56815 FAST TRACKBRIEF May 20, 2009 The IEG report "Nepal Country Assistance Evaluation, 2003-08," was discussed by CODE on May 20, 2009 Nepal Country Assistance Evaluation, 2003­08 The FY03-08 evaluation period was one of tumultuous political turmoil, conflict, and dramatic change in Nepal; today, prospects for sustainable peace are brighter, though still fragile. In such difficult and unpredictable conditions, formulating and implementing an effective development assistance strategy and programs were great challenges for development partners, including the Bank. To its credit, the Bank managed to remain constructively engaged in Nepal despite a challenging political and security context and has achieved some significant results on the ground. Nevertheless, the Bank's strategy was poorly adapted to the country's conflict situation and political instability, and until recently (FY08) underwent little adjustment in response to the rapidly-evolving conditions on the ground. Overall, the outcome of the Bank's program is rated moderately unsatisfactory. Many of the outcomes targeted under the social development pillar, notably improvements in access to basic education, healthcare, and water and sanitation services, were achieved, despite difficult country circumstances. However, most of the outcomes targeted under the other three pillars-- growth, social inclusion and governance ­ were not achieved. Looking forward, IEG recommends that IDA introduce greater realism into its strategy and program design and keep these flexible against a backdrop of a clear long-term vision, applying frequent course corrections in response to changing circumstances and consulting widely with national stakeholders and development partners. Given their importance in improving the living conditions of the poorest, agriculture and rural development need to be the centerpiece of IDA's assistance program. For the Poverty Alleviation Fund (PAF) to realize its potential, it needs to incorporate a mechanism to systematically track its impact on poverty and social exclusion, and its design needs to be adjusted to optimize benefits to the poor and socially- excluded. Finally, as long as prerequisites for policy lending are not met, SWAps can offer an alternative way of supporting public finance management and other institutional reforms. Other than through its existing portfolio of two hydropower projects, IFC did not make a significant contribution to Nepal's development over most of the review period. IFC's gradual re-engagement beginning in 2006 was successful, resulting in two Global Trade Finance Program (GTFP) investments, an investment in a domestic airline in 2008, a pipeline of investment projects in the financial sector, and a constructive dialogue with the government on the business climate. N epal is a small landlocked country with few natural resources and difficult terrain bounded by two giant and nascent economic superpowers, India and China. The country is largely dependent on low- During this period, the Bank's role in Nepal recovered from the low level of the early 2000s. As part of this renewed effort, IDA substantially contributed to the design of the government reform program. The 2002 CAS-PR productivity mostly subsistence agriculture for income and initiated a significant shift in Bank strategy. Since the late employment. Remittances from abroad have steadily 1990s, owing to the lack of progress in implementing increased over the last 15 years and now represent over 15 governance and economic reforms, Nepal had been placed percent of GDP. After accelerating in the 1990s following under the low-case lending scenario specified in the 1998 democratization and economic liberalization, economic CAS. The 2002 CAS-PR shifted the program to a base-case growth slowed, in part due to the decade-long Maoist lending scenario, and the 2003 CAS was prepared in its insurgency that started in 1996 and intensified in late 2001 wake. Total lending commitments in support of IDA's and to the lack of progress in implementing much needed strategy averaged US$150 million per year over the structural reforms. evaluation period, albeit with large annual variations. About half of new commitments over the period were made in Nepal is the 12th-poorest country in the world and the FY08 while there was none in FY06. In addition, IDA poorest in South Asia with a GNI per capita (Atlas conducted extensive economic and sector work, engaged in method) of US$340 in 2007. It is plagued by substantial policy dialogue, and provided substantial technical disparities by caste, ethnicity, gender, and geographic assistance. location. On the 2005 Human Development Index (HDI), Nepal ranked 142nd out of 177 countries, although the gap Two elements were consistently part of IDA's strategy over with South Asia has steadily declined over the last 20 years. the period. The first was fostering broad-based economic Despite the conflict and modest economic growth after the growth through strengthened public expenditure mid-1990s, remarkable progress was posted on social well- management, an improved environment for private sector being: income poverty incidence declined from 45 percent development, and agricultural growth and rural in 1996 to 31 percent in 2004 and most social indicators development. The second was social sector development. improved steadily. Moreover, although income inequality This was to be accomplished through investment in increased, disparities in access to basic services, based on education, health, and rural water and sanitation. Following gender, cast, ethnicity, poverty status and geographic the preparation of Nepal's first Poverty Reduction Strategy location declined. Paper (PRSP) in 2003, which coincided with the government's Tenth Plan, the strategy also increasingly During the period assessed by this Country Assistance emphasized two other themes: social inclusion and good Evaluation (CAE), fiscal years 2003-08, Nepal experienced governance. The Bank supported these through measures intense political turmoil, conflict, and change. This had to strengthen public financial management and to promote major implications for the implementation of IDA's decentralization. assistance strategy. Between 2002 and April 2006, democratic institutions were progressively suspended, and Development Assistance Coordination. The Bank in February 2005 King Gyanendra assumed direct rule. In successfully led in strengthening government ownership of addition to the political instability of the period, the Maoist and leadership in development assistance coordination in Insurgency, which had started in the 1990s, continued to 2002-03. However, its approach met with challenges as the escalate, with a serious deterioration of security. In April conflict and suppression of democracy intensified. 2006, the King was forced to restore parliament by a pro- Increasingly, many development partners took issue with democracy movement and eventually a peace agreement providing budget support against a backdrop of was reached with the Maoists. In April 2008, successful questionable legitimacy of government and elections were held for a Constituent Assembly and the implementability of government programs under the monarchy was abolished. A Maoist-led coalition conditions of conflict and political instability. Despite the government assumed power in September 2008. tensions among development partners, the Bank contributed to and led several productive partnerships: with With this highly fluid political and security situation as a DFID in financial sector restructuring, with the IMF in backdrop, IDA operated under three strategy documents macroeconomic management, and at the sectoral level with during the period of FY03-08: the 2002 CAS Progress Sectorwide Approaches (SWAps) in education and health. Report (CAS-PR) covering FY03-05, the 2003 CAS In addition, IDA, DFID, and ADB more recently initiated covering FY04-07, and the 2007 Interim Strategy Note a promising rapprochement on the peace and development (ISN) covering FY07-08. agenda that resulted in the preparation of a joint assistance framework in 2009. 2 Overall Assessment The promotion of private sector development encountered some initial success and some financial deepening occurred Bank strategy was relevant in that it was geared to Nepal's during this period. This was assisted by moderately longer-term needs and was based on several pieces of ESW. successful efforts to rein in the irresponsible lending The strategy was also closely aligned with the objectives practices of the two large state-owned commercial banks. defined by the government in the Tenth Plan/PRSP. However, from 2006 onward this healthy process of However, full ownership of the government's reform rationalization was partially rolled back as the political program was limited to a handful of technocrats in climate changed, the desire to use state banks to achieve Kathmandu. The relevance of the strategy was further social goals increased, and Central Bank leadership compromised by a lack of realism, above all with regard to weakened. Despite strong and steady support from IDA, political economy considerations. For example, IDA's little improvement in Central Bank regulatory and strategy did not factor in such considerations as the supervisory effectiveness has occurred and the environment of physical insecurity and political instability, restructuring of the two main loss-making commercial which was not conducive to achievement of politically banks has not been completed after seven years. Moreover, sensitive structural reforms; the ongoing Maoist Insurgency, although the CAS had sought either privatization or which made project implementation difficult; and the liquidation of these banks, their disposition is now difficulty of addressing governance issues when a majority of uncertain. Private investment failed to achieve the expected the population questions the legitimacy of the government. recovery, hampered by the impact of several factors, above all the negative impact of the conflict and related insecurity, Failure to account for the specific circumstances of Nepal (at and political instability and uncertainty on the investment least in formal strategy documents) during the review period climate. On this basis, the outcome of IDA's support to goes a long way toward explaining the low efficacy (that is, private sector development is rated unsatisfactory. the extent to which it achieved the outcomes that it had targeted) of the Bank's assistance strategy, except for social Although the Tenth Plan and PRSP had identified development and to some extent social inclusion. Bank agricultural development as a priority for reinvigorating assistance in basic service delivery, primary education, health, income and employment growth in rural areas, planned and rural water supply and sanitation, as well as its support Bank support to agricultural development did not for social inclusion in those same sectors, was characterized materialize. Given the centrality of agriculture to improving by substantial efficacy. Except for telecommunications, living conditions for the poorest, the failure to support efficacy was weak on interventions supporting broad based- agricultural growth constitutes a major setback to the growth, including support to the private sector and growth and poverty reduction goals that were at the heart agriculture. Efficacy was also negligible for the governance of IDA's strategy. On this basis, the outcome for IDA agenda. assistance to agriculture is rated unsatisfactory. Broad-Based Growth. The focus in this pillar was on public The 2003 10th Plan /PRS had laid out a range of expenditure management, private sector development, and environmental issues to be addressed, given the importance agriculture. IDA took the lead in the effort to improve the of environmental management for sustainable development quality of public expenditure management through policy and the well-being of the people of Nepal. IDA helped the advice and technical assistance for establishing output-based government to articulate an effective strategy for budgeting and a Medium-Term Expenditure Framework environmental conservation and management. Thus far, (MTEF). These activities yielded some positive results in the however, the strategy has not been operationalized and early part of the review period and allowed for an increase in there is little evidence of impact. pro-poor expenditure, particularly for education and health. However, with the dismissal of the champions of that reform Overall, because of the limited relevance of IDA's strategy in 2005-06, and their replacement by officials new to the and very low efficacy, the outcome of IDA assistance for concept of medium-term expenditure planning, the process broad-based growth is rated unsatisfactory. was almost entirely reversed. Due to political turmoil and lack of confidence in the government's budgetary process, at Social Development. IDA support was well aligned with least half of capital spending by development partners the government's main objective of increasing access to remained off-budget. Negligible progress was made in and quality of basic education and health while also restructuring state-owned enterprises and reducing their drain reducing disparities. Enrollment in primary education on the budget. Based on the failure to establish an improved increased significantly, and the proportion of out-of-school public expenditure management system and inability to create children of primary age declined dramatically, particularly fiscal space to increase social expenditure and public for girls and socially-excluded populations. However, there investment, the outcome of IDA support to improving public was little progress on quality of education. IDA's strategy expenditure management is rated unsatisfactory. relied on the assumption that community school 3 management would be sufficient to increase quality of Moreover, in the absence of systematic tracking of education and the community school management outcomes, there is thus far little hard evidence that it has committees would be able to monitor this quality. But this been an effective instrument for poverty reduction or that assumption remains untested as the evaluation of the pilot it has promoted greater empowerment and social inclusion. was delayed. The outcome of IDA's assistance for basic Partly as a result, other development partners have been education is rated moderately satisfactory. reluctant to participate. On this basis, the outcome of IDA support through the PAF is rated moderately unsatisfactory. IDA assistance helped the government meet several of its goals for extending access to health services and reducing Some progress was made toward the objective of social disparities in access. The health SWAp has been improving the diversity of the civil service, through IDA successful in scaling-up cost-effective public health support for an affirmative action policy. However, while it services, which are credited with contributing to sustained addressed the inclusion problem, a tremendous improvement of health outcomes over the CAE period. On achievement, the 2007 amendment to the Civil Service Act this basis, the outcome of IDA's assistance in health is did not include safeguards regarding pay-for-performance rated satisfactory. and risks of political interference. The outcome of IDA support in this area is rated moderately satisfactory. Access to safe drinking water and sanitation services in rural areas continued to improve during the CAE period, On balance, given the weight of IDA resources allocated to and disparities were reduced. IDA support facilitated some the PAF, the overall outcome of IDA support for social improvements in sustainable access to safe drinking water inclusion is rated moderately unsatisfactory. and sanitation and in promoting social inclusion with regard to this service, but in the absence of a sound Good Governance. IDA's strategy of supporting sectorwide monitoring and evaluation system, IDA's decentralization was highly relevant but, given the political contribution is difficult to establish. Moreover, IDA context and the fact that local elected governments had support has not been successful in achieving sectoral been suspended since 2002, it could not be implemented. institutional reforms. The outcome of IDA's support to The outcome of IDA support in this area is therefore rated rural water supply and sanitation is rated moderately unsatisfactory. satisfactory. IDA's objective of improving the autonomy and On balance, given that support to education represented accountability of the civil service was not met and little more than half of total IDA resources allocated to social improvement occurred over the CAE period. Moreover, development, the overall outcome of IDA's support for the 2007 amendment of the Civil Service Act carries a risk social development is rated moderately satisfactory. of significant unintended adverse consequences. Overall, the outcome of IDA support for civil service reform is Social Inclusion. Through its lending, IDA helped rated unsatisfactory. improve access to basic services for those who were socially excluded based on gender, caste, or ethnicity. The IDA's objective of improving accountability and efforts were especially effective in education, and to a lesser transparency of public finance achieved some significant extent in the health and water and sanitation sectors. The steps, such as passage of the Procurement Act, but it has outcome of IDA support in this area is rated satisfactory. had little impact on actually improving the quality and efficiency of public financial management. On the contrary, In the 2003 PRSP/CAS, the Poverty Alleviation Fund there has been some significant regression in the quality (PAF) initially aimed to support integrated infrastructure since 2005. Moreover, for most of the CAE period the development (drinking water, small-scale irrigation, Public Accounts Committee (PAC) at the parliament was schools, health posts, and trails) for the most disadvantaged suspended and could not oversee government accounts and communities in remote rural areas, including the socially end-of-year government financial statements were not excluded. It also aimed to strengthen the capacity of local disclosed. The outcome of IDA support for public finance institutions and help the government to better coordinate is rated unsatisfactory. support targeted to these populations. The PAF successfully placed money in the hands of socially excluded Overall, the rating for governance is unsatisfactory. people, helped to improve incomes of PAF beneficiaries in many cases, and initiated a habit of savings among the Overall Rating. Progress was made toward improving poor. However, contrary to plans, the bulk of its financing access to basic services and reducing disparities based on was directed at private goods, mainly livestock, rather than gender, caste, or ethnicity. Diversity of the civil service is focusing on providing better access to services. Also, it did also expected to increase following the 2007 adoption of an not have the envisaged institutional development impact. affirmation action policy. More public resources are 4 reaching the rural poor through the PAF, but the objective Over the past decade, Nepal made significant of providing better services to this population has not been progress in reducing social disparities, despite difficult achieved and there is thus far little hard evidence on their country circumstances. Although in practice IDA poverty impact. In the other areas of IDA intervention, support focused more on economic than social inclusion, it broad-based and governance, progress has been limited or contributed substantially to bringing social inclusion issues negligible. Given the large share of IDA resources devoted to the center of the development strategy. It accomplished to the broad-based growth pillar and the centrality of this by raising awareness and understanding of those issues, improving governance in Nepal's Tenth Plan and PRS as as well as by supporting critical measures such as equal well as in IDA's assistance strategy, the overall outcome of access to education, civil service diversity, and PAF IDA support to Nepal would, on balance, be rated targeting based on gender, caste, and ethnicity. unsatisfactory. However, given the 2003 CAS's explicit recognition that only two-thirds of IDA's objectives and The Bank failed to tailor its assistance strategy to outcome targets would realistically, be met, the adjusted country circumstances. The Bank did not adequately rating is moderately unsatisfactory. account for the implications of Nepal's fragility in designing its strategy, and adjust it when major assumptions Findings on which it was built were no longer valid. This undermined its effectiveness. In addition, the failure to Among the findings of this evaluation of IDA's assistance formalize strategy and program shifts detracted from the program in Nepal over FY03-08, the following findings are Board's ability to exercise oversight. worth highlighting. Most of the economic and governance objectives Recommendations targeted under the broad-based growth and good Based on the analysis and findings of the evaluation, IEG governance pillars were not achieved. This was mostly recommends that IDA: because the prerequisites for effective implementation were not met and the Bank's assistance strategy was not realistic Inject greater realism into the country assistance and attuned to the country circumstances. Bank experience in strategy and program design, retain flexibility to Nepal confirms its experience in other fragile states. adjust to changing circumstances and consult widely Specifically, it shows that continuation of Bank lending where and continually with national stakeholders and there is a deteriorating political environment and weakening development partners throughout program commitment to reforms does not achieve declared goals and implementation. While the prospects for political stability does not serve economic development and poverty reduction. and for sustaining peace look more promising today than in years past, the current government faces enormous IDA has been disengaging from the agriculture sector challenges in the face of high popular expectations. In since the mid-1980s--a process that reached its nadir many areas, the details of the government's policy agenda, during the CAE period. Over the FY04-06 period, there let alone the feasibility, pace and exact form of were no active IDA projects in agriculture, including implementing that agenda and the likely repercussions, are irrigation and forestry. Moreover, although the PAF targets uncertain. Under such conditions, the lessons of recent the rural poor, it does not constitute an alternative for history suggest a need for IDA to inject more realism into supporting agriculture growth. In a country where 85 percent strategy and program design and to be prepared for course of the population depends on agriculture for subsistence and corrections, yet with responsibility and accountability for employment, and poverty is predominantly a rural issue, and signaling major shifts. Moreover, broad consultations on a the 2003 Tenth Plan and PRSP had prioritized agriculture and regular basis would help ensure that IDA's strategy and rural growth, IDA's failure to support agriculture is a critical program remain relevant. gap. Make agriculture and rural development the Despite Nepal's conflict conditions and political centerpiece of the assistance program. This calls for instability, progress was made in improving basic placing agricultural and rural growth, including issues of services (primary education, essential health care, and food security and malnutrition, at the heart of IDA's water and sanitation) for which demand is high in the strategy, given the centrality of agriculture in any realistic country regardless of political dividing lines and in plan to improve the lives of many of Nepal's poor and reaching the poor, particularly in rural areas. Moreover, marginalized inhabitants. In parallel with the focus on this progress was achieved mostly through programs economic growth in rural areas, IDA needs to step up its implemented by central government departments efforts to help increase poor and marginalized people's (education and health) whose administrations (central and access to basic services (basic education, healthcare, safe deconcentrated) were strengthened over the period. water and sanitation, and roads), notably in traditionally 5 lagging regions. In striving to increase such access to basic early to assess the long-term development contributions of services, the focus needs to be on delivery schemes that these interventions, IFC's gradual re-engagement in the have worked and proved sustainable elsewhere in Nepal's context of the difficult overall investment environment has rural environment. Finally, to have any significant impact, resulted in two GTFP investments; an investment in a IDA's engagement in agriculture and rural development domestic airline in 2008, a pipeline of investment projects will need to be sustained over a long period of time, not in the financial sector, and a constructive dialogue with the follow the stop-and-go patterns of the past. government on business enabling environment issues. Design and implement a mechanism to systematically track the impact of the Poverty Alleviation Fund on poverty and social inclusion, and adjust its design as needed to optimize benefits to the poor and socially excluded. The major weakness of the PAF, despite its About Fast Track Briefs potential as an instrument for addressing social exclusion, is that it has not had a mechanism to track the extent to Fast Track Briefs help inform the World Bank Group which its activities are effectively addressing the various (WBG) managers and staff about new evaluation findings dimensions of social exclusion. Given the importance that and recommendations. The views expressed here are those of IEG and should not be attributed to the WBG or its the PAF is now assuming as an outlet for IDA funds, this affiliated organizations. Management's Response to IEG is shortcoming needs to be remedied as soon as possible. included in the published IEG report. The findings here do not support any general inferences beyond the scope of the Support public expenditure and public finance evaluation, including any inferences about the WBG's past, management and other institutional reforms, current or prospective overall performance. preferably through policy-based lending coupled with technical assistance as needed, or SWAps (as was done in primary education and health), if the prerequisites for policy-based lending cannot be met. The Fast Track Brief, which summarizes major IEG In Nepal, SWAps have proven so far to be the most evaluations, will be distributed to selected World Bank promising vehicle for achieving gradual but lasting change. Group staff. If you would like to be added to the subscription If conditions for policy-based IDA budget support do not list, please email us at ieg@worldbank.org, with "FTB come together, IDA could usefully explore the prospects subscription" in the subject line and your mail-stop number. for supporting such reforms through SWAp instruments. If you would like to stop receiving FTBs, please email us at ieg@worldbank.org, with "FTB unsubscribe" in the subject line. Evaluation of IFC Activities As the political and security situation deteriorated after 1999, IFC withdrew its local field presence and had very limited activities in Nepal between 1999-2006. Other than two existing IFC investments in hydropower generation Contact IEG: that made important contributions to Nepal's domestic Director-General, Evaluation: Vinod Thomas electricity supply, IFC's few other operations in Nepal were Director: Cheryl Gray (IEG-WB) not successful. To a large extent, IFC's inability to develop Manager: Ali M. Khadr (IEGCR) successful investment projects through much of the decade Task Manager: Claude Leroy Themeze (IEGCR) can be attributed to the increasingly difficult investment environment. After 2006, IFC began a gradual Copies of the report are available at: reengagement in Nepal that involved advisory work with http://www.worldbank.org/ieg/cae several local banks; development of GTFP facilities that IEG Help Desk: (202) 458-4497 enabled IFC to deepen its relationships in the financial E-mail: ieg@worldbank.org sector; engagement in the investment climate, where no other donors were active, through small diagnostic studies that helped establish relationships with government counterparts; subsequent expansion of Advisory Services (AS) programs in the investment climate and financial sector; and establishment of a single-person field office within the WB office in Kathmandu. While it remains too 6