Nepal - Municipal Development and Earthquake Emergency Housing Reconstruction Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16508 IMPLEMENTATION COMPLETION REPORT NEPAL MUNICIPAL DEVELOPMENT AND EARTHQUAKE EMERGENCY HOUSING RECONSTRUCTION PROJECT (CREDIT 1988-NEP) April 21, 1997 Energy and Infrastructure Operations Division Country Department II South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (Currency Unit = Nepalesc Rupee (NRs.) Year US$1 = NRs. 1988 23.29 1989 27.19 1990 29.37 1991 37.26 1992 42.72 1993 48.61 1994 49.40 1995 51.89 1996 57.30 All rates are annual averages, except 1996. FISCAL YEAR OF BORROWER July 16 through Julv 15 ABBREVIATIONS AND ACRONYMS DCA = Development Credit Agreement EEHR = Earthquake Emergency Housing Reconstruction GTZ = Gesellschaft fur T echnische Zusammenarbeit HMGN = His Majesty's Government of Nepal KfW = Kreditanstalt fur Wiederaufbau MHPP = Ministry of Hlousing and Physical Planning MSUD = Management Support for UJrban Development NGO = Non-Goxvernmental Organization TDFB = Town Development Fund Board SAR = Staff Appraisal Report UNDP = United Nations Development Program Vice President : Mieko Nishimizu Director : Robert S. Drysdale Division Chief : Jean-Francois Bauer Task Manager : Xavier Legrain  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT NEPAL MUNICIPAL DEVELOPMENT AND EARTHQUAKE EMERGENCY HOUSING RECONSTRUCTION PROJECT (Credit 1988-NEP) TABLE OF CONTENTS PREFACE EVALUATION SUMMARY ...............................................i PART I - PROJECT IMPLEMENTATION ASSESSMENT ............................................... I A. Project Objectives ........................................ I B. Achievement of Project Objectives ........................................ 2 C. Major Factors Affecting the Project ........................................ 4 D. Project Sustainability ........................................ 6 E. Bank Performance ........................................ 6 F. Borrower Performance ........................................ 8 G. Assessment of Project Outcome ........................................ 8 H. Future Operations ........................................ 9 1. Key Lessons Learned ........................................ 10 PART II - STATISTICAL ANNEXES Table I Statement of Assessments Table 2 Related Bank Loans/Credits Table 3 Project Timetable Table 4 Loan/Credit Disbursements: Cumulative Estimated Actual Table 5 Key Indicators for Project Implementation Table 6 Key Indicators for Project Operation Table 7 Studies Included in Project Table 8a Project Costs Table 8b Project Financing Table 9 Economic Costs and Benefits Table 10 Status of Legal Covenants Table 11 Compliance with Operational Manual Statements Table 12 Bank Resources: Staff Inputs Table 13 Bank Resources: Missions Appendix A: Mission's Aide-Memoire Appendix B: Borrower's Contribution to ICR (contribution by the Town Development Fund Board for Part A-Municipal Development Component) Appendix C: Borrower's Contribution for ICR (contribution by the Ministry of Housing and Physical Planning for Part B-Earthquake Emergency Housing Development 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.   IMPLEMENTATION COMPLETION REPORT NEPAL MUNICIPAL DEVELOPMENT AND EARTHQUAKE EMERGENCY HOUSING RECONSTRUCTION PROJECT (Credit 1988-NEP) Preface This is the Implementation Completion Report (ICR) for the Nepal Municipal Development and Earthquake Emergency Housing Reconstruction Project for which a Credit of SDR 30.9 million (equivalent to US$41.5 million at the time of appraisal) to the Kingdom of Nepal was approved on March 14, 1989. The Credit became effective on September 14, 1989 and closed on schedule on June 30, 1996. Final disbursement took place on March 24, 1997. In total, SDR 15,886,241.31 (equivalent to US$ 23.4 million) were disbursed. A total of SDR 15,013,758.69 was canceled in 1993, 1995 and 1997. The ICR was prepared by a mission consisting of Mr. Sunil Mathrani, Consultant, which visited Nepal in November 1996, and reviewed by Mr. Jean Francois Bauer, Chief, Energy and Infrastructure Operations Division and Ms. Kazuko Uchimura, Project Adviser, Country Department II, South Asia Region. The Borrower assisted in the preparation of the ICR by preparing their own evaluation of the project's execution.   IMPLEMENTATION COMPLETION REPORT NEPAL MUNICIPAL DEVELOPMENT AND EARTHQUAKE EMERGENCY HOUSING RECONSTRUCTION PROJECT (Credit 1988-NEP) Evaluation Summary Introduction 1. Nepal's urban population has been growing at a rapid 7 percent over the past two decades, significantly faster than overall population growth of 2.5 percent. This trend is likely to continue, given the limited employment opportunities in rural areas. Throughout Nepal there are significant levels of unmet demand for urban infrastructure services. Drinking water, sanitation, drainage and solid waste collection are all inadequate or completely absent. At the time of project preparation, the provision of basic urban services was constrained by limited institutional and managerial capacity, as well as scarce financial resources. 2. A major earthquake hit eastern and central Nepal in August 1988, causing considerable damage to private housing as well as to public infrastructure. Nearly half a million people were rendered homeless. A housing reconstruction component was therefore appended to the already- appraised Municipal Development Project, to facilitate rapid loan processing within the Bank. Project Objectives The main objectives of the Municipal Development Component of the project were to: (a) establish, as a pilot operation, a financial intermediary to assist His Majesty's Government of Nepal (HMGN) in providing appropriate financial support to municipalities; (b) provide long-term loan financing for priority social infrastructure and revenue generating projects of municipalities to support industrial growth and to provide services to rising urban populations; and (c) strengthen further the financial and administrative capacity of municipalities to prepare, implement, supervise and maintain projects. 3. The main objectives of the Earthquake Emergency Housing Reconstruction (EEHR) component of the project were to:  - 11 - (a) assist HMGN in implementing its program to reconstruct housing damaged during the earthquake; (b) improve construction standards and develop earthquake-resistant features for incorporation in buildings through planning and development control regulations; (c) provide technical assistance and training for the housing sector to address longer term needs; and (d) address the environmental impact relating to the excessive use of timber in buildings and building products manufacture. 4. Given the meager transfers to municipalities from the national budget and the absence of any long-term funding sources for local governments, the objective of establishing a financial intermediary to provide loans to municipalities was appropriate. Reinforcing the project implementation capacity of the municipalities was an equally relevant goal. These objectives are still valid today. 5. The objective of financially assisting earthquake victims reconstruct their homes was highly appropriate and timely. However, the other objectives of this component, although desirable, were of lesser importance in a period of emergency reconstruction. They were of a long-term developmental character and did not fit well with the urgency of the housing loan program. Implementation Experience and Results 6. The municipal development component achieved much less than expected. Very few sub-projects were executed during the first five years of the project from 1989 through 1994 for reasons mentioned in Part I, paras. 14-17. As it was apparent in late 1994 that it would be impossible to utilize the available funds before the closing date, SDR 5.51 million from the Credit was canceled as of January 1, 1995. However, due to a major effort in the final two years, a total of 28 sub-projects were executed, of which 24 were fully completed when the IDA credit closed on June 30, 1996. Eleven projects were revenue-generating (bus parks, shop buildings etc.) and the rest were social in nature, mainly storm water drainage. Detail on the sub-projects are given in Annex 2.1 of Appendix, Borrower's Contribution. Against an estimate of SDR 8.2 million, only SDR 1.8 million (about 22 percent) were disbursed in total for this component. 7. Achievements under the Earthquake Emergency Housing Reconstruction Program were better. Against an estimate of 65,000 beneficiaries nearly 53,000 households benefited from financial assistance in the form of concessionary loans. The loan program was satisfactorily completed in 1991. Due to the appreciation of SDR against the Nepalese Rupee savings from the Credit allocation for this component were substantial. Against an estimate of SDR 22.7 million  - iii - for this component, SDR 14.1 million (about 62 percent) were disbursed. The undisbursed balance of SDR 9.33 million was canceled in October 1993.' Major Factors Affecting Achievement 8. The effect of the political changes in Nepal during 1990-92 had a major impact on the project. The dissolution of Nagar Panchayats and the appointment of interim municipality boards prior to elections in mid- 1992, disrupted the preparation and approval of loan proposals. The initial clients of the Town Development Fund Board (TDFB), the Nagar Panchayats, were removed from office and the interim municipality boards were reluctant to enter into loan commitments, given their temporary status. Then the newly-elected municipalities were slow to familiarize themselves with their new responsibilities and become fully operational. As a result, three years were effectively lost before the Municipal Development Component of the project got properly under way. 9. The ability of municipalities to prepare and design project proposals, carry out the bidding and selection process and implement projects in a timely way was (and remains) a bottleneck that limits their absorptive capacity. This weakness hindered the ability of TDFB to make loans to municipalities throughout the project period. 10. The initial formation order setting up TDFB as a body governed by the provisions of the Development Board Act (2013) did not allow it sufficient autonomy. The constraints imposed on TDFB due to its legal status as a 'board' made it impossible for TDFB to operate in the autonomous manner conceived of at the start of the project (Part 1, para. 19). In this respect, the design of project was flawed. 11. TDFB suffered from frequent changes of Executive Director (five in eight years), and there was often political interference in staff recruitment. The erosion of its salaries due to HMGN unwillingness to grant increases led to the loss of some good staff to better-paying organizations and had a negative effect on the motivation of those remaining. It is presently short of qualified staff in critical areas, but overstaffed with low-skill personnel. Project Sustainability 12. The sustainability of the sub-projects financed by TDFB depends on the maintenance practices and financial health of the respective municipalities. These vary considerably from one municipality to another. Some are better placed than others to mobilize revenues from new sources in the future. In overall terms, the sustainability of the sub-projects is uncertain. As regards TDFB itself, its sustainability seems likely, given the build-up in its financial resources from interest charges and loan repayments. I An additional SDR177, 271.16 was canceled as of March 24, 1997. Detailed data is given in Part 11, Table 4.  - lv - Bank and Borrower Performance 13. Bank performance was satisfactory at identification, as can be seen by the appropriateness of project objectives. However, flaws in project design (Part I, para. 19) show that it was unsatisfactory at the preparation and appraisal stage. The size and scope of project was over- ambitious and unrealistic, given the limited absorptive capacity of the municipalities, and use of the newly-established and inexperienced TDFB as implementing agency. At appraisal, the Bank does not appear to have properly understood the implications of the Development Board Act for TDFB's autonomy. Supervision was generally satisfactory and was carried out very regularly till 1993, but was reduced thereafter to one headquarters mission per year. This was a deliberate step arising from the decision to limit the scope of the project and wind it up on schedule (Part I, paras. 30 and 32). 14. Overall Borrower performance was rated as unsatisfactory. HMGN did not share the objective of making TDFB autonomous and there was unnecessary interference in TDFB's staffing and salary policy. Although a major share of the responsibility for the inability to lend was due to factors outside TDFB's control, recent experience (Part I, para. 35) has shown that it could have achieved better results earlier on. The implementation performance of the Earthquake Housing Reconstruction Project Unit was satisfactory. However, HMGN's reversal of its policy on aid to earthquake victims was ill-considered (Part I, paras. 22-23). Assessment of Outcome 15. The Municipal Development Component made a very modest contribution to improving urban infrastructure in towns outside Kathmandu. There has also been some accumulation of expertise in project design, appraisal and implementation within TDFB. Nevertheless, the project outcome is judged to be unsatisfactory, because of: (i) the inability to use scarce IDA resources during a period of pressing urban infrastructure needs; (ii) TDFB's institutional weakness shown (Part I, paras. 19-20); and (iii) the continuing low absorptive capacity of municipalities (Part I, para. 16). 16. The outcome of the Earthquake Emergency Housing Reconstruction Component is judged to be satisfactory because about 300,000 people benefited from loans to reconstruct their homes. The funds were disbursed rapidly and there were few cases of misuse of loans. Although the stated objectives were met only partially, they were of lesser importance than the primary goal of aiding people rendered homeless by the earthquake. Future Prospects and Key Lessons 17. Kreditanstalt fur Wiederaufbau (KfW) has recently made a grant of DM 10 million to TDFB to enable it to continue its lending operations over the 1996-2000 period. There now appears to be greater interest in borrowing on the part of municipalities, compared to several years ago, but the pipeline of adequately prepared and viable proposals to be submitted for donor funding is still thin. TDFB's ability to evolve into an urban development bank in the long-term  v - depends on demonstrating that it is capable of improving upon the rate of disbursements achieved during the last year of the IDA project. In addition, it will need to build up significant financial reserves, which can only occur if the repayment by municipalities continues to be satisfactory. Finally, the process of granting greater autonomy to TDFB (Part I, para. 41) will also need to be taken further to enhance the influence of the municipalities. 18. The key lessons learned from this project are: * The importance of the legal framework for successful institution-building should not be underestimated, but it should also be recognized that an appropriate legal framework will not guarantee autonomy. Much depends on how the texts are interpreted and used in practice, which in turn depends on a commitment to the principles of good governance (Part I, para. 41). * There is a need to focus more on improving the municipalities' implementation capacity since they are the weakest link in the chain between IDA and the ultimate project beneficiaries (Part I, para. 16). * Close coordination is needed between donors with overlapping interventions in a given sector, particularly when the interventions of one donor may be crucial to the success of another donor's project (Part I, para. 33). * It is a mistake to only partly convert emergency relief from loans into grants because of the precedent this sets. It would have been simpler and better to have offered modest grants to all genuine victims right from the start, with top-up loans available for those requiring larger sums for house reconstruction (Part I, para. 40).   IMPLEMENTATION COMPLETION REPORT NEPAL MUNICIPAL DEVELOPMENT AND EARTHQUAKE EMERGENCY HOUSING RECONSTRUCTION PROJECT (Credit 1988-NEP) PART I. PROJECT IMPLEMENTATION ASSESSMENT A. PROJECT OBJECTIVES Background 1. Nepal's urban population has been growing at a rapid 7 percent over the past two decades, significantly faster than overall population growth of 2.5 percent. This trend is likely to continue, given the limited employment opportunities in rural areas. Throughout Nepal there are significant levels of unmet demand for urban infrastructure services. Drinking water, sanitation, drainage and solid waste collection are all inadequate or completely absent. At the time the project was prepared, the provision of basic urban services was constrained by limited institutional and managerial capacity as well as scarce financial resources at both the central and local levels. The Bank's prior involvement in urban infrastructure had been limited to water supply and sanitation. 2. A major earthquake hit eastern and central Nepal in August 1988, causing considerable damage to private housing as well as to public infrastructure. Nearly half a million people were rendered homeless. HMGN sought IDA assistance for house and school reconstruction. A housing reconstruction component was therefore appended to the already-appraised Municipal Development Project to facilitate rapid loan processing within the Bank. IDA assistance for school reconstruction took the form of a self-standing project (Cr. 2047-NEP). Statement of Objectives 3. The main objectives of the municipal development component of the project were to: (a) establish, as a pilot operation, a financial intermediary to assist HMGN in providing appropriate financial support to municipalities; (b) provide long-term loan financing for priority social infrastructure and revenue generating projects of municipalities to support industrial growth and to provide services to rising urban populations; and  - 2 - (c) strengthen further the financial and administrative capacity of municipalities to prepare, implement, supervise and maintain projects. 4. The main objectives of the earthquake emergency housing reconstruction component of the project were to: (a) assist HMGN in implementing its program to reconstruct housing damaged during the earthquake; (b) improve construction standards and develop earthquake-resistant features for incorporation in buildings through planning and development control regulations; (c) provide technical assistance and training for the housing sector to address longer term needs; and (d) address the environmental impact relating to the excessive use of timber in buildings and building products manufacture. Evaluation of Objectives 5. Given the meager transfers to municipalities from the national budget and the absence of any long-term funding sources for local governments, the objective of establishing a financial intermediary to provide loans to municipalities was appropriate. Reinforcing the project implementation capacity of the municipalities was an equally relevant goal. These objectives are still valid today. 6. The objective of financially assisting earthquake victims reconstruct their homes was highly appropriate and timely. However, the other objectives of this component, although desirable, were of lesser importance in a period of emergency reconstruction. They were of a long-term developmental character and did not fit well with the urgency of the housing loan program. B. ACHIEVEMENTS OF PROJECT OBJECTIVES Municipal Development Component 7. The municipal development component achieved much less than expected. Very few sub-projects were executed during the first five years of the project from 1989 through 1994 for reasons mentioned in paras. 14-17. As it was apparent in late 1994 that it would be impossible to utilize the available funds before the closing date, SDR 5.51 million from the Credit was canceled as of January 1, 1995. However, due to a major effort in the final two years, a total of 28 sub-projects were executed, of which 24 were fully completed when the IDA credit closed on June 30, 1996. Details on the sub-projects are given in Annexes 2.1 to 2.4 of Appendix B. Three of the four uncompleted projects require only minor expenditures as they are over 90 percent complete. Only Birgunj Municipality will have to bear a substantial amount of about  - 3 - NRs. 13 million (about US$ 0.24 million) from its own resources to finish the remaining 30 percent of the storm water drainage project. Eleven projects were revenue-generating (bus parks, shop buildings etc.) and the rest were social in nature, mainly storm water drainage. Against an estimate of SDR 8.2 million, only SDR 1.8 million (about 22 percent) were disbursed in total for this component. 8. Repayment performance by municipalities has been satisfactory so far. As of October 27, 1996, overdue repayments on IDA-financed sub-projects represented 17 percent of total repayments due to TDFB for these loans. Prospects for continued satisfactory performance in this area appear to be high, given the almost non-existent alternative sources of investment funds for municipalities. Yet at the time of project appraisal, both IDA and HMGN considered the risk of poor repayment by municipalities to be substantial. 9. No economic rate of return (ERR) was calculated at appraisal. The ERRs were computed in the ICR for the seven revenue generating schemes which have been completed. They range from 14.6 percent to 19.6 percent (Part II, Table 9). Earthquake Emergency Housing Reconstruction Program 10. Achievements under the Earthquake Emergency Housing Reconstruction Program were better. Against an estimate of 65,000 beneficiaries nearly 53,000 households benefited from financial assistance in the form of concessionary loans channeled through three commercial banks. This component incorporated HMGN's preference for loan rather than grant assistance to the affected households, even though World Bank Guidelines (OP 8.50) permit emergency relief to be in the form of grants. The loan program was satisfactorily completed in 1991. Due to the appreciation of SDR against the Nepalese Rupee, savings from the Credit allocation for this component were substantial. Against an estimate of SDR 22.7 million for this component, SDR 14.1 million (about 62 percent) were disbursed. The undisbursed balance of SDR 9.33 million was canceled in October 1993 2 11. The number of grants allocated for latrine construction and smokeless stoves was less than one-quarter of the appraisal estimate of 55,000 households. The low take-up rate of the grants for the smokeless stoves and latrines was attributed to insufficient effort to raise public awareness of the value of such facilities and the inadequate technical support from the project. This was partly due to the lack of participation by NGOs in the promotion and training for the construction of latrines and stoves, even though the project explicitly included funding for support to NGOs assisting with this component. It appears that mutually satisfactory arrangements between HMGN and NGOs could not be worked out to enable them to play a more active role. 12. A survey of 1 percent of loan beneficiaries (500 households) carried out in 1993 showed that 97 percent of them used the loan to rebuild their homes. Eighty four percent built entirely 2 An additional SDR177, 271.16 was canceled as of March 24, 1997. Detailed data is given in Part 11, Table 4.  - 4 - new houses because of the extent of damage to their original homes. Only a small minority reported having received adequate guidance/training from the Project Unit in construction techniques, although the majority incorporated some strengthening features to increase earthquake resistance. 13. No action was taken by the project unit to pursue the non-emergency objectives (para. 3, (b), (c) and (d)) due to lack of interest/commitment on the part of HMGN. They were shelved at the same time as the housing loan program was wound up in mid- 1991. C. MAJOR FACTORS AFFECTING THE PROJECT Factors not Subject to Government Control 14. The effect of the political changes in Nepal during 1990-92 had a major impact on the project. The dissolution of Nagar Panchayats and the appointment of interim municipality boards prior to elections in mid- 1992, disrupted the preparation and approval of loan proposals. The initial clients of the Town Development Fund Board (TDFB), the Nagar Panchayats, were removed from office and the interim municipality boards were reluctant to enter into loan commitments, given their temporary status. Then the newly-elected municipalities were slow to familiarize themselves with their new responsibilities and become fully operational. As a result, three years were effectively lost before the Municipal Development Component of the project got properly under way. 15. There was also a general reluctance on the part of Municipalities to borrow funds for development works, which took substantial time and effort to overcome. The availability of grant funds from TDFB for small projects may have made the task of convincing them to borrow more difficult. Municipalities also resisted donor requirements regarding procurement procedures, employment of local consultants, etc. Municipalities' Implementation Capacity 16. The ability of municipalities to design and prepare project proposals, carry out the bidding and selection process and implement projects in a timely way was (and remains) a bottleneck that limits their absorptive capacity. This weakness hindered the ability of TDFB to make loans to the municipalities, which are also often reluctant to seek outside assistance to carry out feasibility studies and prepare detailed designs, particularly using loan funds. However, there has been some progress since the project was appraised eight years ago, as can be seen by the improved rate of disbursements over the past two years. 17. The project design envisaged that initial assistance to municipalities to prepare projects suitable for IDA financing through TDFB would be provided by a UJNDP-financed technical assistance project, Management Support for Urban Development (MSUD), for which the Bank was the executing agency. According to the Staff Appraisal Report (SAR, para. 4.16), a stock of suitable sub-projects had already been prepared and was sufficient to absorb all the IDA funds. However, the quality of sub-projects prepared with the assistance of MSUD, often, did not meet  - 5 - IDA appraisal standards. Considerable time and effort therefore had to be devoted to improve these loan applications. Technical Assistance to TDFB 18. The project included US$ 0.9 million of expatriate technical assistance to assist the newly-created TDFB establish operating procedures, carry out technical and financial evaluations of project proposals from municipalities and identify training needs. This UNDP-financed assistance was ineffective because it coincided with the period of TDFB inactivity (1990-92) due to political factors and because of the poor integration of the three advisers into TDFB's operations. No lasting benefit remains from their presence. No significant training of TDFB staff appears to have taken place either, despite the clear need. Factors Subject to Government Control Municipal Development Component 19. Institutional Framework The initial formation order setting up TDFB as a body governed by the provisions of the Development Board Act (2013) did not allow it sufficient autonomy. This may have been the simplest legal way of creating TDFB, particularly as it was perceived as a pilot operation at that time. However, the constraints imposed on TDFB due to its legal status as a 'board' had major long-term consequences. It made it impossible for TDFB to operate in the autonomous manner conceived of at the start of the project. The Development Credit Agreement (DCA) with IDA requires TDFB to keep accounts on an accrual basis, while Boards must observe HMGN requirements to prepare accounts on a cash basis. TDFB was prohibited from carrying forward end-of-year balances, investing funds or even operating independent bank accounts. Even though the Municipalities were the project's main beneficiaries, they had little influence over TDFB because they were in a minority on its board and because their board representatives were also government-appointees. In these respects, the design of project was flawed. 20. TDFB Management and Staffing. TDFB suffered from frequent changes of Executive Director (five in eight years), and there was often political interference in staff recruitment. The erosion of its salaries due to HMGN unwillingness to grant increases led to the loss of some good staff to better-paying organizations and had a negative effect on the motivation of those remaining. It is presently short of qualified staff in critical areas, but overstaffed with low-skill personnel. 21. Competition from other donor funding. Utilization of IDA loan funds was also reduced by greater emphasis on the grant facility and later by competition from GTZ's urban development through local efforts project, a soft loan program, which offered more attractive lending terms to the municipalities. However, this program was suspended in late 1993.  -6 - Earthquake Component 22. In 1992, HMGN decided to convert housing reconstruction loans of NRs. 5,000 into grants, and waive repayment of the first NRs. 5,000 of those with loans up to NRs. 10,000. Low- income borrowers accounted for about 22,000 loans with a total value of NRs. 1 10 million. Those whose loans exceeded NRs. 10,000 did not get any such concession. 23. The repayment of the still-outstanding loans to date has been extremely poor because those who were not granted any relief feel that they have been unfairly treated and should have at least benefited from the waiver on their first NRs. 5,000 of borrowings. Meanwhile the interest due but not paid has risen to a level close to the initial principal. The current stalemate is unsatisfactory for all parties; the commercial banks continue to hold these non-performning assets while being theoretically liable for the corresponding repayments to HMGN, the borrowers are unable to sell the assets they used as collateral at the time of borrowing and HMGN continues to be solicited for further concessions that the borrowers feel are inevitable. D. SUSTAINABILITY OF PROJECT ACHIEVEMENTS 24. The sustainability of the sub-projects financed by TDFB depends on the maintenance practices and financial health of the respective Municipalities. These vary considerably from one municipality to another, but the financial position of all the municipalities will be subject to considerable uncertainty in the coming years, following HMGN's decision to abolish octroi taxes. Some municipalities are better placed than others to mobilize revenues from other sources, but in overall terms the sustainability of the sub-projects is uncertain. 25. As regards TDFB itself, its sustainability seems likely, given the build-up in its financial resources from interest charges and loan repayments. The KfW grant (para. 42) will assist TDFB in accumulating further reserves. Unlike the IDA Credit which it must repay to HMGN, TDFB is able to retain all the KfW ]oan repayments from municipalities for future relending operations. The involvement of KfW through its supervision activities should also help to perpetuate rigor in lending criteria and the observance of regular progress reporting. E. BANK PERFORMANCE 26. Bank performance was satisfactory at identification, as can be seen by the appropriateness of project objectives. However, flaws in project design (para. 19) show that it was unsatisfactory at the preparation and appraisal stage. The project itself did not contain any explicit actions or components to enable it to address objective (c) (para. 3) even though this was critical to the ability of TDFB to fund projects. Instead, it initially relied on the UNDP-financed MSUD project to help municipalities prepare project proposals and engineering designs of adequate standard for IDA-financing. However, this arrangement does not seem to have worked satisfactorily (para. 17).  -7 - 27. The size and scope of project was over-ambitious and unrealistic, given the limited absorptive capacity of the municipalities, and use of the newly-established and inexperienced TDFB as implementing agency. It envisaged the onlending of US$1.5-2.0 million annually by TDFB to municipalities from the second year of project implementation. According to the SAR, (para. 2.08), this represented a five-fold increase in annual flows from HMGN to municipalities. However, TDFB only reached this lending level in the seventh and final year of project implementation. 28. At the time of appraisal, the Bank does not appear to have properly understood the implications of the Development Board Act for TDFB's autonomy. There is no reference in the SAR to potential problems which could arise from its legal status. Yet these surfaced almost as soon as the Credit became effective. 29. The evaluation of project risks was weak. The SAR does not mention the risks to successful project implementation posed by the poor implementation capacity of municipalities, or anticipate potential problems arising from TDFB's limited autonomy. 30. Supervision was generally satisfactory and was carried out very regularly till 1993, but was reduced thereafter to one headquarters mission per year. This was a deliberate step arising from the decision to limit the scope of the project and wind it up on schedule (para. 32). There were a total of 13 supervision missions, ten of which took place prior to mid- 1993, with only three formal missions from headquarters during the final three years of implementation. However, during this period, Resident Mission staff were actively involved in project monitoring. More responsibility for supervision could have been delegated to the Resident Mission at an earlier date, given the dispersal of sub-projects all over Nepal and the need to liaise closely with the municipalities. 31. By mid-1993, following several ineffective attempts at piecemeal reform to the TDFB Formation Order, Bank staff correctly concluded that improving the Board's institutional framework would require major changes involving new legislation rather than simple amendments to existing agreements. 32. This assessment was one of the reasons leading to the decision in late 1993 to wind up the project at its original closing date, having ensured that all ongoing commitments would be met. This was achieved by stopping approvals for new sub-projects sufficiently in advance of the closing date. An uncommitted amount of SDR 5.51 million was therefore canceled effective January 1, 1995. 33. Donor coordination within the project appears to have been unsatisfactory, even though the IDA project depended on the efforts of the UNDP and GTZ financed projects, (paras. 17 and 21, respectively) to reinforce municipalities' project implementation capacities.  -8 - F. BORROWER PERFORMANCE Municipal Development 34. Overall Borrower performance was rated as unsatisfactory. HMGN did not share the objective of making TDFB autonomous as it tended to view TDFB as just another donor- supported project implementation unit with a finite life, rather than as a nascent financial institution. There was unnecessary interference in TDFB's staffing and salary policy. After an initial equity contribution from HMGN to TDFB, which was a condition of Credit effectiveness, HMGN never contributed the envisaged 10 percent share of civil works loans3. TDFB was obliged to draw down HMGN's equity to meet this shortfall. 35. TDFB's efforts to 'market' its IDA loan facility to municipalities was inadequate in the early years of project implementation, particularly in the face of reluctance to borrow (Part I, para. 15). Although a major share of the responsibility for the inability to lend was due to factors outside TDFB's control, recent experience has shown that it could have achieved better results earlier on. There was a significant improvement in TDFB's performance during the last two years as indicated by the increase in loan approvals. Out of a total amount of NRs. 124.2 million onlent by TDFB to municipalities, almost 70 percent was disbursed during the final twelve months of project implementation. Earthquake Emergency Housing Reconstruction 36. The implementation performance of the project unit was satisfactory. However, HMGN's reversal of its policy on aid to earthquake victims was ill-considered. Apart from violating a covenant of the DCA with IDA, the decision has also had undesirable consequences because it has demotivated the remaining borrowers from repaying their loans. The decision not to pursue the other objectives of the Earthquake Emergency Housing Reconstruction component also shows a lack of commitment to the longer-term developmental, dimension of natural disasters (as opposed to emergency relief). G. ASSESSMENT OF PROJECT OUTCOME Municipal Development 37. This component made a very modest contribution to improving urban infrastructure in towns outside Kathmandu. There has also been some accumulation of expertise in project design, appraisal and implementation within TDFB, which will assist it in carrying out the follow-on project financed by KfW. In these respects, it is appropriate to view the project as a pilot operation, even if the initial design was more ambitious. 3 For civil works, IDA financed 80 percent of the cost, the municipalities 10 percent and the balance was to come from HMGN.  -9 - 38. Nevertheless, the project outcome is judged to be unsatisfactory, because of (i) the inability to use scarce IDA resources during a period of pressing urban infrastructure needs; (ii) TDFB's institutional weakness (paras. 19-20); and (iii) the continuing low absorptive capacity of municipalities (para. 16). Earthquake Emergency Housing Reconstruction 39. The outcome of this component is judged to be satisfactory because about 300,000 people benefited from loans to reconstruct their homes. The funds were disbursed rapidly and there were few cases of misuse of loans for purposes other than house reconstruction. Although the stated objectives were met only partially, they were of lesser importance than the primary goal of aiding people rendered homeless by the earthquake. H. FUTURE OPERATIONS 40. Completion of the unfinished sub-projects financed by IDA will require close supervision by TDFB. The approval of adequate funds in the budget for the current financial year by the Birgunj Municipality Board is crucial for completion of the project before the next rainy season. 41. Only at the end of the project in mid-1996 has there been an improvement in TDFB's institutional framework. The new Town Development Fund Act, which was granted Royal Assent on February 5, 1997, may free TDFB from some of the current constraints it faces due to its status as a 'board'. It is too early to assess if the transformation of TDFB into a 'Fund' will lead to a significant improvement in its institutional capabilities. However, even under the new Act, the Board of the Fund will continue to be chaired by the Secretary of the Ministry of Housing and Physical Planning (MHPP), or a Government nominee with 'special knowledge in the field of urban development'. HMGN will continue to have the power to appoint the five Mayors who are Board members and to approve the Fund's Rules. The fact that HMGN has retained these critical powers over TDFB suggests that government interference is likely to remain a problem in the future. 42. KfW has recently made a grant of DM 10 million to TDFB to enable it to continue its lending operations over the 1996-2000 period. However, unlike IDA, part of the KfW assistance can be passed on to Municipalities in the form of grants for social infrastructure projects. On- lending tenns for loans to the municipalities are similar to those of the IDA project. 43. The momentum built up by TDFB over the last 12 months of the project needs to be sustained if these funds are to be fully utilized. There now appears to be greater interest in borrowing on the part of municipalities, compared to several years ago, but the pipeline of adequately prepared and viable proposals to be submitted for donor funding is still thin. 44. TDFB's long-termn goal is to become an urban development bank, but its ability to do so depends on demonstrating that it is capable of improving upon the rate of disbursements achieved during the last year of the IDA project. In addition, it will need to build up significant financial reserves, which can only occur if the repayment by municipalities continues to be  - 10- satisfactory. Finally, the process of granting greater autonomy to TDFB will also need to be taken further, to enhance the influence of the municipalities. I. KEY LESSONS LEARNED 45. Key lessons learned from this project are: * The importance of the legal framework for successful institution-building should not be underestimated, but it should also be recognized that an appropriate legal framework will not guarantee autonomy. Much depends on how the texts are interpreted and used in practice, which in turn depends on a commitment to the principles of good governance (para. 41). * There is a need to focus more on improving the municipalities' implementation capacity since they are the weakest link in the chain between IDA and the ultimate project beneficiaries (para. 16). Close coordination is needed between donors with overlapping interventions in a given sector, particularly when the interventions of one donor may be crucial to the success of another donor's project (para. 33). It is a mistake to only partly convert emergency relief from loans into grants because of the precedent this sets. It would have been simpler and better to have offered modest grants to all genuine victims right from the start, with top-up loans available for those requiring larger sums for house reconstruction (para. 40).  - 11 - Part II: STATISTICAL ANNEXES Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Negligible Not Applicable Part A. Municipal Development Component Macroeconomic policies [I I I 1 Sector policies L] 1 * f Financial objectives H * [ i Institutional development i * 11 1 Physical Objectives M * 1 Poverty reduction Li 11 1 1 Gender Concerns Li H 1 1 Other Social Objectives Ii * Environmental objectives 11 1 11 Public sector management 11 1 1 * 1 Private sector development 1 [ 1 1 U Part B. Earthquake Emergency Housing Reconstruction Program Macroeconomic policies 1 V 1:1 Sector policies IJ K ] Financial objectives * I i Institutional development 1I 1 [ 1 1 Physical Objectives * I Ii I Poverty reduction i 1 H 1 Gender Concerns 11 I I I Other Social Objectives Ii 1 U Environmental objectives I * I] Public sector management I ] I I Private sector development I I B. Project Sustainability Likely Unlikely Uncertain C Bank Performance Highly Satisfactory Deficient Satisfactory Identification I * Preparation Assistance I Appraisal i Supervision U D. Borrower Performance Highly Satisfactory Deficient Satisfactory Preparation I ! * Implementation Covenant Compliance * E. Assessment of Outcome Highly Satisfactory Unsatisfactory Highly satisfactory unsatisfactory Ii ! I I I  - 12 - Table 2: Related Bank Loans/Credits Credit Title Purpose Year of Status :__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ : _ _ _ _ _ _ _ _ _ _ __ approval Preceding operation(s) None Following operations Earthquake School Rehab. To provide immediate 1989 Credit closed on (Credit 2047) assistance to HMGN in February 27, 1996. ICR support of its program to under preparation. reconstruct and rehabilitate 2,350 schools in earthquake effected areas of the Eastern and Central Development Regions of Nepal and introduce earthquake resistant design features into these reconstructed buildings and significantly improve durability of these facilities. Table 3: Project Timetable Date Planned Actual Appraisal June 1988 Post-appraisal September 1988 Negotiations September 1988 January 1989 Board Presentation October 1988 March 14, 1989 Signing April 1989 April 7, 1989 Effectiveness July 1989 September 14, 1989 Cancellations October 20, 1993; January 1, 1995; March 24, 1997 * Loan Closing June 30, 1996 June 30, 1996 * Amounts canceled are given in footnote of Table 4.  - 13 - Table 4. Loan Disbursements: Cumulative Estimated and Actual (in US$ million) FY-90 __FY-91 I FY-92 I FY-93 I FY-94 I FY-95 I FY-96 I FY-97 Appraisal Estimate 30.3 32.9 35.1 36.7 38.5 40.5 41.5 Actual * 19.3 19.3 19.3 19.3 19.3 19.3 19.9 20.1 Actual as % of SAR Estimate 65 59 55 53 50 48 48 * SDR 9,326,487.53 canceled as of October 20, 1993; SDR 5,510,000.00 canceled as of January 1, 1995; and SDR 177,271.16 canceled as of March 24, 1977. Cancellations amount to SDR 15,013,758.69. Date of Final Disbursement: March 24, 1997. Table 5: Key Indicators for Project Implementation TDFB Disbursementsfrom SAR Estimate (in NRs. Actual Disbursements (in NRs. IDA Credit million) million) 1989/90 32.7 0.0 1990/91 60.9 0.1 1991/92 48.5 2.1 1992/93 32.1 2.5 1993/94 32.7 16.0 1994/95 36.2 17.2 1995/96 86.3 TOTAL 244.0 124.2 TDFB accumuated surplus SAR Estimate Actual 1989/90 1.1 (0.5) 1990/91 5.3 (1. 1) 1991/92 10.2 (1.7) 1992/93 18.0 (0.7) 1993/94 26.0 1.3 1994/95 36.2 0.7 1995/96 48.0 3.9 Table 6: Key Indicators for Project Operation No key indicators for Project Operation were given in the SAR.  - 14 - Table 7: Studies Included in Project Titde and Purpose of Study Status and Impact Earthquake Housing Loan Evaluation Study: to Completed in 1993. Confirmed that funds were assess utilization and impact of loans for house properly utilized. reconstruction. Table 8A: Project Costs (in US$ million) Appraisal Estimate Actual Local Foreign Costs Costs Total Total Municipal Development Component (MDC) Establishment & Equipment for 0.4 0.2 0.6 TDFB Investment Projects 7.4 8.2 15.6 T.A. & Training 0.5 2.3 2 8 Subtotal - MDC 8.3 10.7 19.0 9.8 ..... ,,,,,..................................... .......... ....................................... ............ ...................... .... ............ ....... . ....................... . . ....... ..... .. ............ e.E m e rg e n cy....H.........................................................................................................................................-.............. ........ Earthquake Emergency.Housing Reconstruction Component (EEHRC) Reconstruction loans 20.6 7.9 28.5 Support to NGOs 0.3 0.2 0.5 Building materials 0.1 0.7 0.8 Grants for sanitation and stoves 1.5 0.0 1.5 Project management 1.4 0.7 2.1 T.A. & Training 0.6 1.8 2.4 Subtotal - EEHRC 241 5 1 3i- 211 Total Project Costs 32.8 22.0 54.8 30.9 Table 8B: Project Financing Appraisal Estimate (US$ M) Actual (US$ M) Local Foreign Source Costs Costs Total Total HMGN 4.7 0.0 4.7 1.3 Municipalities 1.8 0.0 1.8 0.6 UNDP 0.4 4.7 5.1 5.1 GTZ 0.0 1.7 1.7 1.7 IDA 2. 156 41.5 222 * Total 32.8 22.0 41.5 30.9 * With average rate of US$1 .4/SDR.  - 15 - Table 9: Project Economic Evaluation - No economic rate of return was calculated at the time of appraisal. - In the ICR process, the economic rates of returm were computed for the seven revenue generatilig scliemes whichi have been completed. They range from 14.6 percent to 19.6 percent, as follows: ...................................... .................... ......................................... ................ ............. ...... ............ ................... ............... ..... ................. ERR % I. Dhanigadli, bus parks constructioll 19.62 2. Byas, shop stall constructioni 14.57 3. Lalitpur. constructioni of model hiouse 17.66 4. Hetauda, construction of shop stalls with waiting hall 14.59 5. Hetauda, bus park constructioni 15.85 6. Biratnagar, supernarket construction 15.65 7. Dhiaran, shopping complex construction 15.53 Computation tables have been incltided in the Project File. Table 10: Status of Legal Covenants Section Type I Status Description Comments Development Credit Agreement 4.01 (a), (b), I CD Standard covenant on Initial compliance was hindered by (c) accountinig and auditing. HMGN requirement that TDFB maintain accounts on a caslh basis Schedule 5 CP Repayment terms of sub- HMGN waived repayment of first loans for housing NRs. 5000 of loans to lowest reconstruction income h/holds. Project Agreement 2.07 CP TDFB to submit annual plan Not done every year of project and budget by 1 March eacih implementation. year for IDA review 3.01 1 CD Standard covenant on As for DCA 4.01. accounting and auditing. Table 11: Compliance with Operational Manual Statements There was no significant lack of compliance with applicable Operational Directives or Operational Procedures.  - 16 - Table 12: Bank Resources - Staff Inputs Stage of Project Cycle Actual Staff Weeks US$ thousand Through appraisal 22.9 39.9 Appraisal to Board 25.2 78.3 Supervision 40.5 105.6 Completion 10.0 17.1 TOTAL 98.6 240.9 Table 13: Bank Resources: Supervision Missions Performance Rating Month! Number Days Specialized Implementation Development Types of Year of infield Staff Skills Status Impact Problems Persons Represented ____________. Aug.1989 3 13 FA, ME I 1 Oct. 1989 2 17 FA, ME I I May 1990 2 14 FA, ME 2 2 Legal (TDFB autonomy) July 1990 1 9 ME 2 2 Fin/Leg. Oct. 1990 1 9 FA 1 2 Fin/Leg. Feb.1991 2 10 FA, ME 2 2 Financial .June 1991 2 12 FA, ME I I Dec. 1991 2 15 FA, ME 2 2 Fin./Mgmt. Nov. 1992 2 3 FA, ME 2 3 Mgmt/Legal Mar. 1993 2 7 FA, ME 2 3 Fin/Mgmt/ Legal Nov. 1993 2 4 FA, ME 3 3 Fin/Leg. Sep. 1994 2 3 FA, ME U U Fin/Leg. Mar. 1995 2 7 FA, ME U U Legal Abbreviations: FA: Financial Analyst ME: Municipal engineer  - 17 - Appendix A MISSION'S AIDE-MEMOIRE 1. A World Bank mission comprising Mr. Sunil Mathrani (Economist, Consultant), visited Nepal from 28 October to 7 November 1996, to gather data and hold discussions on implementation of the above project. The Mission wishes to record its appreciation for the collaboration and assistance accorded to it by all parties, and in particular by the Town Development Fund Board (TDFB) and the Municipalities of Birgunj. Biratnagar, Bharatpur, Dharan, Dhulikel, Hetauda and Lalitpur. This aide-memoire records the preliminary findings and conclusions of the Mission and does not represent the official views of the World Bank management. 2. The Mission received a copy of the Implementation Completion Report prepared by TDFB on the Municipal Development Component of the project. However, an ICR for the Earthquake Housing Reconstruction Program has not yet been prepared. The Mission requested that MHPP prepare this report and forward it to the Bank by 30th November. At a wrap-up meeting on 7 November, Mr. P. Nepal, the Joint Secretary, \MHPP stated that the Ministry was taking steps to have the ICR prepared rapidly. He also regretted that the Bank had decided to end its involvement with TDFB at a time when it was showing signs of improved performance. The Joint Secretary requested that the Bank continue to maintain links with TDFB with a view to preparing a new lending operation in the future. Project Objectives 3. The main objectives of the earthquake housing reconstruction component of the project were to: (a) assist HMG in implementing its program to reconstruct damaged housing; (b) improve construction standards and develop earthquake-resistant features for buildings. 4. The main objectives of the municipal development component of the project were to: (a) establish a financial intermediary to provide financial support to municipalities; (b) provide long-term financing for social infrastructure and revenue generating projects of municipalities; and (c) strengthen the financial and administrative capacity of municipalities to prepare, implement and maintain projects. Project Design Issues 5. The initial formation order setting up TDFB as a body governed by the provisions of the Development Board Act (2013) did not allow it sufficient autonomy. This may have been the simplest legal way of creating TDFB, particularly as it was perceived as a pilot operation at that time. However, the constraints imposed on TDFB due to its legal status as a 'board' had major long-term consequences. It made it impossible for TDFB to operate in the autonomous manner conceived of at the start of the project. In this respect. the design ol project was flawed. Several  - 18 - Appendix A attempts at piecemeal reform to the Formation Order were attempted during project implementation, but with little effect. Only at the end of the project has there been a breakthrough with the approval by Parliament of a new Town Development Fund Bill, which may free TDFB from some of the current constraints it faces due to its status as a board. 6. The size and scope of project now appears over-ambitious and unrealistic, given the limited absorptive capacity of the municipalities, and use of the newly-established and inexperienced TDFB as implementing agency. It envisaged the onlending of US$ 1.5-2.0 million annually by TDFB to municipalities from the second year of project implementation. TDFB only reached this level in the seventh and final year of implementation. 7. The IDA project itself did not contain any explicit actions or components to enable it to address objective (c), even though this was critical to the ability of TDFB to fund projects. Instead, it initially relied on the UNDP-financed MSUD project to help municipalities prepare project proposals and engineering designs of adequate standard for IDA-financing. However, this arrangement does not seem to have worked satisfactorily. 8. The evaluation of project risks was also weak. The Staff Appraisal Report does not mention the risks to successful project implementation posed by the poor implementation capacity of municipalities, or anticipate potential problems arising from TDFB's limited autonomy. Implementation and Results 9. The project consisted of two unrelated components joined together in one project. The earthquake component was added to a purely municipal development project in September 1988 in order to facilitate rapid loan processing within the World Bank. The components remained entirely separate and have had very different implementation histories. Earthquake Emergency Housing Reconstruction Program 10. About NRs. 503 million (US$ 11.8 m) was disbursed for this component which was satisfactorily completed in 1991. Nearly 53,000 households benefited from financial assistance in the form of concessionary loans channeled through three commercial banks. This component incorporated HMG's preference for loan rather than grant assistance to the affected households, even though World Bank guidelines permit emergency relief to be in the form of grants. However, in 1992 HMG decided to convert loans of NRs. 5000 into grants, and waive repayment of the first NRs. 5000 of those with loans up to NRs. 10,000. Low-income borrowers accounted for about 22,000 loans with a total value of NRs. 110 million. The Mission was unable to ascertain how many borrowers with loans of NRs. 10,000 or less were granted partial relief. Those whose loans exceeded NRs. 10,000 did not get any concession from HMG. 11. The repayment of the still-outstanding loans to date has been extremely poor because those who were not granted any relief feel that they have been unfairly treated and should have at  - 19 - Appendix A least benefited from the waiver on their first Rs. 5000 of borrowings. Meanwhile the interest due but not paid has risen to a level close to the initial principal. They have lobbied HMG for total loan forgiveness, but have not received a response. The Mission was informed that MHPP has proposed to MOF that some additional debt relief be granted, but that this was rejected. The current stalemate is unsatisfactory for all parties; the commercial banks continue to hold these non-performing assets while being theoretically liable for the corresponding repayments to HMG, the borrowers are unable to sell the assets they used as collateral at the time of borrowing and HMG continues to be sollicited for further concessions that the borrowers feel are inevitable. The Mission recommends that HMG take a final decision on the matter so that it can be definitively resolved. Municipal Development Component 12. The municipal development component achieved much less than expected. Very few sub-projects were executed during the first five years of the project (1989-94) for reasons mentioned in paras. 12-16 below. As it was apparent in late 1994 that it would be impossible to utilize the available funds before the closing date, SDR 5.5 million from the Credit was canceled in early 1995. However, due to a major effort in the final two years, a total of 28 sub-projects were executed of which 24 were fully completed when the IDA credit closed on 30 June 1996. A total amount of NRs. 124.2 million was onlent by TDFB as financing for these projects. Eleven projects were revenue-generating (bus parks, shop buildings etc.) and the rest were social in nature (mainly storm water drainage). Three of the four uncompleted projects require only minor expenditures as they are over 90% complete. Only Birgunj Municipality will have to bear a substantial amount of about NRs. 1.3 crores from its own resources to finish the remaining 30% of the storm water drainage project. 13. Repayment performance by municipalities has been satisfactory so far. As of 27 October 1996, overdue repayments on IDA-financed sub-projects represented 17% of total repayments due to TDFB for these loans. Prospects for continued satisfactory performance in this area appear to be high, given the almost non-existent alternative sources of investment funds for municipalities. At the time of project appraisal, both IDA and HMG considered the risk of poor repayment by municipalities to be substantial. Major factors affecting the project. 14. The effect of the political changes in Nepal during 1990-92 had a major impact on the project. The dissolution of Nagar Panchayats and the appointment of interim municipality boards prior to elections in 1992, disrupted the preparation and approval of loan proposals. TDFB's initial clients were removed from office and the interim municipality Boards were reluctant to enter into loan committments, given their temporary status. Then the newly-elected municipalities were slow to familiarize themselves with their new responsibilities and become fully operational.  - 20 - Appendix A 15. There was also a general reluctance on the part of Municipalities to borrow funds for development works, which took substantial time and effort to overcome. The availability of grant funds from TDFB for small projects may have made the task of convincing them to borrow more difficult. Municipalities also resisted donor requirements regarding procurement procedures, employment of local consultants etc. 16. TDFB's efforts to 'market' its IDA loan facility to municipalities was inadequate in the early years of project implementation. Utilisation of IDA loan funds was also reduced by greater emphasis on the grant facility and later by competion from GTZ's soft loan program, which offered more attractive lending terms to the municipalities. However, this program was suspended in late 1993. 17. TDFB suffered from frequent changes of Executive Director (5 in eight years), and the erosion of its salaries due to inadequate increases. This led to the loss of some good staff to better-paying organizations and had a negative effect on the motivation of those remaining. It is presently short of qualified staff in critical areas, but overstaffed with low-skill personnel. 18. The ability of municipalities to design, carry out bidding and selection process and implement projects in a timely way was (and remains) a bottleneck that limits their absorptive capacity. However, there has been some progress since the project was appraised 8 years ago, as can be seen by the improved rate of disbursements over the past two years. 19. Donor coordination within the project appears to have been unsatisfactory, even though the IDA project depended on the efforts of the UNDP and GTZ (udle) projects to reinforce municipalities' project implementation capacities. Assessment of ProJect Outcome 20. The project has made a very modest contribution to improving urban infrastructure in towns outside Kathmandu. There has also been some accumulation of expertise in project design, appraisal and implementation within TDFB, which will assist it in carrying out the follow-on project financed by KfW. In these respects, it is appropriate to view the IDA project as a pilot operation, even if the initial design was more ambitious. 21. Nevertheless, the project outcome is judged to be unsatisfactory, because of (i) the inability to use scarce IDA resources during a period of pressing urban infrastructure needs; (ii) TDFB's institutional weakness (para 17); and (iii) the continuing low absorptive capacity of municipalities (para. 18). 22. It is too early to assess if the improved legal framework and the transformation of TDFB from its current status as a 'Board' into a 'Fund' will lead to a significant improvement in its institutional capabilities. Even under the new Bill (which is now awaiting Royal assent), the Board of the Fund will continue to be chaired by the Secretary, MHPP and the Fund Rules have to be approved by HMG.  - 21 - Appendix A Future Prospects 23. Completion of the unfinished sub-projects financed by IDA should be closely supervised by TDFB. The approval of adequate funds in the budget for the current financial year by the Birgunj Municipality Board is crucial for completion of the project before the next rainy season. 24. The amount KfW financial assistance to continue TDFB's lending operations is adequate for the next 3 years. However, the momentum built up over the last 12 months needs to be sustained if the funds are to be utilised during this time, particularly as municipal elections are due within the next 6 months. There now appears to be greater interest in borrowing on the part of municipalities, compared to several years ago, but the pipeline of adequately prepared and viable proposals to be submitted for donor funding is still thin. 25. TDFB's long-term goal is to become an urban development bank, but its ability to do so depends on demonstrating that it is capable of improving upon the rate of disbursements achieved during the last year of the IDA project. In addition, it will need to build up significant financial reserves, which can only occur if the repayment by municipalities continues to be satisfactory. The autonomy to be granted by HMG to TDFB under the new Act will also need to be respected both in the letter as well as the spirit of the Act. Key Lessons Learnt i The importance of the legal framework for successful institution-building should not be underestimated, but it should also be recognized that an appropriate legal framework will not guarantee autonomy. Much depends on how the texts are interpreted and used in practice. * There is a need to focus more on improving the municipalities' implementation capacity since they are the weakest link in the chain between IDA and the ultimate project beneficiaries. * Close coordination is needed between donors with overlapping interventions in a given sector, particularly when the interventions of one donor may be crucial to the success of another donor's project. 7 November 1996 Kathmandu  - 22 - Appendix B BORROWER'S CONTRIBUTION REPORT (by the Town Development Fund Board for Part A of the Project) Part A. Municipal Development Component A. Evaluation Summary 1. A credit agreement (Municipal Development and Earthquake Emergency Reconstruction Project) had been reached between His Majesty's government of Nepal (HMGN) and International Development Association (IDA) on 7th April 1989, Part of which (SDR 7.8 million) was to finance the "Town Development Programme". The credit was closed on June 30, 1996. 2. A large part of the credit SDR 5.51 million was cancelled by IDA in March 1995 due to slow disbursement of funds for various reasons in the first four years. 3. To provide loan assistance for development of social infrastructure and revenue generating projects in the municipalities is the main objective of the project. Only those municipalities who can generate sufficient net income to service debt were eligible for loan. 4. The achievement of the progress was very slow during the first four years due to the late arrival of the external advisors from UNDP and political changes (no elected Board of municipalities existed from 1990 to 1992). However the achievement of the project was satisfactory thereafter. 5. The TDFB has requested the municipalities to allocate separate budget for the operation and management of the project. Till date the municipalities had taken proper care of the components of the project and there seems to be no problem on the sustainability. 6. The project during its operation was affected mainly by political changes, late arrival of the external advisors, non-acceptablity of the initial project, municipalities lacking expertise to initiate the project, long period of review by IDA, frequent changes in the top management positions in the TDFB and upper limitation on the total loan amount. 7. In totality the outcome of the project has been favourable to promote social, environmental, technical and financial conditions of the municipalities. B. Background and Sources of Finance: 8. The Town Development Fund Board (TDFB) is a financial institution administrating grants and loans to municipalities. The TDFB was established in 1989 as a semi-autonomous body with the overall goal of improving urban management in Nepal by providing financial assistance to municipalities. The main objectives of the TDFB are:  - 23 - Appendix B * to provide financial support to municipalities of the implementation of social infrastructure and revenue generating projects, and * to strengthen the technical and managerial capability of municipalities to implement the projects. 9. From its beginning until July 1996, the TDFB was financed by loans from the World Bank and by grants from GTZ and 273 grant and 41 loan projects were completed at a cost of approximately NRs. 233 million. 10. Although the type of projects differed according to the priorities and needs of the municipalities; the most popular ones included sanitation, environmental improvement and revenue generating projects. 11. To enable the TDFB to continue its support to municipalities, a new financing agreement was concluded in December 1995 between the Federal Republic of Germany and His majesty's Government of Nepal. 12. Under this agreement the Federal Republic of Germany through "Kreditanstalt fur Wiederaufbau" (KfW) has provided grant fund of DM 10 million to the TDFB for continuing their activities until December 2000. 13. The fund will be used for grants and loans to municipalities, as well as local consultancy services for project studies and construction supervision. Interest and loan repayment from the municipalities will be turned into a revolving fund by the TDFB to finance further projects. C. Project Objective: 14. His Majesty's Government of Nepal (HMGN) entered into a development credit agreement (Municipal Development and Earthquake Emergency housing Reconstruction Project) with the International Development Association (IDA) on 7th April 1989, part of which (SDR 7.8 million) was to finance the establishment and operation of the TDFB and provide seed loan capital for Urban Investment Projects for municipalities. 15. The credit was closed on June 30, 1996. Due to a number of reasons, there had been a very slow disbursement of funds for long term loans to municipalities in the first four years of the starting period and the credit (SDR 5.51 million) was cancelled by the IDA in March 1995. 16. The project objective of the Town Development Fund Board (TDFB) was to provide loan assistance available from International Development Association to all municipalities of the Kingdom for promotion and development of social infrastructure and revenue generating projects.  - 24 - Appendix B 17. On the basis of feasibility study reports and technical documents prepared by municipality, TDFB provided loans to the different components of social infrastructure and revenue generating project (Annex B. 1) 18. Only those municipalities which have demonstrated a capacity to manage their investments and generate sufficient net income to service debt was eligible for loan from the TDFB. 19. Minimum loan amount for each component was NRs. 250,000 and maximum was NRs. 20 million. 20. TDFB has provided loan upto 90% (80% from IDA credit and 10% from HMG equity in civil works) of the estimated project cost excluding the cost of land and the municipality had to furnish the remaining 10% as the matching fund from its own source. D. Achievement of the objectives: 21. The project was started in January, 1990 eight months later due to the late arrival of the external advisor from UNDP. 22. By the time the external advisors arrived, the then Panchayat Political System was abolished. The new multiparty system came in. The Board of people's representatives of municipalities was dissolved and a temporary Board consisting of representatives from different organizations could not make any decision to ask for loans. 23. The elected Board consisting of people's representatives was constituted only in mid 1992 and it took several months for them to get convinced and understand the advantages of the loan from the TDFB. 24. It was mainly due to these reasons, the project could not pick up it momentum in the first four years. However rapid progress was made thereafter in the investment in the urban development programmes (Annex-B. I, B.2 and B.4) 25. Though the TDFB was not able to utilize all the sactioned funds resulting in a large amount being cancelled due to the slow disbursement, the progress of the project was good enough at the later stages. The repayment of interest and principal on loan from the municipalities seem to be good. (Annex B.4) E. Sustainability: 26. In order to sustain the project, the TDFB has asked the municipalities to separate the budget for the operation and management of the projects. Even now, when the TDFB gives loan/grant to the municipalities from the KfW funding it still takes into consideration the operational status of the previous projects funded by IDA.  - 25 - Appendix B 27. Since most of the components of the project are directly related to the public welfare, municipalities are pushed by the public itself to maintain the components of the project. 28. Till date, the municipalities have taken proper care of all the components of the project and they seem to be running satisfactorily. F. Major Factors affecting the project: 29. The major factors affecting the projects were as follows: (i) Late arrival of the external advisors from UNDP. The agreement was made on April 1989 and the external advisors arrived only at the beginning of 1990, which was nearly eight months after the agreement. As it was initial stage of TDFB and top management staffs were not experienced, neither the external advisors could help greatly for the speedy progress of the organization nor the staffs could get benefited by the presence of the advisors. (ii) Political changes. The then Panchayat Political System was abolished in 1990. The new multiparty system came in. The Board of people's representatives of municipalities was dissolved. It was difficult to convince non-elected members to take loans. There was no development activity during this interim period by municipalities. (iii) The municipalities were not psychologically prepared to ask and accept loan for the development works, which is but natural in the initial stages. They were not convinced weather they will be in position to pay interest and the principal in time. (iv) Initial loan projects not acceptable. Management Support for Urban Development (MSUD) prepared projects did not fully or sufficiently meet loan application requirements. None could be processed immediately and nearly all of them required considerable more work to bring them upto appraisal requirements. Also, the projects initiated by the then town panchayats were not readily acceptable to the elected municipalities as priority projects. (v) The municipalities were not ready to use loan amount for conducting feasibility studies and detail design of the project. (vi) Municipalities lacked the expertise to initiate projects and prepare loan application documentations.  - 26 - Appendix B (vii) IDA loan requirements necessitated a long initial preparation before application submission followed by another long period for review, tendering procedures and contract awarding. (viii) Frequent changes in the TDFB top management posts resulting in a poor continuity in policy and loan activity experience. (xi) The response from the IDA was slow specially during 1995/96 resulting in incompletion of the projects; and (x) Upper limitations on the total loan amount to be made available to a single municipality discouraged large municipalities, who wish to take loans exceeding NRs. 20 million (the upper limit) G. Assessment of the Outcome: 30. The project laid emphasis on the development and improvement of the social infrastructure and the revenue generating components of the project to promote social infrastructure and financial status of municipalities in Nepal, and the establishment of the TDFB in the direction of strengthening the municipalities though provision of financial, technical and managerial support. 31. Considering the problems faced in the past a separate act called "Town Development Fund Act, 1996", has been approved by the parliament and waiting the Royal assent. This will give the TDFB a lot of autonomy to operate freely and efficiently in the future. 32. To a greater extent the project helped the municipalities to improve themselves in many ways financially, economically, technically and managerially. In totality, the outcome of the project is rated satisfactory.  -27- Appendix B Annex B.1 COMPONENTS OF THE PROJECT Social Infrastructure Revenue Generating Roads and Bridges Public Markets (Retail and Wholesale) Drainage Systems Slaughterhouses Footpaths and Sidewalks Commercial Centers and Stores Public Parks and Recreation Areas Offices Solid Waste Collection Equipment Potable Water Systems Street Lighting Trade Centers and Workshops and Civil Works Equipment Bus and Truck Parks Sewer Systems Public Latrines Local Council Buildings and Public Libraries and Other Social Infrastructure Projects  Appendix B Annex B.2 TOWN DEVELOPMENT FUND BOARD STATUS OF LOAN PROJECTS As of June 30, 1996 Approved Projects: 28 Agreed Projects: 28 Completed Projects : 24 S.N. Municipality Project Project Name Type Project Dateof Date Loan Amount (NRs.) rRemarks Code Cost (NRS) Approved I Agreement Approved Contrctul Disbursed Signed Amount Amount A nt A. Completed I Biratnagar BL-001-R Super Market Construction R 6,383,197.97 2047-09-09 2047-12-15 3,500,000.00 6,383,197.97 3,500,000.00 C 2 Hetauda BL-002-R Bus Park Construction R 4,000,000.00 2047-09-09 2047-1213 2,250,000.00 2,339,749.58 2,250,000.00 C 3 Janakpur BL-003-S Stormwater Drainage Construction S 3,750,000.00 2047-09-09 2047-1213 3,350,000.00 2,549,810.31 2,712,132.51 C 4 Siddharthnagar AL-005-S Stormwater Drainage Construction S 7,213,551.31 2049-11-29 2050-02-24 6,500,000.00 7,188,634.20 6,401,478.38 C 5 Dhulikhel BL-007-S Municipal Council Building - I S 8,280,000.00 2050-05-18 2050-11-10 6,000,000.00 6,145,957.00 5,476,863.38 C 6 Bharatpur AL-008-S Stormwater Drainage Construction S 11,974,800.00 2050-05-18 2050-11-15 10,700,000.00 4,685,396.48 4,586,589.63 C 7 Biratnagar AL-009-S Stormwater Drainage Construction S 25,990,000.00 2050-05-18 2051-05-13 16,500,000.00 18,234,487.50 16,500,000.00 C 8 Janakpur BL-011 -S Procurement of Solidwaste Coll. Eq. S 2,526,000.00 2050-05-18 2050-11-19 2,273,000.00 2,551,000.00 2,273,000.00 C 9 Dharan BL-0 1 2-R Shopping Complex Construction-I R 6,565,000.00 2050-10-23 2050-11-17 5,900,000.00 5,304,879.30 5,331,366.91 C 10 Mahendranaga BL-013-R Shopping Complex With Parapet Const - I R 7,529,000.00 2050-10-23 2050-10-29 5,000,000.00 3,920,389.70 5,000,000.00 C I ILalitpur BL-014-R Multipurpose Shop Bldg. (Model house) Const. R 4,732,600.00 2051-12-08 2051-12-19 4,259,340.00 3,798,046.12 3,452,423.92 C 12 Tribhuvannaga BL-01 5-S Black Topping of Ghorahi Urban Raod S 1,450,110.00 2051-01-23 2051-02-25 1,305,099.00 1,121,934.30 1,001,656.31 C 13 Hetauda BL-016-R Shopping Complex cum Passenger Waiting Hall R 1,375,980 00 2051-01-23 2051-03-23 1,238,382.00 1,382,948.54 1,238,382.00 C 14 Hetauda BL-017-S ProcurementofSWcollection Equipment(Tipper) S 1,312,748.00 2051-01-23 2051-03-23 1,181,474.00 1,268,611.85 1,163,378.96 C 15 Lahan BL-018-R Shop Building cum Muncipal Office Construction R 1.414,000.00 2051-01-23 2051-03-17 1,272,000.00 1,337,972.57 1,272,000.00 C 16 Damak BL-019-S Procurmnent of Solid Waste Collection Equipment S 1,331,000.00 2051-01-23 2051-03-23 1,198,000.00 1,080,078.30 C Cosntruction of Gobin Wall Retaining Wall and surface 17 Dhulikhel BL-020-S drainge inside KU Coumpound in Ward No.4 S 9,522,083.00 2051-01-23 2051-02 -19 7,500,000.00 7,486,650.90 7,500,000.00 C 18 Dhulikhel Bl.-021-S Construction of Recreational park and mini park S 4,049,251.77 2051-01-23 2052-01-07 3,644,326.59 3,475,441 52 3,094,093.53 C 19 Dhangadhi BL-022-S Stormwater Drainage Construction S 7,344,000 00 2051-6-7 11/08/2051 6,610,000.00 6,324,822.60 5,504,863.67 C 20 Dhangadhi BL-023-R Construction of Bus Park. R 3,872,615.12 2051-6-7 11/08/2051 4,136,592.60 3,680,000.00 4,016,452.63 C 21 Mahendranaga BL-024-R Construction of Bus Park R 4,998,030.31 2051-6-7 2051-06-10 4,498,227.55 3,382,680.63 2,670,325.79 C 22 Bhadrapur BL-025-S Procurement of solidwaste collection equipment S 1,100,000 00 2051-06-07 2051-08-11 990,000.00 1,006,960.00 906,264.00 C 23 Byas BL-026-R Shop Stall Construction R 1,170,442.02 19-01-95 2051-10-05 1,053,397.82 947,215.60 982,111.41 C 24 Rajbiraj IBL-028-S Stormwater Drainage Construction S 2,622,895.00 2052/4/12 2052-4-30 2,360,600.00 2,537,965.02 2,315,389.97 C B. Imcompleted I Birgunj AL-004-S StormwaterDrainageConstruction S 25,592,315.02 2048-10-27 2049-03-18 17,000,000.00 23,411,260.14 16,118,942.54 |1-prog. 70% 2 Janakpur BL-006-S By pass drain const in Dirghika Sagar S 3,249,000.00 2050-05-18 2050-11-19 2,924,000.00 3,403,110.28 2,549,305.58 I - prog. 92% Incomplete physical 3 Janakpur BL-027-S Outlet drain construction contract-IlIl S 3,302,244.88 2052-01-12 2052-01-18 2,972,020.40 2,780,562.31 2,405,303.56 progress 92 93%*** :, > B Incomplete physical :S - 4 Butwal AL-010-S Stormwater Drainage Construction S 15,682,435.00 2050-05-18 2050-10-22 14,114,192.00 15,630,856.70 12,892,030.95 progress 96.12%*** X Z !(Tipper) _ _ _ _ ___________H TOTAL 178,333,299.40 | _ 140,230,651.96 142,280,541.12 124,194,433.93 | Note Please see the attached Annex -I, for the detailed reasoning of4 incompleted projects  - 29 - Appendix B Annex B.3 Incompleted Loan Projects and their Summary 1. Stormwater drainage construction (AL-004-S)/Birgunj - This was a problematic project due to court case; which delayed the project progress very much. Upon new approval for packages II and III of the project, the progress is made swiftly to achieve 70% of physical progress; and now the work has been stopped due to early monsoon. The municipality has committed to complete the rest of the project from their own resource at the earliest and forward the project completion report to TDFB. 2. Bypass drain construction in Dirghika Sagar (BL-006-S)/Janakpur:- This project is in the side of Dirghika Sagar (a historical pond) and the physical progress is 92%. The rest of the job can be completed within 10 (ten) working days; but due to early monsoon and heavy flooding the work could not be continued. Municipality is committed to complete the project from their own resource and send the project completion report to TDFB at the earliest. 3. Stormwater Drainage Construction (AL-010-S)/Butwal:- Due to the change in alignment and scope and design the project consequently the cost has increased from NRs. 7.9 million to NRs. 15.6 millions, but it took long time for the approval of additional cost. The municipality has already started the work under irrigation canal (36 Kulo) by diverting the canal but as this is prime time for paddy plantation in Nepal the farmers opposed for the diversion of the canal and the work has been stopped. Also the early monsoon caused interruption in work. The present physical progress is 92.93%. Now the municipality is committed to complete the rest of the project from their own resource at the earliest and send the project completion report to TDFB. 4. Outlet Drain Construction Contract III (BL-027-S)/Janakpur:- This project has physical progress of 96.12%. Only a small portion of the job is left due to the dispute in the site and which is likely to be settled soon. Now, the municipality is committed for the completion of the rest of the project from their own resource and send the project completion report to TDFB at the earliest.  TOWVN DEVELOPMENT FUND BOARD Appendix B Statement of Interest Income and Principal Returnable (October 8, 1996) Annex B.4 S Mo.ieipulty Pneoje Projet Name I-teadr Prncip.1 & Interen Receleed Prnocipal & Intereat Bolaure Prindp "t"'ate t Reei Nt. Code I Pri.np.1 Interal Total Peinape loteent Total Principal tait-nt"" TotIalDte I Biroeauan BL-001-R Super Moektt Cowte 217,931.57 152,873,79 370,805.36 217,93157 152,973~79 370,805.36 0,00 0.90 000 2053/Sn 2 Hvtoada BL-002-R Bun Pok Conutnation 112,500 00 94.500.00 207,00. 00 112,500.00 94,500.00 207,000.00 0.00. 0 00 0.00 205313/24 3 Joerkpur BL.003-S Stonn-ta Drtinag. Coot 90,404.42 94,021 69 184,426.11 90,404.42 94,021.69 184,426.11 0.00 0.00 0.0 2053/4/17 4 Birgnj AL.004-S Stoernoter Dranage Conu 549,208.47 436,140.16 985,348.63 549,200.47 436,140.16 985,348.03 0.00 000l 0.00 2053/5/3 5 Siddhaethnaga AL.005-S Strmsrote Drainog. Coost 213,382.61 228,162.54 441,545.15 _______ 228,162.54 228,102.54 213,382.61 0.00 213,382.61 2053/4/9 6 Jenakpr BL-006-S B4 Po., Drain Conut in DirgiicSugr_______ 12,435.68 12,435.68 ______ 12,435.60 12,435.68 000O 0.00 0.00 2053/4/7 7 Dhulihhe1 BL.007-S iMur,kipol Cownil Building - 1 205,279.56 205,279.56 205,279.56 205,279.56 0.00.00 0.00 2053/4/23 8 Bhoatpu, AL.008-S Stom-tuln Drainag Cotsttuction 49,038.50 49,038.58 49,038.58 49,038.58 0.00 0.00 0.00 2053/4/25 9 Birutooga AL.009-S Sto-oate,nDamnoge COnntUutiu 126,921.01 126,921.01 126,921.01 126,921.01 0.00 000i 0.00 -2053/5n 10 Bumlot AL-010-S Stnso-tnrDrainag. Consfteui.n 313,890.89 313,898.89 313,890.89 313,890.09 5.00 0.00 0.00 2053/5/1t I/ I Jeokpur BE-O1Il-S Peouantenof SWC Equipment (Tippe-) 92,853.32 92,853.32 92,85 3.32 92,8153.32 0.00 0.00 0.00 2053/4/17 1 2 Dhuru BL-012-R Shopping Cainplr Conalnuntio-1 266,360.30 321,860.71 5908,429.00 266,560 35 321,000.71 500,429.00 0.00 000o 0.00 -2053/5/4 / 3 Mahendruagar BL.013-R Shopping Complex With Pnmnpnn Conast 1_ 250,000.00 301,298.86 551,298.86 0.00 250,000.00 301,29886 501,298.86 _ ______ 1 4 Laitap., BL..014-lR Cunst. of 0it-pping Comptex (Mode lHona) 153,825.73 153,825.78 153,825.78 153,825.70 0.00 0.00 0.00 2053/4/I 1 5 Tribhuavunnaga BL-0l15-S Block Topping of Ghorahi Urban Read 40,066.25 40,066.25 0.00 0.00 40,066.25 40,066.235 _________ / 6 Htludad BL.016-R. Shopping Complex am Penegar Weiti.g Hull 61,491910 74,302.92 136,222.02 61,190 74,302.92 136,222.02 0.00 0 00 0.0 2003/3/24j4/31 / 7 Heuada BL-01I-S Pro-ar,nt of SWC.Equipmnt (Tippen) _______ 46,535.16 46,535.16 46,534.44 46,534.44 0.00 0. 72 0.72 2053/3/24 /8 Lahan BE-010-R Shop Building cam M-nipal Offi-n CosOartcion 63,600.00 71,457.46 /35,057.46 _______61,457.46 6 1,457.46 63,600.00 i13,0000 73,600.00 2053/6/14 /9 Deouk BL.019-S Procarent of So/id Wet. Colleaion E4uipmn-t ______ 43,967 63 43,967 63 _____ 43,967.63 43,467.0 0 00 000 0.00 2053/4/2315/23 20 Dhafikhe/ BL-020.S C-ot Gbhin & Returing Well in KU 300,000.00 300,000 00 300,000.00 300,00000O 0.00 0 00 O.0 2053/3/9 2/1 Dh.likh.1 BL-02 I R Conoe-tionofReuna6oa/ Pek 104,961.30 104,9613 5/914,961.58 104,961.30 0.o0 0 00 0.0 2053/4/23 22 Dhogedhri BL.022-S Storsste Drainge Co-tacion 164,229 34 /64,229.34 /64,229 34 /64,229.34 0.00 0 00 0.00 2053/4/115/24 7, Oh.ogedhi BL.023-R Consrsio of Baa Perk 219,005300 219,55000 ______ 2/9,805.00 219,003.0 0 00 0 00 0.00 2053/4/1l5/24 74 Mahnndraagar BL-024-R Co-v-rovo of Baa PAr /41,352 74 /41.352 74 0.00 0 00 /41,352 74 /41,302 74 25 Sh.drepat BL.025.S Pr---o-' of So/id Wast Collertro Eqaiporr ____t__ 36,250056 36,250 56 ______ 36,2500.06 36,250056 0 00 0 00 / DO 2053'0.27 26 Byas BL.026-R Cornninof Shop SW/) 52,613.30 32,6/3 30 5______ 2,613 30 02,613.30 0.00 0.00 0 00 20533//30 27 Jaoahpat BL.027-S Co-st-ci-o of Mat Leo Drai. 77,635 27 77,635,27 ________ 77,635.27 77,633.27 0 00 0.00 0 00 2053/4/17 20 Ra.jbiraj IBL-028-S Ston-ate D,ainage Connoaction 75,500.31 75,500.3/ 75,500 3/ 7 5,566.3/10 0 000 2053/6/15 Total Prionp.l ood ltoe-nt io L.*o I,2,1.2 401888 3,57382.61 1,298,531.91 3,339,149.52 4.837.681.43 92698.6 49.7,57 10901.tO Sari Leon 0 M-orcipality PtoJect Prjec No. R-wainl Pelorpat & toteret Be-i-ed M-nip.l & lut.ret B8tonen Pel-ipa & Inee- tei-da No Coda Pri--ipol Interet Tetal Prinep.i In1eter Teatl Prionipet nlet-eat Toaln Dote But3w-l SL-00/-R P--c-enot of Suntion Tenker 120,000 00 27,000.00 /47,000.00 /20,000 00 27,000 00 /47,000 00 0 00 0 00 0.00 2053/0//I SL.009-R Shop Building C-onitcto in H.t Baaa 1/3,338.70 20,334.07 141.673027 113,33876 20,334 57 /41.67327 0 00 0.00 000o 2053/5/11 SL-010-R Pa-tmen in Hat Baoa (With 4 sheds) 70,906.40 /9.746060 90.733 00 70,986 40 /9,746 66 90.733 00 000c 000 0.00 2053/5/11 2 Tulnaipur SL-002.R Shop Stall Cont-ution 111,670.10 25,125.77 /36,795.07 0 00 1 /1.670A10 25,125 77 /36,795.07 3 Ka/aiya SL-0)33.R Shop Stall ConSt-cion 117,517084 /4,656 82 1302,174 66 117.517084 14,656 81 132,174 65 0.00 0 01 0 01 2053/4/318/6 4 Lahan 01-004.R Goat Godotn Const.cfion 72.057 50 5,5/4 30 27.07/ 00 22.007050 0,5/4 30 27,571.00 0 00 0 00 0 00 2053/6/14 5 Dno-k SL-000.R Shtopp,uo Coop/ox Buildi.g Consr-tion 13 7,'00040 30.380060 /73.20054 /77.900 40 3 5,380060 173.288054 0 00 0 00 000O 2053/4/23 SL.00/6.9 D-nok Hat nout Contuction 800.90003 20.066 67 101.773.30 800.906063 20.06667 /01,773.30 0 00 0,00 0 00 2053/4/23 s hunatpur SL.007.l/ Senetblr Shop Markmt H11.107 75 Z7,303 94 140,411/69 113,107 75 27,303.94 140.4 i1109 0.00 0 00 00>03320&42 7 Dharno SL.009.R klirlt Purpose Shop Buildmng Cotastutu 120.114 10 26,4/2 95 146,527 00 120. 114 / 0 26,412.95 /46,027 05 0 00 0,00 0.00 20533/5/4 0 Mahendr....ugar SL-01 l.R But Path Construction 113.012 36 19532 43.020957 0 00 113,512 36 29,513,21 143,025.57 2l/ 9 T-nse SL-012.R shoppmngC-opl-s Co.stOt-r /6,628.64 /6,628 64 /6,628 64 602 0 00 a000 0 0342 / 0 Bi-nd-aaege SL.013.R IShoppio Coop/e- Constrctio 37,440409 37,46040 37.465340 37,465 40 0 00 0 00 0 0020/64 TtlPoipol and tarot-a io Seff L..a l,129,119.0.3 313,949,12 21,443,068,95 963.937,37 259,310,13 1,163.247,56 225,2102.46 54,638.99 279,821.45 / Grand Total ~~~~~~~~~~~~~2,954.634.35 4.3459017.2t1 7300,451.561 2,282,469.28 3,798,459,65 6,000,925.931 752,165,07 547,357.56 1,299,522.63  - 31 - Appendix C BORROWER'S REPORT ON COMPLETION (by the Ministry of Housing and Physical Planning for Part B of the Project) Part B. Earthquake Emergency Housing Background 1. On August 21, 1988, the Kingdom of Nepal, experienced an earthquake of magnitude 6.7 on the Richter scale. The earthquake's epicenter was in Udayapur, about 160 km south east of Kathmandu. Twenty-seven districts in the Eastern and Central Development Regions of Nepal were affected. These included all the sixteen districts in the Eastern Region and eleven out of nineteen districts in the Central Region. 2. The earthquake resulted in the loss of 721 lives and left more than 460,000 persons homeless. Damages included the loss of more than 65,000 homes, 2,000 schools and 900 public structures and buildings. The greatest amount of damage occurred in the Eastern Region. Additionally, infrastructures, including roads, bridges, and irrigation structures were damaged. Total damage was estimated to be NRs 4.2 billion (US$150 million). 3. In response to earthquake, His Majesty's Government of Nepal, with the assistance of the local and international aid community, provided immediate disaster relief to affected individuals. This included care for the injured, NRs 2,000 for death suffered, NRs 1,000 for loss of a house, plastic sheets for emergency shelter, cloth, cooking utensils and 40 kg of rice per family. Subsequent to the provision of immediate aid, HMGN announced and commenced the implementation of its reconstruction programme. The programme was developed through the following actions by HMGN: (a) Constitution of a Central Earthquake Affected Areas Reconstruction and Rehabilitation Committee (CEAARRC) under the chairmanship of the Minister of Housing and Physical Planning, responsible for coordinating the programme. (b) Allocation of 3% (NRs 340 million approximately) on the current fiscal year's development budget for reconstruction and rehabilitation, part of which was available for housing reconstruction. (c) Negotiation of an US$41.5 million credit (Cr. 1 988-NEP) from the International Development Agency (IDA). (d) Recruiting on contracts of 28 engineers and 272 overseers to work on the housing reconstruction program (recruitment completed by mid October 1988). (e) Commencement training of 1,200 rural workers to promote the use of low cost toilet and smokeless cooking stoves. (f) Development of minimum earthquakes resistant requirements. Their incorporation in district headquarters and urban areas was made mandatory.  - 32 - Appendix C (g) Begin construction of demonstration houses to show sound building techniques and a simple low cost earthquake resistant features. (h) Provide NRs 600 subsidies for families that incorporate low cost toilets and improved cooking stoves as part of the reconstruction programme. (i) Begin a house reconstruction loan programme through Nepal Bank Ltd. (NBL), Rastriya Banijya Bank (RBB), and Agriculture Development Bank (ADB). Project Objectives 4. Soon after the earthquake, the data compiled by the Relief Committees in each affected districts of Eastern and Central Nepal showed that more than 68,000 homes had been damaged with mostly being totally destroyed. Faced on this disaster, the main objective of the project was as follows: (a) Assist HMGN in implementing its programme to reconstruct housing damaged during the earthquake. (b) Improve construction standards and develop earthquake resistant features for incorporation in building through planning and development control regulations. (c) Provide technical assistance and training for the housing sector to address longer term needs. (d) Address the environment impact relating to the excess use of timber in building and building products manufacture. Program Description 5. After the completion of the initial assistance, reconstruction and rehabilitation programmes were launched. According to the existing data some totals of 67,835 houses were affected by the earthquake. although, an additional 7% composed of families, who were not on the original eligibility list has now been added to the program. These figures are based in the original relief list of eligible families which was composed by the then government, Panchyat system, i.e., from ward chairman (now ward member), through Panchyat (Municipality) and Ilaka committees (no longer in the present system) to the district Committee chairman and up to the National Earthquake Relief Committee. 6. Reconstruction and rehabilitation programmes which were completed on Ashad 2048 (July 1991) consisted of two main components as follow: (a) FinancialAssistance (i) Subsidized loans made available by the project through the banks (almost 800 branches were involved) for the purpose of reconstruction or rehabilitation;  - 33 - Appendix C (ii) Grants, also channeled through the banks, utilized as contributions toward the construction by householders of smokeless cooking stoves (chulo), and improved latrines. 7. Based on the location of the house, the types of loans were as follows: i. In the rural areas NRs 10,000 ii. In the district headquarters areas NRs 20,000 iii. In the urban areas NRs 50,000 i. rural areas - maximum loan NRs 10,000 First installment NRs 5,000 1% interest Second installment NRs 5,000 10% interest ii. District headquarters area - maximum loan NRs 20,000 First installment NRs 10,000 consists of NRs 5,000 1% interest NRs 5,000 10% interest second installment NRs 10,000 @ 15% interest iii. Urban areas - maximum loan NRs 50,000 First installment NRs 25,000 consisting of NRs 5,000 @ plus NRs 5,000 @ plus NRs 15,000 @ Second installment NRs 25,000 @c, 8. Loans were made from three major banks, the Rastriya Banijya Bank (RBB), Nepal Bank Ltd. (NBL), and Agriculture Development Bank (ADB). The terms from Government to the Bank were 14 percent for eight years with a two-year grace period. Government, however, was to pay the Bank annually the difference between their standard lending rate for housing credit, 19 percent and the weighted average on leading rates to the affected households. 9. Disbursements of the loans were done in two installments, which in the majority of cases were equal, i.e., NRs 5,000 and NRs 5,000 for rural loans, NRs 10,000 for district center loans and NRs 25,000 and NRs 25,000 for urban loans. For rapid disbursement the first installment was based on field verification by the Panchayat chairman and ward chairman/member. To ensure proper utilization of the loan and to motivate builders to adopt earthquake resistance measures, technical verification by the projects district engineer or overseer was required for the second installment. 10. Further, to improve the health and sanitation aspects of the affected households a grant of NRs 600 (US$2 1) was made to rural households for the construction of a smokeless cooking stove (NRs 100) and an improved latrine (NRs 500).  - 34 - Appendix C (b) Technical Assistance 11. Reconstruction Assistance. Reconstruction assistance was provided by the project engineers (28) and overseers (272) in direct contact with the householders. These technicians received training from the project and were provided with simple drawings and booklets describing designs and techniques for the construction of earthquakes resistant houses, smokeless cooking stoves and improved latrines. The aims of technical services were to enhance level of technical awareness between people and to ensure maximally use of locally available materials. 12. Training. The project trained about 1,200 local artisans in the construction of low-cost improved latrines, smokeless cooking stoves and the proper use of local building materials. They were also given instruction in earthquakes resistant construction measures. The project developed manuals describing earthquake resistant features, building techniques of smokeless cooking stoves and latrine construction which were distributed to the users. 13. Demonstration Housing. The project constructed demonstration housing in the urban and rural areas of the affected districts. The objectives were to demonstrate: (a) Sound building techniques, specially to avoid weakness in traditional building practices. (b) Simple and cost-effective earthquakes resistant feature. (c) Construction of low-cost improved toilets and smokeless cooking stoves. (d) Selection of appropriate altemative building materials, specially which reduced use of timber. 14. The projects had printed booklets of low-cost house designs suitable for the different environment, climatic conditions of Nepal and were distributed. 15. Improved Material Production. Funds were provided to assist entrepreneurs and community groups (for employment generation) to manufacture building products (e.g. cement tiles, concrete elements for low-cost toilets, etc.). Simple and easily operated equipment were provided free of charge to community groups and leased to entrepreneurs. 16. In addition to the two main components of the program, the project was also engaged in the following activities: * District center planning. * Compact settlement development. * Government building reconstruction. * Support to Non-Government Organization.  - 35 - Appendix C Achievement 1. Housing Loan Disbursement. The housing loan programme was completed within two years, i.e., on the end of Fiscal Year 2047/048 (1991). As only those who were listed in the Relief booklet were eligible for the loan, all the affected families could not be covered by the relief operation. concerns were raised by various district committees on this shortcoming. In order to accommodate those who were in advertently left out by the relief team, the central committee decided to grant authority to each district committee to select additional families to the limit of 7% of the original number of listed families in the district. thus, in total about 70,000 families were expected to benefit from the loan programme based on the information, about 78% of the total families obtained either the first or both installments. About 54% of these receiving first installments had obtained second installments as well. Details of loans disbursed in village development committee, district center and municipalities by district regions and total have been included in the Project File. 2. Home Construction. 51,778 households were served out of this amount, 5,369 homes were built under the supervision of the project technician and which have some measures of earthquake resistant features. 3. Smokeless Cooking Stoves and Improved Latrines. This component of the programme started three months after the loan programme due to time taken to devise implementation strategy and schedule. It was determined that the project should proceed and distribute reinforced fiberglass toilet pan and water seal to interested affected families. In the initial phase the project procured and supplied about 2,500 such pans/seals and then after a year procured about 8,000 sets. However, the project was able to help to build 10,857 smokeless cooking stoves and 8,957 improved latrines in the affected districts by the end of the project against the total target of 55,000 each. About 6 months after the introduction of the design of smokeless cooking sto ve, the project undertook the task of improving it to suit local conditions as the following defects were experienced: * It was felt that the prescribed stove was not flexible enough to accommodate different size of utensils that families need in various occasions. * In spite of its simplicity construction of the stove tend to be faulty. * Lack of alternative materials for fuel means the stove could not be used effectively, the stove demanded use of fuel wood of smaller size, etc. Not all these problems could be addressed by the project but lessons learnt from actual experiment at the improvised laboratory in the back yard of the central office as well as from the field tests produced a cadre of technicians called stove (chulo) motivators. These technicians totaling 5 (of this, two were retained as the motivator) in number were familiar with design parameters and as such well equipped to respond to various field situations. Thus, the project changed its overall strategy from implementing and prescribing a particular design or set of design to providing broad framework within which people will evolve, as it was, their own  - 36 - Appendix C design. So far as latrine is concerned, the project prescribed four alternative designs, the primary reliable being the pan and the water seal. The project, however, emphasized two designs more vigorously than the rest. The first design was of improved latrines with concrete rings (for pits), concrete slabs (to cover pits) and concrete pan/water seals. The second design was either concrete ring-pits or ordinary pit with fiberglass pan and water seal. One concrete ring and pan production center was established at Dharan to make these elements easily available and also to train artisans who could carry this art to other districts. The project had procured about 18 set steel formworks, necessary to produce rings, to be distributed to district engineers. At the end of Fiscal Year 2046/47, 7 such centers were established in 7 districts. The total number of units sold to affected families from Dharan units was 267 sets. These production centers were supposed to be self financing, except perhaps, for the initial cost for the training. To date the project has reimbursed NRs 485,446 to the banks in respect of grants provided by them for smokeless cooking stoves and improved latrines. 4. Demonstration House. Totaling 16 demonstration house one each at Dharan, Inarwa, Solukhumbu, Saptari, Dhankutta, Ramechhap, Sindhupalchowk, Siraha, Ilam, Panchtar and three each at Kathmandu and Udayyapr were constructed. 5. Compact Settlement. As per the programme technical support was to make available for the purpose of establishing compact settlement, for this purpose's feasibility studies of 7 district centers and villages which were to be relocated to avoid catastrophes in the event of similar disaster were carried out. The project carried out series of missions to conduct preliminary investigation of the proposed sites. Harakatte in Ilam, Bihibare, Tankisinuwari, Kanepokhari, Suntali and Harkapur Jhode all in Morang, Sukrabare in Therathum, were the seven sites for which feasibility studies were prepared. The planning team also devoted considerable efforts in preparing survey maps of these area. Given the long-term nature of resettlement projects, EAARR project approached Nepal Rural Housing company to assist in the implementation of such projects. This component was terminated in the Fiscal Year 2047/48. All documents were transferred to the Department of Housing and Urban Development. 6. District Center Development Plan. The physical development plans of those district centers which were not covered by regular programme of the Department of Housing and Urban Development were formulated by EAARR project as a part of the rehabilitation programme as per decision of central committee. The programme identified 12 such district centers and 2 commercial centers. This task was divided into two phases, viz. surveys and plans formulation phases. The first phase was completed for five centers Khandbari, Manthali, Okhaldhunga, Diktel and Terathum. Field works at Phidim, Birtamode and Itahari had already been completed. This programme was terminated in the Fiscal Year 2047/48. All documents were transferred to the Department of Housing and Urban Development too. 7. Financial Performance. Information on annual expenditure of the project on housing programmes was as follows (these figures do not include the amount reimbursed to the three banks):  - 37 - Appendix C S. No. Fiscal Year Equivalent year Total Amount 1. 2045/046 1988/89 13,888,343.00 2. 2045/46 (sanitation) 2,653,511.00 3. 2046/47 1989/90 21,019,722.00 4. 2047/48 1990/91 24,027,831.00 5. 2048/49 1991/92 17,423,839.00 Total 79,013,246.00 The total amount disbursed by the three participating banks was NRs 504,363,590.00 (Table 8) of housing loans and obtained as a part of relending scheme NRs 534,226,809.65 from the project. The reimbursed amounts per Fiscal Year were as follows: S. Fiscal Equivalent Rastriya Banijya Nepal Bank Agricultural Total No. Year year Bank Ltd. Development _ _ _ _ _ _ _ _ ________ __ ______ ________B an k 1. 2046/47 1989/90 164,587,500.00 99,330,000.00 24,832,500.00 288,750,000.00 2. 2047/48 1990/91 115,182,990.00 70,046,230.00 30,234,920.00 215,464,140.00 3. 2048/49 1991/92 10,000,000.00 10,000,000.00 4. 2049/50 1992/93 14,229,589.65 5,783,080.00 20,012,669.65 Total 304,000,079.65 175,159,310.00 55,067,420.00 534,226,809.65 Amount reimbursed to the banks for sanitation programs were as follow: S. Fiscal Equivalent Rastriya Banijya Nepal Bank Ltd. Agricultural Total No. Year year Bank Development ________ ____________ ~~~~Bank 1. 2047/48 1990/91 1,723,225.00 7,070,845.00 485,446.00 9,279,516.00 In 1991, HMGN has waived loans up to NRs 5,000. By this decision mostly the economically weaker sections of the society benefited. The total number of beneficiary families was 23,551 and the waived amount was NRs 15,368,848. In the budget of Fiscal Year 2052/53 (1995/96) NRs 10,000,000 was set aside for the purpose of waiving the loan amount of NRs 5,000 for the loanees who have received the loans not more than NRs 1 0,000. Due to this waiver loanee of more than NRs 10,000 are also expecting the same. therefore, only few loanees have started repayment. Organization Given the topography and geography of the earthquake affected area, the organization of the project was necessarily widespread. Essentially, the organization reached to the grassroots level of the local organization within the EAARRP central committees chaired by the Minister of Housing and Physical Planning and each of the Regional committees chaired by Assistant Ministers. Under the EAARR Project office there were two regional offices and 27 district offices each headed by a district engineer. Some 272 overseer and sub-overseer with at least one  - 38 - Appendix C in each Ilaka, regularly reporting to the district engineers. The project headquarters, with 56 employees was the center of project operation. Legal Aspects There were two major aspects of the project: the overall loan agreement between the World Bank/IDA and Governnent and the three participating banks. The second aspect was the legal security, i.e., the collateral, for the housing loan to the beneficiaries. 1. Loan agreement - The subsidiary loan agreement (SLA between Government and the banks reflects on general terms and condition of the Development Credit Agreement between IDA and the Government. The banks were to be responded by the government (the Ministry of Finance) with 14% interest in 8 years time with two-year grace period. 2. Collateral - In additional to the terms of the loan, sizes of the installment, etc. a major portion of the instruction has to do the type of loan collateral to be obtained by the banks. While schedule 5 of the DCA provides for collateral on land, the ownership, of which can be demonstrated by land entitlement certificates, land revenue, tax payment slips or other legal means, unreality the provision/documentation of collateral has sometimes proven rather difficult. The instructions therefore go into details in order that the branches can obtain adequate collateral under various circumstance. Habitat Award The efforts, dedication and achievements of the project staff in assisting the affected families in rebuilding their homes by providing financial and technical support and make them adopt improved or earthquake restraint construction technique to safeguard building against future earthquakes are recognized by UNCHS/Habitat which awarded the Project its Scroll of Honor in 1993. Lessons Learned A great deal had been learned about the start up, implementation, administration and financing of a nationwide housing loan programme. From the first few days after the earthquake to the last it has been a learning by doing experience. Substantial experience were gained in the operation of a loan programme. Drawing on the foregoing, some of the significant experiences and lessons learned from the housing loan programme which could be used in a nationwide housing loan programme were as follows: 1 . Experience a. Collateral - Although the banks take collateral for other loans, they have never done it on such massive scale. As such in the beginning it took few weeks for the transfer of title alone and another few weeks for the processing. But now it has been a routine work for  - 39 - Appendix C them. However, other banks need to be trained in order to launch such types of programmes in a nationwide scale in future. b. Field Inspection - The field staff of districts engineers, overseers and even runners have gained invaluable experience in-house inspection, incorporation of earthquake resistance measures, and basic technical assistance to affected families. Those body of experience and people must be incorporated in any expanded housing loan or development effort. c. Record Keeping - The system of records, forms and data collection would be invaluable to any new programme. However, while the project office was in the process of computerizing its data base, the banks were still keeping records and reporting manually. This would inevitable hinder any expanded programme. 2. Lessons Learned a. Affordability - Any futures housing loan programs would have to be based strictly on the ability and willingness of borrowers to replay the loan. The emergency character of the programme, which had not been the case, justified concern about the repayment of loans, especially in rural areas. b. Subside - The present programme was substantially subsidized in order to reach the rural poor. If an expanded program was to financially viable, any subsidies would have to be applied judiciously, quantified and placed on the budget. c. Repayment Schedules - Knowledge of amounts and dates for the repayment of the loan as well as the grace period of principal and the due date of interest is mandatory to the bank branches and loanee for any loan programme to be self sustaining. Corrective action must also be taken in the loan programme to encourage the habit of repayment, especially of interest during the grace period on district centers and urban loans. d. Loan Recovery - The extent to which the banks made a positive effort in collecting repayments during the loan period, and whether they would attempt to exercise the use of collateral in case of default remains to be seen in the programme. However, if loan recovery would be not enforced or would politicize it will set a precedence for any future loan programme. Conslusion The Earthquake Affected Areas Reconstruction and Rehabilitation project was formulated to adders problems caused by an uncommon incidence. The programme had to be completed on an emergency basis because a vast number of people were suffering. Given the scale of the operation, extent and the remoteness of the area covered, lack of similar experience at the institutional level, and range of actives that needed to be addressed it must be recognized that the Earthquake Affected Areas Reconstruction and Rehabilitation Committee did perform with considerable efficiency and vigor. By the same time the project should be cited for being able to  - 40 - Appendix C keep in race with the speed which the committee was making various decision. Indeed the diversity of jobs that were completed in the short periods (2 years) of the project (ranging from establishing the project offices 30 in total, hiring of about 250 staffs, training them on ranging subjects determining implementation strategies, preparing various technical and administrative manuals, evolving an accounting system which could respond to three separate requirements of HMGN, IDS and project management, to launching a moral boosting campaign and assisted about 78% affected household in rebuilding of their homes by providing financial and technical support) was a confirmation of the dedication of the entire project staffs. Similarly, the fact that in spite of the apparent insurmountable problem of logistics, the three banks were able to mobilize their entire field offices just within a period of one month proves that if need arises our financial institutions can also be counted to respond to similar critical situations the country might face in the future. International agencies, in particular the World Bank should also be commended for the speed with which it moved to finalize credit negotiations. The service of an expert and supply and equipment like computers, cameras for field staffs, and drafting set, by UNDP were small but invaluable support the project received. As stated above details given in the Borrower's Contribution have been included in the Project File.     IMAGING Report No.: 16508 Type. ICR