housing Reconstruction Component (EEHRC). Both components will be coordinated by MHPP. The MDC would assist town panchayats to provide infrastructure and municipal services to their growirg population by (a) establishing, as a pilot operation, a national level financial intermediary, the Town Development Fund Board, which would have a line of credit for financing of priority social infrastructure and revenue generating projects in eligible town panchayats; (b) strengthening the Board's operating procedures through technical assistance and training; and (c) providing technical assistance and training for strengthening town panchayats' administration and technical and financial capacity for project implementation and service management. The Government would onlend to the Board at 32 p.a. over 25 years including five years' grace period. The Board would onlend to town panchayats (a) for social infrastructure projects at 8% p.a. for a maximum of 1 years including a maximum grace period of three years; and (b) for revenue-  - ii - generating projects at 12Z p.a. for a maximum of 12 years including a maximum grace period of two years. The MDC would also include equipment for the Board, and funds to finance the establishment and management costs of the Board during the first three years of operations. The EEHRC would (a) assist in the reconstruction of housing damaged in the August 1988 earthquake by (i) arranging immediate training for 300 contract staff, and (ii) providing funds for house reconstruction loans; (b) improving construction standards and developing earthquake resistant features in planning and development control regulations; (c) improving the environment by mitigating the use of timber in building products; and (d) providing technical assitance and training to address longer term needs. The Government would relend part of the proceeds of the credit to two commerc4al banks (Nepal Bank, Ltd., and Rastriya Banijya Bank) and the Agriculture Development Bank at 14Z p.a. The banks would onlend, nominally, to affected householders at their prevailing interest rate for this type of loan, currently 19% p.a. Households would repay at 1%, lOZ, and 15Z, depending on loan size, over eight years including a grace period of two years. The Government would pay the interest differential to the banks from its budgetary resources, and would also provide as grants, funds for building materials production, low cost sanitation and improved stoves, demonstration housing, and support for non-government organizations (NGOs) for their reconstruction related activities Benefits and Risks: The MDC's main benefit would be the development of an institutional and financial capability to assist town panchayats in financing and implementing priority projects. The main risks would be related to the possible lessening of the Government's capacity to pursue the performance-oriented strategy implicit in the program, and to the pervasive difficulty of recruiting and retaining qualified staff in the Board and town panchayats. The establishment of eligibility and appraisal criteria and guidelines for project financing together with tech-ical assistance to the town panchayats and the Board, and IDA support for the establishment and management of the Board during the first three years of its existence, would minimize those risks.  - iii - The EEHRC's main benefit will be the reconstruction of ab ut 66,000 homes affecting about 460,000 persons. The main risk is the potential for default on recovery of some loans, especially Lhose to the rural poor. The Government will reserve about 3% of the interest paid to it by the banks to cover possible default. MDC Cost: Local Foreign Total -------