Nepal - Delivering Assistance in a Challenging Environment

8/2/2019 Nepal - Delivering Assistance in a Challenging Environment

1/163

Evaluation Study

Independent Evaluation Department

Reference Number: CAP:NEP2009-19Country Assistance Program Evaluation: 26194June 2009

Nepal: Delivering Assistance in a ChallengingEnvironment


2/163

CURRENCY EQUIVALENTS(as of 30 April 2009)

Currency Unit Nepalese rupee/s (NRe/NRs)NRe1.00 = $0.0125

$1.00 = NRs80.0560

ABBREVIATIONS

ADB Asian Development BankADBL Agricultural Development Bank LimitedADF Asian Development FundANR agriculture and natural resourcesCAPE county assistance program evaluationCPS country partnership strategyCSO civil society organizationCSP country strategy and programDFID Department for International Development of the United

KingdomDWSS Department of Water Supply and SewerageEFA education for allEIRR economic internal rate of returnFY fiscal yearGDP gross domestic productGRP Governance Reform ProgramGSP Governance Support Program Subprogram IGTZ Deutsche Gesellschaft fr Technische ZusammenarbeitIAP immediate action planIED Independent Evaluation DepartmentIEM independent evaluation missionkm kilometerLEMPP law, economic management, and public policyMDG Millennium Development GoalMfDR Managing for Development ResultsMOPAN Multilateral Organizations Performance Assessment NetworkMTEF medium-term expenditure frameworkNEA Nepal Electricity AuthorityNGO nongovernment organizationNRB Nepal Rastra BankNRM Nepal Resident MissionOPEC Organization of the Petroleum Exporting Countries Fund for

International DevelopmentPCR project completion reportPPP public-private partnershipPRSP Poverty Reduction Strategy ProgramPSMP Public Sector Management ProgramRBN Road Board NepalREDTP Rural Electrification, Distribution, and Transmission ProjectRFI rural finance institutionRFSDCP Rural Finance Sector Development Cluster Program


3/163

RIDP Rural Infrastructure Development ProjectRMDC Rural Microfinance Development Center LimitedRMP Rural Microfinance ProjectRRR Rural Reconstruction and Rehabilitation Sector Development

ProgramSARD South Asia Department

SASEC South Asia Subregional Economic CooperationSRN strategic road networkSSR school sector reformSTWSSP Small Towns Water Supply and Sanitation Sector ProjectSWAp sector-wide approachTA technical assistanceTDF Town Development FundTEVT technical education and vocational trainingTYIP Three-Year Interim PlanWSS water supply and sanitationWUSC water users and sanitation committee

NOTES

(i) The fiscal year (FY) of the Government and its agencies ends on 15 July. FYbefore a calendar year denotes the year in which the fiscal year ends, e.g.,FY2009 ends on 15 July 2009.

(ii) In this report, "$" refers to US dollars.

KEYWORDS

adb; agriculture; asian development bank; capacity development; conflict situation; country

partnership strategy; country strategy and program; donor coordination; education; energy;finance; gender and development; governance; inclusive growth; independent evaluationdepartment; infrastructure; millennium development goal; nepal; partnership; poverty reduction;private sector development; regional cooperation; results-based framework; sector assessment;transport; urban sector; water supply, sanitation and waste management

Director General H. S. Rao, Independent Evaluation Department (IED)Director R. B. Adhikari, Independent Evaluation Division 1, IED

Team leader K. Hardjanti, Principal Evaluation Specialist, IEDTeam members A. Anabo, Senior Evaluation Officer, IED

S. Labayen, Senior Operations Evaluation Assistant, IED

Independent Evaluation Department, CE-19

In preparing any evaluation report, or by making any designation of or reference to a particularterritory or geographic area in this document, the Independent Evaluation Department does notintend to make any judgments as to the legal or other status of any territory or area.


4/163

CONTENTS

Page

EXECUTIVE SUMMARY i

MAP viiiI. INTRODUCTION 1

A. Objective and Scope 1B. Methodology and Approach 1C. Key Findings of the 2004 Country Assistance Program Evaluation 1D. Trends in Performance Ratings 2

II. DEVELOPMENT CHALLENGES AND GOVERNMENT PRIORITIES 3A. Challenging Political, Social, and Economic Setting 3B. Governments Development Priorities and Strategies 5

III. ADBS COUNTRY STRATEGY AND PROGRAM 6A.

Evolution of ADBs Country Strategy 6

B. Results-Based Country Strategy and Program 7C. Incorporation of 2004 Country Assistance Program Evaluation

Recommendations 9D. Trends in Lending, Grants, and Technical Assistance Program 9E. Delivery of Country Strategy and Program 20052009 10F. Relevance and Strategic Positioning of ADB Assistance 11G. Institutional Performance 13H. Contribution to Development Results and Value Addition 17I. Overall TopDown Assessment 22

IV. PROGRAM RESULTS ACHIEVED AND PERFORMANCE ASSESSMENTS 23A. Performance Assessment of ADB Assistance to Key Sectors 23B. Overall BottomUp Assessment 39

V. OVERALL ASSESSMENT, KEY FINDINGS, LESSONS, AND RECOMMENDATIONS 39A. Overall Assessment 39B. Key Findings 39C. Lessons 41D. Key Recommendations 43

The guidelines formally adopted by the Independent Evaluation Department (IED) on avoidingconflict of interest in its independent evaluations were observed in the preparation of this report.

Marian Bond, Kishore Kumar Jha, Prithvi Raj Ligal, Jyoti Prasad Lohani, and Grace AgnesSevilla were the consultants. To the knowledge of the management of IED, there were noconflicts of interest of the persons preparing, reviewing, or approving this report.


5/163

APPENDIXES1. Evaluation Approach and Methodology 452. Evaluation Results for Sovereign Operations in Nepal 503. Socioeconomic Indicators 524. Features of ADBs Country Strategies in Nepal, 20022010 565. ADBs Lending and Nonlending Assistance to Nepal, 20042008 62

6. Partnering and Donor Coordination Activities and Programs 697. ADB Assistance Programs and Performance, 20042008 738. Stakeholders Perceptions Survey 959. Contribution of ADB's Assistance by Thematic Area 10110. Performance Assessment of ADB's Assistance by Key Sectors 107

SUPPLEMENTARY APPENDIXA. Stakeholders' Perceptions SurveySummary of Responses

Attachments: Management ResponseDEC Chair Summary


6/163

EXECUTIVE SUMMARY

Introduction

This is the second country assistance program evaluation (CAPE) for Nepal. The firstCAPE was completed in 2004 and covered 19882003. As before, the main objective of the

CAPE is to assess the performance of Asian Development Bank (ADB) assistance to Nepal toidentify lessons and provide directional recommendations for the formulation of futureassistance strategy and the implementation of operations. The CAPE therefore (i) assessesprojects and programs of the previous country strategy and program (CSP) not covered by theCAPE 2004; (ii) examines how the lessons and recommendations of the CAPE 2004 wereincorporated in the CSP 20052009; (iii) assesses the performance of the CSP 20052009 asof 31 December 2008; and (iv) provides findings and forward-looking lessons to assist in thepreparation of the next country partnership strategy (CPS). This includes how ADB assistanceresponded to the needs of a developing member country in political turmoil for the past decadeand what the experience of a results-based CSP has been.

Cumulative lending, grants, and technical assistance (TA) to the country from 1968 to

December 2008 was $2.3 billion to finance 111 sovereign loans; $390.6 million for 17 grantprojects; and $132.1 million for 279 TA projects. ADB also provided nonsovereign loans andequity investments, funded by ordinary capital resources, amounting to $58.6 million from 1989to 1996. During 20042008, ADB approved $574.7 million in assistance to Nepal from AsianDevelopment Fund resources, of which 61.8% was grant, 34.1% lending, and 4.1% TA.

The project success rate, based on the proportion of successful ratings in a total of 74projects, is 56.8%. Infrastructure and education projects show higher performance ratings.

ADB's country performance assessment ratings for Nepal are close to the average for all AsianDevelopment Fund recipient countries with slightly lower ratings for portfolio, social inclusionand equity, and governance.

ADB faced a challenging social, political and economic environment in Nepal during theCAPE period of 20042008. At the start of it, the political situation was extremely unstable,armed conflict was at its peak, life was severely disrupted, and development activities wereconstrained by violence and frequent strikes. The preoccupation of the Government of Nepal(the Government) with fighting the insurgency affected its implementation ability and limited itscapacity to make policy decisions or formulate and implement development programs andprojects. The absence of locally elected bodies and weak local capacity were additional keyconstraints on development in Nepal. Sustaining peace, formulating and adopting a newconstitution, conducting elections, and building the economy are some of the main challengesbeing faced by Nepal.

Nepal has opportunities and incentives to expand hydropower, tourism and services,

and export-oriented industries, but civil conflict, political instability, poor governance, and weakstructural reforms continue to hinder economic growth. Political instability (including governanceissues), infrastructure deficits, and labor market disruptions have created an unfavorableinvestment climate and are binding constraints on market-led growth. Large external andinternal migrations have taken place. The external migration has created large incomingremittances, which have financed Nepals growing balance of payments deficits and helped toreduce poverty, particularly in urban areas.


7/163

ii

Overall Assessment and Rating

The topdown assessment, based on an assessment of ADB's performance in terms ofstrategic positioning, institutional performance and contribution to development results, showsthat ADB assistance for the evaluation period was "successful" but on the borderline, indicatingthat areas for improvement exist. The bottomup assessment was based on the actual and

expected performance of ADB operations with regard to completed and continuing projects inkey sectors, following the standard evaluation criteria of relevance, efficiency, effectiveness,sustainability, and impact. This assessment reveals the performance of ADB assistance to be"partly successful." As many of the projects in the sector portfolio are active, the rating on sectorperformance may change over time. Implementation efficiency, the timely completion ofprojects, and the sustainability of project and program outcomes were identified as keyweaknesses. Combined, the topdown and bottomup assessments point to a "partlysuccessful" performance rating for ADB assistance to Nepal.

Key Findings

The evaluation determined that ADBs country strategy and operational plans for

Nepal were appropriate to the conditions prevailing in the country, very responsive to theconflict, and supportive of the Governments development priorities. They alsoincorporated, for the most part, ADBs strategic priorities, which evolved during the study period.In particular, the CSP 2004 was formulated in the context of ADB's Enhanced PovertyReduction Strategy 2004 and Long-Term Strategic Framework 20012015.

ADB delivered its assistance in a very difficult operating environment by adoptinga conflict-sensitive approach. ADB was able to continue implementing its program assistanceduring periods of conflict and political instability because of strong local community support andbecause the programs and projects were highly relevant and well aligned with the Government'sstrategy. ADB's strategic direction was to help the Government address the fundamentalproblems that had long hindered development in Nepal, e.g., exclusion and the lack of

connectivity in rural areas, finance for rural enterprises, or universal education. These wereaddressed through a combination of program and project grants and TA support channeledthrough civil society organizations (CSOs) and local communities, which helped to improveimplementation despite the insurgency, institutional weaknesses, and lack of elected localbodies. Conflict assessment and participatory approaches incorporated in all sector projects andprograms enabled ADB assistance to progress in many cases despite the challengingenvironment. However, there were timesgenerally unpredictablewhen the intensity of theconflict was high. The security situation at several project sites hindered implementation.

To some extent, the difficult environment offered greater opportunities for reforms,particularly in governance. Because of the Governments desire to reestablish its legitimacywhen it was being challenged, governance was prioritized in the development agenda. While

working with CSOs and local communities was a useful approach, the capacity limitations oflocal service providers meant that more systematic and effective monitoring and evaluation oftheir performance and prompt follow up actions would have further improved projectimplementation and provided opportunities to learn lessons for the future.

ADB spread its assistance widely to poor and excluded people to develop ruralinfrastructure, provide universal education and rural finance, and stimulate agricultureproduction and marketing. The priority was to assist the Government in dampening theconflict particularly in areas with deep poverty and exclusion. While this socially inclusive


8/163

iii

approach meant high transaction and supervision costs, initial project feedback indicates thatthe benefits were felt directly through improvements in irrigation and other services toagricultural communities, higher quality and availability of education for the poor and excluded,improved rural roads to bring excluded regions and communities into the economic mainstream,and the provision of basic water supply and sanitation in smaller towns and cities. Indirectly,benefits were felt through services from the projects themselves, wages earned on the projects,

local institutional strengthening and capacity development, and allowing the voices of the poorand excluded to be heard in public and political institutions previously dominated by narrowelites.

While early results are encouraging, the sustainability of such rural infrastructureas roads and irrigation is unclear as there is no certainty of a maintenance regime. Asustainable maintenance regime would require Government assistance as well as communityparticipation and ownership in asset management. Feedback from the stakeholders indicatedthat the design and quality of roads could have been better in terms of reducing the paving overof agriculture lands by, for example, using more bridges, and ensuring that they are strongenough to withstand rainy seasons.

Experience with supporting universal education through the sector-wide approachhas been positive. ADB's support to the Education for All Program for primary education usingthe sector-wide approach has so far been successful. The Government should develop andexpand primary and secondary education of higher quality and with easier access. In particular,the lessons and experiences gained from the implementation of ADB assistance to theGovernments school sector reform program in pilot districts will be invaluable for planningfurther actions towards the fully fledged adoption of school sector reform.

The experience of ADB assistance in promoting good governance by combatingcorruption, improving public service delivery, and strengthening capacity has beenmixed. Support for legal reform needs to go beyond assisting in drafting laws to achieve theintended development outcome. ADB tried to help reform governance and strengthen

anticorruption measures with program and TA supporting anticorruption legislation, theestablishment of vigilance centers and a personal information system for civil servants,procurement laws, and public financial management. However, there are major issues regardingthe capacity of the National Vigilance Center, the Office of the Prime Minister and local bodiesto implement the anticorruption strategy. Though important steps have been taken to pilotresults-based monitoring tools in some ministries and departments, it has been difficult totranslate new policy measures into organizational performance. ADB has provided considerableassistance to improve the legal and judicial system in Nepal through the drafting of manyimportant laws. However, the weakness is in the effective implementation of these laws. Thereare still many institutions in Nepal with large capacity gaps, including the judiciary, andenforcement needs to be strengthened if the legal and judicial systems in Nepal are to lead tothe intended development results. Political instability created further difficulty in addressing

weak governance and corruption.

Issues related to project implementation go beyond political instability andconflict. While the conflict, security concerns, and transport strikes have been importantreasons for implementation delays, other factors persistently affecting project implementationare project design deficiencies; start-up delays; frequent changes of project officials; andconstraints on budgets, institutional capacity, and project monitoring and evaluation.


9/163

iv

The results-based approach introduced by the CSP has been useful to theGovernment and ADB as it tried to identify links to the results sought by the Governmentto which ADB will contribute. ADB is acknowledged among development partners for takingthe lead in the Government-led results-based approach (i.e., Managing for DevelopmentResults [MfDR] process) to improve development effectiveness. However, only a few indicatorswere given for Pillar 1 (broad-based growth) targets to start with, and tracking indicators for

intermediate outcomes were introduced subsequently in later years. There is still a lot of scopefor further improvement, particularly in terms of reporting on outcomes, ADB contribution, andadding the results of ADB's TA operations as well. Moreover, on the Government's side,mainstreaming the tested approach and internalizing it will be fundamental for continuedsuccess and sustainability.

Lessons and Implications

ADBs support for infrastructure was affected by the conflict, policy andinstitutional constraints, and low public investment. The lack of roads and severity of powershortages are major impediments to economic growth, social development, and povertyreduction in Nepal. Accessibility has improved through the extension and upgrading of key

sections of the strategic road network, particularly in the eastern region of the country, and ADBhas provided sustained support to the energy sector. Even so, the efficiency and sustainabilityof ADB-funded infrastructure projects were affected not only by the conflict but also byinfrastructure policy, institutional, and capacity constraints, particularly the lack of reform, and bylow public investment.

Rural and urban roads and power supply are necessary to address infrastructuredeficits. There is a growing influx of people from rural to urban areas, putting pressure onroads, housing, and public utilities and requiring the development of urban infrastructure.Opportunities have emerged to develop large power projects to generate export revenues andgain economies of scale in supplying power to domestic market. This scenario illustrates theneed to make clear strategic choices so that small and large, rural and urban infrastructure

projects can be appropriately timed and sequenced. Pursuing these options would require a lotof capital investment that should come from mobilizing the resources of the private sector, aswell as from other development partners. ADB should play a catalytic role in this regard,something similar to the approach taken for West Seti Hydropower Project.

Risks to long-term macroeconomic sustainability and inclusive developmentremain, despite success in recent years. Regarding risks to macroeconomic stability, loosemonetary conditions have made the financial system vulnerable, as negative real interest ratesand capacity limitations for bank regulation and supervision continue to widen trade imbalances.Lagged impact of the global financial crisis may lead to reduced inflow of remittance, touristexpenditure, and foreign grants. Despite Nepals financial accountability analysis in 2002, theGovernment-led public expenditure and financial accountability exercise in 2006, and the Public

Procurement Act of 2007, the management of public finances in Nepal has deteriorated inrecent years, and inherent weaknesses persist. There has been under-spending of governmentbudget on development works during the first 8 months of the current fiscal year. Theimplementation of many ADB supported rural-based projects is moving slow. Given these andthe protracted and complex political transition, sustaining economic growth and povertyreduction momentum will be challenging in the coming years.

Local and regional user groups need to be included more in the budgetary process. Overthe past few years, a system of performance-based funding of local bodies has been piloted,


10/163

v

and medium-term budgeting introduced, in districts, municipalities, and villages. If inclusivegrowth is to continue, the Government will need to focus on the continued delivery of socialservices to rural and urban areas.

Continued ADB assistance during the conflict situation was possible throughactive involvement of CSOs.ADB continued its operations even during the insurgency, limited

implementation and outreach capacity, and absence of elected members in the localgovernments. During this challenging phase, as prevailing lawlessness and insecurity made itmore difficult for ADB to establish direct contact with local communities, the CSOs have filledthe niche. The role of CSOs for building consensus among political parties and warring factionsat the local level, as well as for social mobilization and raising awareness within the communitywas essential.

Community projects need to be consistent with capacity.ADB experienced capacityconstraints in local governance, as it is still weak and procedures for transferring funds to localauthorities are not yet in place. Reform for local government finance and a more effectivesystem of supervising and monitoring CSOs are necessary steps toward gradualdecentralization and a more effective public service delivery. They need to take place

simultaneously with clear national and local roles. The number of districts, regions, and CSOswith which ADB operates should be consistent with its capacity for project design andimplementation support.

Continued support for policy advice is needed. Improved capacity and humanresource development at all levels in the government are crucial for sustaining sound fiscalmanagement and maintaining macroeconomic stability and peace. There is a pressing need forpost-conflict support to assist the Government in strategizing and policy making in all areasrelated to binding constraints on development, as Nepal is going through a critical time of post-conflict recovery. Economic and sector work would be useful in the area of cooperatives (rules,regulations, supervision), remittances, quality assurance and sustainability in local community-driven development works. This can be achieved by providing cluster TA under the ADB Nepal

Resident Mission (NRM) that could respond to the country's urgent requests.

More delegation to NRM together with necessary additional resources. NRM hasalways been essential to the responsiveness of ADB assistance. Although the challenges facingNepal and the difficulty of working in rural communities have added to the NRM workload and,in some cases, slowed the pace of implementation, it is clear that project implementationimproved once project responsibility was moved to NRM. As of end 2008, NRM had 12delegated projects from 7 in 2004. But its national officers increased only to 12 from 10 in 2004and its international professional staff remained at three, including the country director.

While the strategic focus of the CSP was relevant in 2004, it needs to be fine-tunedfor the future, taking into account the country's binding constraints, Government's

priorities, and ADB's long-term strategic framework 20082020 (Strategy 2020). There is aneed for continued assistance to the Government in addressing infrastructure deficits and socontribute to achieving economic development through increased connectivity, access andsocial inclusion. Equally importantand, to a certain extent, re-enforcingis to provide furthersupport to improving governance by strengthening institutional capacity for public servicedelivery and results-based management, and by reducing opportunities for corruption throughsupport and policy dialogue for law enforcement and better transparency in public spending.While long-term engagement is important for achieving development results, a narrowly focusedapproach to sector and subsector coverage would be expedient. Combined with these, private


11/163

vi

sector development and regional cooperation are other areas for continued ADB assistance.

Key Recommendations

The CAPE puts forward the following directional recommendations for consideration byADB management in formulating and implementing future country partnership strategies and

operations. The proposed recommendations would help a country moving towards lasting peaceby addressing its infrastructure and governance deficits, deep-seated social exclusion, largeregional inequalities, and lack of economic opportunity for the poor.

Infrastructure-Led Inclusive Growth Strategy. In line with the Government's prioritiesand policies as set forth in the Three-Year Interim Plan (2006/072009/10) [TYIP], and with

ADB's Strategy 2020, ADBs inclusive growth strategy should continue. Considering thechallenging political milestones ahead, the strategy should retain its flexibility. A shorter-termstrategy may be considered, given the likelihood that the TYIP will be extended for another 23years and that it will be some time before a new long-term poverty reduction strategy ordevelopment plan is formulated.

Assistance to infrastructure is fundamental to achieving inclusive economic growth,poverty reduction, and regional integration. More emphasis is needed on policy and institutionalreform and on addressing constraints on absorptive capacity. ADB needs to fine-tune thecurrent strategy with more emphasis on efficiently and sustainably expanding transport systemsfor connectivity, both within the country and with neighboring countries, to facilitate themovement of goods and people.

In the power sector, ADB assistance should look at the feasibility of developing large,environmentally friendly hydropower projects and micro projects for small communities notconnected to the national grid. It should reduce transmission losses, promote clean energy, andimprove core infrastructure. Institutional development should be supported by ADB and otherdonors with a long-term strategic approach that considers the role of private investment, public-

private partnership, how prospects for private investment can be improved, and howgovernment capacity can be built.

Governance, Capacity Development and the Results Framework. The country wouldbenefit greatly from good governance and greater transparency and accountability. ADB shouldcontinue its support for good governance and building the capacity of key public institutions,both local and central, to improve the delivery of public goods and services, make it more costeffective, and broaden inclusiveness. Good governance requires continued improvements inpublic policy, public institution management, the incentive framework for civil servants,regulatory capacity, and the rule of law. ADB should focus on strategic actions that can keep thegovernance reform agenda moving forward, particularly in public resource management, localgovernment, and electricity regulation, as well as supporting the development of a road map for

governance. Institutional strengthening and capacity development in government are crucial forimplementing and sustaining reforms in infrastructure, decentralization, and public sectormanagement. The adoption of results-based monitoring tools to assess performance anddevelopment results against targets has facilitated improvement in governance in Nepal. ADBshould continue to provide assistance to strengthen capacity in the ministries where MfDR isalready in place and to extend capacity development for monitoring and evaluation results toother ministries that wish to use MfDR. MfDR practices should be able to inform and contributeto ADB's corporate results framework.


12/163

vii

Private Sector Development and Regional Cooperation. Private sector developmentand regional cooperation should be supported, in line with their importance in the Government'sTYIP and ADB's Strategy 2020, as well as with the availability of opportunity. Creating anenabling environment for the private sector in Nepal is contingent on political stability; improvedgovernance and infrastructure; solutions to long-standing labor problems; an improved policyenvironment, particularly for investment and trade; and a legal system in need of overhaul and

strengthening. ADB assistance is required to remove constraints, such as those on physicalinfrastructure and governance, and to improve the policy environment for investment and trade.ADB's support to capacity building and policy advice for public-private partnerships ininfrastructure development (roads, power and water supply) has produced initial encouragingresults. ADB should continue to support and promote public-private partnerships ininfrastructure. For this purpose, partnership between ADB's South Asia and Private SectorOperations Departments is crucial.

ADB should continue its support for regional cooperation and integration in order tocreate benefits from economies of scale and market access, and accelerate trade and growth.In particular, ADB could help Nepal to realize higher growth through integration and closer linkswith its neighbors, People's Republic of China and India, realizing Nepals immense potential for

hydropower and tourism. It would be mutually beneficial to the People's Republic of China,India, and Nepal to cooperate in tourism, trade, and energy sector development.

The following is a summary of the key recommendations for ADB Management'sconsideration in formulating the new country partnership strategy and business plans and theirimplementation:

Recommendations Responsibility1. Infrastructure-Led Inclusive GrowthContinue to support transport, power, and water supply in rural areas andselected cities, and irrigation and water resource management to addressinfrastructure deficits hindering inclusive growth, with increased attentionto policy and institutional reforms to achieve long-term effectiveness andsustainability.

South Asia Department(SARD)

2. Governance, Capacity Development and the Results FrameworkContinue to promote good governance and build the capacity of keypublic institutions, both local and central, to improve the delivery of publicgoods and services, broaden inclusiveness, and enable results-basedmanagement for better development results of ADB assistance.

SARD

3. Private Sector Development and Regional CooperationAssist in removing key policy and institutional constraints on inwardinvestment, public-private partnership, trade, and mobilizing financialresources.

Increase regional cooperation and integration to allow Nepal to benefitfrom economies of scale and market access, accelerate trade, andpromote tourism.

SARD and Private SectorOperations Department(PSOD)

H. Satish RaoDirector GeneralIndependent Evaluation Department


13/163


14/163

I. INTRODUCTION

A. Objective and Scope

1. This is the second country assistance program evaluation (CAPE) for Nepal. The firstCAPE was prepared in 2004 covering 19882003. As before, the main objective of the current

CAPE is to assess the performance of Asian Development Bank (ADB) assistance to Nepal toidentify lessons and provide directional recommendations for the formulation andimplementation of future assistance strategy and operations. The CAPE therefore (i) assessesprojects and programs of the previous country strategy and program (CSP) not covered by theCAPE 2004; (ii) examines how the lessons and recommendations of the CAPE 2004 wereincorporated in the CSP 20052009; (iii) assesses the performance of the CSP 20052009 asof 31 December 2008, including also how ADB assistance responded to the needs of adeveloping member country (DMC) that had been experiencing political turmoil for the lastdecade, and what has been the experience of a results-based CSP; and (iv) provides findingsand forward-looking lessons to assist in the preparation of the next country partnership strategy(CPS).

B. Methodology and Approach

2. The CAPE methodology is based on the CAPE guidelines.1 The topdown assessmentexamines the relevance and strategic positioning of ADBs strategy and program, ADBsinstitutional performance, and its contribution to development results and value addition. Thebottomup assessment examines the performance of lending, grants, and nonlending technicalassistance (TA) in key sectors in terms of relevance, effectiveness, efficiency, sustainability, andimpact. The main sources of information for CAPE preparation included literature reviews andsecondary data; interviews with ADB, government, and development partner officials; site visits;and a perception survey of key stakeholders. Appendix 1 presents the detailed evaluationapproach and methodology.

C. Key Findings of the 2004 Country Assistance Program Evaluation

3. Over the period 19882003, ADB supported Nepals socioeconomic development with48 loans amounting to $1.4 billion for a total of 47 projects and programs. ADB managed tocomplete most of the projects it started despite difficult circumstances related to conflict, risinginsurgency, and the unstable political situation, which took a large share of governmentresources and affected economic growth. The CAPE 2004 focused mostly on sector-levelperformance. In the sectors that were assessed, the CAPE identified key factors that hadimpeded the effective delivery of development assistance, including (i) poor implementationperformance, (ii) inadequate attention to transport and rural development, (iii) inadequate timehorizons for capacity building, (iv) excessive project complexity, and (v) limitations onperformance posed by the unfolding political conflict.

4. The CAPE 2004 recommended to ADB (i) that the next CPS be sharply focused, easilyunderstood, and acted upon by ADB; (ii) to allow a large degree of flexibility, given the country'ssituation; (iii) to be clearly focused on sectors that had been proven to be successful and thatwould additionally contribute directly to the improvement of incomes of socially and regionallydisadvantaged people, such as road transport including rural infrastructure; (iv) that modality be

1 ADB. 2006. Guidelines for the Preparation of Country Assistance Program Evaluation Reports. Manila. The CAPEmethodology is covered in chapter II.


15/163

2

focused on sector loans or sector development programs rather than project and program loans,as the latter had had relatively lower success rates; and (v) to ensure that large-scale projectsare in conformity with the future strategy that could conceivably take Nepal to a higher level ofdevelopment. Two other major recommendations to the Government were to focus ongovernance and institutions in priority sectors, and to monitor the delivery of results. No overallperformance rating was given in the CAPE 2004; however, based on its narrative information,

the 2008 Annual Evaluation Review interpreted it as partly successful.2

D. Trends in Performance Ratings

5. Of the 74 projects (approved in the 1970s to 2000s) evaluated at their completion andduring postcompletion, 56.8% were rated "successful" or better (Appendix 2). This success rateis below the ADB-wide average of 65%. The trend in project success ratings was mixed.Projects approved in the 1970s had the highest success rate (81.3%), followed by a sharpdecline to 45.2% for those approved in the 1980s, and a recovery to 60% for those approved inthe 1990s. Two projects that were approved in the 2000s and evaluated at their completionwere found "partly successful." Furthermore, relatively low project success rates were found in(i) law, economic management, and public policy (LEMPP) (0%); (ii) energy sector development

(0%); (iii) industry and trade (20%); (iv) basic education (33.3%); and (v) agriculture (production,processing, sector development) and livestock (37%). Higher rates of project success wereshown in hydropower and transmission (100%), nonformal and vocational education (100%),roads (83.3%), irrigation and drainage (77.8%), water supply (75%), and civil aviation (66.7%).

6. Nepal is an Asian Development Fund (ADF) recipient, with its allocation based oncountry performance assessment (CPA) carried out by ADB since 2001.3 The trend incomposite country performance ratings4 over 20052007 was slightly upward, but overall it wasclose to average for all ADF recipient countries. The low-performing CPA dimensions have beenportfolio; social protection and labor policy; property rights; and transparency, accountability,and corruption in the public sector. However, there has been an increasing trend in compositecountry performance ratings. Yearly approvals5 of ADF resources for the country from 2004 to

2008 are shown in Figure 1.

2

ADB. 2008. 2008 Annual Evaluation Review: Lessons from a Decade of ADB Country Assistance ProgramEvaluation. Manila.

3ADB. 2001. Policy on Performance-Based Allocation for Asian Development Fund Resources. Manila. The policyon the program-based approach was revised in 2004 to place greater weight on performance, especially regardinggovernance. (ADB. 2004. Review of the Asian Development Bank's Policy on the Performance-Based Allocation ofAsian Development Fund Resources. Manila. [R249-04, 19 November].)

4ADB. 2006. 2005 Annual Report on ADB's Country Performance Assessment Exercise. Manila; ADB. 2007. AnnualReport on the 2006 Country Performance Assessment Exercise. Manila. and ADB. 2008. Annual Report on the2007 Country Performance Assessment Exercise. Manila.

5 Based on actual yearly approval of loans and grants to Nepal from 2004 to 2008, with no approvals in 2005because of the difficult political situation in the country.


16/163

3

0

20

40

60

80

100

120

140

160

180

2004 2005 2006 2007 2008

Amountin($m

illion)

Loans Grants

Figure 1: Yearly Approvals of Loans and Grants to Nepal, 20042008

Source of basic data: ADB loan, technical assistance, grant, and equity approvals database.

II. DEVELOPMENT CHALLENGES AND GOVERNMENT PRIORITIES

A. Challenging Political, Social, and Economic Setting

7. Political Landscape. Civil conflict, political instability, poor governance, and weakstructural reform, particularly over the past decade, have hindered economic growth and povertyreduction in Nepal. Early in the CAPE period, the political situation was extremely unstable, witharmed conflict at its peak, posing serious difficulties for ADB operations in the country. During20012005, many parts of the constitution were suspended in response to the evolving situationand as a result of direct rule by King Gyanendra. Life was severely disrupted; politicalpolarization increased; and development activities were highly constrained by violence, frequentstrikes, and long closures caused by intense insurgency, except in towns in the KathmanduValley. The Governments preoccupation with fighting the insurgency affected its resource

allocations and implementation ability, limiting its capacity to make policy decisions or toformulate and implement development programs and projects. The absence of locally electedbodies since 2002 and weak local capacity constrained (i) Nepals decentralization process, (ii)

ADB operations, and (iii) the building of institutional structures between the Government andlocal agencies. The comprehensive peace agreement, signed in November 2006, was followedby an interim constitution. The interim Government's taking over from the monarchy broughtnew hope to the people and development partners. Constitutional elections were held in 2008,installing a Maoist-led coalition. However, the resignation of the Prime Minister on 4 May 2009created a vacuum in political leadership until a new Prime Minister was elected on 23 May 2009.The main challenges for the Government in the short term are sustaining the peace process,drafting and introducing a new constitution, and integrating peace into the development process.

8. Economic Performance. Nepals macroeconomic performance has remained stable inrecent years despite political upheavals, with slow economic growth of 3.8% per annum over20042008. Vulnerabilities in the financial system are reflected in negative real interest rates,property price increases, and high credit growth. The exchange rate peg to the Indian rupee hashelped contain consumer price inflation during the recent food and fuel price crises, but hasdamaged prospects for exports. Trade imbalances have widened. The budget deficit declined to2% of gross domestic product (GDP) in May 2008, albeit with weaknesses related to lower-than-planned capital expenditures, pressures on the budget for public capital expenditures on


17/163

4

infrastructure, and the large drain on the budget caused by losses incurred by the state oilcompany because of price controls on petroleum.

9. Binding Constraints. Nepal remains one of the poorest countries in the world, withinadequate infrastructure and weak governance as key binding constraints on economic growthand poverty reduction. With a lower road density and paved road percentage than its regional

neighbors, Nepal has the lowest road infrastructure quality in South Asia. Power shortages arerampant. The absence of a well-planned rural, urban, and interconnected system of road andpower infrastructure constrains the expansion of agriculture and industry in rural areas. Theinfrastructure deficit is also a major impediment to attracting inward investment and allowingpeople access to social services. Civil conflict and political turmoil have disrupted labor andcommodity markets, causing loss of potential output and both external and internal migration.Internal migration has put further pressure on limited infrastructure and public utilities in urbanareas. Civil conflict and political turmoil have created an unfavorable investment climate, withthe investment rate stagnating or declining during most of the past decade. The other majorconstraints on investment include (i) property rights issues and lack of security, (ii) an inflexiblelabor market with highly politicized trade unions, (iii) weak governance and perceived corruption,and (iv) currency inconvertibility and a fixed exchange rate. These constraints have made the

country one of the least competitive in the region, ranked 111 out of 178 by Doing Business2008,6 with foreign direct investment extremely low at 0.4% of capital formation.

10. While the country is between the two large economies of the People's Republic of China(PRC) and India, its location has not helped in terms of access to supply chains or economies ofscale in production. This is because of policies as well as logistical constraints. The formal tradeimbalance with India, which accounts for twothirds of Nepal's trade, continues to expand, largelybecause of the administratively fixed exchange rate for the Indian rupee at Re1.00 equalsNRs1.60 since 1988. This, coupled with restricted market access, creates disincentives for localNepalese producers and suppliers. At the same time, import growth has been strong because ofhigher consumption expenditure funded largely by remittances from Nepalese living andworking abroad. Incentives for capital flight have risen because of security concerns, weak

governance, negative real interest rates, and the fixed exchange rate with Indian currency. Highand growing balance of payments deficits have, however, been more than offset by remittances,which now provide 18% of GDP. Since the rescinding of the Multi Fiber Agreement quotas in2004, Nepal's textile exports have stagnated, with growth of almost 12% by value in fiscal year(FY) 2001 falling to less than 3% by FY2006. Nepals accession to the World TradeOrganization has not boosted its exports. Real exchange rate appreciation in recent years, asthe US dollar fell against the Indian rupee, hobbled Nepal's export competitiveness and ability toattract investment. Nepal's porous border with India and its policy and institutional weaknessesallow unrecorded trade and currency movements, which undermine the overall effectiveness ofeconomic policy and growth performance.

11. The principal development challenge for Nepal is poverty reduction, the pace of which

has been limited by slow growth. The conflict is believed to have been intimately linked withpoverty and social exclusion. Most of the benefits of development have accrued to theKathmandu Valley and a few other urban areas, excluding large segments of the population.Rural households' poor access to health and education services and to economic opportunitybecause of infrastructure deficit and weak service delivery has contributed to uneven povertyreduction. Nepal's socioeconomic indicators are shown in Appendix 3.

6World Bank. 2007. Doing Business 2008. Washington, D.C.


18/163

5

B. Governments Development Priorities and Strategies

12. While economic growth and poverty reduction have been the overriding goals ofdevelopment efforts in Nepal, the transition to a multiparty democratic system in the early 1990sraised people's aspirations and political attention. The objective of the Government's EighthPlan (1991/921996/97) was to reduce poverty by accelerating economic growth, expanding

employment opportunities, and providing economic and social services to the poor andbackward regions as a priority. It initiated an extensive reform agenda to remove distortionsfrom Nepals economic and administrative structures and to open the economy to private sectorparticipation. While the plan had relevant policies, it failed to accomplish the stated goals inseveral areas.

13. The Ninth Plan (1997/982001/02)advanced the poverty-reductionagenda further withthe stated goal of reducing the income poverty rate from 42% to 32% by its end. The planplaced high priority on agriculture. The Agriculture Perspective Plan, formulated in 1995, aimedto raise agricultural growth to 4% per annum. But its implementation was disrupted by adversedomestic political developments, and it fell short of its targets.

14. The Tenth Plan (2002/032006/07) adopted Nepals first Poverty Reduction StrategyProgram (PRSP).7 In 2001, ADB provided TA8 to help the Government prepare this plan, whichbecame a key guiding document for the Government and its developing partners. It adopted aresults-based approach that included a results framework with performance indicators for majorsectors. It sought to address root causes of the conflict by reducing inequalities and bringingmarginalized people and underdeveloped regions into the mainstream of development. Thedifficulties the conflict posed for project implementation were recognized. Decentralization andthe promotion of service delivery through civil society organizations (CSOs), includingnongovernment organizations (NGOs) and community-based organizations (CBOs), wereproposed to facilitate the implementation of development activities. It had four pillars: (i)sustained high and broad-based economic growth; (ii) social sector and human development;(iii) targeted programs to foster the social inclusion of the ultrapoor; and (iv) good governance

for the effective, equitable, and efficient delivery of public services. Crosscutting themesincluded (i) redefining the role of the state to limit public sector intervention, (ii) enlisting theprivate sector and CBOs to provide public services, (iii) promoting community participation in themanagement of local development activities, and (iv) accelerating decentralization. The TenthPlan recognized that progress in good governance, the fourth pillar, was vital for theachievement of the other three pillars, and it fostered decentralization to ensure people's andcommunities' greater participation in governance. The strategy for fostering high and broad-based growth, the first pillar, depended on reviving growth in agriculture and a recovery inmanufacturing, tourism, and exports.9 Social development measures were initiated to improveservices delivery, the second pillar, through decentralization, greater involvement of local

7

National Planning Commission. 2003. The Tenth Plan (Poverty Reduction Strategy Paper) 20022007.Kathmandu.

8ADB. 2001. Technical Assistance to Nepal for Support for Preparation of the Tenth Five-Year Plan. Manila (TA3689-NEP, for $300,000, approved on 23 July). The TA scope was to (i) assess and identify long-term options forpro-poor development, (ii) identify priorities and strategies for poverty reduction based on realistic resourceestimates, (iii) ensure public participation and transparency in the planning process, and (iv) assist in developingeffective implementation and monitoring systems.

9In agriculture, crop and livestock production were to be commercialized with modern technology, rural transportlinks, and improved farmers' access to modern inputs and credit. For industry and exports, investment was to bestimulated by streamlining regulatory processes, amending labor laws, and reforming property rights that hadimpeded private sector development.


19/163

6

communities, and improved access to and quality of education.10 In implementing key sectorprograms, special attention was to be paid to ensuring access for women and mainstreamingdeprived communities, the third pillar.

15. The Government established a medium-term expenditure framework (MTEF) to enforcefiscal discipline and translate plans into action through an implementation modality called the

immediate action plan (IAP). The IAP that started in 2002/03 effectively became an annual plan,prioritizing key measures outlined in the Tenth Plan for immediate implementation, includingexpediting public service delivery by devolving public services. Public procurement, financialaccountability measures, and privatization were prioritized, and development programs targetedexcluded groups. The Government introduced a poverty monitoring and analysis system at thenational and district levels to collect and analyze data on the achievement of national planindicators. Indicative monitorable targets were included for overall, sector-specific, and keyhuman development variables. Recognizing the importance of effectively implementing andmonitoring the PRSP, the IAP included a participatory results-based framework for monitoringand evaluating performance using tracking indicators for the desired outcomes. Whileconceptually sound in general, the Tenth Plan had many ambitious targets, especially in light ofthe prevailing security and political situation. With political change and the emergence of the

new Government in 2006, the initiative also stalled.

16. Following the end of the Tenth Plan and the PRSP, the Government launched its Three-Year Interim Plan (TYIP) 2007/082009/10 to provide a framework for addressing developmentchallenges in the transitional period. The plan's goal is to bring about economic and socialtransformation by boosting investment in the postconflict period. It envisages an economicgrowth rate of 5.5% per annum by FY2010, more than double the 2.5% in FY2007, to provideemployment, lessen inequality, and reduce poverty incidence to 24%. To help achieve thesegoals, its stated priority areas include (i) physical infrastructure through physical reconstructionand rehabilitation, as well as providing conflict-affected people with relief for reintegration; (ii)investments to support development through the inclusion of excluded groups; (iii) revitalizingthe national economy with increased investments in physical infrastructure supporting

agriculture, tourism, and industry; and (iv) increased investment in education, health, watersupply, and sanitation to enhance the quality of human resources. The TYIP and the financeminister's budget speech for FY2009 emphasize the role of government, cooperatives, and theprivate sector as contributors to the country's inclusive development. Cooperatives are expectedto contribute to rural development, including agriculture, rural infrastructure, and finance. TheTYIP is likely to be extended for 23 years, as indicated to the CAPE mission by seniorgovernment officials, instead of formulating a new one, since its goal and priorities remainrelevant, and political transition, including writing a new constitution, will require time. TheGovernment was expected to announce this to its development partners at an annualdevelopment forum scheduled for mid-May 2009, which did not take place because of the thenPrime Minister's resignation.

III. ADBS COUNTRY STRATEGY AND PROGRAM

A. Evolution of ADBs Country Strategy

17. Nepal is a founding member of ADB and has a little more than four decades ofpartnership with ADB toward the country's economic growth and poverty reduction. The ADB-

10 The improved provision of essential health care and access to safe water, sewerage, and sanitation were expected

to result from devolving the management of health facilities to local communities.


20/163

7

Nepal partnership has seen many CSPs. More recently since 2002, ADB formulated one CSPupdate on the ongoing country operations strategy (COS), one new CSP, and two countryoperations business plans (COBPs) to support the Government in implementing the Tenth Planand the TYIP. ADB also conducted a CPS midterm review 20052009, which included anindicative rolling COBP 20092011 (see further details in Appendix 4). An examination of theindividual strategies, update, and business plans determined that ADBs country strategy and

operations plans for Nepal were appropriate to the conditions prevailing in the country, veryresponsive to the countrys development plans, and supportive of the Governmentsdevelopment priorities. They also incorporated, for the most part, ADBs strategic priorities,which evolved throughout the study period. The CSP 2004, in particular, was formulated in thecontext of ADB's Enhanced Poverty Reduction Strategy 2004 and Long-Term StrategicFramework (20012015).11

B. Results-Based Country Strategy and Program

18. A "results framework" is a useful management tool for the design and monitoring ofCPSs. It is used by the Government and ADB to assist in managing the whole CPS cycle. Itdefines the logical links among country level development goals, outcomes influenced by the

CPS, and ADB-supported interventions and partnerships. Indicators are the quantitative orqualitative variables that provide a simple and reliable means to monitor progress, and toassess achievements. In principle, good outcome indicators should be (i) specific and clearlyand directly related to the intended outcomes; (ii) measurable specifying quantity and quality;(iii) achievable realistic in what is to be achieved in a practical and cost-effective manner; (iv)relevant useful for management information purposes; and (v) time bound.

19. ADB embarked on piloting a results-based CSP in 2004, and the Nepal CSP 200509,approved in September 2004, was the first pilot results-based CSP. The CSP 20052009 is fullyaligned with the Tenth Plan (paras. 1415). It supports the country's development priorities andincludes four strategic pillars. The CSP identifies links to the results sought by the Governmentto which ADB will contribute and the outcomes that are expected during its implementation, and

it provides tracking indicators for implementation progress (although added subsequently). Itdoes not, however, establish any quantitative measures for ADB's contribution to national goalsand objectives.

20. In the original CSP results framework, only a few indicators were given and only for Pillar1 targets.12 They were actually the same as the Tenth Plan's goals. The CSP included thestrategic goals for the midterm development agenda to (i) achieve an annual average growthrate of 6.2% during 20022007, (ii) increase overall private investment to 23.5% of GDP by2007, and (iii) achieve annual average agricultural growth of 4.1% by 2007. Based on theinformation presented in the draft CSP completion report (2008), the achievements for the sameperiod were (i) GDP growth rate of 3.54%, (ii) overall private investment of 17% in 2007, and (iii)agricultural GDP growth of 2.82%. These were the Government's goals, and the achievements

fell short of the targets indicated in the CSP results framework.

21. The GDP growth recovered to 5.6% in 2008, as reported in the Asian DevelopmentOutlook 2009, which was due mainly to the sustained expansion of the services and a weather-

11

ADB. 2004. Enhancing the Fight Against Poverty in Asia and the Pacific: The Poverty Reduction Strategy of theAsian Development Bank. Manila; and ADB. 2001. Moving the Poverty Reduction Agenda Forward in Asia and thePacific: The Long-Term Strategic Framework of the Asian Development Bank (2001-2015). Manila.

12 The long-term goals for Pillar 1: (i) accelerate broad-based economic growth to 8.3% per annum by FY2017; and(ii) reduce poverty level to 10% by 2017.


21/163

8

induced recovery in agriculture, although the industry sector suffered from input supplydisruptions and labor agitation. Assuming normal situations concerning weather, politicaltransition, economic policies, and no disruptions in input supply, GDP growth is forecast to beslower at around 3.03.5% for FY2009 and FY2010.

22. The CSP draft completion report highlights progress in achieving physical milestones

contributing towards Pillar 1 and Pillar 2 targets. But the information is scant in terms ofcoverage and time frame, and the results are not necessarily linked to ADB assistance. UnderPillar 2: (i) ADB support to the Education for All (EFA) Program on a sector-wide approach(SWAp) basis has helped in significantly improving access to and quality of basic education; onthe vocational front, 5,000 pupils are being trained annually; (ii) 692 rural projects wereidentified and 10 town water supply projects completed; and (iii) womens and otherdisadvantaged groups involvement in ADB-assisted projects increased to 41% from 25%.

23. ADB is acknowledged among development partners for taking the lead in theGovernment-led results-based approach (i.e., the Managing for Development Results [MfDR]process) to improve development effectiveness. ADB provided assistance for these effortsthrough two TA activities, one at the country level (Operationalization of MfDR) and another at

the regional level (Mainstreaming MfDR in Support of Poverty Reduction in South Asia). 13 Whileselected ministries and district development committees14 that were covered by ADB'sassistance have been able to come up with results-based frameworks that contain baseline andtarget data, others did not have such capacity. The Government continued with results-basedapproaches in the subsequent TYIP with support from these TA operations.

24. ADB's Nepal Resident Mission (NRM) monitors progress towards results at the sectorand country levels through a bottomup process. For this, project results profiles and sectorresults profiles (SRPs) have been prepared. SRPs are consolidated into a country results profile(CRP), which provides a unified picture of ADBs operation in the country. A resultsmanagement team has been set up at NRM to coordinate the development of SRPs and theCRP, and to update the CSP. In addition, closer monitoring of the CSP results indicators,

among others, has helped in portfolio performance monitoring. The annual country portfolioreview mission is also being used to facilitate the adoption of MfDR in portfolio management.The benefit of conducting such exercises is that both ADB staff and government counterpartagencies gain clarity about the implementation progress. It has enabled drawing attention toareas that need improvement. Lessons from the first results-based CSP have been welldocumented in Learning by Doing: The Nepal Results-Based Country Strategy and Program.15

25. Overall, the results-based CSP and ADB's assistance to Nepal for MfDR adoption havebeen useful. However, there is still considerable scope for further improvement, particularly interms of reporting on outcomes, ADB contribution, and adding the results of ADB's TAoperations as well. Moreover, on the Government's side, mainstreaming the tested approachand internalizing it will be fundamental for continued success and sustainability.

13ADB. 2006. Technical Assistance for Operationalization of Managing for Development Results. Manila (TA 4765-NEP, for $0.4 million, approved on 13 February); and ADB. 2006. Technical Assistance for MainstreamingManaging for Development Results in Support of Poverty Reduction in South Asia. Manila (TA 6306-REG, for $1.9million, approved on 27 January).

14Ministry of Education, Ministry of Local Development, and Ministry of Physical Planning and Works (Department ofRoads, Department of Water Supply and Sanitation, and four district development committees (Jumla, Dang,Jhapa, and Dhanusa).

15ADB. 2006. Learning by Doing: The Nepal Results-Based Country Strategy and Program A Pilot for AchievingCountry Outcomes. Manila.


22/163

9

C. Incorporation of 2004 Country Assistance Program Evaluation Recommendations

26. The CSP 20052009 addresses many of the CAPE 2004 recommendations (para. 4).While it rightly aligns with the three strategic pillars of broad-based economic growth, inclusivesocial development, and good governance, the CSP includes a conflict-sensitive approach,which allows flexibility in project design to take into account changing circumstances during

implementation and more time for preparation to ensure beneficiary consultation. The CSPprovides increased allocation to road and rural infrastructure projects to contribute directly toimproving the incomes of socially and regionally marginalized groups (accordingly, 21.8% of theapproved value of loans and grants during 20042008 supported multisector ruralreconstruction and rehabilitation, and 19.8% supported transport and communications). Itincludes two fast-disbursing program loans for rural finance and education. Regarding largeinfrastructure projects, a power generation project in West Seti was added to the lendingpipeline; the same is under process. The CSP includes assistance to the Government forensuring good governance for policy improvement and local institutional development. Itsupports the development of the framework for results monitoring, which is considered a majorundertaking, and it is recognized that considerable capacity building is required at all levels ofgovernment to make monitoring effective.

D. Trends in Lending, Grants, and Technical Assistance Program

27. Cumulative lending, grants, and TA to Nepal from 1968 to December 2008 comprised$2.3 billion to finance 111 sovereign loans, $390.6 million for 17 grant projects, and $132.1million for 279 TA operations. ADB also provided nonsovereign loans and equity investmentsamounting to $58.6 million from 1989 to 1996.16 During 20042008, ADB approved $574.7million in total assistance to Nepal from ADF resources, of which 61.8% was grant, 34.1%lending, and 4.1% TA (Table 1). Because of the challenges posed by political uncertainty in thecountry, new loan and grant approvals were suspended in 2005. ADB assistance resumed inearly 2006 and shifted from lending to grants, and from projects to programs in some cases, asthe need for support in key sectors to achieve inclusive growth became more apparent and

urgent (Figure 2). All ADB sovereign loans and grants to Nepal were funded by ADF, while TAwas funded mostly by the technical assistance special fund. 17

Table 1: Approved ADB Lending, Grants, and Technical Assistance to Nepal, 20042008($ million)

Approval Loans Grants TA TotalYear No. Amount No. Amount No. Amount No. Amount2004 5 110.0 0 0.0 8 3.2 13 113.22005

a0 0.0 0 0.0 3 2.2 3 2.2

2006b

2 86.0 5 84.9 13 6.4 20 177.32007

b0 0.0 4 111.0 10 7.2 14 118.2

2008c

0 0.0 3 159.3 9 4.5 12 163.8Total 7 196.0 12 355.2 43 23.5 62 574.7

% Share toTotal Assistance 11.3 34.1 19.4 61.8 69.4 4.1 100.0 100.0ADB = Asian Development Bank, No. = number, TA = technical assistance.a

ADBs assistance in 2005 consisted of TA amounting to $2.2 million against the indicative country program forthe year comprising three firm loans for $110.0 million and eight TA operations for $3.5 million. Most of theloans and TA that could not be processed in 2005 were carried over to 2006.

16The last nonsovereign loan, or equity investment, approved for Nepal was in 1996. Nepals nonsovereign loans andequity investments were funded by ordinary capital resources.

17Details of ADB's lending and nonlending assistance to Nepal are in Appendix 5.


23/163

10

Education

10.9%

Finance

11.7%

Law, Economic

Management, and

Public Policy

19.3%

Health, Nutrition,

and Social

Protection

0.4%

Multisector

21.8%

Transport and

Communications

19.8%

Agriculture and

Natural Resources

16.1%

bThis includes two Japan Fund for Poverty Reduction grants, one approved in 2006 and the other in 2007.

cApprovals as of 31 December 2008.

Source: ADB loan, technical assistance, grant, and equity approvals database.

Figure 2: Sector Distribution - Amount of Loans and Grants to Nepal

(approved from 2004 to 2008)

Source: ADB loan, technical assistance, grant, and equity approvals database.

28. The sector focus of ADB lending, grants, and nonlending TA to Nepal approved during20042008 was consistent with the priority sectors and themes identified in the CSP 20052009, namely (i) agriculture and rural development; (ii) education; (iii) energy; (iv) finance; (v)transport and communications; (vi) water supply, sanitation, and urban development; and (vii)

governance. The COBPs for 2007200918

and 2008201019

support these priority sectors andthemes in the prevailing country context, but with an additional focus on reconstruction andrehabilitation. The CPS midterm review20 confirmed the relevance of this approach, as thecountry was still recovering from political instability.

E. Delivery of Country Strategy and Program 20052009

29. The CSP 20052009 pipeline of projects for the period 20052008 comprised 16 lendingand grant projects with an indicative ADF level of $524.5 million. As of December 2008, 79.4%($416.2 million) of the total planned assistance of $524.5 million had been approved. Of the totalnumber of projects in the pipeline (12 loans and four grants), 87.5% or two loans and 12 grantswere approved. In addition, five investment projects worth $187.0 million and two regional

cooperation grants worth $9.0 million are programmed for 2009, of which one multisectorproject21 has so far been approved (April 2009). Table A5.5 in Appendix 5 shows the approvedloans and grants from 20052009 compared with the lending pipeline.

18ADB. 2006. Country Operations Business Plan: Nepal 20072009. Manila.

19ADB. 2007. Country Operations Business Plan: Nepal 20082010. Manila.

20ADB. 2008. Nepal: Country Partnership Strategy Midterm Review 20052009. Manila.

21ADB. 2009. Report and Recommendation of the President to the Board of Directors on a Proposed Grant to Nepalfor the Emergency Flood Damage Rehabilitation Project. Manila (Grant 0150-NEP, for $25.6 million, approved on21 April).


24/163

11

30. The changes in the lending and nonlending program could be attributed to a number offactors, including (i) reprioritization of the Government's needs, (ii) expected annual allocation tothe country, (iii) performance of specific sectors, and (iv) project preparedness. For example,the CSP lending pipeline for 20052008 included three energy projects totaling $115.0 million:(i) the Rural Electrification and Renewable Energy Project for $40 million, (ii) the Power SectorDevelopment Project I for $30 million, and (iii) the West Seti Hydropower Project for $45 million.

However, no energy sector loans and grants were approved from 2005 to 2008.22 In theagriculture and natural resources (ANR) sector, only $19 million or 47.5% was approved ascompared with the planned amount of $40 million. This can be explained, among others, by thereprogramming for 2010 of the Decentralized Rural Infrastructure and Livelihood Project II. Mostof the activities planned under this project have been supported by the Rural Reconstructionand Rehabilitation Sector Development Program ($120 million). In addition, the plannedDecentralized Community-Based Water Management Support Project ($20 million) has beendropped.

31. The nonlending assistance pipeline for 20052008 comprised 41 TA activities worth$16.4 million. As of December 2008, $20.3 million or 90.2% of the programmed nonlendingprojects had been approved. The 2009 nonlending pipeline consists of 10 TA operations worth

$4.8 million, of which one23 in the ANR sector has so far been approved.

F. Relevance and Strategic Positioning of ADB Assistance

1. Relevance and Alignment

32. The relevance and alignment of ADB assistance is rated "substantial." The CSP 20052009 focuses on the countrys needs for broad-based growth, social inclusion, and governancein the conflict environment. The CSP aligns itself closely with the Governments Tenth Plan andPRSP,24 recognizing that it is necessary to work in rural areas, despite the conflict, to addresspoverty and deep-seated social exclusion. It adopts the Tenth Plan's participatory approach. Byengaging in extensive consultations and using their results, it reflects the knowledge of local

groups in the design and implementation of assistance projects.

33. As envisaged, congruent with the Government's policy, the CSP 20052009 adopts aconflict-sensitive approach that includes (i) simplified project design with a manageable set ofobjectives, (ii) greater community participation in project design to create community ownership,(iii) inclusiveness and poverty orientation by ensuring that the socially and ethnicallymarginalized both work on and benefit from projects, and (iv) transparency and accountabilityregarding the flow of funds. ADB has been at the forefront of working in conflict areas. Itswillingness to take a participatory approach to working with local organizations in conflict areashas served rural areas well. Projects have been simplified and based on the needs of differentregions, and community participation has been promoted, particularly in agriculture.

22The Rural Electrification and Renewable Energy Project was dropped, and there is no energy project in the pipelinefor 2009. The Power Sector Development Project I grant has been dropped; instead, a loan entitled ElectricityConnectivity and Energy Efficiency I is being processed, with approval planned for 2009. The West SetiHydropower Project is still a probable project and is estimated to be approved in 2009. The fact-finding missionwas undertaken in January 2008.

23ADB. 2009. Technical Assistance to Nepal for the Community Irrigation Project. Manila (TA 7229-NEP, for $0.75million, approved on 29 January).

24 The Tenth Plan and PRSP were developed with the participation of many stakeholders, including the ADB. Thisgave ADB a clearer perspective on the Governments development priorities.


25/163

12

2. Sector Selectivity, Focus, and Continuity

34. The selectivity and focus of ADB assistance demonstrate its responsiveness andflexibility in a difficult country situation and its long-term commitment to the sectors in which ithas been active. This dimension is rated "substantial"but on the low side. The CSP is spreadover seven sectors, which is an improvement over the 10 in the previous country strategy, but it

has more than 14 subsectors. Multisector assistance was added late in 2007, seemingly toaccommodate the TYIP's priority for rural reconstruction and rehabilitation, which does not seemto have been foreseen by the CSP. As envisaged in the conflict assessment, the CSP couldhave had an immediate and medium-term strategic approach,25 taking into account absorptivecapacity, and reconstruction and development needs. Rural infrastructure deficits are beingaddressed under agriculture, transport, and multisector assistance. While the CSP is wellintended to assist the Government in addressing rural infrastructure deficits and reconstructionpriorities, rather complicated project classification and division of labor for implementation arerequired for coordination in ADB as well as in the Government. Meanwhile, the CSP payslimited attention to addressing structural issues for further improving the long-term policy andregulatory environments at both the macro and sector levels.

35. Poverty in Nepal is predominantly rural, and agriculture dominates rural livelihoods, butagricultural growth is constrained by the deficit in infrastructure and by poor tradingopportunities. ADB has supported agriculture for the past four decades, but with limitedsuccess. The CSP 20052009 gives priority to agriculture but spreads assistance over morethan four subsectors, including rural infrastructure, rural finance, and women's legalempowerment, which do not quite fit in. Assistance does not include forestry, which was thecorrect decision, as other development partners are sufficiently active in that subsector. ADBhas focused its assistance geographically on excluded regions and social groups with thehighest incidence of poverty, bringing them into the economic mainstream by fosteringconnectivity across the country. This is consistent with the CAPE 2004 recommendations.

36. Geographical selectivity depended on areas needs; their comparative advantages in

productive potential, existing or potential; wealth creation for the poor and marginalized; anddonor coordination. Assistance has been balanced in regard to districts and regions, bearing inmind safety and security issues. Many of the districts covered by ADB projects had povertyrates above the national average. This geographic spread means that ADB's resources havebeen spread widely over rural areas and sectors, and the focus on rural areas has reduced theresources available for the urban areas in which ADB operates.

37. Meanwhile, at the sector level, the efficiency and sustainability of ADB-fundedinfrastructure projects have been affected by prevailing policy and institutional constraints. Thelack of institutional reform to alleviate management capacity constraints and a reliablemaintenance regime has limited the effectiveness of ADB road projects. The subsidy onpetroleum in the Governments price setting has caused shortages and additional costs to the

Government. In the power sector, the lack of an action plan or strategy and the inability to dealwith large transmission and distribution losses, receivables, and theft (which have had to berecovered by charging end users) have contributed to the poor financial health of the NepalElectricity Authority (NEA) and inadequate investment in hydropower generation. Growingcongestion in the Kathmandu airport, the only international airport in the country, continues forlack of facilities or regional flights from cities other than Kathmandu to neighboring countries.

25Mahat, Prakesh S. 2004. Transition and Post Conflict Strategy. Manila: Asian Development Bank.


26/163


27/163

14

economies in Nepal's development policy choices and efforts. It had no programs explicitly forfurther improving the policy and regulatory environments at both the macro and sector level tofoster long-lasting market-led economic growth and poverty reduction. Environmental protectionis another area in which the CSPs were weak in terms of strategic emphasis and the pipeline ofprojects. Gender and inclusiveness issues were, in contrast, consistently well covered.

3. Partnering and Donor Coordination

43. ADB continues to harmonize its assistance with development partners by implementingjoint action plans, strategic alignment, and synergies in program formulation andimplementation.26 The four major development partners in NepalADB, World Bank,Department for International Development (DFID) of the United Kingdom, and Japanhaveregular coordination meetings. ADB and the World Bank have held joint harmonization retreatsand meetings to discuss ways to support Nepals development in the postconflict environmentand to enhance aid effectiveness. The four institutions have held review meetings on jointoperations to consider important policy, operational, and sectoral collaboration issues.

44. Despite these coordination efforts, ADBs overall performance on key harmonization

indicators is less positive, according to the Nepal 2008 Paris Declaration Monitoring Survey. Forinstance, regarding joint missions, ADB reported that fewer than 11% of its missions werecoordinated with other development partners, which was less than a third of the nationalaverage of 36%. On joint country analytical work, ADB reported that none of its analytical workin 2007 was collaborated with other partners; the national average was 37%. Similarly, ADBreported that none of its TA was coordinated, compared with 14% for all overseas developmentassistance and partners.

45. Lately, there is a growing trend toward channeling ADB assistance through program-based approaches or SWAps by pooling funds in joint financing arrangements with otherdevelopment partners. In education, ADB is one of nine partners of the flagship SWAp for theimplementation of the Governments EFA Program, which has a well-established consultative

mechanism for joint policy dialogue and program implementation monitoring by the Governmentand development partners. Good practices of the program-based approach are emerging inother key sectors and/or thematic areas that ADB has actively supported. For example, a newmulti-agency-supported program, the Local Governance and Community DevelopmentProgram, led by the Ministry of Local Development, is jointly funded by ADB, CanadianInternational Development Agency, Denmark, DFID, Norway, Switzerland, and the UnitedNations, and the World Bank is considering joining. The Organization of the PetroleumExporting Countries (OPEC) Fund for International Development has provided $10 million incofinancing for the Rural Reconstruction and Rehabilitation Sector Development Program, andDFID is considering cofinancing $20 million of the program. The possibility of adopting a SWApfor rural roads is being discussed with the Government, World Bank, DFID, and SwissDevelopment Corporation (SDC) among other development partners. NRM has been proactive

in mobilizing donor partner cofinancing early in the identification stage of new projects, including(i) the Skills for Employment Project cofinancing from SDC, (ii) the Road Connectivity SectorProject cofinancing from OPEC, and (iii) the Road Network Development Project cofinancingfrom DFID.

46. Another example of multi-agency support is the promulgation of the Public ProcurementAct 2007 and the Public Procurement Regulations 2007, the results of rigorous coordination

26A matrix of donor partners and their activities and programs is given in Appendix 6.


28/163

15

among the Government, ADB, and the World Bank. Similarly, TA on Knowledge Transfer forPublic Procurement,27 approved by ADB in 2008 to strengthen the newly established PublicProcurement Monitoring Office, was prepared in coordination with the World Bank. Currently,

ADB, DFID, and the World Bank have a joint procurement review team headed by the Ministryof Finance to suggest best solutions for effectively implementing the Public Procurement Actand Regulations.

4. Portfolio Performance

47. Maintaining higher contract award and disbursement ratios to avoid risk to projects iscritical for improving portfolio performance. In 2008, ADBs CPS midterm review 20052009(footnote 20) noted that, despite the challenging environment, noticeable implementationprogress had been made in CSP priority sectors. In particular, the conflict-sensitive approachhad facilitated effective project implementation in many cases as described in the performanceassessment of key sectors (see Chapter IV of this paper).

48. Implementation issues such as delays in project start-up, lengthy procurementprocesses, frequent transfer of project staff following changes in political leadership, inadequate

staffing, untimely release of program budgets, and weak monitoring and evaluation continue tobe hurdles for the timely completion of projects. Furthermore, government efforts need to besignificantly strengthened to operationalize MfDR mechanisms, focusing not only on immediateinputs and outputs but also on longer term development outcomes and impacts.

49. In view of its commitment to deliver the envisioned results of its operations, ADB, inpartnership with the Government, tried to improve portfolio performance through severalinitiatives. Designed to enable improved portfolio performance are, among other initiatives, (i)adoption of the first results-based CSP, (ii) initiation of annual country portfolio review missionsthat involve the Government and development partners, (iii) establishment of an early warningsystem on portfolio performance, (iv) initiation of reforms to procurement and financialmanagement, (v) increased delegation of projects to NRM, (vi) increased staff monitoring and

supervision of their projects, and (vii) adoption of a screening mechanism to assess projectdesign early in project preparation. These initiatives are expected to improve portfolioperformance in the coming years.

50. The contract award and commitment ratio for loans and grants, including program loans,also improved, steadily increasing from 7% in 2004 to 24% in 2008. Further, there were no moreprojects at risk by the end of 2008, a marked improvement from the six (26.1% of the portfolio)in 2004, with the completion of the only at-risk project in 2008. This, however, does not includethe South Asia Subregional Economic Cooperation (SASEC) Information Highway Project,approved in 2007, which showed an unsatisfactory rating in terms of implementation progressbased on its project performance report as of 30 June 2009.

51. The disbursement performance of sovereign loans has improved substantially in recentyears. For instance, the disbursement ratio for project and program loans rose from 4.4% in2004 to 15.4% in 2008. Including grants, the disbursement ratio during the CAPE period morethan doubled in 2006 compared to the previous year (2005) and then remained relatively stableuntil 2008 (Table 2). However, the overall portfolio performance indicators such as contracts,awards, and disbursements ratings were still below the ADB-wide average.

27 ADB. 2008. Technical Assistance to Nepal for Knowledge Transfer for Public Procurement. Manila (TA7111-NEP,for $0.5 million, approved on 31 July).


29/163


30/163

17

and Related Operations: Delivering Services to Clients.31 NRM was established in 1989 and isregarded by in-country partners as adding value to ADB operations in Nepal. According to thefindings of the survey conducted as a component of the special evaluation study, there is strongconsensus among stakeholders that NRM has enhanced ADB operations in Nepal in suchareas as strengthening understanding of the country context, strengthening ADB partnerships inNepal, and heightening ADBs visibility in Nepal. The perception of CAPE survey respondents is

further supported by the 2006 Multilateral Organizations Performance Assessment Network(MOPAN) survey,32 which states that NRM is seen as generally flexible and responsive tochanging circumstances in the country, as demonstrated by its ability and willingness to balanceits mandate with careful consideration of the countrys current political situation. These factorshave contributed to the high relevance of ADB operations in Nepal. The external assessment isthat NRM is "highly effective."

55. The MOPAN survey results revealed a general external perception that NRM has limitedauthority to make significant decisions, requiring frequent consultations with ADB headquartersin Manila. In addition, ADBs contributions to harmonization efforts in terms of operationalpractices and procedures were perceived as limited by rigid administrative requirementsimposed by headquarters. The perception survey carried out by the CAPE indicated that about

two-thirds of the respondents felt that aid coordination at operational level needs improvement,as only 30.6% viewed it as satisfactory (Appendix 8).

H. Contribution to Development Results and Value Addition

1. Macroeconomic Stability and Growth Outlook

56. ADB contributed to Nepals macroeconomic stability by continuing its assistance overthe evaluation period, during which the country was in conflict and political transition. Netresource transfer to the coun

Documents

Nepal - Delivering Assistance in a Challenging Environment