Nepal - Country assistance evaluation

Report No. 19850 Nepal Country Assistance Evaluation November 1, 1999 Operations Evaluation Department Document of the World Bank Abbreviations and Acronyms ADB Asian Development Bank BOP Balance of Payments CAE Country Assistance Evaluation CAS Country Assistance Strategy CECI Canadian Center for International Studies and Corporation CIAA Commission of Investigation of Abuse of Authority DEI Development Effectiveness Index ESAF Enhanced Structural Adjustment Facility ESW Economic and Sector Work FIAS Foreign Investment Advisory Service GDF Global Development Finance GDP Gross Domestic Product GNP Gross National Product HMG His Majesty's Government of Nepal ID Institutional Development IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund IRIS Center for Institutional Reform and the Informal Sector LIL Learning and Innovation Loan MW Megawatt NCP Nepali Congress Party NEA National Electrical Authority NGO Non-Governmental Organization NTC Nepal Telecommunications Corporation NWSC Nepal Water Supply Corporation OED Operations Evaluation Department PAR Performance Audit Report PBD Planning and Budgeting Department PFP Policy Framework Paper PHN Population, Health, and Nutrition SAARC South Asian Association for Regional Cooperation SAL Structural Adjustment Loan SAR South Asia Region SDR Special Drawing Rights T&V Training and Visit TA Technical Assistance UNCED United Nations Conference on Environment and Development UNDP United Nations Development Program USAID United States Agency for International Development WDI World Development Indicators Director-General, Operations Evaluation Mr. Robert Picciotto Director, Operations Evaluation Dept. Ms. Elizabeth McAllister Manager, OEDCR Mr. Ruben Lamdany Task Manager Mr. Asita De Silva The World Bank Washington, D.C. 20433 U.S.A. Office of the Director-General Operations Evaluation November 1, 1999 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT NEPAL - COUNTRYASSISTANCE EVALUATION Nepal's per capita income and social indicators are among the lowest in the world. It is a land-locked, resource-poor, and largely agrarian country. Rugged terrain makes communication and transport difficult. A legacy of elitist rule, weak public management, poor infrastructure, unskilled labor, and sparse public social services are major constraints to development. On the positive side, Nepal is located in between two large potential markets, it is an attractive tourist destination, and has extensive hydroelectric potential. In 1991, the government began implementing a broad strategy to reduce poverty by stimulating market- oriented private sector growth and expanding access to basic social services. Good progress was made in liberalizing the price and trade regime, maintaining stability, and increasing access to primary education. GDP grew an average of 5 percent between 1990 and 1997. However, the sustainability of these results in uncertain and progress in other areas was poor. Estimates indicate a decline in growth to 2.3 percent in 1998; per capita growth in agriculture in the 1990s was stagnant; stability in the financial sector is at risk; exports are overly concentrated on carpets and garments; public revenues are inadequate and expenditures unprioritized; only 0.5 percent of Nepal's hydroelectric potential has been developed; education quality is low; access to health services scarce; and more than half the people still have no access to safe water. While the overall strategy pursued by the government and supported by the Bank remains relevant to reducing poverty in Nepal, this limited progress in advancing the reform agenda has resulted in an increase in the number of poor by over a million people since 1990. Bank financial assistance in the 1990s consisted of investments in agriculture, infrastructure, power, and the social sectors. As a consequence of a poor enabling environment, Bank projects had limited impact on their broader objectives; suffered from a range of implementation problems; and there are serious doubts about their sustainability. Frequent changes in key decision-makers due to political instability, inadequate management, and lack of counterpart funds undermined project implementation and sustainability. Poor donor coordination, political interference into projects, and alleged corruption further complicated the environment for public investment. The private sector investment response in the 1990s was also limited. Key factors behind this include the absence of critical infrastructure; low investor confidence due to political instability; the presence of inefficient public enterprises in key sectors; lack of access to investment finance; difficult access to markets in India; and the perception of a corrupt environment. Bank performance in Nepal in the 1990s was unsatisfactory. In retrospect, the Bank should have done more to help address fundamental institutional and policy constraints to create an enabling environment for (i) cost- effective and sustainable public investment; and (ii) much greater private sector activity. No agreed policy framework was in place after 1995; no policy loans were made in the 1990s; the Bank did not actively engage in policy dialogue in key areas, including agriculture, the financial sector, or privatization; civil service and public expenditure reforms were not pressed after 1995. The Bank changed country directors six times between 1990 and 1997 and relatively low attention was paid to Nepal by the respective country department. The dropped Arun III power project generated wide negative publicity for the Bank, affected relations with the government, and consumed substantial Bank staff efforts and financial resources. Future Bank assistance should include: (i) a strategy for improving public sector management; (ii) close monitoring of the structural and social policy environment; (iii) a strategy for donor coordination to further the reform agenda; and (iv) initiatives to develop rural infrastructure, with emphasis on management by non-governmental, private, and autonomous public entities. Contents 1. Nepal's Development Strategy in the 1990s...................................................................... 1 2. B ank O bjectives and A ssistance.........................................................................................2 3. The Bank's Contribution to Development ........................................................................ 3 4. O utcom e: Unsatisfactory ..................................................................................................... 5 5. Institutional Development Impact: Modest....................................................................... 5 6. Sustainability: U ncertain..................................................................................................... 6 7. Bank Performance: Unsatisfactory.....................................................................................7 8. Borrower Performance: Unsatisfactory............................................................................. 9 9. Im plications for Bank A ssistance.......................................................................................9 10. C urren t C A S ....................................................................................................................... 10 A nnex A : A nnex T ables.............................................................................................................. 1 Table 1. Nepal: Key Economic Indicators, 1990-1996...........................................................13 Table 2. Key Economic Indicators: Nepal and Comparator Countries, 1992-96.................... 14 Table 3. N epal: D ebt Indicators............................................................................................... 16 Table 4. N epal: Structure of Exports........................................................................................ 16 Table 5. N epal: Poverty Trends................................................................................................ 17 Table 6. Composition of External Aid Disbursed to Nepal in 1996......................................... 17 Table 7. Sectoral Distribution of Aid to Nepal, 1993-1996.....................................................18 Table 8. World Bank Activities in Nepal by Sector, FY90-FY98............................................19 Table 9. OED Project Performance Ratings for Nepal.............................................................21 Table 10. Factors Influencing Project Outcomes (among projects evaluated since 1994).......22 Table 11. Active Projects in Nepal (as of July 1998)................................................................23 Table 12. Nepal: Comparative Lending Indicators among Completed Projects.......................24 Table 13. Performance of Active Projects in Nepal.................................................................24 Table 14. Bank Assistance Cost Indicators..............................................................................24 This report was written by Asita De Silva (Evaluation Officer). Comments on drafts of the report were received from Luis Ramirez, Ren6 Vandendries, Osvaldo Feinstein, Patrick Grasso, Helen Abadzi, Ridley Nelson, Susan Stout, Wendy Jarvie, John Eriksson, Nigel Roberts, Giovanna Prennushi, and Nabil Moukarbel (Bank Group staff). The report also incorporates comments from Hans Rothenbtihler (Country Director for Nepal), Peter Nicholas (Country Anchor for Nepal), and the Ministry of Finance of the Government of Nepal. Barbara Yale and Norma Namisato provided administrative assistance. ii Contents (cont.) Table 15. Level of ESW : Nepal and Regional Countries........................................................25 Table 16. List of Formal ESW on Nepal, FY90-FY98.............................................................26 Table 17. Bank Management for Nepal: 1990 - 1997.............................................................27 Table 18. Development Effectiveness Index - Nepal and Other SAR Countries.....................28 Annex B: References ................................................................................................................... 29 Attachment: Report from CODE .............................................................................................. 32 1. Nepal's Development Strategy In The 1990s 1.1 Background. Nepal is one of the ten poorest countries in the world, with a per capita income of US$210. It has a largely agrarian economy, with over 40 percent of GDP attributable to agriculture (compared to an average of 29 percent in South Asia) and over 80 percent of the people relying on agriculture for their livelihoods. Nepal is landlocked, has limited mineral resources, and has a very rugged terrain that makes transport and communication difficult. Ninety percent of its people live in 4,000 villages scattered across the country. Close proximity to India has limited Nepal's ability to pursue independent trade and industrial policies in the past. Weak public management, a low skills base, political instability, and the recent emergence of an armed insurgency hamper development progress. On the positive side, Nepal's closest neighbors-India and China-are two of the largest potential markets in the world; Nepal has abundant water resources, extensive hydroelectric potential, and is an attractive tourist destination. 1.2 Limited early progress. After the end of Nepal's self-imposed isolation in the early 1950s, initial development plans focused on public sector manufacturing, import substitution, and infrastructure development, mainly in the Katmandu valley. These efforts yielded economic growth that only just exceeded population growth through the 1970s. Expansionary fiscal policies in the early 1980s to accelerate growth failed to stimulate a supply response and resulted in a macroeconomic crisis by 1985. In 1986, Nepal launched a stabilization and adjustment program (supported by the Bank/IMF) aimed at restoring prudent fiscal and monetary policies and setting the economy on a sustainable growth path. By the late 1980s, stability was restored and liberalization of the trade and industrial regime had begun. 1.3 Broad strategy adopted in the 1990s. In 1990, the partyless Panchayat system was ended and in May 1991, a new democratically elected government began implementing a broad set of reforms aimed at reducing poverty through market-oriented growth and social sector investments to develop human capital. The strategy was supported by an IMF facility (Oct 1992); substantial grants and loans from bilateral donors and the Asian Development Bank; and the Bank's country assistance strategy (CAS), as outlined below. Main elements of the program were (i) promoting efficient private sector activity; (ii) gradual withdrawal of the public sector from commercial and industrial activity; (iii) prudent macroeconomic policy; (iv) improved public sector management; (iv) development of Nepal's limited resource base; (v) public investment in human capital, power, and infrastructure; (vi) decentralization of decision-making; and (vii) environmental protection. Growth sectors were expected to be agriculture, manufacturing, tourism, and hydropower. 1.4 Halting progress on reform agenda. Good progress was made toward these objectives in the early 1990s, due to both a committed Nepali government and liberalization in India. Price controls on most products were removed, industrial licensing eliminated, quantitative barriers removed, tariffs consolidated and reduced, convertibility on the current account allowed, and interest rates liberalized. Public enterprise reform and privatization commenced and public expenditure on health and education increased. However, in 1994, the incumbent government lost support and there has since been a succession of five unstable coalition or minority governments, none lasting for more than a year and a half. None of the successive governments radically altered the direction of economic policy, allowing most market-oriented initiatives to remain in place. However, the fragility of successive governments slowed advancement of the reform agenda. 1.5 Positive early results, although of questionable sustainability and inadequate to reduce poverty. Results of market reforms and human capital development measures of the early 1990s are visible. Exports - driven by carpets and garments - grew an average of 20 percent per year in the 1990s and increased as a share of GDP from 10 percent in 1990 to 22 percent in 1996. Manufacturing grew 12 percent a year and credit to the private sector doubled from 13 percent of GDP in 1990 to 25 percent in 1996. Inflation was maintained around 10 percent and the external and fiscal deficits (after grants) restricted to 8 percent and 6 percent of GDP respectively. Gross primary enrollment rose from 80 percent in 1985 to 110 percent in 2 1993. Between 1990 and 1997, GDP grew an average of 5 percent a year. However, as discussed below, the sustainability of these results is uncertain and they in themselves have not been enough to make a dent in Nepal's pervasive poverty. Estimates indicate a decline in GDP growth to 1.9 percent in 1998. Income distribution worsened, with the Gini coefficient rising from 0.24 in 1985 to 0.34 in 1996 (UNDP). Illiteracy decreased from 77 percent in 1980 to 64 percent in 1995, but remains among the highest in the world. Life expectancy is the lowest in SAR. Less than half the people have access to safe water, compared to a 77 percent average in SAR. The total number of poor has risen by over a million people since 1996. 2. Bank Objectives And Assistance 2.1 Bank objectives. Bank strategy in the 1990s, as reported to the Board in CAS documents, aimed to support most elements of the government's broad poverty alleviation strategy. Objectives were to help: (i) maintain macroeconomic stability; (ii) increase investment in human resources; (iii) improve public resource management; (vi) stimulate the private sector; (v) improve infrastructure; (vi) increase agricultural productivity; and (vii) develop hydroelectric potential. The Bank also sought to help preserve Nepal's natural resource base and better integrate women into development. Lessons from the past incorporated into the strategy to improve project performance included enhancing donor coordination, strengthening project implementation capacity, and including NGO participation. OED's view is that these objectives remain appropriate to reducing poverty in Nepal. However, as discussed below, not enough progress was made toward them to have set Nepal on a more advanced and sustainable course in reducing poverty. 2.2 Lending operations since 1990. Lending to Nepal in the 1990s was lower than in the past and consisted largely of infrastructure and agriculture investment operations. Between FY90 and FY98, 13 projects were approved, worth SDR 387 million in commitments. This volume was considerably lower than that of the prior nine years (FY81-89), during which 34 projects were approved for SDR 63 Imillion. Sector distribution by commitment in the 1990s was 39 percent infrastructure, 34 percent agriculture, 15 percent social sectors, and 12 percent power sector (a distribution similar to that of the preceding nine years). There are presently 15 active projects in the portfolio, of which 47 percent are at risk or potentially at risk. IFC has had a limited portfolio in Nepal, having approved 8 investments to date, mainly in tourism and power. 2.3 Policy interventions and ESW Policy Framework Paper (PFP) agreements between the Bank, IMF, and government were in place until 1995, In early 1996, a PFP was discussed but no agreement was reached and no framework has been in place since the lapse of the last ESAF agreement in 1995. The 1996 CAS's lending triggers were partly based on PFP targets and became meaningless when the PFP failed to materialize. The IMF plans to initiate ESAF discussions later in 1998, but no dates have been specified as yet. No policy-based loans were made in the 1990s. Preparation of the Arun III power project included conditions on expenditure prioritization and civil service reform. No further action was taken by the Bank after the project was dropped in 1995. The Bank did not engage in significant policy dialogue in the financial sector, agriculture, or privatization after the end of the SAL II operation in 1992. Since FY90, the Bank completed 18 formal ESW reports. Topics included secondary education, fiscal reform, infrastructure development, civil service reform, water supply and sanitation, agriculture, and overall economic progress. FIAS produced diagnostic studies on the foreign investment environment in FY97 and FY93. 2.4 Performance of completed projecls. Between FY90 and FY98, 26 projects exited the Bank's Nepal portfolio, accounting for US$604 million in net disbursements (1996 US$). Of this amount 82 percent supported projects with satisfactory outcomes. This percentage exceeds Bank-wide and SAR outcomes of 76 percent satisfactory over the same period as well as the 67 percent satisfactory ratings for all completed projects in Nepal prior to FY90. However, performance is declining: 93 percent of projects approved between 1981 and 1985 were satisfactory, compared to 66 percent of projects approved between 1986 and 1993. Among projects completed in the 1990s 27 percent of original commitments were cancelled, the 3 highest in the region. Average completion delay per project was 31 months, compared to 27 in Pakistan, 25 in Bangladesh, and 20 in Sri Lanka. Institutional development impact ratings were 28 percent substantial, somewhat below SAR and Bank-wide averages of 31 percent and 38 percent respectively, but higher than pre-1990 ratings in Nepal of 23 percent substantial. Sustainability of projects in Nepal indicate a markedly low performance, with only 16 percent of projects being likely to be sustainable, compared to SAR and Bank-wide averages of 55 percent and 59 percent respectively. The average Development Effectiveness Index for projects in Nepal was the lowest in SAR (see Annex Table 18). Bank performance ratings for identification, appraisal, and supervision were close to SAR averages. As discussed below, however, ratings for Borrower performance in preparation, implementation, and compliance were well below regional and Bank-wide norms. 3. The Bank's Contribution To Development 3.1 Macroeconomic stability maintained, although fragile. Despite frequent government changes after 1994 and limited policy involvement of the Bank and IMF, macroeconomic stability was largely maintained in the 1990s, due to tight fiscal and monetary policies, stability in India, and large aid inflows. However, sustainability is uncertain due to weak fiscal revenues; increasing donor fatigue (see below); and the vulnerability of the market for carpets and garments, which account for 85 percent of merchandise exports. 3.2 Limited progress in the financial sector. Two major public-controlled banks have a 70 percent share of the financial sector; interest rate spreads are high at 6 - 10 percent; and the formal sector is estimated to account for just 16 percent of total credit (the rest being met by informal lenders). Poor portfolio quality and high loan to deposit ratios in the dominant banks threaten stability in the system. The FY92 SAL II contained conditions to re-capitalize and restructure the banks, but the restructuring measures did not take place and there was subsequently no further activity. In effect, by enabling the re-capitalization of the two banks without ensuring their reform, the Bank facilitated postponement of reforms in the banking sector. 3.3 Unsustainable interventions in agriculture. In agriculture (the largest sector in the Bank's portfolio), four out of nine completed projects had unsatisfactory outcomes, just two had substantial ID impact, and only one was considered likely to be sustainable. According to evaluations, the impact of research and extension projects was limited because they did not respond to farmers needs, the T&V system was unsuited to the hills, and there were weak linkages between research and extension and poor motivation in public agencies. In irrigation, early projects failed to yield reliable water systems, mainly because they did not involve farmers in the project or ensure appropriate cost-recovery mechanisms. Later projects incorporated these lessons and emphasized beneficiary involvement, cost-recovery, and private irrigation schemes. Results of these efforts remain to be seen. The FY89 SAL contained conditions to open the fertilizer market to private traders. However, political resistance frustrated these efforts and no further action was taken. Overall, although over 80 percent of the people depend on agriculture for their livelihoods, annual growth in the sector was just 2.6 percent in the 1990s, only marginally above the rate of population growth. 3.4 Undeveloped power generation capacity. Bank contributions in power included construction of the Marsyangdi power plant, establishment of the Nepal Electricity Authority (NEA), and TA to screen and rank power sites. However, the 400MW Arun III project, under preparation since the early 1980s was dropped in 1995 due to its expected adverse fiscal impact, lack of implementation capacity, and the withdrawal of other donors. After this, the Bank supported efforts to create an environment for private development of hydropower and improve the electricity distribution network. Private investors have responded to the liberalized regime - for example, IFC is participating in two projects that will increase capacity by nearly 100MW. However, uncertain access to markets in India and inefficiencies in NEA appear to be key remaining constraints for the power sector in Nepal. Until India's electricity market is rationalized, including privatization of utilities and removal of subsidies, the risk of major investment in hydropower is 4 high. Only limited progress was seen in strengthening NEA. Poor service, price controls, and the high costs that it incurs increase the risks for private investors and are key obstacles to expanding local access to electricity. To date, only 293 MW out of Nepal's estimated 43,000MW economically viable hydro-power potential has been developed and 85 percent of the people remain without access to electricity. 3.5 Slow progress in the health sector. The Bank had one project in the health sector, the FY94 Population and Family Health (PHN) project. A health sector review, expected in FY99 will be the first ESW of the 1990s. Slow progress in preparing the PHN project reflected the government's view that adequate grant funding was available in the sector, making it reluctant to borrow from the Bank. The Bank's position was that other donors were failing to address critical institutional and policy constraints. However, the Bank's efforts have not addressed some of these constraints. At present, more than 40 percent of health expenditures are allocated to tertiary health care. The PHN project lagged in its first three years after effectiveness until mid-1997, when the Bank threatened to cancel the project. The government then made some key managerial appointments and restrained from interfering in project activities and the project is now expected to achieve its objectives. The experience indicated the extent to which project success relies on government commitment to achieving proj ect objectives. 3.6 Effective contribution in primary education, although limited impact in other areas. Seven Bank projects were under implementation in education in the 1990s: three in basic and four in higher education. An ESW report in FY95 addressed major constraints to improving access and quality in secondary education. With strong government commitment, the Bank's projects in primary education had a significant impact on moving the agenda forward and expanding primary school coverage. However, despite Bank efforts, the prospects of rationalizing budgetary allocations and management in higher education remain poor due to lack of will among university management and political leaders. In secondary education, the need to move two university grades to secondary education is recognized as important by the government, but efforts have been frustrated by poor cooperation between agencies as well as anticipated adverse political impacts. 3.7 Weak utility and poor project design hampered water supply interventions. Three Bank-financed projects or components of projects aimed to increase safe water coverage. Projects suffered from inadequate engagement of user groups; excess government interference; lack of cost recovery mechanisms; and insufficient capacity in the public water utility to meet its investment and operational responsibilities. Efforts to build capacity in the utility saw little progress and an ongoing water supply project was recently amended to contract out some of the utility's operations. An FY97 rural water project is attempting to overcome some of these obstacles by creating a new social fund-type institution to manage demand-driven construction of safe water schemes. At present, less than 50 percent of the people have access to safe water, well short of the 75 percent target established by the government and the Bank in the early 1990s. 3.8 Some progress in transport, although sustainability a concern. In transport, Bank assistance focused on building and maintaining the core road network. Progress was made, although implementation was slow due to cumbersome decision-making processes and lack of technical and managerial expertise in the construction industry. As in other investment operations, sustainability remains a central concern. Neither Bank project was considered likely to be sustainable due to uncertain government commitment and lack of results-oriented maintenance spending. Bank-financed TA helped develop a Priority Investment Plan that provides a strategic framework for investment in the sector and made some gains in strengthening capacity in the Department of Roads. With strong government demand, the Bank now has on-going and proposed pilot projects to help develop road construction and maintenance capacity at the district level. Other donors are active in building roads at the community level. One key lesson learned by the Bank and government in the 1990s was that basic, low quality roads built with labor-intensive processes best suit Nepal's needs, given fiscal constraints and low volumes of traffic, rather than the higher standard roads previously. At present, many villages remain several days walk from the nearest road and poor transport remains a major constraint to growth and greater access to basic social services in Nepal. 5 3.9 Effective contribution in telecom. While overall telephone coverage in Nepal continues to be low, some progress was seen in the sector. Two Bank projects were active in the 1990s and a further is presently being prepared. Under the FY85 Telecom IV project, all physical targets were exceeded and the project helped establish a telephone network covering 73 of Nepal's 75 districts. The on-going FY92 Telecom V project aimed to further expand coverage, improve quality, and establish the grounds for privatization. To date, some 240,000 new lines have been added (compared to SAR estimates of 140,000) and the project is on target to achieve all its objectives. Most importantly, the public telecom company has consistently maintained good cost-recovery levels and is financially sustainable. Relative success in telecom is partly attributed to the presence of committed high-level officials in the sector; restrained interference into management of the utility; and the same set of officials consistently working in the sector. 4. Outcome: Unsatisfactory 4.1 Slow progress toward objectives. The broad poverty reduction strategy adopted by the government and supported by the Bank in the 1990s remains relevant to reducing poverty in Nepal. However, while advances were made toward some of the key intermediate objectives-particularly in liberalizing the price and trade regime, maintaining macroeconomic stability, and expanding access to primary education-on balance progress in implementing the strategy has been poor. Outcomes in most areas of Bank assistance- agriculture, the financial sector, power, health, education quality, water supply, transportation, and public sector management-were unsatisfactory. Nepal saw good GDP and export growth between 1990 and 1996, due to the liberalization and stability in India and the impact of international garment quotas that caused manufacturers to locate in Nepal. However, there has been insufficient progress in removing fundamental institutional and policy constraints to help consolidate this progress and as a result Nepal is presently in a precarious position: growth is declining; export markets are threatened; and there are serious concerns as to the sustainability of the macroeconomic position. 4.2 Inadequate private supply response. In the long-term, the success of the strategy being pursued by the government and supported by the Bank depends on a strong private sector supply response-in agriculture, power, tourism, or manufacturing-that will generate employment and income earning opportunities and increase public revenues. In the 1990s, this response was largely limited to carpets and garments-both of which have vulnerable markets. Agro-processing, which is likely to be a key link between the predominantly subsistence production of the present and a modern manufacturing sector, has not emerged. Agriculture, which remains the mainstay of the majority, has stagnated and the vast potential for power generation has not been exploited. The absence of critical infrastructure and low investor confidence due to political instability are key factors behind this outcome. Other factors deterring investment include the presence of inefficient public enterprises in key sectors (i.e. banking, aviation, fertilizer); lack of access to investment finance due to the inefficient banking system and low savings; difficult access to markets in India; uncertain legal recourse for businesses; remaining anti-export biases in the trade regime; insecure property ownership rights; and the perception of a corrupt political environment. 5. Institutional Development Impact: Modest 5.1 Some achievements, although limited efforts in public sector management after Arun III. Nearly all Bank investment operations contained components to help build the administrative capacity of public agencies concerned. Institutional development impact ratings in completed projects, at 28 percent substantial, were considerably higher than in Sri Lanka (14 percent) and Bangladesh (16 percent) and above the 23 percent among projects completed prior to 1990. An agenda for civil service reform was prepared in FY93 and fiscal expenditure studies were produced in FY92 and FY94 as part of the preparation for Arun 6 III. However, after cancellation of the project, the Bank lost its leverage and the agenda was not aggressively pursued. A public expenditure review is planned in FY99 to re-establish a dialogue with the government. Meanwhile, the same problems that afflicted Nepal's public sector in 1990 remain today. Expenditures are over-stretched and unprioritized, revenues are low, and budgeting is increasingly unrealistic. The civil service, in turn remains "politicized, demoralized, uninspired, inefficient and ineffective" (ADB, 1998). Inadequate project administration remains a central cause of poor outcomes in Bank-financed operations. A key requirement to improve the performance of public institutions is reforming civil service staffing procedures. Efforts to strengthen existing agencies through training and expatriate counterparts have been consistently undermined by conditions that encourage high turnover, low motivation, and poor performance. Politicization of public agencies, overlapping ministries and agencies, and poor coordination among them further undermine public service delivery. Extensive efforts to decentralize decision-making authority, led by UNDP, have been frustrated by central political resistance that prevents financial resources going to the district level. 6. Sustainability: Uncertain 6.1 Poor project sustainability. Only 16 percent of projects completed in Nepal in the 1990s are likely to be sustainable, compared to an SAR average of 55 percent and a Bank-wide average of 59 percent. This poor result raises serious questions as to the value of Bank-financed investments. Main causes of low sustainability include inadequate fiscal management, a low emphasis on operation and maintenance, lack of beneficiary involvement, ineffective public administration, and wavering commitment on the part of the government. While Bank projects have increasingly involved beneficiaries in projects, these other major problems persist. To promote project sustainability, one approach will be to rely on community groups and NGOs to build and operate infrastructure through social fund-type interventions - in cases where this is possible. In the longer-term, progress in expenditure management and civil service reform, stronger political determination, and growth in public revenues will be essential to ensure sustainable public investment. 6.2 Over-dependence on external aid, lack of export diversification, potential banking crisis. On a broader level, the sustainability of Nepal's current position is threatened by a number of factors. External aid financed 60-80 percent of Nepal's annual development budgets in the 1990s and accounted for over 10 percent of GDP. As the bulk of external assistance is on grant and concessional terms, Nepal's debt service position has not reached unsustainable levels: the debt service ratio in the 1990s was between 8 percent and 11 percent, compared to the 20 percent point considered unsustainable. However, the growing sense of aid- fatigue among official donors raises the possibility of reduced aid levels, with consequent implications for Nepal's development budget. Improved performance in implementing projects is likely to be needed to ensure continued high aid flows. Export diversification, particularly by taking advantage of recently improved access to SAARC markets, will also be essential to promote sustainability. The financial sector is under strain due to the lack of liquidity, bad portfolios, and poor lending practices of the two big banks. A close review and steps to address these circumstances are clearly warranted. 6.3 Poverty is the main threat to the environment, although sources of growth are also threats. It is apparent that each of the major expected sources of growth-agriculture, hydroelectric power, tourism, and manufacturing-all pose some threat to the environment. Rapid urbanization of a few centers in the Terai and Katmandu valley has also created high pollution indexes. However, poverty poses the biggest threat to land degradation and deforestation. Due to the absence of alternative energy sources, forests account for about 80 percent of Nepal's total energy consumption. UNCED estimates that 11 percent of the forest land is in a degraded state while another 26 percent has less than 40 percent crown cover. Community-based efforts under an on-going Bank-financed forestry project are reported to be helping reverse the decline in forest cover in parts of the hills. In general, the Bank was fairly diligent in the 1990s in building in safeguards in its projects to prevent depletion of natural resources and this emphasis will have to be maintained. 7 7. Bank Performance: Unsatisfactory 7.1 Limited policy focus in a poor policy environment. In retrospect, in the 1990s, the Bank focused too much on implementing its investment projects in infrastructure, agriculture, and power in a very difficult environment and not enough on helping ensure the presence of a conducive policy environment to support both sustainable public investment as well as much greater private sector activity. In seven out of nine projects evaluated since 1994, the sector policy environment was considered to be not supportive of project implementation. After 1995, Nepal had no agreed macro framework with the Bank or IMF; no policy-based loans were made in the 1990s; despite a succession of investment projects, policy involvement in agriculture was low; civil service and fiscal management reforms were not pressed after Arun III; dialogue in the financial sector and privatization lapsed for a good part of the 1990s; and dialogue in health and higher education was largely ineffective. As a consequence, of the poor environment, while most completed Bank- financed projects had satisfactory outcomes, (i) the contribution of these interventions toward their broader objectives was limited; and (ii) the sustainability of benefits created is highly questionable. 7.2 General low level of activity. Along with gaps in the policy dialogue, there was a generally low level of Bank activity in Nepal in the 1990s. The number of ESW reports was low, with only one report and the CAS produced in the last three years. Lending between FY90-98 was 40 percent below that of FY81-89 and, only one project was approved between FY95 and FY98. Arun III seems to have monopolized the attention of senior staff and the Resident Mission until 1995. There are views among Bank staff that integration of Nepal into the same department as India in 1995 led to the neglect of Nepal as internal incentives encouraged Bank staff to work on India. Combining the three SAR divisions into two is also thought to have resulted in a loss of institutional memory when staff working on Nepal left the department. The country director for Nepal changed six times in the 1990s. Since 1997, this situation has improved with the establishment of an independent country department for Nepal and location of the country director in the field. Bank activity in the social sectors was constrained by the government's reluctance to borrow and the presence of numerous other donors in these areas. 7.3 Narrow Bank focus in agriculture. In agriculture, in particular, Bank assistance tended to focus at the project-level rather than on stimulating broader changes necessary to create an enabling environment for agricultural growth and diversification. Interventions concentrated on improving public research and extension to intensify traditional food-crop production (rice, maize, and wheat) and until recently on large public sector irrigation schemes. The need for a much more diverse production of cash crops in the hills due to their topography and a range of micro-climatic variations was not emphasized. After the FY89 SAL II, the Bank took no measures to help rationalize food, fertilizer, or interest rates subsidies that distort market production incentives. The critical obstacle to agricultural growth and diversification represented by lack of rural roads was also not fully integrated into the Bank's agriculture strategy. Until road access improves, access to markets and inputs, linkages with agro-industry, and the inflow of food will remain limited. 7.4 Controversial performance under Arun II. The dropped Arun III project generated wide negative publicity for the Bank, strained relations with the government for a period thereafter, and consumed substantial Bank staff efforts and financial resources. The two-phase 400 MW project was a high risk and only marginally viable operation. The proposed first phase would have increased generation capacity by 200 MW at an estimated cost of 15 percent of Nepal's development expenditures between FY94 and FY00. There were high risks that the government would be unable to sustain local tariff increases necessary to keep the project viable; to mitigate the social and environmental impacts of the project; and to prevent crowding out of social expenditures. The project would also have pre-empted the current alternate strategy involving smaller projects that help build local technical capacity. These issues were highlighted by interest groups in a public campaign against the project. Given the high level of risk and the only marginal benefits likely to accrue from the project, the Bank canceled the project in 1995. 8 7.5 Uncoordinated aid along with aid fatigue. Poor donor coordination is an issue that has frequently arisen in the design and implementation of projects in Nepal. In 1996, there were 52 major donors in Nepal, including 20 multilateral and 15 bilateral donors. In water and sanitation, there were 26 different donors, disbursing 6 percent of total aid. The audit of the SAL II project found that "jurisdictional disputes" between UNDP and IDA over the provision of TA to improve expenditure management resulted in the initiative being dropped. According to a 1998 Netherlands Development Organization evaluation of its aid program, "several donor agencies were sometimes involved in the same area, hardly knowing what each other was doing". Recently, key donors have warned of reduced aid flows in the absence of improvements in public sector management in Nepal. In May 1998, Japan threatened to cut its aid budget by more than 10 percent in the absence of improvements in project management and budgeting. In July, a visiting ADB director suggested that assistance to Nepal may be reduced due to poor project performance and increased competition for ADB resources from regional countries. UNDP has expressed similar sentiments. 7.6 Positive efforts to integrate gender issues. Nepal is one of few countries where life expectancy for women is lower than that of men. Legal and social discrimination includes restricted access to property and credit. Both the government and the Bank have been aware of the need to integrate women into development and taken steps to do so. For example, government policy is to provide free textbooks for girls through grade five, two years more than for boys. The Bank's agriculture projects aimed to increase women's access to extension services and irrigation, while water supply projects directly benefited women by reducing time spent on collecting water. Bank projects also emphasized the recruitment of female teachers, health workers, and extension agents to help improve women's access to these services. However, while Nepal does not have strict religious restrictions on women, progress in integrating women into development is constrained by cultural traditions. As an example, parliamentary opponents of a bill to confer equal property rights on women claim that the bill will "destroy the social fabric." Lack of rural infrastructure is a major constraint to women's development, causing extensive amounts of their time to be spent collecting firewood and water. 7.7 Sparse but sound economic and sector work. As indicated above, Bank ESW in Nepal was relatively sparse and no work was done in several key sectors, including health or agriculture (a 1997 ADB study filled this void). Nevertheless, the ESW that was produced was of good quality. As examples, the FY97 Economic Update provides a comprehensive view of what Nepal needs to do to change its poor record to date. The FY94 infrastructure strategy paper elucidated a clear set of priorities that remain relevant to date. Good quality reports in fiscal management were produced in FY92 and FY94 in support Arun III. The main issue has been the lack of follow-through on the recommendations of the various reports. 7.8 Good move toward participatory operation. During the 1990s, Bank operations made significant efforts to better include beneficiaries in projects. In irrigation, extension, forestry, and rural water supply, Bank projects abandoned the failed earlier top-down approaches in favor of participatory project design and implementation. Preparation of the current CAS has included broad consultations with stakeholders, including through a village immersion program for Bank staff and the country director. 7.9 Bank costs driven up by Arun III and PHNproject. Bank cost indicators do not indicate major deviations from norms, with the exception of the PHN and dropped projects. Average completion costs per project between FY90-97 was 2.1staff years, compared to 1.8 in Sri Lanka, 2.8 in Pakistan, and 3.00 in SAR. A notable outlier in preparation costs was the FY94 PHN project discussed above, which commenced preparation in the early 1980s and took 1,024 staff weeks to prepare, compared to an average of 130 staff weeks per project in the PHN sector. Average time spent on supervision per project in Nepal was 0.35 staff years, compared to 0.4 in SAR. However, the average cost per dropped project was US$423,000, compared to US$147,000 in SAR. This figure was driven up by the dropped Arun III project, which cost the Bank over US$2 million. Average cost of an ESW report was US$187,000, compared to US$178,000 in SAR. 9 8. Borrower Performance: Unsatisfactory 8.1 Some achievements, especially between 1991 and 1994. Strong commitment by the government between 1991 and 1994 resulted in significant progress in liberalizing the trade and price regime and removing regulatory barriers to investment. In addition, macroeconomic stability was maintained throughout the 1990s (albeit buttressed by high levels of aid). Consistent commitment by successive governments was also seen in primary education. More recently, in 1998, the government has shown determination to improve the revenue situation by implementing a value added tax, despite vocal opposition from parts of the business community. However, in the 1990s, commitment was not consistent across sectors, implementation of policy reforms slowed after 1994, and performance in project implementation has been very poor. 8.2 Poor performance in projects. Among projects completed in the 1990s, Borrower preparation was satisfactory in just 40 percent (compared to an average of 81 percent in SAR); implementation performance was satisfactory in only 38 percent (70 percent in SAR); and compliance with loan covenants was satisfactory in 52 percent (70 percent in SAR). Lack of commitment, shown through failure to provide counterpart funding or appoint key staff was a key factor behind implementation delays and poor sustainability. Lack of political will to proceed with reforms in fiscal management, banking, privatization, and civil service staffing is also apparent. Evaluations also indicate that projects suffered from mis-directed political interference into project activities. 8.3 Fluctuating ownership ofreforms. The relatively short time span of each government since 1994 is widely seen as a key factor behind slow progress in advancing the overall poverty reduction agenda. In the past four years, there have been 5 different prime ministers, while 121 different members of parliament have become ministers at some point. While none of the successive governments reversed market-oriented reforms, some initiatives such as privatization and reduced subsidies to public enterprises have slowed down. Reports from the Bank and other donors indicate that frequent changes of government and senior civil service officials had a critical negative impact on project implementation, on the performance of the civil service in general, and on the ability to implement long-term and difficult policy reforms. 8.4 Corruption is an issue. There is a widespread view that corruption and unaccountability in public institutions causes a leakage of public funds and results in adverse political interference into development projects. A study commissioned by the Bank and conducted by IRIS on corruption in rural works found that corruption was endemic and widespread, with estimates of amounts being siphoned at over 50 percent. A key question to be answered is to what extent corruption in Nepal deters potential local and foreign private sector investors. At the national level, Nepal has two anti-corruption agencies - the Auditor General's Office and the Commission of Investigation of Abuse of Authority (CIAA), tasked with collecting evidence and prosecuting cases of alleged fraud. These institutions, however, have lacked either the teeth or the will necessary to succeed in these tasks. The CIAA has lost all 25 of the corruption cases it filed with the Supreme Court, due to lack of evidence. Sustainable progress against corruption will require reforms in the civil service that enable better remuneration and motivation of public service employees. In his speech at the 1998 Annual Meetings, the Governor for Nepal stated that his government was "committed to addressing the problem of corruption" and requested cooperation of the Bank in dealing with the issue. 9. Implications For Bank Assistance 9.1 Business as usual will not work. For Nepal to progress more rapidly toward sustainable growth and poverty reduction, new measures are required to improve the quality of its public investments and to expand private sector activity. The upcoming CAS should include: 10 An investment lending program conditioned on improvements in public sector management. Bank- financed investments are likely to continue to be unsustainable and have limited impact on their broader objectives in the absence of real improvements in the performance of the civil service, expenditure management, and governance. It is recommended that: (i) clear lending triggers be established and strictly adhered to; (ii) intensive dialogue and ESW focus on these issues; and (iii) adaptable program lending where strong government corrinitment is required for its continuation be utilized. * Close monitoring of the structural and social policy environment. An emphasis should be placed on defining and realizing a conducive policy environment for increased private sector activity and improved access to social services. ESW should support reform in the financial sector, an improved competitive environment through privatization of key enterprises, and intra-sectoral re-orientation of public expenditures toward basic social services. A monitorable policy framework agreement between the Bank, IMF and government should be re-established. * A strategy for donor coordination to further the policy reform agenda. Recent unilateral warnings by key donors of reduced aid flows reflect a growing consensus that in the absence of key policy changes, donor assistance to Nepal will continue to fall short of its potential impact. The Bank should take a lead in coordinating the donor approach to help build government ownership and advance essential reforms. Initiatives in rural infrastructure, using non-traditional approaches where possible. Poor infrastructure, particularly in rural areas, remains an immediate constraint to growth and wider access to basic social services. Given current weaknesses in public sector management, the Bank should work with the authorities and other donors to develop a multi-faceted strategy to build and maintain infrastructure by strengthening capacity at the central level as well as promoting management by non-governmental, private, and autonomous public entities. A greater use of LILs to help develop these approaches would facilitate rapid expansion of the infrastructure development program as government ownership improves. 10. Current CAS 10.1 The current CAS incorporates lessons of the Bank's past experience in Nepal and reflects broad stakeholder consultation. The strategy em]phasizes: (i) beneficiary and private sector participation in project implementation; (ii) closer cooperation with donors to bring about improved governance; and (iii) linkage of lending levels to improvements in public sector management, financial sector reform, privatization, decentralization, and governance. These priorities conform to the recommendations made in this CAE. The CAS matrix provides a good set of outcome indicators that will support future evaluation of the assistance strategy. The CAS could spell out more clearly the respective priority areas of major donors. Reflections of a former Resident Representative in Nepal The Bank has never done that well in Nepal-it is a very difficult place to obtain results and requires a kind of stamina and clarity of vision that we never really deployed in Nepal's case . . . . Where I felt we were weakest, apart from our unwillingness to confront the Government when it mattered, was in our reluctance to get to grips with institutional and capacity problems-and our unwillingness to choose a few strategic areas/issues and to concentrate our efforts on them. Both of these things are necessary if we are to see the translation of good policy ideas and project designs into action, and if we are to see positive action sustained over time. I always felt that we had the potential to be very effective in Nepal, provided that we decentralized authority to the field, put key international staff in the Resident Mission, funded supervision and policy dialogue first and new lending as a residual, and kept our nerve. I still think this; that we can be the agency that really counts in Nepal-and can live up to the expectations of the Nepalese, who continue to give us the benefit of the doubt. Ngel Roberts (former Resident Representative in Nepal), commenting on a draft of this CAE, November 1998. 11 ANNEXES 12 Annex A: Annex Tables Table 1. Nepal: Key Economic Indicators, 1990-1996 Table 2. Key Economic Indicators: Nepal and Comparator Countries, 1992-96 Table 3. Nepal: Debt Indicators Table 4. Nepal: Structure of Exports Table 5. Nepal: Poverty Trends Table 6. Composition of External Aid Disbursed to Nepal in 1996 Table 7. Sectoral Distribution of Aid to Nepal, 1993-1996 Table 8. World Bank Activities in Nepal by Sector, FY90-FY98 Table 9. OED Project Performance Ratings for Nepal Table 10. Factors Influencing Project Outcomes (among projects evaluated since 1994) Table 11. Active Projects in Nepal (as of July 1998) Table 12. Nepal: Comparative Lending Indicators among Completed Projects Table 13. Performance of Active Projects in Nepal Table 14. Bank Assistance Cost Indicators Table 15. Level of ESW: Nepal and Regional Countries Table 16. List of Formal ESW on Nepal, FY90-FY98 Table 17. Bank Management for Nepal: 1990 - 1997 Table 18. Development Effectiveness Index - Nepal and Other SAR Countries 13 TABLE 1: NEPAL: KEY ECONOMIC INDICATORS, 1990 - 1996 Indicator 1990 1991 1992 1993 1994 1995 1996 Average Average Average 1965-1979 1980-1989 1990-1996 GDP growth (annual%) 4.7 6.3 4.0 3.8 8.2 3.4 5.3 2.3 4.1 5.1 GNPpercapitagrowth(annual%) 2.2 3.5 1.3 1.1 5.4 0.8 1.8 0.0 1.4 2.3 GNP per capita, Atlas method (current US$) 210 210 200 200 200 210 210 98 173 206 GNP per capita, PPP (current international $) 820 870 920 950 1020 1060 1090 595 961 Population growth (annual %) 2.5 2.6 2.6 2.7 2.7 2.8 2.7 2.2 2.6 2.7 Agriculture, value added (% of GDP) 51.6 48.6 45.9 43.3 43.1 41.8 42.0 67.6 56.0 45.2 Manufacturing, value added (% of GDP) 6.1 6.9 9.0 9.0 9.5 9.5 9.7 3.9 5.2 8.6 Services, etc., value added (% ofGDP) 32.1 33.6 33.3 35.4 35.2 35.5 35.3 22.3 29.8 34.3 Exports of goods and services (% of GDP) 10.5 11.8 16.0 18.1 23.9 24.2 22.5 7.7 11.4 18.1 Imports of goods and services (% of GDP) 21.1 23.1 26.3 27.7 31.6 34.6 37.1 11.1 20.1 j 28.8 International tourism, receipts (% of total exports) 28.7 28.8 19.3 23.2 17.8 11.0 13.0 1 18.5 20.3 International tourism, growth in number of arrivals 6.3 14.9 14.0 -12.01 11.2 11.0 11.3 4.7 8.1 Manufactured exports (% of merchandise exports) 83.5 80.7 82.8 84.3 .. 98.8 .. 27.2 52.7 86.0 Current account balance (% of GDP) -8.4 -9.3 -7.9 -7.9 -5.6 -7.8 -12.8 -0.3 -5.8 -8.5 Resource balance (% of GDP) -10.6 -11.3 -10.3 -9.6 -7.7 -10.4 -14.6 -3.4 -8.7 -10.6 Agriculture, value added (annual % growth) 5.8 2.2 -1.1 -0.6 7.6 -0.3 4.4 0.8 3 6 2.6 Manufacturing, value added (annual% growth) 9.8 17.7 32.0 6.2 12.3 2.0 5.0 4.0 12.1 Services, etc., value added (annual % growth) 3.4 9.9 6.4 7.2 7.2 5.6 6.4 5.0 6.6 Exports of goods and services (annual % growth) 2.6 25.6 49.2 25.1 39.6 0.2 0.5 6.4 20.4 Aid (% of central government expenditures) 70.7 74.3 73.9 60.7 75.8 58.9 46.0 40.6 58.6 65.8 Aid (% of GNP) 11.6 I 12.0 12.3 9.5 10.9 9.7 8.9 4.8 9.6 10.7 Aid (% of gross domestic investment) 64.1 58.8 59.1 41.8 49.6 42.5 38.8 30.4 49.9 50.7 Aid per capita (current US$) 22.9 23.5 22.0 17.9 21.6 20.3 18.2 5.7 16.3 20.9 World Bank Aid (% of total aid) Money and quasi money (M2) as % of GDP 29.7 30.8 30.2 32.3 33.7 35.8 36.2 12.7 25.4 32.7 Money and quasi money growth (annual %) 18.5 22.7 20.7 24.8 18.1 15.6 12.2 17.8 19.6 18.9 Inflation, consumer prices (annual %) 8.2 15.6 17.1 7.5 8.3 7.6 9.4 6.9 10.8 10.5 Credit to private sector (% of GDP) 12.8 13.7 13.7 14.9 18.6 22.8 24.6 3.7 9.9 17.3 Domestic credit prov. by banking sector (% of GDP) 28.9 29.2 28.2 29.2 29.9 34.6 36.0 6.3 25.8 30.8 Gross domestic savings (% of GDP) 7.9 9.6 10.8 13.5 14.7 13.0 8.6 6.3 10.7 11.2 Gross domestic investment (% of GDP) 18.4 20.8 21.2 23.1 22.4 23.4 23.2 9.7 19.4 21.8 Gross international reserves in months of imports 5.5 6.2 6.7 7.8 6.9 5.0 4.5 10.0 5.2 6.1 Private investment (% of GDFI) 53.1 61.9 64.7 67.8 71.2 57.3 64.7 Total debt service (% of exports goods and services) 15.4 12.6 10.4 9.0 7.7 7.7 7.7 2.0 7.4 10.1 Overall budget deficit, including grants (% of GDP) -6.8 -8.2 -6.7 -6.0 -3.7 -4.6 -5.1 -2.3 -6.2 -5.9 Expenditure, total (% of GDP) 17.2 18.9 16.8 17.0 14.7 17.5 20.1 10.8 17.4 17.5 Current revenue, excluding grants (% of GDP) 8.4 8.6 8.7 8.3 9.5 10.7 12.2 6.6 8.5 9.5 Tax revenue (% of GDP) 7.0 6.8 6.6 6.8 7.7 9.1 10.4 5.6 7.0 7.8 Trade (% of GDP) 31.6 34.9 42.3 45.7 55.5 58.8 59.6 18.9 31.6 46.9 Foreign direct investment, net inflows (% of GDI) 0.9 0.3 0.5 0.7 0.8 0.8 1.9 0.0 0.1 0.8 Illiteracy rate, adult total (% of people 15+) 74.4 .. .. .. .. 72.5 . 84.2 78.5 73.4 Immunization, DPT (% of child. under 12 months) 80.0 74.0 72.0 68.0 77.0 65.0 6.0 36.0 72.7 Life expectancy at birth, total (years) 53.6 .. 54.6 .. .. 56.3 56.8 43.2 48.7 55.3 Mortality rate, infant (per 1,000 live births) 10 .. . 0 .. .. 87.6 84.8 160.8 120.3 92.4 Safe water (% of population with access) 1 44. .. .. 8.6 .8 5.0 17.2 46.0 Sanitation (% of population with access) 20.0 .. 20.0 .. 0.5 20.0 School enrollment, primary (% gross) 8.0108.0 111.0 110.0 . .. .. 55.7 83.0 109.3 Population density (people per sq km) 131.3 134.7 138.3 142.0 146.0 150.0 154.1 84.2 114.2 142.3 Urban population (% of total) 8.9 9.2 9.5 9.7 10.0 10.3 10.6 4.5 7.6 9.7 Source: WDI TABLE 2: KEY ECONOMIC INDICATORS: NEPAL AND COMPARATOR COUNTRIES, 1992-1996 Low inc. South Sri All1figures are annual averages for the period 1992-1996 Nepal India Pakistan Banglad. EAP Indonesia Malaysia Thailand Mauritius Ethiopia excl China Asia Lanka & India GDP growth (annual %) 4.8 6.4 6.4 4.8 5.2 4.2 10.4 7.6 8.6 8.0 5.0 5.2 3.6 GNP per capita growth (annual %) 2.0 4.0 4.4 1.4 3.4 3.2 9.0 5.8 6.2 6.4 3.6 3.4 0.0 GNP per capita, Atlas method (current US$) 204 336 334 446 644 236 718 900 3524 2408 3272 108 308 GNP per capita, PPP (current international $) 1008 1433 1384 1508 2094 918 3080 2860 8904 5748 8088 440 1143 Agriculture, value added (% of GDP) 43.2 29.0 29.6 25.6 24.0 31.0 20.3 17.4 14.6 11.0 9.8 59.3 34.0 Industry, value added (% of GDP) 22.0 27.6 28.8 24.8 25.6 17.6 43.0 41.0 43.2 39.0 32.8 9.3 25.2 Manufacturing, value added (% of GDP) 9.6 17.8 18.6 17.0 15.4 9.8 32.3 23.2 31.6 28.4 23.2 5.5 12.2 Services, etc., value added (% of GDP) 34.6 43.2 41.8 49.6 50.4 51.6 36.8 41.6 42.2 50.2 57.4 31.3 41.0 Exports of goods and services (% of GDP) 21.0 12.2 11.2 16.4 34.2 12.4 26.5 26.8 87.6 38.4 59.4 10.2 26.4 Imports of goods and services (% of GDP) 31.6 15.4 13.6 20.2 44.0 20.0 26.8 24.6 87.8 43.6 64.4 19.8 32.4 Manufactures exports (% of merchandise exports) 88.7 76.5 74.5 83.6 71.7 83.5 70.6 51.0 71.8 70.8 68.8 1.5 Trade (% of GDP) 52.4 28.0 24.8 36.8 78.0 32.6 53.0 51.6 174.8 82.2 123.8 30.6 58.8 Agriculture, value added (annual% growth) 20 3 4 4. 8 4 4 3 2.2 3 2 3 industry, value added (annual% growth) 82 78 78 5.6 6.8 7.2 14.4 9.8 112 10.0 54 84 Manufacturing, value added (annual % growth) 11.4 8.6 8.8 5.4 9.0 7.6 15.0 11.0 13.0 10.0 6.0 11 .2 Services, etc., value added (annual % growth) 6.4 7.0 7.0 5.2 6.0 6.0 8.2 7.2 8.2 7.8 6.2 7.0 Exports of goods and services (annual % growth) -22.8 12.0 132 34 8.8 17.8 13.5 84 142 116 56 138 56 Imports of goods and services (annual % growth) 22.8 12.2 13.2 10.6 8.8 10.2 15.0 11.0 15.0 118 3.4 5.0 5.0 Aid (% of central government expenditures) 63.2 3.8 9.3 19.0 6.0 0.2 3.2 3.2 101.0 Aid (%of GNP) 10.2 1.4 1.0 1.8 5.2 5.8 1.0 1.2 0.0 0.4 0.6 18.6 8.6 Aid (% of gross domestic investment) 46.4 7.3 2.8 9.8 20.4 39.0 3.2 0.0 1.2 2.6 133.2 43.0 Aid per capita (current US$) 20.0 4.8 2.4 8.4 33.0 12.8 5.8 8.8 0.6 12.6 23.2 18.8 23.6 Commercial energy use (kg of oil equivalent per capita) 26.5 218.0 244.5 235.0 116.8 61.8 609.0 404.0 1628.8 739.5 388.8 21.0 140.3 Electric power consumption (kwh per capita) 36.3 277.5 311.8 295.3 190.3 51.5 519.8 226.8 1676.5 1023.3 22.3 189.0 Electricity production from hydroelectric sources (% of total) 94.0 23.5 20.5 41.3 90.8 7.3 19.5 17.0 14.3 6.8 87.5 52.5 Gross domestic savings (% of GDP) 12.4 20.6 22.2 15.8 15.4 7.6 36.4 32.2 37.6 35.8 24.0 5.6 13.2 Gross domestic investment (% of GDP) 22.4 23.4 24.6 19.8 25.4 15.0 36.8 30.0 38.2 40.8 28.6 15.2 19.4 Gross domestic fixed investment (% of GDP) 21.4 23.6 18.0 25.2 15.0 27.6 38.2 40.6 27.2 15.2 Gross international reserves in months of imports 6.2 5.0 1.8 3.8 5.2 3.0 4.3 5.0 4.2 5.0 Total consumption, etc. (% of GDP) 87.6 79.4 77.8 84.2 84.6 92.4 63.6 67.8 62.4 64.2 76.0 - 94.4 86.8 Private consumption, etc. (% of GDP) 79.2 68.6 67.2 71.8 74.4 78.4 51.4 59.4 49.8 54.2 64.4 83.6 72.6 Private investment (% of GDFI) 67.6 61.3 62.5 52.6 57.6 54.8 63.8 66.2 79.2 68.2 57.8 60.6 Current account balance (% of GDP) -8.6 -1.4 -4.0 -5.2 -3.0 -2.0 -6.0 -6.6 -22 -54 Foreign direct investment, net inflows (% of GDI) 1.2 2.2 14 4.4 4.4 0.0 10.6 6.2 17.6 3.4 2.0 0.6 92 Resource balance (% of GDP) -10.6 -3.4 -2.4 -38 -10.0 . -7.4 -1.0 - 2.2 -0.4 -5.0 -5.0 -9.6 F 76 Total debt service (% of exports of goods and services) 8.6 24.2 27.2 27.4 9.0 14.4 14.4 33.2 8.2 13.0 8.0 24.6 17.8 Source: World Development Indicators 1 f7 7~TiSrl f 1 .~ . Low inc.j South IdnsaMlyi hiadMuiisEhoi xlhn All figures are annual averages for the period 1992-1996 Nepal India Pakistan Banglad. EAP Indonesia Malaysia thailand vaurmus atmopta excl China Asia Lanka & India Overall budget deficit, including grants (% of GDP) -5.4 -6.8 -6.0 -7.3 -7.2 1.0 1.8 2.4 -1.2 -6.5 Expenditure, total (% of GDP) 17.4 17.6 16.4 24.0 27.4 12.0 16.2 25.0 15.8 22.6 18.0 Current revenue, excluding grants (% of GDP) 9.8 13.8 13.2 18.5 19.6 10.3 17.6 27.2 18.6 21.4 11.5 Military expenditure (% of central government expenditure) 6.3 13.0 26.5 15.8 9.5 8.0 11.3 16.5 1 _ 150 Credit to private sector (% of GDP) 19.2 25.0 25.4 27.2 24.0 20.4 842 51.4 117.3 115.4 43.8 17.8 17.6 13.0 15.3 17.0 14.6 14.6 16.6 20.2 8.6 16.0 19.0 130 21.3 Domestic credit provided by banking sector (% of GDP) 31.6 49.0 50.8 53.0 35.4 30.4 87.2 50.4 122.0 114.4 61.8 50.6 36.4 Inflation, consumer prices (annual%) 10.0 9.10 .0.8 11.0 3.4 8.8 4.2 Money and quasi money (M2) as % of GDP 33.6 44.8 40.8 30.4 34.2 -- 42.0 80.0 73.0 69.2 41.4 Money and quasi money growth (annual %) 18.4 16.8 19.6 17.4 12.8 22.8 22.3 15.4 14.4 13.8 Export duties (% of exports) 1.4 0.0 0.0 0.0 0.3 0.0 1.2 010 1.2 3.0 Import duties (% of imports) 9.6 26.8 29.6 25.8 11.0 6.3 3.8 3.8 8.0 16.4 15.0 Tax revenue (% of GDP) 8.2 10.6 10.0 13.5 17.4 9.0 15.4 20.8 16.6 18.4 8.0 Taxes on goods and services (% of current revenue) 39.8 37.4 30.8 32.0 51.2 26.5 29.8 23.2 40.2 24.2 23.5 Taxes on income, profits and capital gains (% of current rev.) 10.0 14.2 20.8 15.0 13.6 34.0 49.2 34.6 29.6 12.8 26.0 Taxes on intemational trade (% of current revenue) 28.0 24.6 23.4 25.8 20.4 14.8 4.6 13.2 16.6 38.2 21.5 International tourism, expenditures (% of total imports) 8.2 2.4 1.2 4.8 3.0 3.2 30 3.8 3.0 4.2 6.2 1.4 4.0 Arrivals/population 1.6 0.3 0.2 0.3 2.1 0.1 2.4 2.1 34.9 10.6 36.4 0.2 0.9 Ailputnn International tourism, receipts (% of total exports) 16.8 6.2 7.4 1.2 5.4 0.8 7.2 10.2 4.4 11.2 17.0 5.0 4.0 International tourism, number of arrivals (growth) 7.1 5.0 6.6 0.0 -10.9 8.2 11.1 14.5 1.0 2.2 4.2 5.5 12.4 Public spending on education, total (% of GNP, UNESCO) 3.0 3.0 4.0 3.0 2.0 3.0 1.3 5.3 4.0 Pupil-teacherratio, primary 39.0 61.7 63.7 50.0 28.7 24.0 23.0 20.0 19.3 21.0 29.0 40.0 School enrollment, primary (% gross) 110.5 98.0 100.3 71.5 110.0 92.0 115.0 114.3 91.0 92.0 106.3 27.0 80.5 Health expenditure per capita (current US$) 9.0 1 .0 17.0 85.0 111.0 Illiteracy rate, adult female (% of females 15+) 86.0 64.0 62.0 76.0 13.0 74.0 24.0 22.0 22.0 8.0 21.0 75.0 55.0 Illiteracy rate, adult male (% of males 15+) 59.0 38.0 35.0 50.0 7.0 51.0 9.0 10.0 11.0 4.0 13.0 55.0 36.0 Illiteracy rate, adult total (% of people 15+) 73.0 51.0 48.0 62.0 10.0 62.0 17.0 16.0 17.0 6.0 17.0 65.0 46.0 Immunization, measles (% of children under 12 months) 67.7 83.0 85.7 66.0 85.0 92.0 89.7 89.3 81.3 76.7 84.5 253 61.0 Life expectancy at birth, total (years) 56.0 61.3 62.0 62.7 72.7 57.7 68.0 64.0 71.6 69.0 70.7 48.3 55.7 Mortality rate, infant (per 1,000 live births) 89.7 77.0 69.3 91.0 16.7 80.3 41.5 52.3 12.0 35.3 18.3 113.3 91.0 Safe water (% of population with access) 48.0 77.0 81.0 60.0 46.0 81.5 84.0 62.0 89.0 81.0 98.0 27.0 Sanitation (% of population with access) 20.0 29.0 29.0 30.0 52.0 35.0 30.0 51.0 92.5 78.5 100.0 10.0 Population density (people per sq km) 146.0 255.4 307.4 164.0 276.2 906.2 106.6 105.4 59.8 114.8 546.6 55.5 38.4 Populatiotigrowth(annual %3.0 2.0 2.0 3.0 1.0::h0 1 .0 2.0 2.0 1.0 1.0 1.8 2.6 Urban population of total) 10.0 26.0 233 8 22.0 17.8 Source: World Development Indicators 16 Table 3: Nepal: Debt Indicators 1990 1991 1992 1993 1994 1995 1996 Concessional debt/Total debt (EDT) (%) 89 91 92 93 92 95 96 Current account balance (US$m) -305 -344 -275 -296 -225 -343 -569 Debt service (TDS)/Exports of goods and services (XGS) (%) 15 13 11 9 8 8 8 Exports of goods and services (XGS) (US$m) 463 529 651 775 1,072 1,206 1,111 Foreign direct investment, net inflows (US$m) 6 2 4 6 7 8 19.2 Grants, excluding technical cooperation (US$m) 143 142 158 146 170 171 146 Gross national product (GNP) (US$m) 3,695 3,770 3,540 3,840 4,123 4,484 4,521 Imports of goods and services (MGS) (US$m) 766 868 933 1,081 1,302 1,555 1,686 Interest (INT)/Exports of goods and services (XGS) (%) 6 6 5 4 3 3 3 Interest (INT)/GNP (%) 1 1 1 1 1 1 1 Multilateral debt/Total debt (EDT) (%) 77 79 80 79 78 81 82 Reserves (RES)/Imports of goods and services (MGS) (months) 6 6 7 8 7 5 5 Reserves (RES)/Total debt (EDT) (%) 22 26 29 35 32 27 26 Short-term debt/Total debt (EDT) (%) 2 1 0 1 3 1 1 Technical cooperation grants (US$m) 109 117 127 146 143 143 145 Total debt (EDT)/Exports of goods and services (XGS) (%) 354 335 277 259 217 199 217 Total debt (EDT)/GNP (%) 44 47 51 52 56 54 53 Workers' remittances, received (USSm) 61 65 54 66 70 101 78 Source: GDF Table 4: Nepal: Structure of Exports Table A: Major External Trading Partners (Share of Exports) FY91 FY92 FY93 FY94 FY95 FY96 FY97 Germany 37% 43% 48% 42% 37% 34% 33% USA 19% 23% 21% 29% 29% 28% 26% India 21% 10% 10% 13% 19% 20% 24% Sri Lanka 1% 6% 5% 1% Switzerland 7% 5% 4% 4% 3% 2% 2% Belgium 2% 2% 2% 2% 2% 2% 1% Canada 0% 1% 1% 1% 1% UK 2% 1% 1% 2% 2% 1% 1% Bangladesh 0% 0% 0% 0% 0% 2% 2% Italy 2% 1% 1% 1% 2% 2% 2% Germany+USA+India 77% 76% 79% 85% 84% 82% 82% Exports to SAARC Countries 23% 18% 15% 14% 19% 22% 26% Table B: Major Exports by Commodity (Share of Total Value) FY92 FY93 FY94 FY95 FY96 FY97 Carpets 58.5% 61.5% 57.7% 53.9% 51.7% 53.8% Readymade Garments 25.5% 24.0% 34.9% 37.5% 34.9% 33.0% Pulses (lentils) 9.4% 7.0% 1.0% 0.4% 2.4% 2.9% Woolen goods 1.8% 2.3% 1.8% 1.4% 0.9% 1.3% Goatskin 1.6% 1.4% 1.1% 2.5% 2.2% 1.6% Towels 0.0% 0.2% 0.2% 0.5% 1.4% 2.1% Nigerseeds 1.1% 1.3% 0.8% 0.6% 2.7% 1.6% Carpets+Garments 84% 86% 93% 91% 87% 87% Table C: Source of Exports by Development Region FY91 FY92 FY93 FY94 FY95 FY96 FY97 Eastern Development Region 1.6% 4.9% 0.7% 0.9% 4.0% 12.4% 16.5% Central Development Region 98.2% 97.6% 97.5% 98.9% 96.0% 87.1% 83.3% Western Development Region 0.0% 0.1% 0.2% 0.1% 0.0% 0.0% 0.0% Mid-Western Development Region 0.8% 1.7% 1.4% 0.2% 0.0% 0.5% 0.2% Far-Western Development Region 0.0% 0.1% 0.2% 0.0% 0.0% 0.0% 0.0% Source: Nepal Trade Promotion Center 17 Table 5: Nepal: Poverty Trends Year Percent ofPopulation below Poor Annual annual Source the poverty line Population increase (%) (million) Rural (%) Urban (%) Nepal (%) 1977 37.2 17.0 36.2 5.5 NPC 1986 43.1 19.2 41.4 7.2 3.4 MPHBS 1996 46.6 17.8 44.6 9.2 2.8 NLSS Source: UNDP/World Bank Table 6: Composition of External Aid Disbursed to Nepal in 1996 A. Share of Total Aid Disbursements in 1996, by Sector Sector Percent of Total Number of Donors Agriculture, Forestry, and Fisheries 14 23 Area Development 7 23 Communications 5 9 Development Administration 2 12 Disaster Preparedness 2 2 Economic Management 3 7 Education 14 25 Energy 11 14 Health 8 25 Humanitarian and Relief 4 13 Industry 1 8 Natural Resources 9 18 Social Development (include. water and sanitation) 6 26 Trade (include. tourism) 1 7 Transport (roads and air) 14 10 B. Share of Grants vs. Loans, 1996 Loans Terms Share Percent Loans 34% Percent Grants 66% C. Number and Share of Donors in 1996, by Donor Type Donor Type Number ofDonors Share ofDisbursements Multilateral Donors 20 46% Bilateral Donors 15 49% INGO's 17 5% TOTAL 52 100% D. Major Individual Donors in 1996 (Share of total disbursements) Donor Share of Total Major Sectors Asian Development Bank 18% Japan 16% IDA 16% UN System (excl. IDA) 11% Denmark 6% UK 6% USA 5% Germany 4% Others 16% Source: UNDP 18 TABLE 7: SECTORAL DISTRIBUTION OF AID TO NEPAL, 1993 - 1996 Disbursements in 000US$ Percentage share 1993 1994 1995 1996 1993 1994 1995 1996 1993-1996 Transport (roads and air) 52,269 93,528 69,410 53,869 14% 20% 16% 14% 16% Agriculture, Forestry, and Fisheries 61,279 76,686 55,293 53,937 16% 16% 13% 14% 15% Energy 32,406 56,284 30,010 44,286 8% 12% 7% 11% 10% Natural Resources 43,808 41,320 34,419 35,280 11% 9% 8% 9% 9% Education 23,878 31,587 39,435 54,302 6% 7% 9% 14% 9% Health 33,825 33,059 27,120 30,558 9% 7% 6% 8% 7% Area Development 22599 22,783 24,913 26,037 6% 5% 6% 7% 6% Social Development (incl. water and sanitation) 28,307 29,566 15,939 22,011 7% 6% 4% 6% 6% Humanitarian and Relief 22336 17,614 36,699 16,572 6% 4% 9% 4% 6% Communications 8,489 21,578 29,417 18,643 2% 5% 7% 5% 5% Economic Management 11.629 22,582 21,171 13,545 3% 1.5% 5% 3% 4% Industry 20.041 8,528 17,573 4,778 5% 2% 4% 1% 3% Disaster Preparedness 14,678 10,746 18,651 6,492 4% 2% 4% 2% 3% Development Administration 6,447 7,980 7,963 7,183 2% 2% 2% 2% 2% Trade (incl tourism) 925 2,848 3,193 4,294 0% 1% 1% 1% 1% TOTAL AID DISBURSED TO NEPAL 38.2,916 476,689 431,206 391,787 100% 100% 100% 100% 100% Source: UNDP TABLE 8: WORLD BANK ACTIVITIES IN NEPAL BY SECTOR, FY90 - FY98 Project Name Status Sub-Sector Committme FY Outcome Sustainabili ID Completion. Percent nt Sm ty Delay (months) Cancelled AGRICULTURE Agricultural Extension and Research Completed Research & Extension 17.50 FY81 Satisfactory Uncertain Modest 37 18% Hill Food Production Completed Research & Extension 8.00 FY81 Unsatisfactory Uncertain Modest 37 30% Bhairawa-Lumbini Groundwater Completed Irrigation 16.00 FY83 Satisfactory Likely Substantial 24 0% Second forestry project Completed Forestry 18.00 FY84 Unsatisfactory Unlikely Negligible 31 80% Agricultural Extension 2 Completed Research & Extension 7.20 FY85 Satisfactory Uncertain Modest 37 19% Narayani Irrigation 3 Completed Irrigation 24.50 FY86 Unsatisfactory Unlikely Negligible 6 42% Sunsari Morang Irr. 2 Completed __ Irrigation 40.00 FY87 -Satisfactory Uncertain Modest 6 9% Third rural development project Completed Integrated RD 19.10 FY87 Unsatisfactory Unlikely Negligible 5 _ 76% Mahakali Irrigation II Active Irrigation 41.30 FY88 No Risk Hill Community Forest Active Forestry 30.50 FY89 Potential Risk Bhairawa Lumbini III Active Irrigation 47.20 FY90 No Risk Sunsari Morang Headworks Completed Irrigation 28.00 FY93 Satisfactory Uncertain Substantial 0 1% Irrigation Sector Development Active Irrigation 79.80 FY98 No Risk Agricultural Research and Extension Active Research & Extension 24.30 FY98 Potential Risk ESW: Agriculture Sector Review FY90 EDUCATION Second education project Completed Technical Education 1430 Y82 SatisfacWory Uncertain Substantial 43 21% Primary education project Completed Basic Education 12.78 FY84 Satisfactory Likely Negligible napl 45% Earthquake Emergency Schools Completed -Basic Education 22.80 FY89 Satisfactory Likely -Modest 47 9% Agricultural Manpower Dev Completed Technical Education 8.40 FY85 Unsatisfactory Uncertain Modest 43 7% Engineering Education Active Technical Education 11.40 FY89 Potential Risk Basic & Primary Education Active Basic Education 30.60 FY92 No Risk Higher Education _ Active Higher Education 20.00 FY94 At Risk ESW Critical Issues in Secondary Education and Optionsfor Reform FY95 POWER Karnali Preparation Completed Hydro Power 11.00 FY84 Satisfactory Uncertain Not rated 24 1% Marsyangdi_HydroPower Completed Hydro Power 107.00 FY84 Satisfactory Uncertain Modest 6 25% Tech Assist (Pancheswar) 3 Completed Hydro_Power 14.40 FY88 -Unsatisfactory Uncertain Modest 24 1% Power Efficiency Improvement Active Hydro Power 65.00 FY92 Potential Risk INDUSTRY Industrial Development were ef cv ete 9 nd d f ESW FY85 s StfY Cottage & Small Industries 2 Completed Industry 1000 FY86 Unsatisfactoy Unlikely Nelgbenp49 Includes all projects that were effective between FY90 and FY98 and formal ESW completed since FY90. Project Name Status Sub-Sector Committme Sustainabili Completion Percent ntFY Outcome l ID Delay (months) Cancelled ESW Non-Financial Public Enterprises Sector Report FY91 ESW: Employment and the Labor Force: The Coming Crisis FY95 BROAD POLICY REFORMS Structural Adj. 2 Completed Multisector 60.00 FY89 Satisfactory Uncertain -Modest napl 0% ESW: Maintaining Structural Reforms and Managing Public Resources FY90 ESW: Relieving Poverty in a Resource Scarce Economy FY91 ESW: 1997 Economic Update: The Challenge ofAccelerating Economic FY98 Growth PUBLIC SECTOR MANAGEMENT Second technical assistance project Completed PublicSector Management 6.00 FY83 _Satisfactory Likely _Substantial 47 5% ESW Public Resource Management in a Resource Scarce Economy FY92 ESW: Civil Service Reform: An Agenda for Action FY93 - ESW: Fiscal Restructuring and Public Resource Management in the 1990's FY94 OIL AND GAS Petroleum Exploration Pr_omotion -Com-td -Oil & -- Ga-s 9a- FY4 2 at i Unca or ertain 61ods -T 29%/ HEALTH 0 Population and Health ve PHN0670 Potential Ris INFRASTRUCTURE Telecommunications 4 Complected Telecommunic-atin 85m Satisfactor Liey Susata 49 6% Telecoms V Active Telecommunications 55.00 FY92 No Risk Highway 3 _Completed Transportation 47.50 FY85 Satisfactory Uncertain Substantial 61 8% Road Flood Rehabilitation Completed Transportation 15.50 FY88 Unsatisfactory Uncertain Modest 37 Arun 3 Access Road Completed Transportation 32.80 FY89 Not rated Not rated Not rated napl 100% Road Maint and Rehabilitation Active Transportation 50.50 _FY94 No Risk Multimodal Transit Active Transportation 23.50 FY98 No Risk Municipal Dev & Housing Recon. Completed Urban Development 41.50 FY89 Unsatisfactory Uncertain Modest 6 49% Urban Water and Sanitation Rehab Active Water Supply and Sanitation 60.00 FY91 At Risk Rural Water and Sanitation Active Water Supply and Sanitation I8.30 -f-Y-97 - No Risk_ ESW Water Supply and Sanitation Sector Issues Paper FY93 ESW- Expenditures in the Road Sector FY93 ESW Infras_tructure De-velopment FY93 ESW:- Selected Issues in Infrastructure F9 Development Includes all projects that were effective between FY90 and FY98 and formal ESW completed since FY90. 죠· So&rce.& OED Database TABLE 10. FACTORS INFLUENCING PROJECT OUTCOMES (AMONG PROJECTS EVALUATED SINCE 1994) ID Cofinanc. Perfeinri. of Macro Sector Govt Appoint. of Counterpart ImpL Impl. ID Project Description Outcome Sust. Impact Perform. Contract/ Policies/ Policies/ commiment Key Staff Funding Agency Agency Consult conditions conditions Mgmcnt Staffing C1478 Marsyangdi Hydro Power SAT LIK MOD SUP SUP NOT S UP NOT SUP NOT SUP NOT SUP SUP NOTSUP NOTSUP C F 15 - Highway 3 SAT UNC SUB NOTSUP NOTSUP SUP SUP NOTSUP SUP SUP C1535 Industrial Development SAT UNC MOD NOT SUP-1 SUP SUP SUP SUP -0570 Agri -cultural Extension2- -SAT UNC MOD NOTSUP NOTSUP NOTSUP SUP NOT SUP cl-- 5 8- TeleCoMmu 6 c-; AT LIK SUB S P Sull SUP-- -----S-UP---1- J - C1814 Sunsari Morang Irr. 2 SAT UNC MD SUP NOTSUP NOT SUP SUP NOT SUP NOT SUP INOTSUP NOTSUP S t r u c t u r -a I A dj. 2 SAT U14-C MOD NOTSUP [-NoT §1M NOT SU P NOT Sup- ZT SUP NOTSU - PiNOTSUP C2047 Earthquake Ernerg Schools SAT LIK MOD SUP i Sul, Slip NOT SUP SUP SUP C24jO Sunsari Morang fleadworks SAT UNC S-UB- SUP I SUP NOT SUP- NOT SUP SUP SUP CM4 Agric - u It - ural Nfanpower D - ev ONS - A UNC MOD SUP SUP NOT SUi -NOf-- NOT SUP SUP --TNOT SUP SUP d 646 Cottage & Small Indust 2 UNSAT U`NL NEG NOTSUP NOTSUP -NO51 -- NOfSU O-T-S U ----P-1N-----P 1 5 Narayani Irriga6onj UNsxf, UNL, NEG NOTSUP lvi-Ti U P NOT SU. NOT SUP __ NOT SUP -NOT SUP NOTSUP NOT SUP -11 -- -- ---- ---- -- -SUP --Nd- %-IY Tech Assist (Panches7ar) 3 MOD SU13--- --sbP NOTSUP NOTSUP NOT T SUP. SUP NOTSUP NOTSUP C0 2- Road Flood Rehabilitation UNSAT UINC I M( D_ L SUP NOTSUP NOTSUP SUP NOTSUP NOTSUP SUP Cl 9l3V-Munni-c.D-ev&-Hou sing UNSAT I U C MdD NOT SUP J NOT -SUP -----NO-TSUP--NOT-S--UP N-TSUP--NOT--UP- NOT-SUP tQ Source: OED PIF Database ofprojects evaluated since 1994. Supportive (SUP)= Positive, Substantial, High. Non Supportive (NOT SUP)= Negative, Negligible, Modest TABLE 11. ACTIVE PROJECTS IN NEPAL (as of July 1998) Proj. Name FY Risk Status Task Manager Major Sector Approval Loan CofinanceCofinancers Name Date $m $m MAHAKALI IRRIG. II 1988 No Risk MYINT Agriculture 6/15/88 41.3 HILL COMMUNITY FORES 1989 Potential Risk HILL Agriculture 5/30/89 30.5 7.4 DANIDA ($6.9m), UNDP ($0.5m) ENGINEERING EDUC. 1989 Potential Risk PANTH Education 6/22/89 11.4 12.5 CIDA ($4m), Swiss ($8.5m) BHAIRAWA LUMBINI III 1990 No Risk MYINT Agriculture 5/29/90 47.2 URB WATER & SAN REHAB 1991 At Risk LEGRAIN Water Supply and 5/7/91 60 3.4 UNDP ($3.4m) Sanitation POWER EFF IMPROVEMEN 1992 Potential Risk CEYHAN Electrical Power and 3/26/92 65 14.7 France ($5.1m), Germny ($4.2m), Nordic Other Energy DF ($5.4m) ADB ($20.2m), DANIDA ($10m), Grant BASIC & PRIMARY EDUC 1992 No Risk JERIA Education 4/21/92 30.6 63 Facility/PHRD - Japan ($1.6m), Japan ($13.4m), UNDP($7m), UNICEF ($10.8m) TELECOMS. V 1992 No Risk CRUZAT Telecommunications 5/12/92 55 37.5 DANIDA(18m), Finnish IDA ($1 ' ), Japan ($8.5m) HIGHER EDUCATION 1994 At Risk SINCLAIR Education 12/21/93 20 POPULATION & HEALTH 1994 Potential Risk DUZA PHN 4/12/94 26.7 ROAD MAINT.& REHAB. 1994 No Risk HOBAN Transportation 3/15/94 50.5 16.2 UK ($12.4), Swiss ($2.8), UNDP ($Im) RURAL WS& SANITATION 1997 No Risk LEGRAIN Water Supply and 9/3/96 18.3 Sanitation AGRI RES & EXTENSION 1998 Potential Risk SEREJSKI Agriculture 8/26/97 24.3 IRRIG SECTOR DEVT 1998 No Risk MYINT Agriculture 11/25/97 79.8 MULTIMODAL TRANSIT 1998 No Risk HA_NSEN Transportation 11/25/97 23.5 Source: MIS 24 Table 12: Nepal: Comparative Lending Indicators among Completed Projects Indicator Nepal Sri Lanka Bangladesh Pakistan India SAR Bank-Wide Region No. of projects (exit years 1991 - 1996) 25 26 42 44 91 235 1739 Net amount disbursed (1996$m) 576 1,049 2,577 4,193 17,652 26,082 147,139 Average completion delay (months) 31 20 25 27 42 27 21 Percent of commitments cancelled (%) 27% 20% 23% 10% 25% 23% 15% Average project size (before cancellations) ($m) 23.7 40.3 61.4 85.4 202.0 100.0 81.4 Source: OED. Table 13: Performance of Active Projects in Nepal Number of Amount Share of No Risk At or Potentially projects amount At Risk All Active Projects 15 584 100% 53% 47% By Sector Agriculture 5 223 38% 60% 40% Education 3 62 11% 33% 67% Power 1 65 11% 0% 100% PHN 1 27 5% 0% 100% Telecommunications 1 55 9% 100% 0% Transportation 2 74 13% 100% 0% Water Supply and Sanitation 2 78 13% 50% 50% By Approval FY FY88 - FY92 8 341 58% 50% 50% FY93 - FY98 7 243 42% 57% 43% Source: QAG as of July 1998. Table 14: Bank Assistance Cost Indicators Average Supervision Supervision CAmegn co ion intensity: (Direct intensity: (SY tafv per Average cost Cost per ESW Cost (SYs per cost ($ per cost inputs/ No. of inputs/No. of prjects dper dropped projects Under under supervision m project ($) project) project) supervision in $) . SYs) project (SWs) Period Average FY90-Average FY90 Average FY90- Average FY90-FY98 Average FY92-Average FY92 Average FY90 FY97 FY97 FY98 FY98 FY98 FY98 Bank-wide 2.3 328,084 52,252 0.32 32.5 89,304 133,477 Africa 2.2 313,679 55,934 0.34 30.4 79,558 111,726 South Asia 3.0 401,453 57,888 0.40 57.0 147,242 178,087 Bangladesh 4.5 555,583 65,427 0.51 51.5 110,162 166,422 India 2.9 385,584 53,823 0.43 61.3 154,032 287,610 Nepal 2.1 280,491 51,537 0.35 146.8 423,845 187,304 Pakistan 2.8 389,809 55,265 0.39 39.0 117,010 119,703 Sri Lanka 1.8 273,163 44,103 0.27 34.4 89,029 133,774 Source: PBD. 25 TABLE 15. LEVEL OF ESW: NEPAL AND REGIONAL COUNTRIES Economic and Sector Reports (#) 9Total FY90- FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY97 Bank-wide 371 343 395 379 332 368 340 265 2793 Africa 135 127 155 142 113 145 126 89 1032 South Asia 28 32 31f 29 25 22 25 31 223 Bangladesh 96 6 3 4 4 9 8 49 India 9 4 9 8 5 5 2 10 52 Nepal 2 3 1 7 3 0 1 1 18 Pakistan 6 12 10 8 5 6 7 6 60 SriLanka 1 7 3 1 5 5 5 5 32 Direct Costs ($000) 1 Total FY90- FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY90 ______ ___ [FY97 Bank-wide 37,818 37,888 42,657 54,825 56,618 54,866 46,898 41,233 372,802 Africa 12,500 12,0781 13,247 18,574 14,053 17,194 16,994 10,662 115,301 South Asia 3,536 4,651 4,190 4,382 5,417 5,850 2,705 8,982 39,713 Bangladesh 1,339 654 984 517 958 1,269 861 1,574 8,155 India 1,324 1,874 1,665 1,463 1,568 2,146 230 4,686 14,956 Nepal 409 235 288 887 749 0 40 763 3,371 Pakistan 374 1,095 747 1,229 491 822 1,043 1,380 7,182 SriLanka 39 793 318 59 1,313 1,038 231 489 4,281 Direct Costs per Economic and Sector Report ($000) Total FY90- FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY97 FY90 FTotalFY90- Bank-wide 102 110 108 145 171 149 138 156 133 Africa 93 95 85 131 124 119 135 120 112 South Asia 126 145 135 151 217 266 108 290 178 Bangladesh 149 109 164 172 240 317 96 197 166 India 147 468 185 183 314 429 115 469 288 Nepal 204 78 288 127 250 NAPL 40 763 187 Pakistan 62 91 75 154 98 137 149 230 120 Sri Lanka 39 113 106 59 263 208 46 98 134 Source: PBD 26 TABLE 16: LIST OF FORMAL ESW ON NEPAL, FY90-FY98 FY98 17034 ER 11/11/97 Nepal - 1997 Economic update: the challenge of accelerating economic growth FY97 FY96 (15508 CAS 04/30/96 Nepal - Country assistance strategy) FY95 14580 SR 06/09/95 Nepal - Employment and the labor force : the coming crisis 12243 SR 08/26/94 Nepal - Critical issues in secondary education and options for reform FY94 12281 ER 03/17/94 Nepal - Fiscal restructuring and public resource management in the nineties 11800 SR 02/01/94 Selected issues in infrastructure development - Nepal FY93 12063 SR 06/01/93 Civil service reform: an agenda for action - Nepal 11479 SR 02/01/93 Water supply and sanitation sector issues paper - Nepal 10988 SR 01/01/93 Nepal - Expenditures in the road sector 11565 SR 12/01/92 Nepal - Infrastructure development FY92 10324 ER 03/01/92 Nepal - Public resource management in a resource scarce economy FY91 9076 SR 01/01/91 Nepal - Nonfinancial public enterprises sector report 8635 ER 08/01/90 Nepal - Relieving poverty in a resource-scarce economy FY90 8352 ER 03/30/90 Nepal - Maintaining structural reforms and managing public resources 7693 SR 03/01/90 Nepal - Agricultural sector review 27 TABLE 17: BANK MANAGEMENT FOR NEPAL: 1990 - 1997 Country Operations Year Vice President Country Director Don Chif Resident Representative Division Chief 1990 Attila Karaosmanoglul Shinji Asanuma Yukon Huang Nigel Roberts 1991 Attila Karaosmanoglu Jochen Kraske Yukon Huang Nigel Roberts 1992 Attila Karaosmanoglu Ann Hamilton Yukon Huang Nigel Roberts 1993 D. Joseph Wood Ann Hamilton Fred Kilby Joe Manickavagasam 1994 D. Joseph Wood Ann Hamilton Fred Kilby Joe Manickavagasam 1995 D. Joseph Wood Heinz Vergin Pradeep Mitra Joe Manickavagasam 1996 D. Joseph Wood Robert Drysdale Luis Ernesto Derbez Joe Manickavagasam 1997 Mieko Nishimizu Hans RothenbiAhler Luis Ernesto Derbez Hans Rothenbihiler (CD) 1998 Mieko Nishimizu Hans Rothenbifhler Roberto Zagha Hans RothenbUhler (CD) 28 Table 18: Development Effectiveness Index - Nepal and Other SAR Countries, Exit FY90-98 Country DEI # ofprojects SD Nepal 5.84 19 1.74 Bangladesh 6.16 39 1.70 Pakistan 6.21 45 1.72 India 6.24 94 1.86 Sri Lanka 6.24 23 1.28 SAR 6.24 227 1.74 BANK 6.43 1666 1.87 Notes: - the figures refer to the period ARPP exit fiscal year 1990-1998; - averages and standard deviations are computed by project (that is, not weighted by disbursements); - the Development Effectiveness Index (DEI) ranges between 2 ( a project with highly unsatisfactory outcome, unlikely sustainability, and negligible institutional development impact) and 10 (a project with highly satisfactory outcome, likely sustainability, and substantial institutional development impact); - projects with less than marginally unsatisfactory outcome score 6 or less in the DEI scale (no matter what ratings they get on sustainability and ID impact); conversely, projects with more than marginally satisfactory outcome score 6 or more in the DEI scale). Source: OED, 1998 ARDE 29 Annex B Page 1 of 3 Annex IB: References The research for the Nepal CAE was conducted between July and September 1998. The CAE draws on performance audit reports; project/implementation completion reports; staff appraisal reports; President's memorandum; supervision reports; policy framework papers; country assistance strategies; and interviews with past and present Bank staff Other references include: Abadzi, Helen, Reforming Higher Secondary Education in South Asia: The Case ofNepal, Report No. IDP-109, World Bank, May 1993. Asian Development Bank, Technical Assistance for Action Plan on Civil Service Reform, Fact- finding Mission Report, June 1998. CECI, Action Visits to Nepal: An Essential Element of Grassroots Income Generation Projects, CECI DIT, Vol 11, No. 2, November 1995. CECI, Improving Education in Rural Nepal, CECI-Nepal, July 1997 Danish Ministry of Foreign Affairs, Nepal: Strategy for Danish-Nepalese Development Cooperation, 1998. FIAS, Attracting Foreign Direct Investment to Nepal's Infrastructure, World Bank Group, June 1998. FIAS, Foreign Investment Environment Study in Nepal: A Diagnostic Study, World Bank Group, September 1992. FIAS, Nepal. Investment Incentives, Capital Repatriation, and Dispute Resolution, World Bank Group, May 1997. Gharana, K.K.G., Trends and Issues in Poverty Alleviation in Nepal, The Economic Journal of Nepal, Vol. 18, No.1 Issues 69, January-March 1995. Hachhethu, Krishna, Nepal in 1996: Experimenting with a Coalition Government, Asian Survey, Vol. XXXVII No. 2, February 1997. IFC, Nepal Country Strategy, March 11, 1998. IMF, Recent Economic Developments, Staff Reports, Economic Reviews, various years. IRIS, JRIS in Nepal, 1997. Karan, Pradyumna and Hiroshi Ishii, Nepal: A Himalayan Kingdom in Transition, United Nations University Press, 1996. Khadka, N. A Study ofthe Impact ofAid on Nepal's Economy, Economia Internazionale, November 1996. 30 Annex B Page 2 of 3 Khadka, N., Foreign Aid to Nepal: Donor Motivations in the Post- Cold War Period, Asian Survey, Vol. XXXVII, No. 11, November 1997. Khanal, Y.N., Nepal in 1997: Political Stability Eludes, Asian Survey, Vol. XXXVIII, No. 2 February 1998. Nepal Foreign Investment Promotion Division, Foreign Investment Opportunities, Ministry of Industry, 1998. Nepal Rastra Bank, Economic Report, various years. Nepal Trade Promotion Center, Nepal: Overseas Trade Statistics FY1 995/96. Netherlands Development Assistance, SV-Nepal, 1985-1995, Evaluation Report, 1998 Osada, Hiroshi and Hiroaki Sano, The Future Challenges for Nepalese Economy: Focused on Debt Servicing Capacity, OECF Journal of Development Assistance Vol3, No. 2, 1998. Paudyal, S.B., Tourism Development in Nepal in the Context ofRegional Perspective, The Economic Journal of Nepal, Vol. 20, No. 3, Issue 79, July-September 1997. Shakya, Kushum, Causes ofLow Female Life Expectancy in Nepal, The Economic Journal of Nepal, Vol. 18, No. 2. Issue 70, April-June 1995. Sharma, Kishor, Impact of Policy Reforms on Manufacturing Growth in Nepal, Asian Survey, Vol XXXVII, No. 6, June 1997. Sharma, Vishnu P., Economic Reform: Theoretical Consideration and its Macro Impact on Nepalese Economy, The Economic Journal of Nepal, Vol. 20, No. 2, Issue 78, April-June 1997. "The Independent," various articles. "The Kathmandu Post," various articles. "The Rising Nepal," various articles. UNDP, Nepal: Development Cooperation Report, 1996 UNDP, First Country Cooperation Framework (CCF) for Nepal (1997-2001), 1997. UNDP, National Human Development Report: Nepal, 1998. UNDP, UNDP in Nepal, 1998. USAID, Congressional Presentation for Nepal, 1997, 1998, 1999. US Embassy in Nepal, Doing Business in Nepal, March 1998. 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World Bank, Nepal: Agricultural Sector Review, Report No. 7693 -NEP, March 20, 1990. World Bank, Nepal: Fiscal Restructuring and Public Resource Management in the Nineties, Report No. 1228 1-NEP, March 17, 1994. World Bank, Nepal: Policies for Improving Growth and Alleviating Poverty, Report No. 7418-NEP, October 14, 1988. World Bank, Nepal: Arun III Proposed Hydroelectric Project & Restructuring ofIDA Credit 2029, Inspection Panel Investigation Report, June 21, 1995. World Bank, Report on an Audit of the Bank's Resident Mission in Nepal: Operational Functions, Internal Auditing Department, August 7, 1995. World Bank, Report on an Audit of the Bank's resident Mission in Nepal: Financial and Administrative Operations, Internal Auditing Department, June 29, 1995. World Trade Organization, Nepal: Trade-Related Technical Assistance Needs-Assessment and Integrated Responses by IMF, ITC, UNCTAD, UNDP, World Bafik, and WTO, Committee on Trade and I)evelopment, November 24, 1997. 32 Attachment 12/14/1998 CODE98-76 country directors six times between 1990 Rep ort from and 1997 and at times, relatively low attention was paid to Nepal by the country department. The dropped Arun III power C O D E project generated wide negative publicity for the Bank, affected relations with the government, and consumed substantial Bank Committee on Development staff and financial resources. The CAN also Effectiveness reports that borrower performance was unsatisfactory for a number of reasons Nepal: Country Assistance Note including lack of commitment and political will to proceed with needed reforms, and widespread corruption , and lack of On December 9, 1998, the Committee on accountability in public institutions. Development Effectiveness (CODE) reviewed a Country Assistance Note (CAN) The Committee stressed that the Bank's for Nepal (CODE98-69), prepared by the relationship with Nepal should not be Operations Evaluation Department (OED). "business as usual". It endorsed OED's The Committee expressed appreciation for recommendations and welcomed the excellent report which provides useful management's concurrence and background information about the Bank's acknowledgment that a."business as usual" performance in Nepal in the 1990s. approach would not work. Although most speakers reserved their comments until the upcoming Board In particular, OED recommends that the consideration of the Nepal CAS on current CAS should include a strategy for Tuesday, December 15, 1998, several key donor coordination to further the reform points were made. agenda. CODE stressed that the Bank should take a lead role in helping the government to The CAN reports that the Bank's rationalize donor assistance requests. It performance in Nepal in the 1990s was welcomed management's assertion that the unsatisfactory and examines the reasons. In current CAS recognizes the need to improve OED's view, the Bank should have done donors' effectiveness through more more to help address fundamental cooperation and less competition and institutional and policy constraints to create proposes steps to achieve this. an enabling environment for (1) cost- effective and sustainable public investment; The Committee emphasized the importance and (2) much greater private sector activity. of a participatory approach to enhance The CAN notes that no agreed Policy borrower ownership of and commitment to Framework Paper was in place after 1995. reforms. It was pleased to hear from No policy loans were made in the 1990s. management that extensive consultations The Bank did not actively engage in policy with the Nepalese people indicate that they dialogue in key areas, including agriculture, are ready to take ownership and participate the financial sector, or privatization. Civil in the fight against corruption and inefficient service and public expenditure reforms were use of public funds in their communities. An not pressed after 1995. The Bank changed important aspect of the current strategy is to 33 12/14/1998 CODE98-76 bring resources closer to the people to The Committee agreed with OED mobilize and empower communities. recommendation that an emphasis should be placed on defining and realizing a conducive Noting OED's recommendation that the policy environment for increased private Bank's lending program should be sector activity and improved access to social conditioned on improvements in public services. It noted management's assertion sector management, the Committee stressed that the Bank was taking steps to address the need for capacity building in the civil this issue through initiatives such as a major service. It welcomed management's public expenditure review and an increased statement that capacity building is an pace of work in the financial sector. integral part of the proposed strategy. The Committee noted management's statement that in providing technical assistance for capacity building, the Bank must pay adequate attention to existing local capacities and institutions. Jan Piercy Chairperson