Nepal - Road Maintenance and Development Project

Document of The World Bank Report No: 19760 - NEP PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 40.1 MILLION TO THE KINGDOM OF NEPAL FOR A ROAD MAINTENANCE AND DEVELOPMENT PROJECT Infrastructure Unit South Asia Regional Office  CURRENCY EQUIVALENTS (Exchange Rate EffectiveApril 1999) Currency Unit = Nepalese Rupee NRs= US$ 0.015 US$ 1 = NRs 68.0 FISCAL YEAR July 16 July 15 ABBREVIATIONS AND ACRONYMS OAG Office of the Auditor General DDC District Development Committee DDG Deputy Director General DffD Department of International Development, U.K. DOLIDAR Department of Local Infrastructure Development and Agricultural Roads DOR Department of Roads EIA Environmental Impact Assessment (new roads) FCGO Financial Controller General's Office GEU Geo-environmental Unit HMG/N His Majesty' Government of Nepal lEE Initial Environmental Examination (upgrading and rehabilitation roads) NGO Non-Governmental Organization MOPE Ministry of Population and the Environment MOWT Ministry of Works and Transport MLD Ministry of Local Development MLJ Ministry of Law and Justice MRCU Maintenance and Rehabilitation Coordination Unit MTC Mechanical Training Center NRDUC New Road Development and Upgrading Component PCU Project Coordination and Implementation Unit PIP Priority Investment Plan PLRP Pilot Labor-based District Road Maintenance and Rehabilitation Project PPF Project Preparation Facility RMRP Road Maintenance and Rehabilitation Project RSSDU Road Sector Skills Development Unit RUC Road User Committee SA Social Assessment SDC Swiss Agency for Development and Cooperation SMD Strengthened Maintenance Divisions SOE Statement of Expenditure TESU Traffic Engineering and Safety Unit VDC Village Development Committee Vice President: Mieko Nishimizu Country Manager/Director: Hans M. Rothenbuhler Sector Manager/Director: Frannie A. Leautier Task Team Leader: Juan Gaviria  NEPAL ROAD MAINTENANCE AND DEVELOPMENT PROJECT CONTENTS Page A. Project Development Objective 2 1. Project development objective 2 2. Key performance indicators 2 B. Strategic Context 2 1. Sector-related Country Assistance Strategy (CAS) goal supported by the 2 project 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 4 C. Project Description Summary 5 1. Project components 5 2. Key policy and institutional reforms supported by the project 5 3. Benefits and target population 6 4. Institutional and implementation arrangements 6 D. Project Rationale 7 1. Project alternatives considered and reasons for rejection 7 2. Major related projects financed by the Bank and other development agencies 7 3. Lessons learned and reflected in proposed project design 8 4. Indications of borrower commitment and ownership 9 5. Value added of Bank support in this project 10 E. Summary Project Analyses 10 1. Economic 10 2. Financial 11 3. Technical 12 4. Institutional 13 5. Social 16 6. Environmental assessment 20 7. Participatory approach 21 F. Sustainability and Risks 22 1. Sustainability 22 2. Critical risks 22 3. Possible controversial aspects 23  G. Main conditions 23 1. Effectiveness conditions 23 2. Other 24 H. Readiness for Implementation 25 I. Compliance with Bank Policies 25 Annexes Annex 1: Project Design Summary 26 Annex 2: Detailed Project Description 30 Annex 3: Estimated Project Costs 33 Annex 4: Cost Benefit Analysis Summary 34 Annex 5: Financial Summary 40 Annex 6: Procurement and Disbursement Arrangements 43 Annex 7: Project Processing Schedule 54 Annex 8: Documents in Project File 55 Annex 9: Statement of Loans and Credits 56 Annex 10: Country at a Glance 58 Annex 11: Institutional Strengthening and Training 60 Annex 12: Technical Annex on Environmental Assessment 72 MAP(S) IBRD No. 30306  NEPAL ROAD MAINTENANCE AND DEVELOPMENT Project Appraisal Document South Asia Regional Office SASIN Date: September 24, 1999 Team Leader: Juan Gaviria Country Manager/Director. Hans M. Rothenbuhler Sector Manager/Director: Frannie A. Leautier Project ID: P045052 Sector(s): TY - Other Transportation Lending Instrument: Specific Investment Loan (SIL) Theme(s): TRANSPORT Poverty Targeted Intervention: N Project Financing Data D Loan M Credit O Grant Ol Guarantee E Other (Specify) For Loans/Credits/Others: Amount (US$m) 54.5 Proposed Terms: O To be defined 12 Multicurrency O Single currency EO Standard Variable M Fixed a LIBOR-based Grace period (years): 10 Years to maturity: 40 Commitment fee: 0 Service charge 0.75% Financing Plan: 1 To be defined Source Local Foreign Total Government 3.37 8.03 11.40 IBRD IDA 25.60 28.90 54.50 |Total: 28.97 36.93 65.90 Borrower: KINGDOM OF NEPAL Guarantor: N/A Responsible agency: DEPARTMENT OF ROADS Other Agency(ies): Department of Roads (DOR) Address: Babar Mahal, Kathmandu Contact Person: Director General Tel: 977-1-262675 Fax: 977-1-262993 Email: dgdor@mos.com.np Estimated disbursements ( Bank FY/US$M): FY 2000 2001 2002 2003 2004 Annual: 7.0 17.8 19.2 8.2 2.3 Cumulative 7.0 24.8 44.0 52.2 54.5 Project implementation period: 5 years Expected effectiveness date: 12/31/99 Expected closing date: 12/31/2004 OCS F PD W 9.l I  A: Project Development Objective 1. Project development objective: (see Annex 1) (a) Achieve sustainable maintenance, rehabilitation and construction of economically justifiable roads in the strategic road network within the Priority Investment Plan framework; (b) Improve the access to district headquarters not currently served by road, andeduce vehicle transport costs and delays in project areas; (c) Promote more sustainable funding and more efficient public sector management of road maintenance; (d) Adopt and disseminate environmentally sustainable road construction and maintenance practices; and (e) Generate rural-employment through adoption of labor-based technologies and long-term employment for the additional generated economic activity. 2. Key performance indicators: (see Annex I) B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex I) Document number: 18578-NEP Date of latest CAS discussion: 12/15/98 The project supports the CAS objective to reduce poverty in rural areas by improving rural access (about 500,000 beneficiaries), and promoting higher agricultural output and non-farm income in remote hill areas of the Western, Mid-Western and Far Western regions (which have an overrepresentation of the poor in Nepal). The second CAS objective supported by the project is supporting beneficiaries, encouraging private sector, NGOs and community participation. This objective will be pursued by implementing contracts through contractors, improving access to districts headquarters involving community participation, encouraging the implementation of labor-based methods to ensure economic viability, maximize local benefits and minimize environmental impacts. A thorough social assessment effort has been initiated to monitor and evaluate the impact of the project on beneficiaries. The inclusion of the private sector is ensured with their leadership of the efforts to establish a private sector lead Roads Boards. The third CAS objective supported by the project is a more efficient infrastructure spending through increased prioritization of public expenditures, and a focus on productive investments and maintenance of existing assets. This objective will be pursued by (a) following up and implementing the Priority Investment Plan (PIP) for the Road Sector (February 1997), and (b) providing sufficient funding to support maintenance and rehabilitation of the existing network and increasing HMG' effectiveness in management and funding of routine and periodic maintenance activities. The project continues to support close and efficient donor coordination in the sector, as under the on-going Road Maintenance and Rehabilitation Project (RMRP), co-financed by IDA, the Swiss Agency for Development and Cooperation (SDC) and the Department for International Development of the U.K. (Df[D). The RMRP has assisted DOR to focus donor resources in rehabilitation and maintenance of strategic roads and to allocate resources in conformity with the PIP. Finally, the project will also supportthe long term institutional development strategy for the Departnent of Roads (DOR), through continued assistancefor key areas of institutional strengthening and training, and - 2 -  improved management of the strategic road network with attention to efficient financial and administrative management practices 2. Main sector issues and Government strategy: General. Road sector priorities for Government and donors during the last decade have targeted the completion of the east-west highway, rehabilitating and maintaining the strategic network, building farm-to-market roads in the Terai, and building the institutional capacity to manage an expanding network. A sector investment strategy for the road sector has been developed during the preparation of the PIP which calls for a balanced investment in rehabilitation and maintenance of existing assets complemented with cost-effective and environmentally sound construction and maintenance approaches for feeder roads. Prioritization of Public Expenditures and Sector Revenues. The PIP for the road sector completed in February 1997 with IDAs assistance identified priority projects for sustainable development of the strategic and rural road network for the period of 1997-2006. The PIP assessed resource constraints and funding requirements, sustainability of investment projects in Nepal, and the environmental impact and policy considerations of road investments and maintenance. Following the completion of the PIP, it has gained acceptance from Government, the Bank and other donor agencies, and it has now been adopted as the guide or plan for road development activities during the next decade. The completion of the PIP supports effective utilization of scarce public resources. DOR has improved its capacities to prioritize and execute maintenance, in an effort towards rationalizing public expenditures in the sector. With respect to sector revenues, road user charges in Nepal go directly to the Treasury but in general cover sector requirements. Currently, the main road user revenues are fuel tax and vehicle licenisng, taxes and duties. A modest complement to the road user revenues has been established by a toll road fund enacted by Law in 1995. The current toll revenues only amount to about 2-3% of maintenance requirements and HMG/N is currently considering expanding toll collection. A more substantial approach to capture additional revenues for the sector is being developed by the Implementation Committee to develop a Roads Board and Fund Act, which will be supported by the project and increase the efficiency of road sector revenues and expenditures. Private Sector Involvement. The Government is trying to encourage private sector investment to develop commercial infrastructure projects. However, it is still not envisaged that with the low level of traffic private sector investments become a viable alternative for road construction or maintenance. Under the RMRP private sector contractors have been encouraged to enhance their capabilities and carry out the civil works financed by the Bank through competitive processes. Moreover, project management assistance has been made available to contractors through the projects internationally experienced supervision consultants. Coordination with Other Institutions. Substantial efforts have been required to coordinate donor inputs into the sector and an effective donor group has been in operation during the last 8 years. During the on-going RMRP and the preparation of the PIP, participation and consultation were obtained from the key financing institutions, including the Asian Development Bank (ADB), SDC, DffD & the UNDP. The on-going RMRP is the first multi-donor co-financed road sector project in the country and the coordination with DffD and SDC is expected to continue. While IDA' focus would be on sectoral policies, the civil works financed under the proposed project will affect primarily the road network west of Kathmnandu. Other New Issues. IDA should continue to pursue the agenda of civil service reform in the road sector as a key element of policy dialogue with EIMG/N. Good governance and combating issues of corruption need to be addressed and promoted in Nepal. In view of the frequent changes in counterparts, HMG/N - 3 -  commitments have been sought early during project preparation to ensure a certain level of institutional strengthening and sustainability, staff continuity for preparation and project management policies across departments in DOR. 3. Sector issues to be addressed by the project and strategic choices: The PIP study proposed an optimum balance between maintaining the core road network and new road development efforts. It also recommended priorities for both the expansion of the strategic network and the rural road network. The proposed Road Maintenance and Development (RMD) Project, will be a natural follow-up of the ongoing RMRP and would build upon the PIP focusing on the strategic network, providing a tool to implement the Government' road sector development strategy, and continuing efforts on institutional strengthening and training. The proposed project would provide assistance to HMG in implementing this strategy by addressing the following main issues: Road Management and Finance: As part of a world-wide trend of commercializing road management the project contains a policy component which aims at establishing ajoint government/private sector roads board overseeing the collection and expenditures of road user funds for the maintenance of both the strategic and the local government road networks. The Nepal Roads Board Act to be passed by parliament will assist to establish an adequate and stable source of funding of aintenance, and will strengthen the sector oversight and the effectiveness and efficiency of road maintenance expenditures. The proposed Nepal Roads Board will assist in improving fiscal discipline in the sector, developing and monitoring 3-year rolling plans, and implementing performance indicators tying inputs to outputs for both maintenance and development expenditures. Maintenance: Effective planned maintenance needs to be carried out in roads that are in a maintainable state to begin with. The proposed project will rehabilitate the remaining portions of the strategic network which are still in a poor condition at the end of the RMRP. It will also continue to provide assistance to strengthen DOR' maintenance capabilities through the different initiatives started during the RMRP and snown to be effective such as the Maintenance and Rehabilitation Coordination Unit (MRCU) and the Strengthened Maintenance Division (SMD) program. The MRCU has been effectively assisting in the policy, programming and prioritization of maintenance and the SMD is increasing the accountability of the divisions for the maintenance of the strategic network under their control. Inevitably this will lead to a more effective use of maintenance funding. Decentralization Due to the limited capacity for rural road construction and maintenance in the Ministry of Local Development (MLD), as well as in district and village development committees, most responsibilities for local roads used to fall on DOR. Recently, HMG has established a Department in MLD pepartment of Local Infrastructure Development and Agricultural Roads- DOLIDAR) responsible for village and district roads. DOR is in the process of handing over the local road network which will allow it to concentrate on the strategic roads (highways and feeder roads) with greater efficiency. The project will continue to support institutional strengthening and training of DOR in the regions and district levels. Participation: The past experience in Nepal has shown that a key element in the sustainability of roads built with community participation is a sense of local ownership. The project will ensure that the road selection process for the road development component has been coordinated by DOR and has involved District and Village Development Committees (i.e, DDCs and VDCs) according to criteria put forward by the PIP, establishing a sense of local ownership, leading to increased community participation and a sense of the value of future maintenance. -4 -  C: Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): Indicative Bank- % of Component Sector Costs % of financing Bank-. (USSM) Total (US$M) financing 1. Policy Reform including support to 0.40 0.6 0.40 0.7 setup a Roads Board, amend regulatory framework and develop the Road Fund 2. Dry-weather feeder road 45.80 69.5 36.60 67.2 canstruction (197 km) and upgadingto gavel standard (253 km) including resettlement assistance, environmental menitoring, technical assistance for design, project coordination & construction supervision, and land acquisition 3. Rehabilitation of 160 km of 6.80 10.3 5.70 10.5 strategic highway and feeder road network 4. Periodic maintenance of strategic 6.60 10.0 5.50 10.1 roads (470 km) 5. Institutional strengthening and 4.80 7.3 4.80 8.8 training of DORIMOWT, third party audit of works by CTES, pre- investment studies, socio-economic studies, office improvements modernization and equipment 6. Project Preparation Facility 1.50 2.3 1.50 2.8 Total Project Costs 65.90 100.0 54.50 100.0 Total Financing Required 65.90 100.0 54.50 100.0 2. Key policy and institutional reforms supported by the project: Implementation of the PIP, strengthening of institutional capabilities and maintenance effectiveness in DOR, and operationalization of the road fund. Approval of the Nepal Roads Board Act which would lead to the establishment of a Roads Board and a Road Fund. The purpose of the act would be to increase funding for road maintenance of both the strategic and the local government networks through enhanced road user contribution (mainly through a fuel levy and a possible heavy vehicle tax) and through enhanced efficiency of expenditures. Under the act a joint private sector/government oversight board with a small executive management unit would be created, as well as a Road Fund which would gradually be increased to finally cover all required maintenance - 5-  expenditures, including routine, periodic, recurrent and emergency maintenance. Institutional strengthening and training of DOR in support of the institutional development strategy of DOR. DOR is currently in a transitional stage, from a public oriented, traditional, government organization to a private oriented, modem one. The project would assist DOR to continue implementing its institutional development plan and priorities (details in Annex 11). The institutional strengthening and training components will build upon the institutional achievements of the on-going RMRP, which has been co-financed by IDA, DFID and SDC closed in June 1999. 3. Benefits and target population: a) Lower freight and passenger transport costs for road users, with resulting benefits in fares, price of goods and reduction of transport bottlenecks affecting economic development; (b) Better accessibility to district headquarters to improve standards of living of rural population; (c) More effective management and sustainable maintenance of Nepals road assets; (d) Generation of employment opportunities in rural areas. 4. Institutional and implementation arrangements: The Department of Roads (DOR) will be the implementing agency. The implementation of the project components will be programmed, coordinated and monitored by the Foreign Cooperation Branch, Deputy Director General (DDG), Department of Roads, as Program Coordinator fully responsible for all project components, including, but not limited to, planning, supervising, monitoring and evaluation, financial management reporting, procurement, and implementation of civil works and institutional strengthening and training. The Program Coordinator will be assisted by the Project Coordination and Implementation Unit (PCU), including two Senior Divisional Engineers (one of which will be designated as Procurement Engineer). DOR has already established the PCU. Staff of the PCU will also include an Environmental Engineer, an Accounts Offcer, an Accuntant and a Scial Planner. During implementation, the PCU will be responsible for coordinating the implementation of the various project components, and would ensure that the institutional and training components are developed in complete coordination with the needs of the policy and physical aspects of the project. The physical components would be implemented as follows: (i) one Senior Divisional Engineer at the PCU will be responsible for the implementation of the New Road Development and Upgrading Componpent (NRDUC), (ii) one Senior Divisional Engineer will be responsible for procurement and the Rehabilitation Component, (iii) the Regional Directors under the DDG Maintenance, will be responsible for the implementation of the periodic maintenance component in each Region through the Divisions, and (iv) the DDG Planning will be responsible for coordinating, implementing and monitoring along with the Road Sector Skills Development Unit (RSSDU), Geo-environmental Unit (GEU), MRCU and the Mechanical Training Center (MTC) the institutional strengthening and training component of the project. Until the Nepal Roads Board is established, DOR will finance consultant services to assist the Road Management and Finance Refonn Implementation Committee in carrying out the activities under the policy component of the project. Afterwards, the Nepal Roads Board will carry out the policy reform component. The DDGs for Planning, Design and Maintenance will prepare and submit timely reporting to the PCU for consolidation of periodic reports to IDA. The Project Managers of the NRDUC and Rehabilitation Components shall coordinate with the respective Regional Directors for the implementation of the program. The institutional strengthening activities will be coordinated with DfID and SDC as a follow-up of the efforts already undertaken in the completed RMRP (including MRCU, TESU and SMD). The PCU will have responsibility for the project's management including engineering and procurement, -6 -  maintenance, land acquisition, implementation of resettlement and environmental action plans, institutional development plan, financial management, planning and accounting, etc..The PCU will carry out all procurement related decisions in accordance with the Development Credit Agreement, and will oversee the timely and adequate implementation of procurement activities with the assistance of the supervision consultants and the institutional development consultants. The Procurement Engineer in the PCU will be the focal point to assist with developing procurement capacities of the various implementation units, supporting the training and capacity building of the project managers on procurement matters and setting up a Procurement Unit in DOR during the project life (Annex 6). D: Project Rationale 1. Project alternatives considered and reasons for rejection: The PIP prepared a 10-year investment plan for the road sector, including both the strategic road network (national highways and feeder roads) and rural transport components (district roads, main trails, suspension bridges and domestic aviation). The PIP assessed and recommended the optimal balance of expenditures between new construction, improvement, and maintenance activities, and deterrnined a balance between national and local level inputs. The main road options considered were analyzed in the PIP in terms of their cost-effectiveness, environmental adaptability and resource constraints. The roads in the project support the PIP. Moreover, during preparation, DOR and its Consultants have assessed various road standards in the economic, environmental, social and technical evaluation of each road. The design of each project component has taken into consideration recent experiences in Nepal for low-cost roads (new construction and upgrading), and maintenance (resealing and rehabilitation). 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). Latest Supervision Sector Issue Project (PSR) Ratings (Bank-financed projects onl Implementation Development Bank-financed Progress (IP) Objective (DO) Bridge replacement road maintenance First Highway (Credit 223) N/A N/A Upgrading of 18 km road, feeder road Second Highway (Cr. 730) N/A N/A construction, training of mechanics Road and feeder road construction Third Highway (Cr. 1515) S S Emergency rehabilitation and Road Flood Rehabilitation (Cr. S S rebuilding of roads and bridges 1922) Maintenance and rehabilitation of the Road Maintenance and S S core network (DflD/SDC/UNDP) Rehabilitation Project (Cr.2578) Improvement of Nepal extemal trade Multimodal transit and trade S S infrastructure facilitation (Cr.3008) Infrastructure - PER Public Expenditure Review - 7 -  Other development agencies ADB - Maint. Rehab. of core network Third Road Maintenance ADB - Rural Infrastructure Rural Infrastructure Development Project SDC- Highway rehabilitation Arniko Highway Project, SMD, District Road Support Program DfID (ODA) Eastern Region Road Maintenance (ERROM) GTZ Gorkha, Dhading-District Dev. Programs Japan - Construction of gravel road Dhulikhel - Sindhuli Road IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: Given the long standing assistance of the World Bank for the road sector in Nepal, there are important lessons learned in particular in the areas of public and private sector management capabilities, environmental and social assessment, and the construction industry. Sector Management Capabilities. Project implementation and preparation in the past was often delayed as a result of slow govemment decision making under an environment of political instability. Substantial efforts are underway, in partnership with the SDC and Df[D, as part of the ongoing RMRP to assist the DOR to improve its road maintenance management capacity, planning and monitoring capability, and environmental and traffic safety practices. These efforts have been made through a series of specialized training and studies, services of in-house technical and policy advisors, and technical reviews and audits as part of project monitoring and evaluation. As a result, DOR has been able to develop and improve its basic capabilities to better manage the road capital and resources allocated to the sector. Among others, the RMRP has supported (i) a Road Sector Skills Development Unit (RSSDU) to address human resource constraints, (ii) a labor-based pilot project with community-participation which was introduced for the rehabilitation and maintenance of district roads, and has shown good results in the development of institutional and planning capability at the district level, and (iii) a Strengthened Maintenance Division project to improve the capacity to plan, program and execute maintenance at the division level. Through the preparation and adoption of the PIP, IDA also has supported the introduction and dissemination of planning tools for government agencies responsible for road transport. These initiatives should be further supported. Environmental Assessment. During the past 5 years substantial progress has been made in bolstering local capacities for environmental assessment, geo-technical and bio-engineering with the establishment of the GEU in the DOR. This unit has generated interest among the engineers of DOR and is now an example in the region. The unit has been successful starting to train and deliver the message to DOR staff of the relevance and importance of addressing environmental aspects of road sector activities early on and throughout the project cycle. More recently DOR has prepared Environmental Assessment Guidelines which includes an excellent presentation of simple and practical information on environmental processes, mitigation measures and sensitive areas. The interest of the Department in involving all of its engineers in bio-engineering is now expanding to environmental assessment which will certainly give the DOR a leadership role on this matters. The checklists are now models being used in other countries. Private Sector Involvement in Road Construction and Consulting. There are positive achievements in the - 8 -  road construction and maintenance industry and consultant services sector over the past five years: (i) local private sector is taking a much stronger role, (ii) DOR has improved its construction management of privately implemented works, (iii) commercialization of government construction equipment has encouraged contractors to buy their own equipment and improve equipment maintenance, (iv) divisions are taking stronger decentralized role in managing minor works and contracting out even routine maintenance, (v) roadside environmental practices have improved, and (vi) districts have begun to develop capacity for road planning and labor-based contracting of works. At the same time, there are some problem areas in the road construction industry, including: (i) contractors need to manage their work better, (ii) contractors need to treat workers fairly and equitably, (iii) consultants need to bring more efficiency to their design and supervision of works, (iv) HMG procurement decision-making is slow, (v) Government delays in payments and release of funds for works lead to inefficiencies, (vi) contractors with a unsatisfactory track record should not be eligible for IDA financed works, and (vii) privatization of government equipment and mechanical training programs should be accelerated. Finally, IDA has also introduced changes to help encourage efficiency in the implementation of works which will be supported under the project including: (i) an increasing proportion of oversight for project supervision, including procurement support and quality inspections, is being carried out from the Field Office, (ii) IDA is generally not accepting extensions of bid validity beyond 60 days, and is declaring misprocurement when bids are not awarded in this period, (iii) IDA has encouraged Borrowers to make careful scrutiny of the track record of firms during pre-qualification and post-qualification. In cases where the Borrower has documented evidence of firms having non-performance or poor performance on past contracts, IDA has accepted the position taken by Borrowers to disqualify firms based on that past performance. HMG would undertake to have an annual summary of non-performing contractors. Moreover, and based on the experience gained from implementing road projects in Nepal, the preparation and implementation of the proposed operation will incorporate the following lessons: (a) environmental, social and institutional aspects of the project will require to be comprehensively prepared with substantial participatory approaches; (b) strengthening of basic institutional capacities for effective project management need to be prepared and implemented early in the life of the project; (c) procurement capabilities need to be bolstered from project design, with initial contracts based on completed designs, strict qualification criteria and awards planned before project effectiveness; and (d) encourage efforts to have timely availability of project sites. Furthermore, the project will continue adopting international standards for preparation of feasibility, design, procurement planning, environmental planning and social impact studies. 4. Indications of borrower commitment and ownership: The Government has supported the preparation of the PIP and adopted the PIP as the main road sector plan. HMG/N has allocated resources from the ongoing RMRP and a Project Preparation Facility (PPF) to finance feasibility and final engineering of the road maintenance and development works. DOR has established an effective team for project preparation which has adhered to the original preparation plan. -9-  5. Value added of Bank support in this project: The implementation of the RMRP, which includes an important institutional development component and a pilot labor-based component, provides the basis on which IDA can design a natural follow-up operation in Nepal. Based on this and other relevant project experience, the Bank will be able to assist HMG/N in finding a balanced approach regarding investment, management and financing which is reflected in the project design and implementation. IDA would also provide support to Govemrnent and private sector for the road finance reform initiative based on experience in Nepal and elsewhere. Furthermore, IDA can provide HMG/N with valuable experience from the preparation of similar projects in the sub-continent. Also, the Bank will emphasize best practice' in road construction and management by supporting the employment of consultants to carry out (i) appropriate supervision of construction and maintenance works; (ii) procurement, and (iii) dispute resolution. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (supported by Annex 4): * Cost beneft NPV-US$41 million; ERR = 28.2 % O Cost effectiveness 0 Other (specify) The economic analyses were undertaken separately for the three different civil works components of the project. For the new road construction and upgrading component, the analysis was based on the "Nepal: Road Maintenance and Development Project: Final Report - Economic Aspect" of June 1999, which included the screening and feasibility study for construction of about 320 km and upgrading of 250 km of dry-weather roads. For the road rehabilitation component, a feasibility update was carried out on about 165 km of strategic roads during April-July 1999 following the earlier feasibility studies compIeted in 1996/1997. For the periodic maintenance component, a network-based prioritization exercise was conducted by DOR which gave rise to a prioritized resealing program for DOR's paved strategic road network, covering a total of about 3,000 km of strategic highways. The feasibility study of the periodic maintenance component was based on the "Strategic Road Network Resealing Program for RMDP" dated November 24, 1998. a. New Road Development and Upgrading Component. The economic appraisal was undertaken using a Vehicle Operating Costs in Nepal (VOCN) modekalibrated to Nepal's operating environmen,twhich was developed using an earlier version of the VOC module of the Highway Design and Maintenance (HDM-III) model as a foundation. The VOCN was initially used in the PIP study, and was updated and modified by the consultant for the project analysis to include a module to compute benefits to normal and generated traffic on newly constructed roads. Traffic projection in the "with project" scenario consisted of the growth of normal, diverted and generated traffic. Growth projections were made taking into account population and income growth rates, population-based traffic generation factors, price and income elasticity of demand, and regional development effects as a result of the road development progranProject benefits also took account of personal time values for both work-related and no-work-related tripsas well as motorized and non-motorized trips Construction costs included civil works, design and supervision, land acquisition and social resettlement, environmental mitigation measures, and physical contingencies. Agricultural producers' surplus was estimated for all project roads, as they all pass predominantly agricultural areas. As a result of reduced transport costs and improved rainy season access to markets, it is envisaged that production of certain crops will be increased. The net economic surplus values of these increased production quantity would constitute part of the project benefits. The economic rates of retuam for the eight links to be included in the project ranged from 12% to 96%. The ERR and NPV of the component are 23.3% and NRs 1,867 million, respectively. In addition to quantifiable benefits, the project is also expected to generate some - 10-  positive social and economic benefits to the regions that are difficult to quantify. b. Road Rehabilitation Component. The economic analysis of the rehabilitation component has consisted of updating existing feasibility analyses carried out earlier for the three roads: Tansen-Syangja, Harthok-Tamghas, and Lumbini-Taulihawa. To supplement the existing traffic and engineering data, additional traffic surveys and engineering surveys were undertaken, and cost estimates updated to 1999 price level. Subsequently, the economic feasibility updating was undertaken. Project benefits include savings in VOC and maintenance costs. The three roads studied were selected for rehabilitation under the project, based on the optimal economic indicators of the rehabilitation options. The ERR and NPV of the component are 17.3% and NRs 122 million, respectively. c. Periodic Maintenance Component The prioritization exercise was carried out using HDM-Ill to develop a resealing program for all paved roads under DOR's responsibility. Data was drawn from the Highway Management Information System (HMIS) for each link in the strategic network, and they include AADT, IRI and surface distress index, road length, and other historical data, mostly from DOR's surveys conducted in 1996/1997. The surveys are continuing annual exercises and results are used to update the resealing program. The road selection and economics analysis for this component was based on th- Strategic Road Network Resealing Program for RMDP"dated November 24, 1998 prepared by DOR/MRCU. The Program covered a seven-year period (1998/99-2004/05) to assess resealing requirements of the paved portion of the strategic road network totaling some 3,063 km. The Program was developed on the basis of the DOR's maintenance strategy which emphasizes planning for cyclical resealing requirements. Roads in the hill region assume a cyclical resealing requirement of every 5 years, while roads in the terai (plains) region every 6 years. Traffic volume on the road links included in this component varied between 500 to 1,950 AADT. The "without project" scenario refers to undertaking of routine maintenance plus 1% patching. The "with project" case refers to routine maintenance, patching, plus resealing in the year 2000. The results of the evaluation served as the basis for deriving the prioritized resealing program for each road link, adjusted for cyclical requirements, and practicalities of contract packaging. Based on DOR's Resealing Program, a total ofabout 470 km priority roads have been identified for inclusion in the projectduring a five-year implementation period (FY 1999/2000 to FY 2003/2004.) The ERRs of resealing these links ranged from 24% to 184%. The ERR and NPV of the component were estimated to be 61% and Rs. 827 million, respectively. Combining the three components, the project's EIRR and NPV were estimated to be 28.2% and US$ 41 million, respectively. 2. Financial (see Annex 5): NPV=US$ million; FRR = % During the past five years the allocations and expenditures for periodic and recurrent maintenance of the strategic road sector have been gradually increased (see table below), as a result of combined efforts by Government and donors supporting the on-going RMRP. The allocations for these types of essential maintenance (i.e., periodic and recurrent) have also increased as a percentage of road sector revenues (vehicle duties and taxes, fuel tax, road and bridge maintenance tax). Routine maintenance allocations, however, have been maintained at a very low level for many years (i.e., between NRs 30-40 million per year) which is clearly insufficient to attend the requirements. The trend to increase overall allocations for road maintenance (commensurate with the needs of the strategic roads), and the regularity of fiscal transfers, needs to be supported and continued throughout the project life to improve sustainability of road sector expenditures. Nepal - Road Sector Revenues, Maintenance Allocations and Expenditures (NRs million) - 11 -  19992/93 1993/94 1994/95 1995/96 1996/97 Road Sector Revenue 1,351 1,428 1,744 2,059 2,321 Periodic, Allocations 180 220 320 486 525 Emergency and Recurrent Expenditures 130 149 314 375 393 MaintenanceIIIII Expenditures as % of Revenues 9.6% 10.4% 18.0% 18.2% 16.9% At the same time that road maintenance allocations have been increased, the planning and programming of maintenance for the strategic road network has been improving. The focus point in DOR for these efforts has been the Maintenance and Rehabilitation Coordination Unit funded by SDC and DfID (funded until Dec. 1999 and future funding to be discussed in a future Workshop), and Phase 2 of the Strengthened Maintenance Divisions (funded by SDC). The latter program has developed a well structured programming capability for routine maintenance which is essential for the upkeeping of road assets in Nepal. During appraisal, agreements were reached with HMGN on annual allocations for periodic and recurrent maintenance for each year of the project period. The allocations would be financed through a combination of the general revenue allocation and the proposed road fund. Fiscal Impact: As seen in the table below, the project counterpart funding requirements and maintenance funding requirements are manageable within the envelope of total road sector allocations specified in the 9th Five Year Plan. Even though the sector allocations included in the Plan appear to be on the high side, the project requirements (i.e., counterpart and maintenance funding) would not appropriate more than 15% of total road sector allocations assuming the allocations remain at the 1999/2000 level. Nepal - Planned Road Sector Allocations, Project and Maintenance Expenditures lNRs miltion) 1999/2000 2000/2001 2001/2002 2002/2003 2003/2004 l. Total Road Sector 5,840 8,760 10,512 14,720 19,130 Allocations (gh Plan) 2. RMDP related Expenditures 750 1,200 1,350 1,000 120 in Development Budget _ 3. Counterpart funding for 138 224 288 133 30 RMDP 4. Routine, Periodic, Recurrent 700 850 950 1,050 1,150 and Emergency Maintenance Funding Requirement for Strategic Road Network (Covenant) 3. Technical: The main civil works component of the project involves constructing and upgrading priority feeder road sections of national road network, to increase rural access and reduce vehicle operating costs. Many of the existing feeder roads to be upgraded have substantial deficiencies in pavement strength, road width, geometric standards and drainage. The proposed works have been designed to avoid or minimize negative - 12-  social and environmental impacts, and where possible to enhance the roadside environment. The project will emphasize incorporation of environmental safeguards in road construction and upgrading and will built on the substantial experience in Nepal in adapting environmentally friendly methods to construct and maintain roads in the Himalayas. Engineering studies have been undertaken by a team of international and domestic consulting engineers, using modem survey and design technology. Work specifications, bid packages and pre-qualification criteria are designed to attract a combination of (i) well-qualified contractors with appropriate construction equipment and experience and (ii) community based contractors. Construction supervision will be the responsibility of internationally-experienced and local consultants. Maintenance of existing roads in Nepal has improved during recent years but there is still room for improvement in maintenance funding and effectiveness of road maintenance operations. The maintenance component of the project has been prepared analyzing overall maintenance needs of strategic road network (based on the HMIS pavement management model developed by DOR and taking into account the up to date information on road condition). The maintenance component will focus primarily on patching, profile correction, surfacing, shoulders and road signs and markings, with limited quantities provided as necessary for high-priority repairs to roadside drainage and structures. The roads to b included in the maintenance component have been selected according to economic priorities and the program size has been defined within a budget constraint. The project will assist DOR in the implementation of a maintenance program, with particular emphasis on more systematic utilization of maintenance planning processes, and managing the quality of maintenance operations. This will be coordinated through the Maintenance and Rehabilitation Coordination Unit (MRCU) of DOR. The effectiveness of maintenance programs will be monitored throughout the life of the project to assess construction quality, effective life of various treatments, and overall changes in road asset conditions. The monitoring program will include an annual survey of road and visual condition rating on at least 50% of National Highways and Feeder Roads, and dissemination of the results available in a public Road Condition Report. 4. Institutional: a. Executing agencies: The Department of Roads (DOR) will be the implementing agency. b. Project management:The implementation of the project components will be programmed, coordinated and monitored by the Foreign Cooperation Branch, Deputy Director General, Department of Roads with the assistance of the Project Coordination and Implementation Unit (see implementation arrangements). The financial management and auditing arrangements are detailed below in Section (d) and further in Annex 5. c. Institutional Strengthening & Training: MOWT and DOR have prepared an internal assessment to determine the priority requirements for institutional strengthening and training over the next five years, and identified key areas to be supported by IDA. Considering the institutional strengthening and training requirements of both DOR and MOWT in support of the institutional development strategy, and taking into consideration the assistance expected to be provided by other donors, during appraisal it was agreed that the IDA financed institutional strengthening and training activities in the project will include: (i) strengthening the human resource development initiatives in DOR, (ii) expanding the GEU in DOR to develop environmental and social assessment and monitoring and evaluation capabilities for road sector - 13 -  activities, (iii) provide local expertise support to the Mechanical Training Center (MTC), and (iv) establish the Chief Technical Examiner Section (CTES) in MOWT to carry-out third party operational audits of road sector operations. These efforts are complementary to the activities of the Maintenance Rehabilitation and Coordination Unit (SDC and DfID) and the Strengthened Maintenance Divisions Program (SDC). The above objectives would be achieved through institutional strengthening and training efforts (see more details of each component in Annex 1 1), including: (l) support to the Road Sector Skills Development Unit (RSSDU) training activities for DOR and MOWT; (2) establishment of a social section within GEU and strengthening of its existing environmental section; (3) assisting the MTC to continue its training activities with an emphasis on commercialization and training of private sector operators and mechanics; and (4) assisting in establishing a technical audit capacity at the CTES of MOWT, which would also oversee the implementation of third party operational audits of DORS RMDP operations. Additional undertakings to be financed by the project would include (i) training of local contractors, Community Based Organizations and DOR staff in labor based road construction, (ii) preparation of pre-investment studies, (iii) socio-economic studies, and (iv) training in procurement and project management reporting for staff from MOF, OAG, FCGO and MLJ. During negotiations it was agreed that the institutional strengthening component will also finance services to support the streamlining and integration of plannning and programming of maintenance as part of an agreed exit strategy of MRCU. Project inputs to assist with implementation of this strategy would include: (a) provision of technical assistance to DOR (RSSDU, GEU, MTC, Planning, Design and Maintenance Branches) and technical assistance to the CTES (including periodic Third Party Operational Audits), (b) in-country and overseas training linking efforts with local institutions, (c) procurement of training aids, equipment for office modernization and vehicles for field visits; and (d) improvements to DOR' training facilities at Kurintar and to MOWTIDOR main office facilities. The main outcomes of the institutional strengthening and training initiatives would include: e a human resources development policy and strategy, staff development program and training plans in place and being implemented. - Systems and procedures for preparation of environmental and social assessments and action plans in place. . Environmental and Resettlement Actions Plans (EMAPs and RAPs) being prepared and implemented. * Marketing program for commercialization of MTC operations in place and being implemented. * Technical audit policies, systems and procedures in place and audits being implemented. * Procedures for third party operational audits in place and audits completed for RMDP. d. Accounting and Financial Reporting Arrangements A financial management system review of DOR was carried out (See Annex 5). The financial control environment in Nepal has been weakened by the transfer of responsibility of the control and management of accounts staff from the Financial Comptroller General's Office (FCGO) to the Ministry of General Administration (MOGA) as explained below, and organizational risks are present in the short-term in the context of still insufficient monitoring and reporting capacity of DOR for PMR-based disbursements (which assumes project and financial management responsibility through the PCU) during the initial phase of project implementation. However, since DOR has a rich experience of implementing several donor financed projects including IDA, organizational risks are minimum and there is adequate scope built in the project for strengthening its financial management capacity. In order to mitigate institutional development risks, capacity for financial management is being built up in accordance with a time-bound action plan which includes the timely recruitment and placement of key staff in the PCU and the field Project Implementation Units (PIUs)It - 14 -  was agreed that (i) Financial management staff satisfactory to IDA will be appointed and maintained during project implementation; (ii) HMG/N will not replace key staff in the PCU (Project Coordinator and accounts staff) except as required by applicable law, and (iii) Evidence of appointment of an Accounts Officer and an Accountant meeting the criteria as described in the Financial Assessment Report, satisfactory to IDA will be a condition of effectiveness. In addition, at the start of implementation DOR will appoint a skilled computer technician to support a fully computerized system in the PCU and to operate the computerized Financial Management Information System which will be developed under technical assistance component. The financial management system review concluded that the DOR still does not have all the necessary financial management capacity in place to be eligible for PMR-based disbursements. The action plan outlining activities that must be undertaken during project implementation in order to strengthen the financial management reporting capacity of the PCU was agreed upon between HMG/N and IDA. Until the PCU has the capacity to deliver the Project Management Reports (PMRs) as per LACI requirements, existing disbursement procedures will be followed. IDA will review the progress made in establishing a strong financial management system after about a year, and will ascertain whether the Project is then eligible for PMR-based disbursements. However, the PCU will report to HMG/N and IDA in the mutually agreed format of PMRs. During the interim period, the PCU will produce the following PMR statements: Financial Statement (Report 1-A) and Procurement Management Reports (Section 3), to be confirmed at negotiations. The recent transfer of responsibility for the control and managemenbf the accounting cadre of staff from the FCGO to the MOGA has created a potential country risk to the project. However, FCGO retains overall responsibility and accountability for public financial management including maintaining central accounts (including donor accounts) and preparing the national accounts for timely external audit by the Auditor General. Unless the responsibility of control and management of accounts staff is reverted back to FCGO, this risk remains. A further risk is the timely submission of accounts by the PCU, and completion of audit and submission of audit report within six months of the end of each fiscal year. Trimester project management reports which will be prepared by the PCU, will be valuable for progress monitoring and will be subject to close review and supervision by IDA. This will allow prompt follow-up to bring to Govemment's attention to any ongoing problems in the project's accounting, internal controls and financial reporting. An implementation completion report will be prepared by the DOR six months before the closing of the project. Disbursements. The Ministry of Finance (MOF) will allocate annual budgets to the project as envisaged in the annual work plan and budget agreed between HMG/N and IDA. HMG/N will include this project under the list of core projects, and will commit for timely release of funds. The DOR will allocate adequate resources to the PCU which will include qualified staff, equipment and budget, to administer overall project coordination. The PCU will be responsible for overall project administration and management, which include programming, budgeting, contract administration, and monitoring of project progress and submission of Project Management Reports (PMRs) to HMG/N and IDA. The PCU will be sufficiently equipped and will have the required number of staff (technical, administrative and financial). The actual implementation of the individual projects will be carried out through a number of field based DOR staff (PIUs). Disbursements will be made on the basis of a percentage of eligible expenditures according to - 15 -  Schedule I of DCA. The statement of expenditures (SOE) procedure will be used. Special Account. A Special Account in US dollars will be established at the Nepal Rastra Bank (Central Bank) on terns and conditions satisfactory to IDA. For the interim period, until IDA disbursements are based on the PMR, the account will have an authorized limit of US$2,000,000 and will follow the existing disbursement procedure. The PCU will submit replenishment applications for the Special Account on a monthly basis, or when 25% of the authorized allocation has been used, whichever occurs first. The replenishment applications will be supported by the necessary documentation which include a bank statement and a reconciliation statement. Auditing Arrangements. Audit reports of the recently completed Cr. 2578-NEP have been reviewed and are acceptable. Project financial statements, prepared in the formats agreed with IDA, will be audited annually by the Auditor General of Nepal who is considered an independent auditor for IDA's purposes. Audit reports will be due within six months of the end of each fiscal year. All records including contracts, orders, invoices, bills, receipts and other relevant documents evidencing all expenditures will be kept properly and the Bank' representative will have the access to them for the purpose of examination. 5. Social: Key Social Issues: The project involves resettlement mainly along 197 km of new feeder road construction (within a new public Right of Way), and to a lesser extent along 253 km of existing feeder roads which will be upgraded (re-established Right of Way) and along 100 km of highway rehabilitation works (established Right of Way). There are no land acquisition/resettlement issues in the periodic maintenance component. A detailed social assessment has been undertaken for the new/upgrading (and to a lesser extent for the rehabilitation component) during project preparation to study potential impacts, identify and recommend mitigation mechanisms, improve project design, and develop a full Resettlement Action Plan in compliance with Bank and Government guidelines. The projectrs Social Assessment Category is A (i.e. a project with potential social risk). The project is expected to provide high social benefits through better access to social and economic services, reduced transport costs, and some employment to local economies (confirmed by local stakeholder discussions). Such positive impacts outweigh the direct negate impacts, though mitigation measures have been carefully considered as described below. Kegocial impacts/issues which are being considered in the project include: (i) land acquisition, resettlement and rehabilitation (R&R), (ii) indigenous peoples issues, (iii) stakeholder participation and consultation, (iv) labor issues, (v) road safety issue, and (vi) other socio-economic impacts. During preparation, substantial attention has been paid to social considerations through a social assessment process, which closely interacted with other dimensions including engineering, economics and environment. Social Assessment: The project's Social Assessment, conducted for new roads and upgrading component (also conducted if required for the rehabilitation component), included assessment of social impacts of the project and development of appropriate mitigation plans in accordance with the Bank's Operational Directives 4.30 and 4.20. The social impact assessment and resettlement planning component consisted of: (i) early screening and social impact assessment as part of project feasibility studies (by using districts' socioeconomic status and potential social impact as one of screening criteria), (ii) public consultation, (iii) preparation of a project specific resettlement and rehabilitation entitlement framework consistent with Government and Bank policies, (iv) census and baseline socio-economic survey of the potentially affected population; and (v) preparation of a time-bound Resettlement Action Plan (RAP). The main (6) socio-economic issues are addressed below: - 16 -  a. Key Resettlement & Rehabilitation Issues Through comprehensive screening and local consultation in parallel with engineering design and environmental consideration, the project preparation has minimized cases where land acquisition may be required, or where there may be other losses of assets or resources. To minimize negative impacts the project has taken the corridor of impact (COI) approach, i.e. land acquisition and resettlement to be limited, in principle, to the COI of 15 m for new roads and existing road formation plus a safety zone for upgrading roads, as opposed to legal right of way (ROW) of 30 to 50 m. An Entitlement Policy Framework for the project which details compensation and rehabilitation arrangements has been cleared by IDA and the Government. -Scope of Impact (i) New Road and Upgrading Component: The baseline survey (April 1999) identified the scope of R&R as follows(Note: These figures were revised with the updated census of all potential Project Affected Peoples [PAPs] completed in July 1999 and the final RAP. The figures below have been updated to include the the impacts along all road segmentwhich have been surveyed). Private Land to Buildings to be Displaced individuals Potential PAPs (i.e., be acquired acquired (incl. (No. of households) displaced plus those residences) losing land and/or commercial buildings) New Roads 123.83 ha 404 (182) 1,901 (247) 30,931 Upgrading Roads 3.74 ha 105 (28) 281 ( 34) 4,651 Total 127.57 ha 509 (210) 2,182 (281) 35,582 Source: Final RAP, June 1999 and RAP (Addendum) July 1999. The number of squatters and encroachers within the strip of 15 m for upgrading roads are recorded as 18. The total estimated budget required for R&R is about US$ 2.2 million (i.e. 1.45 million for direct costs, 0.65 million for support and training, 0.1 million for contingencies). (ii) Rehabilitation Component: A recent survey (April, 1999) identified that there are no significant direct adverse impact except that nineteen buildings (including 11 residences) with 135 persons in Ridi Bazar and a local commercial center will be affected by a new alignment. There will be about five households displaced. The total budget is estimated at approximately US$ 0.17 million. - Land Acquisition: Extensive stakeholder consultations identified that (i) land donations made to date have not been properly documented in the land transfer record, hence, some are still paying taxes for the donated land, and (ii) few households are willing to donate land when a 15 meter corridor of impact is being considered. Therefore, the project ensures that: (i) sufficient information and an option to refuse donation will be provided to PAPs so that they can make an informed decision, (ii) for PAPs under the upgrading component, registration of the land donated in the past will be initiated (documentation of which was already completed during project preparation), and (iii) institutional capacity of DOR, District Land Revenue Office, and other concerned bodies will be strengthenedIn some cases, private lands are held without legal titles when ownership is traditional or communal. Where untitled private lands or common property with traditional usufruct rights are required by the project, DOR must also acquire them through purchase, applying the same principles, provisions, and protections provided to title-holders under the Land Acquisition Act. - Upgrading Roads: About 250 km of upgrading roads are expected to be funded by the project. Some of the upgrading road stretches are undergoing some construction/upgrading at present. As requested by IDA, DOR has provided auequate documentation and registration of past land transfers for the potential PAPs in the upgrading road sections. - 17 -  - RAPP: A RAP was prepared based on a baseline survey of properties affected, stakeholder consultations, and sample socio-economic survey. It includes the entitlement framework, institutional arrangements, and cost estimates based on the sample socio-economic survey. The Bank endorsed the RAP and RAP update. A workshop to present the draft RAP and EIA was organized with MOPE and MOWT by the Consultants in April, 1999. The RAP was approved by the MOWT. - Census Covering All Potential PAPs: The baseline census has been completed and reported in the RAP and RAP update of July 1999. The three main objectives and types of information collected through census are: (i) property and residence registrations with on-site verification in order to determine eligibility for entitlements; (ii) property registration with on-site verification of possession or use of assets in order to determine categories of entitlement; and (iii) on-site assessment of number and quality of assets to provide basis for valuation and compensation. - Institutional Arrangement for R&R: (i) Project level: A Social Unit will be created under the PCU, consisting of one full-time social focal point from the GEU (TOR prepared) and a computer operator managing PAP database. The unit will be supervised by the project manager and will coordinate R&R preparation, implementation, and monitoring for all roads involving 11 DDCs/58 VDCs. It will be supported intermittently by three Social Planners of the Supervision Consultant team (i.e., one international and two local experts). To carry out Monitoring & Evaluation the unit will be assisted by an external monitoring agent. For long term sustainability, the already established GEU will be strengthened to address and manage social dimensions of road projects. The GEU would be reinforced with two Social Planners (one international and one local) as part of a technical assistance (see also section C-2 on key policy/institutional reforms);(ii) District Level: Compensation Determnination Committee, an inter-departmental coordination body (involving Chief District Officer, Department of Land Revenue and Surveys); (iii) VDC and Community level: a Local Consultative Forum (LCF) in each VDC (comprising of DDC and VDC representatives, PAP representatives, representatives from women's groups, local user groups, local NGOs, and government line agencies) will be a main community-based venue for consultation, information dissemination, and grievance resolution. b. Indigenous Peoples: Available data and documents suggest that the project area is largely inhabited by the caste groups, and a number of various small ethnic groups. These ethnic groups fall within the definition of "indigenous peoples" under O.D. 4.20, and they constitute the bulk of the expected beneficiaries of the project. Also, the social assessment has concluded that there will be no disproportionally adverse impact on certain ethnic groups over others. Therefore, the requirements of O.D. 4.20 are addressed by the design of the project itself, and no separate "indigenous peoples" plan is necessary for any particular group. Moreover, the project has developed an M&E mechanism under the RAP which will closely monitor any adverse impact on potentially vulnerable sub-groups (e.g. minority ethnic groups, female headed household, small landholders, etc.). Measures to mitigate adverse impacts are included in the RAP. c. Participation and Consultationr (see section below E-7 on participatory approach) d. Contracting and Employment Issues Temporary employment creation in rural areas (mainly for new roads component) is one of the major development objectives of the project. In order to ensumquity of such benefits being accrued to different segments of society (especially the poor and vulnerable groups) and its sustainability, the following measures would be taken: - Issue of local employment benefit: maximizing community involvement in road construction is one of the major benefits envisaged under the proposed project using labor-based approaches for the new - 18 -  road construction. The impact assessment identified that the major obstacles for contractors to hire local labor are (i) their unavailability due to agricultural and other obligations and out-migration, and (ii) higher wages expectations by local labors (40-80% difference). The project is designed to ensure tha(i) the contracts for the new road component will include a Community Based Organization as nominated sub-contractor for certain items in the bill of quantities to ensure a minimum percentage of local labor (including adjacent districts) to be hired, (ii) local labor participation will be monitored closely by Supervision Consultants, and (iii) formulation of road user groups as local labor groups to mobilize the communities will be considered to the extent possible. Where possible Community Based Organizations will be awarded directly small contracts. - Wage related issues: Interviews with local contractors identified there is no gender discrimination in wages when the same task is undertaken. On the other hand, household interviews and group discussions among local communities suggested that there are some level of indifference to employment on road projects and among local communities, mainly due to their concerns with fair wages paid by contractors. Therefore, gender-based, foreign-local and other types of wage differentials will be closely monitored during the project implementation through socio-economic surveys. For overall accountability and transparency of contractor-labor relationship and quality of works, the application of an operational audit will be implemented by the Chief Technical Examiner. - Child labor will be closely monitored during supervision paying attention to the specific contractual clauses incorporated in the sample bidding documents. - Pooling of resourcesfor community purposes: The Green Road experience supported by some bilateral donors (e.g., GTZ and Helvetas) has demonstrated limited success in which a small portion of road wages are set aside for small savings schemes, which are then used to finance small-scale community and family investments. During training for labor-based road construction an effort will be made to transfer experiences from these projects. e. Road Safety: Given the expected increased volume of traffic, road safety issues have been incorporated into the engineering designs. Special road safety considerations are being made (e.g., safety zones are being provided for people carrying heavy loads). Moreover, the DOR has established a unit for road safety and traffic engineering. Nepal has established recently a National Road Safety Council and adopted a Road Safety Policy. During appraisal a discussion was initiated on accessing financing from the Global Road Safety Initiative which is being developed by the Bank. f. Other Socio-economic Impac1s: -Porters: Assessment from existing roads pointed out that the potential reduction in the use of porter and other non-vehicular transport services due to new road construction may not be significant, since increased imports of goods may expand their opportunities to convey goods to off-road settlements. However, periodic monitoring both at community and project level will be necessary. - Smugglers: Local communities also expressed concerns over increased smuggling of medicinal plants and forest resources by outsiders. Local Consultative Forums (described above in R&R) will be used to address such concerns and establish prevention and monitoring mechanisms. - Gender Discrimination which is prevalent against women under the system ofjari or polyandry, though punishable under the law, is expected to be reduced somewhat due to opportunities which will be created along the road corridor through the diversification of the cropping pattern, export of cash crops to urban centres, and the growth of market centers - 19 -  6. Environmental assessment: Environment Category I A II C O B O FI a. Justification of EA Category: The project involves the construction of five new roads and three roads for upgrading. Road construction in the Middle Mountains and High Mountains of Nepal is a high impact activity, particularly during construction and the following initial few years. The cumulative impact of steep topography, often unstable geology, high rainfall intensities and intensive land use leads to road construction resulting in the destabilization of terrain, of production land and other related significant impacts. Given these major natural limitations to road construction, all construction impacts cannot be avoided. Therefore the construction of new roads is dealt as EA category "A" and the upgrading is dealt as '4B" b. Construction of new roads involves a total of approximately 200 km i.e., Chameliya - Darchula, Sanfebagar - Martadi, Sanfebagar - Mangalsen, Kalikot - Jumla, Chedagad - Jajarkot. c. Impacts: The priority bio-physical impacts include land stability (slope stability hazards, erosion, drainage); land loss (agriculture, forest and other resources); ecological degradation (direct impact of alignment clearing on forests, indirect impacts of road operation on forests, wildlife, protected areas and other significant features). Secondary impacts include archaeological, cultural and religious sites, air / water quality, noise / vibration, drinking water catchments, and refuse pollution. (Detailed impacts in EIA, IEE and EMAPs and summarized in Annex 12) d. Mitigation and management measures: cover - (i) road design /formation with a focus on minimizing excavation by equalizing cut and fill where possible, minimizing slope disturbance, installing retaining walls on the low side of the road where embankment crosses cultivation, exploring construction of dry stone walls to save cost etc.; drainage, with a focus on cross road drainage to reduce the concentration of water on the road surface, provisions of outfall and infall cross drainage, drive-over crossbanks and excavated causeways, lined side drains etc. (ii) road construction with a focus on construction programs; methodologies using local labor based road construction and maintenance; fill disposal; re-vegetation and construction management (iii) improvement proposals for degraded land and environmental enhancements including hill-slope reforestation, enrichment planting / protection e.g., in Sajanigajal Forest, community forest programs e.g., in Salanidhar and Sakar ; market center planning and cash crop development programs, stabilization / improvement of walking trails and bridges, landslide stabilization etc. Impacts will be avoided or mitigated through the selection of the most stable alignment, sympathetic road design incorporating environmental mitigation measures and the strict construction of the road in accordance with the prescribed road design and environmental mitigation measures. In this regard, a detailed Environmental Impact Assessment (EIA) has been carried out following Bank guidelines for EA Category A and HMG/Ns EIA guidelines. A screening and scoping exercise was undertaken to inform stakeholders about the proposed project, receive their comments and identify priority environmental issues for assessment. (Scoping is required by HMGNs Environment Protection Regulations 2054 and constitutes good practice in EIAs to help focus on priority environmental issues). The output of the EIA includes an Environment Management Action Plan (EMAP). e. Upgrading of roads: involves a total of approximately 250 km of roads i.e.,Surkhet - Kalikot, Dharapani - Chhedagadi, Gorusinge - Sandhikharka. f. Impacts: The potential impacts are related to the proposed road upgrading works which include standard works i.e., road surface reformation, gravelling, side drain construction, as well as site specific -20 -  works to stabilize embankments, adequately drain the road and bring the existing formnation up to the required design standards. Other significant upgrading works are likely to include road widening at places, slope stabilization i.e., excavation and filling, retaining wall and breast wall construction and re-vegetation, the installation of additional cross drainage structures, and improvements to road geometry. These works will have site-specific environmental impacts and will be mitigated on the same principles as the EIA. An EMAP has been prepared as part of the IEE detailing the implementation of mitigation measures. g. Initial Environment Examination / Environmental Analysis: An IEE has been prepared by HMGN for upgrading and rehabilitation of selected national highways and feeder roads. The 3 roads proposed (Surkhet - Kalikot, Dharapani - Chhedagad, Gorusinge - Sandhikharka, a total of approximately 250 km) for upgrading, already exist at a very low earth standard. The proposal is to upgrade, these to fair weather gravel standards, which would prevent further environment degradation and help reduce the need for frequent emergency maintenance and better accessibility (roads located in the poorest regions of the country). The IEE and EMAP prepared address these impacts in terms of mitigating adverse and enhancing positive impacts. This is essentially a limited EA and follows HMGNs guidelines which require an IEE for "upgrading rehabilitation and reconstruction of national highways and feeder roads". As per the Bank, these are categorized as EA Category B and require a limited Environmental Analysis. The IEE prepared satisfies both requirements. Similar to EIA, IEE Scoping was also undertaken and a workshop was held in Kathmandu to provide a forum for interested groups to identify environmental issues. The EMAP as part of the IEE will follow the same format as that in the EIA. The IEE assesses the potential impacts that are likely to result from the construction activities of the selected upgrading roads. The proposed road upgrading works include standard works i.e., road surface reformation, gravelling, side drain construction, as well as site specific works to stabilize embankments, adequately drain the road and bring the existing formation up to the required design standards. 7. Participatory Approach (key stakeholders, how involved, and what they have influenced or may influence; if participatory approach not used, describe why not applicable): a. Primary beneficiaries and other affected groups: - Primary beneficiaries: general road users and road-side communities (e.g. farmers, local businesses) (see C-3). -Key stakeholders include: (i) Project/national level: DOR/MOWT officials, other govemment agencies concerned (e.g. MLD, Department of Land Revenue and Surveys, etc.), consultants (preparation, supervision, external monitoring), donors (e.g. IDA, ADB, SDC, DflD, UJNDP, etc.), commercial private sector (i.e. participants in Implementation Committee for Roads Board), contractors. (ii) District level: DDC elected officials, DDC administrative officials (including Chief District Officer). (iii) Village/community level: VDC officials, PAPs, general users, NGOs, user groups (e.g. road, irrigation, forest), women's groups (if any). - Affected Groups: Primary groups adversely affected by the project are: PAPs (i.e. losing assets and livelihood), community-based groups who may lose/be disrupted communal resources (e.g. forestry, irrigation, etc.). A table indicating key stakeholders, stage of involvement, roles/types of influence, and type of participation has been included in the RAP. - Stakeholder Participation in Institutional/Policy Reform: The policy reform component of the project has been prepared and will be carried on with extensive participation of stakeholders including private sector, government representativesand major donors. A series of national-level workshops (e.g., - 21 -  Road Finance and Management Reform workshopMay 1998, Workshop to Review Draft Roads Board and Fund Act, April 1999) have been carried out with participation of key private sector, Government officials and other donors (including FNCCI, Federation of Transport Entrepreneurs, NEA, NATA, Consumer's Association and Farmers Association, representatives from MOF, MOWT, DOR, NPC, and MLD, and other donors including SDC and DfMD). Regional workshops were conducted. A media campaign is to be undertaken to raise public awareness of the benefits of the Nepal Roads Board Act establishment. b. Other key stakeholders: - Community Participation in New Roads, Upgrading, and Rehabilitation: The overall focus on maintenance under the PIP and this project requires stronger sense of ownership than before. User and community participation to the extent possible would be pursued under this project not only for information dissemination purposes but also as one of the ways to generate ownership .of strategic network, although it is more difficult to do so in strategic networks than in district and village roads. As part of the new road construction and upgrading component the following activities have been and will be supported: (i) Planning: As part of baseline socio-economic survey and the EIA processes, extensive stakeholder consultations have been carried out with a sample of groups of potentially affected people (including separate discussions with women' groups), representatives of local communities, district officials, business owners, and Kathmandu-based private contractors, in order to assess their needs and expectations for the project, their roles in the project and potential impacts. Environmental impact assessment has been also carried out with broad stakeholder participation. (ii) Participation in implementation: local employment, tree plantation, savings scheme, and others, and (iii) Participation in M&E: communities need to monitor wage payment, and savings scheme. The rehabilitation component has also been prepared following a social assessment and an IEE which involves similar type of participatory approaches taken in the new roads/upgrading components. F: Sustainability and Risks 1. Sustainability: The most important factor to ensure the project' sustainability will be the continued commitment from HMG/N to substantially increase in real terms maintenance funding to close the gap with the networks requirements. Furthermore, the road fund must be strengthened and made very prominent as a tool to improve sector expenditures. Emphasis will also be made on continuing to improve maintenance management. 2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): Risk Risk Rating Risk Minimization Measure From Outputs to Objective Delay or inaction on policy reforms S Close monitoring of institutional development program, training and related components and maintenance covenants. -22-  Inadequate maintenance, new roads M Increased budget, making road fund with appropriate standards are not effective, improved road management, adequately maintained, closures affect and perfornance indicators. DOR and access funding agencies (SDC, IDA and DfID) to agree and support a program to streamline and integrate the activities o MRCU in the various branches of DOR. From Components to Outputs Delays in procurement and contract S Continued attention at improving implementation. procurement capabilities in DOR, appointment of Procurement Engineer i PCU, assistance from supervision consultants, suitably packaged contracts and PCU closely monitoring. Level of authority increased. IDA may declare misprocurement on contracts that are not awarded within 60 days of expiry o the original bid validity period. Delays in site readiness and M Immediate actions are needed to appoin implementation of RAP key counterpart staff in DOR to implement RAP (see Social Data Sheet for details). Poor performance of contractors and/or M Training of project managers, consultants contractors and consultants, improved monitoring and evaluation of projects, operational audits, non-performing contractors excluded in pre-qualificatio Overall Risk Rating M Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects During project preparation, locations alongside the existing roads selected for construction or upgrading were identified where the proposed road works could have environmental effects. The areas of natural habitat which might be affected have been extensively assessed and mitigation measures have been incorporated in the design and management plan of the project, as well as documented extensively in the environmental clearance application submitted to the MOPE. None other identified at present. G: Main Loan Conditions 1. Effectiveness Condition (a) Standard conditions. (b) Bids received for First Year Civil Works and proposals received for Institutional Stregthening and Training Assistance consultants. (c) Appointment of key staff in PCU. (d) Draft Legislation for Nepal Roads Board Act submitted to Parliament Secretariat for the purpose of - 23 -  obtaining approval by Parliament. (e) Completion of actions set forth in FMS action plan with due dates that precede effectiveness date. 2. Other [classify according to covenant types used in the Legal Agreements.] (a) The Borrower shall maintain the PCU with adequate numbers of professional staff with skills and experience and on terms of reference satisfactory to the Association, including without limitation (i) the Deputy Director General, Foreign Cooperation Branch, as Program Coordinator, (ii) two Senior Divisional Engineers (including one designated as Procurement Engineer), (iii) an Accounts Officer, (iv) two Accountants, (v) an Environmental Engineer, (vi) a Social Planner, and (vii) two Assistant Engineers. (b) By December 31, 2000: Expand the Geo-Environmental Unit capabilities to carry out the social and environmental assessment monitoring and evaluation for the project. (c) By the end of June and December each year: Arrange a sample survey of overall quality of construction and maintenance works by an independent monitoring engineer and report the monitoring results to IDA. This survey will be undertaken as part of Third Party Independent Audits which would be part of the Institutional Strengthening and Training Component. (d) Throughout the life of the project, MOWT/DOR will ensure that funding for maintenance of roads (comprising the strategic road network of highways and feeder roads under DOR) is systematically increased from the current level, which is about 75% of needs, to annual allocations and expenditures for maintenance (i.e., routine, periodic, recurrent and emergency maintenance expenditures excluding donor financed activities and HMGN counterpart funding of development and upgrading components) as follows: in 1999/00 not less than NRs 700 million, in 2000/01 not less than NRs 850 million, in 2001/02 not less than NRs 950 million, in 2002/03 not less than NRs 1,050 million, and in 2004/5 not less than NRs 1,150 million. (e) By May 31 each year, undertake an annual survey of road roughness and visual condition rating on at least 50% of strategic highways and feeder roads (strategic network first and alternatively to cover the entire network), and disseminate the results available in a public Road Condition Report. (f) The Borrower shall not use any part of the proceeds of the Credit to undertake civil works on any roads not included in the Project Implementation Plan, unless and until the Borrower has submitted to IDA documentation satisfactory to IDA for undertaking civil works for such roads, including without limitation a feasibility study report, an environmental management plan and a resettlement action plan. (g) MOWT/DOR will produce trimesterly reports on implementation and performance indicators, and state future action plans for each component of the Project, which will be reviewed by the Association. (h) By November 30, 2001, DOR will conduct with IDA a mid-term review of project implementation. The Borrower will prepare a comprehensive assessment of the project implementation and make ita-vailable 30 days in advance of the mid-term review. (i) By December 31, 2001, the Borrower will make the Roads Board and the Road Fund operational under the Nepal Roads Board Act as part of the policy reform components of the project. (i) By October 31, 2001 and May 31, 2003 the Borrower shall conduct a socio-economic assessment of impacts on project beneficiaries of the road construction and improvements made under the project and to - 24 -  prepare a report of such assessment. (k) The Borrower shall: (i) by March 1, 2000, submit to the Association an action plan, satisfactory to the Association, for strengthening DOR' capabilities for road maintenance planning, programming and implementation; and (ii) thereafter implement such action plan in a manner satisfactory to the Association, including without limitation the implementation of the exit strategy for the Maintenance and Rehabilitation Coordination Unit of DOR and the streamlining of the maintenance planning and programming activities in the Planning Branch of DOR, by the earlier of (a) September 1, 2000 or (b) the award of the contracts for maintenance works for the second year of Project implementation. H. Readiness for Implementation 1 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. EO 1. b) Not applicable. Z 2. The procurement documents for the firstyear's activities are complete and ready for the start of project implementation 1 3. The Project ImplementationPlan has been appraised and found to be realistic and of satisfactory quality. O 4. The following items are lacking and are discussed under loan conditions (Section G): 1. Compliance with Bank Policies H 1. This project complies with all applicable Bank policies. Li 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Juan Gaviria _/f.. Frannie A. Leautier Hans M. Rothenbuhler Team Leader /s1ef<3 Sector Manager/Director Country Manager/Director - 25 -  Annex 1: Project Design Summary NEPAL: ROAD MAINTENANCE AND DEVELOPMENT Key Performance Hierarchy of Objectives., Indicators Monitoring & Evaluation Critical Assumptions Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission) To develop basic Access of rural population to Bank Economic Report on District and community infrastructure where basic infrastructure services Nepal accessibility improvement economically justified and and social facilities improves. programs are successful and improve resource utilization i sustainable. the road sector. Transport costs decrease and Economic Survey Complementary investments assist to accelerate economic to support infrastructure growth development take place. Project Development Outcome I Impact Project reports: (from Objective to Goal) Objective: Indicators: To achieve sustainable Share of population provided Reports of DOR Goverrnent adheres to the maintenance and with basic motorized access policies outlined in the rehabilitation of the strategic increases in the project Priority Investment Plan and road network, and districts. donor coordination and construction of economically Project Progress Reports support in the road sector justifiable rural roads, subject Numbers of person-days of continues to a sound government employment created in the strategy for road maintenance project districts. and the adoption of Reports of the Road Board environmentally sustainable Overall maintenance construction and maintenance allocation as per agreed practices. project covenants and road user share increase as per agreed plan between Roads Board and MOWT/DOR Output from each Output Indicators: Project reports: (from Outputs to Objective) component: 1. Improved efficiency and 1.1 Maintenance allocations 1.1 Reports of DOR and the Nepal Roads Board Act is effectiveness in public sector for both Strategic and District Nepal Roads Board (periodic passed by Parliament. Roads management of road networks are made available progress reports, plans and Board established, becomes an investments. in time and in sufficient implementation documents) effective tool to enhance the amounts, as outlined in the efficiency and effectiveness of Credit agreement road maintenance allocations 1.2 Allocations are actually 1.2 Third party technical and and efficiently used for the financial audits of road sector planned purpose revenues and expenditures 1.3 Nepal Roads Board and Fund established, regulations approved, annual programs implemented and audited - 26 -  2. Improved access to district 2.1 Average travel time 2.1 Implementation Environmentally sustainable headquarters in areas not reductions and transport cost Completion Report road construction and currently served by reductions achieved as per maintenance practices utilized dry-weather roads utilizing appraisal estimates. for all road sector activities. appropriate design, technologa 2.2 Detailed technical, 2.2 Project Appraisal and economic justification social, environmental and economic feasibility studies to be carried out as part of project preparation and followed 3. Reduce bacldog of 3.1 Share of strategic network 3.1 Annual Road Condition Established Road Fund rehabilitation and implement in poor condition reduced to Report of DOR becomes operational and sustainable maintenance on 20% sustainable strategic network 4. Enhanced management 4.1 Reduced unit costs for 4.1 Reports of DOR and Nepal Internal renewal and capacity of DOR through works by type of road and Roads Board enhancement of DOR's improved contracting and activities effectiveness continues accountability procedures, as 4.2 Improved average road 4.2 Third Party Audit (CTES) well as standardization of condition and quality of road reports and Annual Road environmentally sound, works Condition reports low-cost construction and 4.3 Reduced throughput time 4.3 Reports of DOR maintenance methods. for procurement decisions 4.4 Environmentally sound, 4.4 Progress reports, PBME low-cost construction and reports and Implementation methods become standardized Completion Report approach within DOR - 27 -  5. Institutional development 5.1 DOR Human resources 5.1 Special reports and Adequate staff continuity and training development policy and progress reports within DOR. strategy, staff development program and training plans in DOR staff assume growing place and being implemented responsibility for project 5.2 Annual in-country 5.2 Progress reports. For implementation. short-term courses (120 study tours, de-briefing on trainees), overseas short-term return and report preparation MOWT supports development courses/study tours 12 by trainees, and evaluation by of CTES capacity. participants), and in-service DOR. courses (100 trainees). 5.3 Annual in-country 5.3 For overseas courses training (20 trainees), de-briefing on return and overseas short courses (2 report preparation by trainees, trainees) on Project and evaluation by MOF, Management Reporting OAG, FCGO and MLJ. (LACI) and procurement for staff in MOF, OAG, FCGO and MLJ. 5.4 Special reports 5.4 Systems and procedures for preparation of environmental and social assessments and action plans in place. 5.5 Progress reports 5.5 EMAPs and RAP being prepared and implemented. 5.6 Special reports and 5.6 Marketing program for progress reports commercialization of DOR' mechanical training operations prepared and being implemented. 5.7 Progress reports 5.7 Annual training of equipment operators (30), mechanics/electricians (70) and supervisors (20). Project Components I Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) 1. Support to sector policy US$ 0.4 million (IDA 0.4 Project progress and Nepal Roads Board Act passed reform including amendment million) disbursement reports. by Parliament of the legal framework, to set up a Roads Board and to develop the Road Fund - 28 -  2. Construction of US$ 45.8 million (IDA 36.6 Sufficient and timely dry-weather feeder roads (197 million) counterpart funding is km) and upgrading to gravel available standard (253 krm) including resettlement assistance, environmental monitoring, and technical assistance for design, project coordination & construction supervision 3. Rehabilitation (147 km) of US$ 6.8 million (IDA US$ 5.7 Procurement actions are strategic highways million) streamlined and timely 4. Periodic maintenance (470 US$ 6.6 million (IDA US$ Procurement actions are kim) of strategic highways 5.5 million) streamlined and timely 5. Institutional strengthening US$ 4.8 million (IDA US$ Adequate staff continuity and training of Department of 4.8 million) within DOR Roads and MOWT - 29 -  Annex 2: Project Description NEPAL: ROAD MAINTENANCE AND DEVELOPMENT By Component: Project Component I - US$0.40 million 1. Policy Reform including support to setup the Nepal Roads Board, amend regulatory framework and develop the Road Fund. An Implementation Committee (IC) consisting of six private sector members (FNCCI, Federation of Transport Entrepreneurs, NEA, NATA, Consumer's Association and Farmers Association) and five Government representatives (MOF, MOWT, DOR, NPC, and MLD) was established with the approval of Cabinet to implement the proposed reform. An action plan with agreed actions by the IC is under implementation until the creation of the Nepal Roads Board. In a first phase, up to March 1999, the IC and the Executive Secretary (ES) estimated existing and potential road user revenues and road maintenance funding needs, assessed international experience with road funds carrying out study tours, and prepared a first draft of the Nepal Roads Board Act. A joint stakeholders workshop was held in April 1999 with the IC, donors and road fund experts to review the draft act. The revised draft was submitted to MOWT for presentation to Cabinet in July 1999. The Cabinet approved the act in principle in September 1999 and presentation to Parliament is planned to take place before Dec. 31, 1999 in time to register it for consideration during the next winter session of Parliament. The IC has also started a broad informative and consultative process with all major stakeholders in order to achieve the necessary consensus for the implementation of the reform. Furthermore, the IC is preparing detailed technical, financial and organizational rules and bylaws for the implementation of the Act. Presentation of the Nepal Road Board Act to the Parliament Secretariat is a condition of project effectiveness. During project implementation the Nepal Roads Board and Fund would become operational. This project component would financeconsulting services and technical assistance required by the Implementation Committee and the Nepal Roads Board (NRB) once established ($0.15 m), study tours to functional Road Funds elsewhere for key decision makers ($0.03 m), support to private sector capacity building activities (contractor training) lead by NRB ($0.12 m), ancbffice equipment support for the NRB ($0.1 m). Project Component 2 - US$45.80 million 2. Dry-weather feeder road construction (197 km) and upgrading to gravel standard (253 km) including resettlement assistance, environmental monitoring, and technical assistance for design, project coordination & construction supervision. This component includes als(rivil works for improvements to training and office facilities ($2,280,000), The civil works underthis project component will include about 197 km of new dry-weather feeder roads and upgrading 253 km of existing dry-weather roads to gravel road standard. The new roads include: Chameliya - Darchula, Sanfebagar - Martadi, Sanfebagar - Mangalsen, Kalikot - Jumla, Chedagad - Jajarkot. The roads for upgrading include Surkhet - Kalikot, Dharapani-Chedagad-Dhaira, Gorusinge - Sandhikharka. This project component has required substantial attention to consultation during the selection of alignments and the preparation of the environmental (see Annex 12) and social assessment of the project. This - 30 -  component will be implemented in parallel with the implementation of the EMAP and RAP. DOR agreed to appoint on a permanent basis two Assistant Engineers assigned to monitor and evaluate the social and environmental activities and the teams of the Consultants. The implementation of the new road construction wilbe carried out by local contractors trained in labor-based road works. The project will finance a labor-based training and related technical assistance inputs necessary for the project to carry out training of DOR staff, contractors and consultants. Existing DOR facilities at Butwal and Nepalgunj are being considered as the basis to prepare the training program. The training materials and methodologies developed for the Pilot Labor Based Rehabilitation Program will be adapted for this project. The training of DOR staff and selected contractors would start on or October 1999. The supervision of the new road construction and upgrading will be carried out by international consultants. It is envisaged that one international services contract will be procured for supervision of this component Project Component 3 - US$ 6.80 million 3. Rehabilitation of 160 km of strategic highway and feeder road network. Two priority roads of the strategic road network are being included in this component based on an update of the feasibility, and subject to the environmental and social studies being satisfactory to IDA. The roads are: Tansen-Syangja, Harthok-Tamgas andLumbini-Taulihawa. Given the proximity of the civil work sites it has been agreed that one international engineering firm will be selected to supervise this project component. Project Component 4 - US$6.60 million 4. Periodic maintenance of strategic roads. The Maintenance and Rehabilitation Coordination Unit (MRCU) has prepared a network-based analysis of a periodic maintenance program for the period 1999-2005 which consists of priority resealing of strategic roads totaling some 3,063 km. The annual programs derived from this analysis includes stretches of roads to be considered for financing by various donors, including IDA under RMDP. The analysis was undertaken by DOR staff using the HMD-II model and data from DOR's in-house Highway Management Information System (HMIS). The five-year program proposed for financing under this project consists of a total of 470 km with AADT of more than 400 vehicles and rates of return well over 40% (see economic analysis). The details of the program were agreed during appraisal. The supervision of this component will be carried out by local consulting firrns to be selected every year. Great attention will be paid to the quality of supervision and planning of works. Project Component 5 - US$4.80 million 5. Institutional strengthening and training, including: consulting services for institutional strengthening/training of the DOR and third party operational audits of works ($2,380,000), 5-year training and human resource development program for DOR and MOWT ($ 830,000), equipment for office modernization ($490,000), equipment for training ($390,000) an4re-investment and scoio-economic impact of road construction studies ($550,000). - 31 -  Based on an assessment of on-going institutional strengthening efforts in DOR which has been conducted by DOR and IDA, the project could finance institutional strengthening and training activities in support of: (i) Road Sector Skills Development Unit (RSSDU) for local training, (ii) Geo-Environmental Unit to expand its capabilities to implement the Environmental Management Action Plan (EMAP) and the Resettlement Action Plan (RAP),(iii) the Mechanical Training Center of DOR to assist with its commercialization, continuation of mechanical training, and expansion of training to cover private sector personnel, (iv) the Chief Technical Examiner Section (CTES) of MOWT, to enable it to establish a technical audit capacity and undertake technical audits of DOR projects, and (v) the Planning and Design Branches of DOR for activities related to MRCU and TESU. Agreement has been obtained from MOWT/DOR on the scope of the assistance, TORs and costs (see Annex I 1). During negotiations it was agreed that support for the phase out strategy of MRCU (under the institutional strengthening and training component) and financing a socio-economic impact study of beneficiaries road construction will included in the project. The CTES component will finance semi-annual Third Party Operational Audits of DOR' operations. Agreement has been obtained during appraisal with MOWT/DOR on the TOR for the Third Party Operational Audits, which would be undertaken by international consultants providing technical assistance services to CTES, under the supervision of CTES. - 32 -  Annex 3: Estimated Project Costs NEPAL: ROAD MAINTENANCE AND DEVELOPMENT Local Foreign Total Project Cost By Component US $million US $million US $million 1. Policy Reform Support for Roads Board 0.21 0.17 0.38 2. Development & Upgrading of Feeder Roads 18.66 20.81 39.47 3. Rehabilitation of Strategic Roads 2.76 3.39 6.15 4. Periodic Maintenance of Strategic Roads 2.86 2.77 5.63 5. Institutional Strengthening & Training 1.96 2.21 4.17 Total Baseline Cost 26.45 29.35 55.80 Physical Contingencies 2.50 2.77 5.27 Price Contingencies 1.60 1.73 3.33 Total Project Costs 30.55 33.85 64.40 Total Financing Required 30.55 33.85 64.40 Local Foreign Total Project Cost By Category US $million US $million US $million Goods 0.40 0.60 1.00 Works 23.70 29.10 52.80 Services 6.30 3.50 9.80 Training 0.40 0.40 0.80 Total Project Costs 30.80 33.60 64.40 Total Financing Required 30.80 33.60 64.40 - 33 -  Annex 4: Cost Benefit Analysis Summary NEPAL: ROAD MAINTENANCE AND DEVELOPMENT Present Value of Flows (Rs million) Economi Analysis Financial Analysis NRDUC Rehabilita Periodic Total NRDUC Rehabilita Periodic Total -tion. Maint. -tion Maint. Benefits 3516 522 1204 5242 3906 593 1368 5867 Costs 1649 400 377 2426 1832 454 429 2715 Net 1867 122 827 2816 2074 139 939 3125 Benefits ERR(%) 23.3 17.3 61 28.2 Summary of Benefits and Costs: Project benefits were derived from a net reduction in generalized transport costs on the project roads compared to a "without the project scenario". The generalized transport costs of the project included construction and maintenance costs, vehicle operating costs (VOC)s. In the case of the new road development and upgrading component, in additional to construction and maintenance costs as well as VOCs, the transport costs also included time costs of motorized and non-motorized trips, social resettlement and environmental costs, and agricultural surplus. The cost-benefit analyses were undertaken separately for the three different components of the project. Main Assumptions: New Dry-weather Road Development and Upgrading Component (NRDUC) The methodology and key assumptions applied for the economic analysis of this component are as follows: 1. The economic appraisal was undertaken using a Vehicle Operating Costs in Nepal (VOCN) model, which is a simplified version of the VOC module of the Highway Design and Maintenance (HDM-III) Model calibrated to Nepal's operating environment by the Maintenance and Rehabilitation Coordination Unit (MRCU) of the DOR. The Model was initially used in the PIP study, and was updated and modified by the consultant for the project analysis to include a module to compute benefits to normal and generated traffic on newly constructed roads. 2. Traffic projection in the "with project" scenario consisted of the growth of normal, diverted and generated traffic. Growth projections were made taking into account population and income growth rates, population-based traffic generation factors, price and income elasticity of demand. In estimating income and population growth in project areas currently without roads, the analysis distinguished the growth rates in the "with project" and "without project scenario". Because the pattern of road usage and maintenance in the project areas are dominated by the monsoon season, which makes fair-weather roads generally impassable for up to four months, assumptions were made on the number of days the project roads would be closed under "with" and "without" the project scenario. 3. Benefit estimation also took into account personal time values for both work-related and no-work-related trips. As a result of the project road construction, there will be reduction of government food subsidy to the areas currently not-connected by roads. The reduction in subsidy was not counted as a project benefit except to the extent that they are implicit in the estimated cost of non-vehicle (including air) - 34 -  transport. 4. Construction costs were initially estimated using quantity estimates derived from the preliminary engineering and surveys, and contractors' bidding rates for similar works during 1998. The unit construction costs thus derived were cross-checked and modified with cost data of similar projects and the PIP estimates. Prior to finalizing the appraisal, the estimated capital costs were further refined based on the detailed surveys and engineering designs of the project roads. The based costs are in 1998 prices. The engineering cost estimates were factored by 1.05 to account for physical contingencies and 1.1 for supervision costs. The official district rates were adopted in estimating maintenance costs. Where applicable, the costs of social resettlement and environmental mitigation measures were included in the base estimates. A standard conversion factor of 0.9 and a discount rate of 12% were used in the economic evaluation. 5. Agricultural producers' surplus was estimated for all project roads, as they all pass predominantly agricultural areas. As a result of reduced transport costs and improved rainy season access to markets, it is envisaged that production of certain crops will be increased. The identified existing subsistence and commercial crops and potential new commercial crops included vegetables, potatoes, apples, citrus fruit and ginger. The net economic surplus values of these increased production quantity would constitute part of the project benefits. Since it was observed that producers may not respond to cost reductions as readily as analyst expect them to, the analysis in this respect was restricted to cases where suitable land would be available for new cultivation. Also, it was conservatively assumed that the build-up of producer surplus benefits would take 20 years, reaching 50% of the estimated full potential only in the 11th year. The resulting agricultural benefits were estimated to account for about I% point of the overall EIRRs of the project roads. 6. Road 2, 4B and SB would benefit considerably from the shift of transport modality through the displacement of existing air transport on these routes. The very high air transport costs currently incurred by freight and passenger traffic to these project areas were expected to be largely saved by the construction of new roads serving the same destinations. After the construction of the project roads, it was envisaged that most of the air traffic (which accounted for 27% to 65% of current freight traffic) would be diverted from using helicopters to trucking on roads, as there were very high cost differentials in these two modes of transport. Some traffic, especially tourists, may still prefer air transport. Based on detailed surveys, it was assumed that air transport would retain 50%, 25%, and 25% of the existing traffic on Road Link 2, 4B, and SB, respectively. The summary result of the economic analysis are shown in the following table: Contru- Estimated ction financial NPV @ EIRR EIRR Economic Road Description Length capital cost 12% (Rs. (%) (%) evaluation No. (km) (Rs million) million) (Base (Worst length (km) case) case) 1 Chamelia - Darchula 33.7 143 0 12.0 6.0 75 2 Sanfebagar- Martadi 37.2 220 650 36.1 24.8 56 3 Sanfebagar - Mangalsen 14.72 93 84 16.9 10.6 37 - 35 -  4B Kalikot- Jumla 88.44 757 457 22.9 14.1 88 SB Chedegad - Jajarkot 21.0 110 428 95.7 56.0 20 4A Surkhet - Kalikot 132.0 607 204 19.9 8.8 132 5A Dharapani - Chhedegad 61.5 305 9 12.7 8.7 62 7 Gorusinghe - Sandhikharka 59.2 248 36 15.8 5.3 59 Total 449.26 2482* 1867 23.3 13.9 529 * Note: 1. Costs for economic analysis include physical contingencies and supervision. 2. Road # 4A, SA & 7 are for upgrading while the rest of the road links are for new construction. Based on the quantifiable economic benefits, the component would have an EIRR of 23.3%, and a NPV of Rs. 1,867 million, making the proposed investment for the component economically viable. In addition to the quantifiable economic benefits, the project will also generate a number of positive social and economic developmental impacts to the project influence areas. Some of which are summarized below: (1) Discriminations currently existing against women under the system ofjari or polyandry is expected to improve substantially due to opportunities that would be created along the road corridor through the diversification of the cropping pattern, export of cash crops to urban centers, and the growth of market centers. (2) Food shortage existing in the catchment area of road corridors is expected to be reduced. (3) Duration of seasonal migration to terai and India would decrease. (4) New north-south feeder roads are necessary condition for promoting growth in hill districts still characterized by: (i) dependence on subsistence agriculture; (ii) trade based on barter exchange system; (iii) economy supported by high seasonal migration to terai and India; and (iv) the majority of population not having sufficient food for survival for more than six months in a year. To utilize the comparative economic advantages of hill regions, investments on new roads are needed where justified. They will promote strong complementary support existing between the hill and the plains. (5) There are a number of potential market centers for growth in the project areas, such as Rakam, Kalikot, Nagma, and Chedagad on Chedagad Jajarkot road. The urban demand for crop increases leading, which will lead to growth in trade flows passing through these market centers. New economic opportunities and employment structures in market centers will be created. Road Rehabilitation Component The economic analysis of the Rehabilitation Component consisted of updating existing feasibility analyses carried out earlier for the three roads which were considered, i.e. Tansen-Syangja, Harthok-Tamghas, and Lumbini-Taulihawa. Due to a budgetary constraint the Lumbini-Taulihawa road is excluded from the project. Previous studies for Tansen-Syangja Road and Harthok-Tamghas Road were completed in May 1993 and April 1997, respectively. For the Lumbini-Taulihawa Road, a preliminary study was also carried out as part of the Resealing Programme of Strategic Road Network in 1997/98. To supplement the existing traffic and engineering data, additional traffic surveys and engineering surveys were undertaken, and cost estimates updated to 1999 price level. The salient features and resulting NPV/EIRRs of these three roads are as follows: - 36 -  Links Length (km) AADT IRI (m/km) Surface Base-case Base-case (1999) NPV (Rs. m) EIRR (%) Tansen-Syangia 85 140 14 Sealed 19.3 13.9 Harthok-Tamghas 63 110 22 Earthen 103.1 19.9 Lumbini-Taulihawa 14 150 14 Gravel 1.0 12.6 The key assumptions are: I. For each road, 2 or 3 levels of improvement alternatives were considered for the project roads to arrive at an optimum rehabilitation option. The HDM III model was used to evaluate the alternative pavement rehabilitation and maintenance policies. Adjustment and calibration of the model for Nepal conditions was made prior to applying it for the update. The analysis was carried out over a 20-year period. 2. Project benefits included savings in maintenance costs and VOCs. 3. Under the without project scenario, the Harthok Tamghas Road is closed for 15 days a year; while in the with project case, the road is closed for only 5 days a year. 4. Traffic projection was derived by first estimating the elasticity of demand for different types of vehicles, then related the traffic growth with the economic growth projection in the region. The elasticity of demand was estimated using the growth of petrol and diesel consumption between 1990 and 1998, and the corresponding GDP growth rates. The resulting projected traffic growth rate is 6% per year for all roads in the analysis. 5. Financial costs were converted to economic costs by using a standard conversion factor (SCF) of 0.88. The base financial costs are increased by 10% to account for design and supervision cost, and physical contingencies. 6. The 'without-project' case for the Tansen-Syangja road refers to annual patching of potholes and single surface dressing at 7 year intervals. For the Harthok-Tamghas Road, in the without project case, no maintenance grading was applied and average roughness reverted to the maximum allowed in the model of 20m/km; in the with-project scenario, grading was applied twice per year and regravelling when the residual gravel thickness fell below 50 mm. 7. Among the various altematives studied, it was found that the most economically viable options for Tansen-Syangja Road is limited rehabilitation to its current condition with DBST surfacing (Option II in the study); for Harthok-Tamghas Road, the best alternative is improvement to limited feeder road standard with gravel surface (Option III in the study). The Lumbini-Taulihawa Road has a marginal rate of return and during supervision special efforts are needed to ensure that the actual costs are below the engineer's estimates. 8. The total financial costs of the roads in this component, including additional 10% for contingencies, design and supervision, would be Rs. 458.5 million (excluding price contingency). Excluding the Lumbini-Taulihawa Road, It was estimated that the component had an EIRR of 14.6% and a NPV of Rs.123.4 million. Sensitivity analyses were undertaken by considering the variation of construction costs and base year vehicle operating cost savings. In the worse-case scenario, i.e., increase of construction costs by 20% and reduction of VOC savings by 20%, the component's NPV and EIRR would be reduced to Rs. -28 million and 10.9%, respectively. Road Periodic Maintenance Component - 37 -  The methodology and key assumptions applied for the economic analysis of the periodic maintenance are as follows: I. The economic analysis for the Periodic Maintenance Component was based on the "Strategic Road Network Resealing Programme for RMDP" dated November 24, 1998 prepared by DOR/MRCU. The Program covered the annual resealing (periodic maintenance) requirement for the strategic network as a whole, and proposed different time slices of the Program for support by different donors and from DOR's own resources. 2. Data was drawn from the Highway Management Information System (HMIS) for each link in the strategic network, and they include AADT, IRI and surface distress index, road length, and other historical data, mostly from 1996/1997 surveys. The surveys will be carried out annually and the results will be used to update the HMIS. 3. The program covered resealing of existing blacktop surfaced portion of the strategic road network totaling 3063 km. Non-surfaced strategic network was not included in the analysis. The programn was developed on the basis of the DOR's maintenance strategy which emphasized on planning for cyclical resealing requirements rather than following the previous reactive intervention approach. Roads in the hill region assume a cyclical resealing requirement of every 5 years, while roads in the terai region every 6 years. 4. The economic evaluation of resealing each road section was undertaken using HDM-III. While the investment would occur from 2000 to 2005, the NPVs were estimated on the basis of all resealing being carried out in year 2000 for ranking purposes, whereas the ERRs were calculated with the year of resealing being undertaken shown in the program. 5. Input data for HDM including road and vehicle characteristics, unit cost were applied to all road links, with distinction of hill roads and terai roads. 6. Traffic volume on the road links included in component were mostly in the range of 500 to 1900 AADT. Under the model, NPV approaches to zero when traffic volume is about 350 AADT. 7. Financial costs are in 1997/98 prices and excluded supervision costs, but allow for 5% pre-treatment and up to 10% drainage/structure works. These costs were updated to 1999 prices for the project analysis. The cost adopted covered Double Bituminous Surface Treatment (DBST) with over 500 AADT and Single Bituminous Surface Treatment (SBST) for less than 500 AADT. All financial costs were converted to economic costs using standard conversion factor of 0.88. The discount rate applied was 12%. 8. The "without project" scenario refers to undertaking of routine maintenance plus 1% patching. The "with project" case refers to routine maintenance plus 1% patching, as well as resealing in year 2000. 9. Unit NPV values were estimated by assuming each road section was 100 km in length, and by inputting data of different traffic bands, roughness and pavement conditions for both hill and terai roads. The NPVs for individual road link were adjusted to take into account of actual length of each road section. 10. The results of the evaluation served as the basis for deriving the prioritized resealing program for each road link, adjusted for cyclical requirements, and practicalities of contract packaging. The results of the analysis are shown below: Year Length of Costs of Length Numbers of Total NPV of ERRs for total total proposed for road links financial proposed Proposed program program RMDP (km) proposed for costs for RMDP links RMDP links (km) (Rs. RMDP RMDP (Rs. million) (%) million) (Rs. million) - 38 -  1999/2000 537 _ 65 3 59 2 216 1 70 to 78 J 2000/01 363 334 106 6 98 200 24to 164 2001/02 288 259 130 5 115 158 -24to70 2002/03 599 404 109 3 ! 100 47. 24 2003/04 598 385 63 3 57 '205 41 2to184 Total .7 3 20 L 429 827 61 Sensitivity analysis / Switching values of critical items: For the new road construction and upgrading component, a detailed sensitivity analvsis was undertaken to take account of variations in different factors including: (i) 20% increase in construction costs, (ii) 100% increase in maintenance cost, (iii) 20% reduction in road user costs, (iv) 1/3 reduction in traffic growth rates, (v) elimination of agricultural benefits. In the worst case scenario, in which capital and maintenance costs were to increase by 20%, road user benefits reduced by 20%, and both traffic growth rates and agricultural benefits were reduced by 1/3, the componentfs EIRR would be 1 3.9%, and the NNPV would be Rs. 314 million. -39 -  Annex 5: Financial Summary NEPAL: ROAD MAINTENANCE AND DEVELOPMENT Nepal Road Maintenance and Development Project Project Components by Year Totals Including Contingencies (US$ '000) Totals Including Contingencies 99/00 00/01 01/02 02103 03/04 Total 1. Policy Reform Support for Roads Board 82.0 83.6 85.6 87.5 89.3 427.9 2. Development & Upgrading of Feeder Roads 7,747.5 13,641.6 17,880.4 6,309.3 - 45,578.8 3. Rehabilitation of Strategic Roads 922.7 2,630.3 2,519.9 1,048.6 - 7,121.5 4. Periodic aintenance of Strategic Roads 1,263.4 1,287.4 1,318.7 1,348.8 1,377.6 6,595.8 5. Institutional Strengthening & Training 900.3 917.4 939.7 961.2 981.7 4,700.4 Total PROJECT COSTS (excl. PPF) 10,916.0 18,560.3 22,744.3 9,755.3 2,448.5 64,424.4 Nepal Road Maintenance and Developrnent Project Expenditure Accounts by Years -Totals Including Contingencies (US$ '000) Totals Including Contingencies 99/00 00/01 01102 02/03 03104 I. Investment Costs A. Civil Works Development & Upgrading of Feeder Roads 6,012.2 11,055.0 14,752.2 5,423.5 Land Acquisition for Development & Upgrading of Feeder Roads 546.0 648.7 662.8 - R&R MonTionng and Iplerrentation 390.0 397.2 405.8 137.7 Supervision of Developrent & Upgrading of Feeder Roads 896.8 1,648.3 2,169.5 765.3 Rehabilitation of Strategic Roads 750.6 2,294.8 2,192.5 938.6 Supervision of Rehabilitation of Strategic Roads 74.6 228.0 217.4 92.8 Periodic Maintenance of Strategic Roads 1,181.1 1,203.5 1,232.9 1,261.2 1,288.3 Supervision of Periodic Maintenance 82.3 83.9 85.8 87.6 89.3 Subtotal Civil Works 9,933.6 17,559.3 21,719.0 8,706.7 1,377.6 B. Technical Assistance Institufional Strengthening of DOR 616.1 627.7 642.8 657.1 670.8 Re-investrrent Studies 106.7 108.8 111.5 114.2 116.8 Technical Assistance to Roads Board 65.6 66.8 68.4 69.9 71.3 Subtotal Technical Assistance 788.4 803.4 822.7 841.2 858.9 C. Euiprent 193.9 197.7 202.6 207.4 212.1 Total Investment Costs 10,916.0 18,560.3 22,744.3 9,755.3 Z448.5 D. Recurrent Costs Total PROJECT COSTS (excL PPF) 10,916.0 18,560.3 22,744.3 9,755.3 Z448.5 Summary of Financial Manazement. Accountin! and Auditine: Background. The financial control environment in Nepal has been weakened by the recent transfer of responsibility of the deployment and management of the accounting cadre from the FCGO to the Ministry of General Administration. Organizational risks for the project are minimum, since DOR has a rich experience of implementing IDA financed projects, and other donor financed projects. There is a risk that inadequate coordination among various components, may slow down project implementation. This risk can be minimized through the arrangement of the Project Coordinating Unit which will be functional through -40 -  the Foreign Cooperation Branch of the DOR. The PCU needs to play a very strong role in building coordination with all components and other agencies as necessary. In order to mitigate institutional development risks, capacity for FM is being built up in accordance with a time-boundetion plan which includes the recruitment and training of key FM staff. Accounting Process. The Project books of account will be kept on a cash basis. The PCU will take the leadership in coordinating with other components of the Project on a regular basis to formulate the budget, obtain the flow of accounting information, and reconcile and audit of such information. The component managers are required to submit monthly statement of expenditures to the PCU within seven days ofthe following month. As per the govemment requirement, the Special Accounts will be maintained at Nepal Rastra Bank. The PCU will be responsible for consolidating the accounts, and submitting applications to IDA for reimbursement. The PCU will be adequately strengthened to maintain a computerized Project Financial Management Information System (FMIS). Accounting information received from various components will be regularly updated in the computerized system to timely generate Project Management Reports (PMRs). The PCU will maintain Main Loan Ledger, Subsidiary Loan Ledger, SOE Ledger, Withdrawal Monitoring Register, Special Account Ledger and other ledgers required by HMG/N. Budget and Project Implementation. The Ministry of Finance (MOF) will allocate annual budgets to the project as envisaged in the annual work plan and as agreed between HMG/N and IDA. HMG/N will include this project under the list of core projects, and will commit to a timely release of funds. The DOR will allocate adequate resources to the PCU which should include qualified staff, equipment and budget, to administer overall project coordination. The PCU will be responsible for overall project administration and management, which include programming, budgeting, contract administration, and monitoring of project progress and submission of Project Management Reports (PMRs) to HMG/N and IDA. The PCU will be sufficiently equipped and will have the required number of staff (technical, administrative and financial). The actual implementation of the individual projects will be carried out through a number of site-based project implementing units, having a separate budget authority, Risks. There is a risk of poor control of project finances due to the recent transfer of the responsibility for deploying and managing the accounting cadre of staff from the FCGO to the Ministry of General Administration (MOGA). The FCGO, however, retains overall responsibility and accountability for public financial management including maintaining central accounts (including donor accounts) and preparing the national accounts for timely external audit by the Auditor General. A further risk is the timely submission of accounts by various project implementation units to the PCU and their timely compilation for timely submission of claims to IDA, and for timely audit and submission of project accounts within six months after the end of each fiscal year. Financial Monitoring and Reporting. In order to ensure timely reporting, the PCU will be strengthened and will maintain a computerized Project Financial Management Information System (FMIS). The FMIS will facilitate timely and reliable project management information, and will be integrated with PMRs in order to map the financial data with physical data to monitor the performance of the Project. The PCU will develop the FMIS as required under IDAs Loan Administration Change Initiative (LACI). A financial management systems review of DOR was undertaken by IDA, and it was concluded that the DOR does not have the financial management capacity to be eligible for PMR-based disbursements. An action plan outlining activities that must be undertaken during project implementation in order to strengthen the financial management reporting capacity of the PCU was agreed upon between HMG/N and IDA. Until the PCU has the capacity to deliver the Project Management Reports (PMRs) as per LACI requirements, existing disbursement procedures will be followed. IDA will review the progress made in -41 -  establishing a strong financial management system after about a year, and will ascertain whether the Project is then eligible for PMR-based disbursements. If qualified, appropriate arrangements will be made to convert to PMR-based disbursements. The project will produce from the outset the following PMR statements: Financial Statement (Report IA) and Procurement Management Reports (Section 3)until the Project migrates to full PMR based disbursement The PCU will gradually start withPhysical Progress Report (Section 2) The formats are included in the BPIP. In order to match with the government planning and reporting cycle, the PMRs will be produced on a trimester basis and submitted within 45 days from the end of the preceding trimester. They will inform Project Management and IDA of the project's physical and financial progress, and will feature commitment monitoring which will give advance indication of project expenditure status. Trimesterly project management reports will be valuable for progress monitoring and subject to close review and supervision. This will allow prompt follow-up to bring to HMG/N's attention any ongoing problems in the projects accounting, internal controls, financial reporting etc. Project Staffmg Arrangements. Against this backdrop, the PCU has to be adequately staffed and the accounting staff properly trained. The Action Plan (included in the Assessment Report to be included in the Minutes of Negotiations) is expected to result in a sound financial management system for the project. Under the plan, the PCU will include a core of three accounting staff to ensure that financial management capacity will be available by project startup. The financial experts will be expected to maintain a FMIS which will be developed by DOR by using the assistance of a local consultant. The PCU will also ensure that a computer technician is available in-house within PCU to provide any technical support to the FMIS. The PCU will also ensure that there are adequate accounting staff in other project implementing units (PIUs) which will implement the project activities. The PCU will take the responsibility to build up the implementing and financial management capacity of other PIUs. Auditing Arrangements. Project Financial Statements, prepared in the formats as agreed with IDA, will be audited annually by the Auditor General (AG) of Nepal who is considered an independent auditor for IDA's purposes. The terms of reference for the audit will require the AG to provide a separate audit opinion in his audit report on: (i) the project accounts, to ensure that project funds have been spent in accordance with the terns and conditions of the project legal agreements; (ii) the PMRs/SOEs submitted for reimbursement purposes during the year, confirming these are properly supported by fornal contracts and documentation checked and verified by the project accounting staff; (iii) the project'S Special Account to ensure that this has been operated in accordance with IDA's procedures. The PCU will make available to the AG the PAD, project cost tables, legal agreements and such other information and explanations as the AG shall require from time to time to carry out his duties. The Accounts Officer of the PCU will be the main liaison person for the AG' office to ensure the audit is carried out in a timely fashion and to formally answer all questions raised by the AG. The PCU and other PIUs will provide the AG with the project annual financial statements (project accounts) and all supporting documents required by the AG within 60 days of the end of the fiscal year after verification by the FCGO. The annual project accounts package together with the audit report thereon including the three audit opinions noted above will be submitted to IDA within 6 months of the end of the fiscal year. The unaudited accounts will be submitted to IDA within 3 months of the end of the fiscal year. -42 -  Annex 6: Procurement and Disbursement Arrangements NEPAL: ROAD MAINTENANCE AND DEVELOPMENT Procurement Capacity to Implement Procurement Actions During preparation, an assessment was conducted of the readiness of the Department of Roads to implement the proposed procurement plan for the project and the compliance with the recently introduced Loans Administration Change Initiative (LACI). The main considerations are: I. The legal framework to implement procurement monitoring according to LACI is somewhat deficient. A long-term plan to improve the same will be prepared by the Borrower which would include initiatives for enactment and fornulation of laws/rules that either revise or supersede those existing and inadequate rules, which are vague or inconsistent. [For this purpose UNCITRAL Model Law on Procurement could be used as a basis.] 2. The Ministry of Works and Transport (and DOR) should have a separate Procurement Unit fully staffed with skilled and adequately trained manpower, including designating a Procurement Engineer and having assistance on procurement from the supervision consultants. Procurement activities undertaken by PIU shall be closely monitored by this unit for adherence to plans and policies. 3. As required by rules, MOWT should take steps for preparing a Procurement Manual in consultation with related Legal and Financial institution of HMG. This procurement manual also applicable for DOR should, inter alia, have provisions for contract administration as well. Procurement methods (Table A) The procurement of works, goods and services required for the different components are to be managed as shown below and detailed out throughout this Annex: Civil Works: I. Construction of new dry-weather roads to district headquarters (197 Km.): It is not expected that contracts under this component would attract international contractors. The contractors will be post-qualified according to Bank Guidelines and those selected would be required to undertake labor-based road works training provided under the projeclDue to the estimated size of the contract packages for this type work (less than $500,000 equivalent), it is expected that most contracts will be by NCB, but with allowance for Community Pariticipation, direct contracting or 3 quotations for selected contracts estimated to cost less than $50,000. 2. Upgrading of feeder roads to district headquarters from earth to gravel surface (250 Km.): In general, it is anticipated that thework for this component will be procured through ICEn packages of more than $500,000 equivalent. 3. Periodic Maintenance of Strategic Road Network (470 Km.): - 43 -  In general, it is anticipated that the work for this component will be procured through NCB and ICB. Packages of more than $500,000 equivalent will be procured through ICB. 4. Rehabilitation of highways and feeder roads (160 Km.): It is anticipated thatthe rehabilitation work will be procured through ICB. Because of their proximity and cost effective consideration, it is envisaged that one package with all roads in this component would be most appropriate. 5. Notwithstanding the descriptions above, the thresholds for works contracts are as follows: * National Competitive Bidding (NCB) for each package valued NRs. 35 million (U$0.5 m equivalent) or less, up to an aggregate amount not to exceed US$22.0 million equivalent. * Works estimated to cost less than NRs. 3.5 million (US$50,000 equivalent) per contract, upto an aggregate amount not to exceed US$2 million equivalent (when added to the amount under direct contracting), may be procured by community participation contracts. * Small contracts to cost less than NRs. 2 million (US$30,000 equivalent) per contract, upto an aggregate amount not to exceed US$2 million equivalenrwhen added to the amount under community participation contracts) may be procured either under lump sum or fixed-price contracts awarded on the basis of quotations obtained from three qualified domestic contractors in response to a written invitation. * Works estimated to cost less than NRs. 1.5 million (US$20,000 equivalent) per contract, upto an aggregate amount not to exceed US$2 million equivalen(when added to the amount under community participation contracts)may also, with the prior agreement of the Bank, be procured by direct contracting. Certified training in labor-based road construction methods, approved by the project, will be required from each selected contractor. 6. In order to ensure economy, efficiency, transparency and broad consistency with the provisions of Section I of the Procurement Guidelines in the case of National Competitive Bidding the folowing was agreed: (i) invitations to bid shall be advertised in at least one widely circulated national daily newspaper, at least 30 days prior to the deadline for the submission of bids; (ii) bid documents shall be made available, by mail or in person, to all who are willing to pay the required fee; (iii) evaluation of bids shall be made in strict adherence to the criteria disclosed in the bidding documents, in a format and specified period agreed with the Association; (iv) bids shall be opened in public in one place, immediately after the deadline for submission of bids; -44 -  (v) foreign bidders shall not be precluded from bidding and no preference of any kind shall be given to national bidders; (vi) qualification criteria (in case pre-qualifications were not carried out) shall be stated in the bidding documents, and if a registration process is required, a foreign firm declared as the lowest evaluated bidder shall be given a reasonable opportunity of registering, without let or hindrance; (vii) contracts shall be awarded to the lowest evaluated bidders; (viii) post-bidding negotiations shall not be allowed with the lowest evaluated bidders or any other bidders; (ix) bids shall not be rejected merely on the basis of a comparison with an official estimate without the prior concurrence of the Association; (x) contracts shall not be awarded on the basis of nationally negotiated rates; (xi) re-bidding shall not be carried out without the prior concurrence of the Association; (xii) all bidders/contractors shall provide bid/performance security as indicated in the bidding/contract documents; (xiii) a bidderf bid security shall apply only to a specific bid, and a contractor' performance security shall apply only to the specific contract under which it was furnished; (xiv) split award or lottery in award of contracts shall not be carried out. When two or more bidders quote the same lowest price, an investigation shall be made to determine any evidence of collusion, following which (A) if collusion is determined, the parties involved shall be disqualified and the award shall then be made to the next lowest evaluated and qualified bidder and (B) if no evidence of collusion can be confirmed, then fresh bids shall be invited after receiving the concurrence of the Association; (xv) extension of bid validity shall not be allowed without the prior concurrence of the Association (A) for the first request for extension if it is longer than eight weeks and (B) for all subsequent requests for extension irrespective of the period; (xvi) bids shall not be invited on the basis of percentage premium or discount over the estimated cost; and (xvii) there shall not be any restrictions on the means of delivery of the bids. Services: Consulting Services will be procured according to Bank Guidelines. The main consultant -45 -  services for final design and supervision include: 1. Final Design and Supervision of Development and Upgrading Components: These are likely to require services of international consultants. It is envisaged that one international consultant services package will be procured through QCBS for both of the above activities. Participation of national consultants as part of a joint venture or as subconsultants will be encouraged. 2. Supervision of Periodic Maintenance of Strategic Road Network: It is envisaged that one national consulting services contract for each year of the maintenance program will be procured through QCBS every year. 3. Supervision of Rehabilitation of Strategic Highways: Since the roads considered for rehabilitation are relatively close within the western region, and works will be carried out under one ICB contract, the supervision of this component is likely to require one international consulting services package to be procured under QCBS. 4. Resettlement and Environmental Monitoring and Implementation: Consultant services of local organizations and NGOs are required to assist DOR with resettlement and environmental monitoring and implementation (RAP and EMAP). Selection of consultants for these services will be done under a fixed budget. Consultant services for the Technical Assistance for the policy reform component and the institutional strengthening and training component shall be procured as indicated below: 1. Assistance with Policy Reform Initiatives (Roads Board): These are likely to require services of individual consultants who will be procured in accordance with the provisions of Section V of the Consultants Guidelines 2. Institutional Strengthening and Training Technical Assistance: These are likely to require two packages of international consultant services to be procured under QCBS including: (I) a consultant services package for the technical assistance to DOR (i.e., its units RSSDU, GEU and MTC), and (2) a consultant services package for the technical audit TA services to MOWT (i.e., the Chief Technical Examiner, CTES), including a semi-annual third party operational audit of the Project. Consultancy services estimated to cost more than US$200,000 per contract must also be advertised in national newspapers and in Development Business (UNDB). The shortlist may comprise entirely of national consultants for contracts estimated to cost less than US$200,000. All civil works, goods and consulting services will be procured using Bank/Country Specific Standard Bidding Documents. Training: Training services will be procured on the basis of consultancy services and statements of - 46 -  expenditures, after agreement with the Bank on priorities and selection criteriaTraining in established institutions for regular courses could be claimed under SOE. Training through specific courses organized at agreed rates by these institutions could be claimed under SOE. Goods (including equipment and related services): Goods, equipment and related services for office modernization and road management systems in conjunction with institutional strengthening will be procured by a combination ofInternational Competitive Bidding (CB), National Competitive Bidding (NCB) and National Shopping as appropriate based on the following defined thresholds. Some software procurement is envisaged, most of which will be procured under "Direct Contracting". Each contract estimated to cost more than US$200,000 shall be procured by ICB. Goods to cost less than US$200,000 equivalent, per contract upto an aggregate amount not to exceed US$300,000 equivalent, will be procured by NCB. Goods estimated to cost less than US$50,000 equivalent per contract, upto an aggregate amount not to exceed US$200,000 equivalent, will be procured under contracts awarded on the basis of National Shopping. Prior review thresholds (Table B) Civil works contracts each estimated to cost -the equivalent of US$200,000 and more will be subject to prior review. Civil works procured with community participation with an individual contract value of more than US$30,000 and the three first contracts procured through quotations obtained from at least three qualified domestic contractors in response to a written invitation, will also be subject to prior review. Procurement of goods with an individual contract value of more than US$50,000 will be subject to prior review. Contracts awarded on the basis of National Shopping will all be subject to prior review. Consulting services contract estimated to cost the equivalent of US$ 100,000 or more for the employment of firms and contract to cost the equivalent US$ 10,000 or more for the employment of the individual consultants will be subject to prior review. With respect to each contract for the employment of firms estimated to cost the equivalent of US$50,000 or more but less than the equivalent of US$100,000 will also be subject to prior review in accordance with the procedure set forth in paragraph 1, 2 (other than the second paragraph of paragraph 2(a)) and 5 of Appendix I to the Consultant Guidelines. Disbursement Allocation of loan proceeds (Table C) Use of statements of expenditures (SOEs): For the interim period until the disbursements are based on PMR, IDA may require withdrawals from the Credit Account to be made on the basis of SOE for the following expenditures: (a) for civil works under contracts costing less than US$ 200,000 each, (b) for goods under contracts costing less than US$ 50,000 equivalent each, (c) for consultants'services contracts costing less than US$50,000 in case of finns, and less than US$ 10,000 equivalent in case of individuals, and (d) for all training costs. Special account: A Special Account in US Dollars may be established, on terms and conditions satisfactory to IDA. For the interim period until the disbursement is based on PMR, an arrangement would be made to have an authorized allocation of US$ 2,000,000 and will follow the existing disbursement procedure (the authorized allocation will be reviewed at the time of negotiations when the Project goes to PMR based disbursements, the authorized allocation may go up to 20% of the credit amount). The PCU will submit replenishment applications for the Special Account on a monthly basis, or when 25% of the authorized allocation has been - 47 -  used, whichever occurs first. The replenishment applications will be supported by the necessary documentation which include a bank statement and a reconciliation statement. The IDA Special Account will be managed under the joint signature of the Program Coordinator and the Accounts Officer of the PCU. As per the government requirement, Special Accounts will be maintained at Nepal Rastra Bank (Central Bank). The Project will follow the prescribed accounting procedures as per the Financial Administration Regulations, 1999, and record daily transactions in the ledgers which are self-balancing. The PCU will ensure that the Bank/Cash books are reconciled with bank statements regularly every month. The books of accounts do not record commitment. A separate memorandum of records is maintained to track the procurement under various contract arrangements. Expenditures are categorized and coded under various budget items and accounts are maintained accordingly. Internal audit is carried out by the DTCOs on a regular basis to ensure that the accounting records are accurate. When the project qualifies for PMR based disbursements, the amount of the authorized allocation will vary to cover two trimesters expenditures financed by,the credit. This authorized allocation of the special account cannot exceed an amount representing 20% of the credit. The Special Account would be replenished at least trimesterly, based on the budget presented in the PMR, to assure liquidity of funds, and all replenishment applications would be accompanied by reconciled statements from the bank in which the account is maintained, showing all transactions-in the Special Account. Supporting documentation will be maintained by the PCU and PIUs for at least orne fiscal year after the year in which the last disbursement from the credit took place, and will be available for IDA: staff and independent auditors review. - 48 -  Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Procurement Method Expenditure Category ICB NCB O 2h N.B.F. Total Cost 1. Works 25.90 22.00 3.30 1.90 53.10 (20.80) (17.60) (2.60) (0.00) (41.00) 2. Goods 0.50 0.30 0.20 0.00 1.00 (0.45) (0.27) (0.18) (0.00) (0.90) 3. Services 0.00 0.00 10.40 0.00 10.40 (0.00) (0.00) (10.40) (0.00) (10.40) 4. Miscellaneous 0.00 0.00 0.00 0.00 O.00 __________ (0.00) (0.00) (0.00) (0.00) (0.00) Total 26.40 22.30 13.90 1.90 64.50 .________ _ (21.25) (17.87) (13.18) (0.00)c (52.30) " Figures in parenthesis are the amounts to be financed by the Bank Loan.All costs include contingencies 2'Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to (i) managing the project, and (ii) re-lending project funds to local government units. -49 -  Table Al: Consultant Selection Arrangements (optional) (US$ million equivalent) Consultant Selection Method Services Expenditure QCBS QBS SFB LCS CQ Other N.B.F. Total Cost Category V _ _ A. Firms 9.80 0.00 0.10 0.00 0.00 0.00 0.00 9.90 (9.80) (0.00) (0. 10) (0.00) (0.00) (0.00) (0.00) (9.90) B. Individuals 0.00 0.00 0.10 0.00 0.00 0.40 0.00 0.50 (0.00) (0.00) (0. 1 0) (0.00) (0.00) (0.40) (0.00) (0.50) Total 9.80 0.00 0.20 0.00 0.00 0.40 0.00 10.40 (9.80) (0.00) (0.20) (0.00) (0.00) (0.40) (0.00) (10.40) 1\ Including contingencies Note: QCBS = Quality- and Cost-Based Selection QBS Quality-based Selection SFB = Selection under a Fixed Budget LCS - Least-Cost Selection CQ = Selection Based on Consultants' Qualifications Other = Selection of individual consultants (per Section V of Consultants Guidelines), Commercial Practices, etc. N.B.F. = Not Bank-financed Figures in parenthesis are the amounts to be financed by the Bank loan. - 50 -  Table B: Thresholds for Procurement Methods and Prior Review Contract Value Contracts Subject to Threshold Procurement Prior Review Expenditure Category (US$ thousands) Method (US$ millions) 1. Works Over $500,000 ICB All mandatory $500,000 or less upto an NCB $200,000 or more aggregate amount of $22.0 million Individual contracts of less than $50,000 up to an Community Participation $30,000 or more aggregate of $2,000,000, cumulatively with contracts under direct contracting Individual contracts of less than $30,000 uptoan Through quotations First three contracts aggregate of $2,000,000 Individual contracts of $20,000 or less up to an Direct contracting All mandatory aggregate of $2,000,000, cumulatively with contracts under communicty partic. 2. Goods Over $200,000 ICB All mandatory Over $50,000 and less than NCB All mandatory $200,000 upto an aggregate of $300,000 Individual contracts of National shopping All mandatory $50,000 or less upto an ______________________ aggregate of $200,000 - 51 -  3. Services Contracts with consulting QCBS All mandatory firms of $100,000 and above For contracts of $50,000 or QCBS Limited; paragraph 1, 2 more but less than (excluding second $100,000 paragraph of 2(a)) and 5 of Appendix of 1 of Guidelines to apply Section V of the Guidelines All mandatory Individual consultants for contracts of $10,000 or more All mandatory In-country training, and ____________ _ overseas study tours Total value of contracts subject to prior review: $51 m Overall Procurement Risk Assessment Average Frequency of procurement supervision missions proposed: One every 3 months (includes special procurement supervision for post-review/audits) 1Thresholds generally differ by country and project. Consult 00 11.04 "Review of Procurement Documentation" and contact the Regional Procurement Adviser for guidance. - 52 -  Table C: Allocation of Loan Proceeds Expenditure Category Amount in US$million Financing Percentage A. Civil Works 27.90 100% of foreign expenditures and 55% 1. Development & Upgrading of of local expenditures Feeder Roads 2. Resettlement & Rehabilitation 1.00 Same as above Assistance, Implementation and Monitoring (excludes asset acquisition) 3. Rehabilitation of Strategic Roads 4.30 Same as above 4. Periodic Maintenance of Strategic 4.50 Same as above Highways B. Goods 0.10 100% for foreign expenditures, 1. Office Equip. for Roads Board 100% for local expenditures (ex-factory) and 90% for any local expenditure for other items procured locally 2. Office Equip. for Training 0.40 Same as above 3. Office Modernization and Equip. 0.40 Same as above for DOR C. Consulting Services & Training 3.40 100% 1. Technical Assistance for Institutional Strengthening, Training and Operational Audits 2. Construction Supervision of 5.10 100% Development & Upgrading of Feeder Roads 3. Construction Supervision of 0.50 100% Rehabilitation of Strategic Roads 4. Construction Supervision of 0.40 100% Periodic Maintenance 5. Pre-investment Studies 0.50 100% D. Refunding of PPF 1.50 E. Unallocated 4.50 Total Project Costs 54.50 Total 54.50 - 53 -  Annex 7: Project Processing Schedule NEPAL: ROAD MAINTENANCE AND DEVELOPMENT Project Schedule Planned Actual Time taken to prepare the project (months) _ First Bank mission (identification) Appraisal mission departure 03/15/99 04/12/99 Negotiations 07/20/99 09/15/99 Planned Date of Effectiveness 12/31/99 Prepared by: SASIN Preparation assistance: Hernan Levy, OED, Peer Review Bank staff who worked on the project included: Name Speciality Narayan D. Sharma Procurement Specialist Chris Hoban Highway Engineer Guang Chen Transport Economist Surendra Govinda Joshi Transport Specialist Dieter Schelling Rural Roads Advisor Sonia Kapoor Environmental Engineer Malcolm Jansen Environmental Specialist Hiroko Imamura Lawyer Ayse Kudat Social Development Advisor Afshan H. Khawaja Social Development Specialist Robert Saum Financial Management Specialist Bigyan Pradhan Financial Management Specialist Johana S. Thapa Team Assistant Anita Shrestha Team Assistant Beltrania Scarano Team Assistant Juan Gaviria TTL - 54 -  Annex 8: Documents in the Project File* NEPAL: ROAD MAINTENANCE AND DEVELOPMENT A. Project Implementation Plan Borrower's Project Implementation Plan, May 1999 B. Bank Staff Assessments Aide-Memoires, various missions (February 1998, December, 1998, May 1999) C. Other "Nepal: Road Maintenance and Development Project: Final Report", 17 Volumes, SMEC Intl. Pty. Ltd., Cooma, June 1999 (which includes detailed technical, economic, environmental, social screening and feasibility studies, and preliminary engineering designs and bid documents for construction of about 320 km and upgrading of 250 km of dry-weather roads). * I- Main Text * II- Economic Aspects