Document of The World Bank Report No: ICR00004091 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-49050 and IDA-H6610) ON A CREDIT IN THE AMOUNT OF SDR 8.80 MILLION (US$13.75 MILLION EQUIVALENT) AND A GRANT IN THE AMOUNT OF SDR 7.20 MILLION (US$11.25 MILLION EQUIVALENT) TO THE FEDERAL DEMOCRATIC REPUBLIC OF NEPAL FOR A URBAN GOVERNANCE AND DEVELOPMENT PROGRAM: EMERGING TOWNS PROJECT July 27, 2017 Social, Urban, Rural and Resilience (SURR) Global Practice South Asia Region CURRENCY EQUIVALENTS (Exchange Rate Effective March 22, 2017) Currency Unit = Nepalese Rupee (NPR) NPR1 = US$0.0095, US$1 = NPR104.72 (NPR1 = US$0.014, US$1 = NPR72.43 at appraisal) FISCAL YEAR July 16 – July 15 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank BRAP Business Restructuring Action Plan CAS Country Assistance Strategy CPS Country Partnership Strategy DDC District Development Committee DTCO District Treasury Controller Office DPR Detailed Project Report DUDBC Department of Urban Development and Building Construction EO Executive Officer ESMF Environmental and Social Management Framework FA Financing Agreement FM Financial Management GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH GTZ Deutsche Gesellschaft für Technische Zusammenarbeit GmbH GON Government of Nepal GIS Geographic Information System ID Institutional Development IDA International Development Association IEG Independent Evaluation Group IP Investment Plan IPT Integrated Property Tax IRBAS Integrated Revenue Billing and Accounting Software IRS Implementation Review and Support IGFT Intergovernmental fiscal transfer ISN Nepal Interim Strategy Note IPR Implementation Progress Report LBFC Local Bodies Fiscal Commission LEFAR Local Entities Financial Administration Regulation LGCDP Local Governance and Community Development Program LSGA Local Self Governance Act MGOP Municipality Grant Operation Procedure MOFALD Ministry of Federal Affairs and Local Development MOF Ministry of Finance ii MOUD Ministry of Urban Development MPPW Ministry of Physical Planning and Works MLD Ministry of Local Development MST Municipal Support Team MTR Mid-term Review MuAN Municipal Association of Nepal NLTA Non-Lending Technical Assistance NUP National Urban Policy NUDS National Urban Development Strategy OSR Own Source Revenues OM Operations Manual O&M Operating and Maintenance PCO Project Coordination Office PDO Project Development Objective PFM Public financial management PforR Program for Results REP Revenue Enhancement Plan STWSSP Small Towns Water Supply and Sanitation Project TDF Town Development Fund TYIP Three-Year Interim Plan UDTC Urban Development Training Centre VDC Village Development Committee WB World Bank Senior Global Practice Director: Ede Jorge Ijjasz-Vasquez Practice Manager: Catalina Marulanda Project Team Leader: Yoonhee Kim ICR Team Leader: Yoonhee Kim iii NEPAL Urban Governance and Development Program: Emerging Towns Project CONTENTS Data Sheet A. Basic Information ......................................................................................................... v B. Key Dates ..................................................................................................................... v C. Ratings Summary .......................................................................................................... v D. Sector and Theme Codes .............................................................................................. vi E. Bank Staff.................................................................................................................... vi F. Results Framework Analysis ........................................................................................ vii G. Ratings of Project Performance in ISRs .......................................................................... x H. Restructuring ................................................................................................................ x I. Disbursement Graph Annex .......................................................................................... xi 1. Project Context, Development Objectives and Design ...................................................... 1 2. Key Factors Affecting Implementation and Outcomes ...................................................... 5 3. Assessment of Outcomes .............................................................................................. 11 4. Assessment of Risk to Development Outcome ............................................................... 19 5. Assessment of Bank and Borrower Performance ............................................................ 20 6. Lessons Learned .......................................................................................................... 23 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ..................... 24 Annex 1. Project Costs and Financing ............................................................................... 25 Annex 2. Outputs by Component ...................................................................................... 26 Annex 3. Economic and Financial Analysis ....................................................................... 29 Annex 4. Bank Lending and Implementation Support/Supervision Processes....................... 33 Annex 5. Beneficiary Survey Results ................................................................................ 35 Annex 6. Stakeholder Workshop Report and Results.......................................................... 36 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR .............................. 37 Annex 8. List of Supporting Documents............................................................................ 47 MAP .............................................................................................................................. 48 iv A. Basic Information Urban Governance and Development Program: Country: Nepal Project Name: Emerging Towns Project IDA-49050, `IDA- Project ID: P120265 L/C/TF Number(s): H6610 ICR Date: 03/16/2017 ICR Type: Core ICR GOVERNMENT OF Lending Instrument: SIL Borrower: NEPAL Original Total USD 25.00M Disbursed Amount: USD 11.66M Commitment: Revised Amount: USD 12.9M Environmental Category: B Implementing Agencies: Department of Urban Development and Building Construction (DUDBC) Cofinanciers and Other External Partners: Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH (GIZ) B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 04/07/2010 Effectiveness: 10/02/2011 01/21/2013 Appraisal: 02/14/2011 Restructuring(s): 07/19/2013 07/18/2016 Approval: 05/10/2011 Mid-term Review: 03/03/2014 03/19/2014 Closing: 07/31/2016 01/31/2017 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Substantial Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Moderately Quality at Entry: Moderately Unsatisfactory Government: Unsatisfactory Implementing Quality of Supervision: Moderately Satisfactory Moderately Satisfactory Agency/Agencies: v Overall Bank Overall Borrower Moderately Satisfactory Moderately Satisfactory Performance: Performance: C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating Performance (if any) Potential Problem Project Quality at Entry Yes None at any time (Yes/No): (QEA): Problem Project at any Quality of Yes None time (Yes/No): Supervision (QSA): DO rating before Moderately Closing/Inactive status: Satisfactory D. Sector and Theme Codes Original Actual Major Sector/Sector Public Administration Sub-National Government 100 100 Major Theme/Theme/Sub Theme Public Sector Management Public Administration 38 38 Administrative and Civil Service Reform 11 11 Municipal Institution Building 27 27 Urban and Rural Development Urban Development 62 62 Municipal Finance 23 23 Urban Infrastructure and Service Delivery 39 39 E. Bank Staff Positions At ICR At Approval Vice President: Annette Dixon Isabel M. Guerrero Country Director: Qimiao Fan Susan G. Goldmark Practice Manager: Catalina Marulanda Ming Zhang Project Team Leader: Yoonhee Kim Balakrishna Menon Parameswaran ICR Team Leader: Yoonhee Kim ICR Primary Author: Sangmoo Kim vi F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The original PDO was to improve delivery and sustainable provision of basic services and priority infrastructure in the participating municipalities. Revised Project Development Objectives (as approved by original approving authority) The revised PDO was to improve the capacity of the participating municipalities to plan, implement and fund urban development activities. (a) PDO Indicator(s) Actual Value Original Target Formally Achieved at Indicator Baseline Value Values (from Revised Target Completion or approval documents) Values Target Years Indicator 1 : Number of participating municipalities with funded investment and O&M plans. Value (quantitative or Zero 6 6 6 Qualitative) Date achieved 06-04-2011 31-07-2016 31-07-2016 31-01-2017 Comments Target Achieved. All six participating municipalities prepared and updated O&M (incl. % Plans and Investment Plans (IPs). O&M plans and IPs are included in the FY 17 Achievement) budgets. Municipal sub-projects under implementation with construction works on track Indicator 2 : as per the signed contract Value (quantitative or Zero 90% 90% 99% Qualitative) Date achieved 06-04-2011 31-07-2016 31-07-2016 31-01-2017 Comments Target Exceeded. Only one of the 15 construction contracts was not fully completed (incl. % at the end of the project. Achievement) Indicator 3 : Increase in municipal own source revenues in the participating municipalities. Value (quantitative or 15% 25% 25% 33% Qualitative) Date achieved 06-04-2011 31-07-2016 31-07-2016 31-01-2017 Comments Target Exceeded. Overall own source revenues (OSR) of the six participating (incl. % municipalities increased by 161% during the four year project implementation period. Achievement) Total number of people (of which females and people from disadvantaged Indicator 4 : groups) benefiting from the project activities. Value 25,000 (F+DG 40%) 92,000 (F 35% 124,224 (F 44%, DG (quantitative or 100,000 DG 10%) 50%) Qualitative) Date achieved 06-04-2011 31-07-2016 31-07-2016 31-01-2017 Target Exceeded. The total number of beneficiaries exceeded by 32,224. Percentage Comments of female beneficiaries and disadvantaged groups also exceeded targets. Beneficiaries (incl. % from the municipal infrastructure sub-projects (Component 2) are not included in this Achievement) figure to avoid double counting. (c) Intermediate Results Indicator(s) vii Actual Value Original Target Formally Outcome Achieved at Baseline Value Values (from Revised Target Indicators Completion or approval documents) Values Target Years Component One Strengthening Municipal Planning Capacity for Urban Development Municipal Grant allocated to programs targeting women, children and Indicator 1 : disadvantaged groups. Value (quantitative or 35% 35% 35% 45% Qualitative) Date achieved 06-04-2011 31-07-2016 31-07-2016 31-01-2017 Comments (incl. % Target Exceeded. Achievement) Number of municipalities submitting satisfactory annual plans for the municipal Indicator 2 : block grants to MoUD by November 15 (end of first trimester of the Fiscal Year) Value (quantitative or 0 6 6 Qualitative) Date achieved 06-04-2011 31-07-2016 31-01-2017 Comments Target Achieved. All six municipalities submitted satisfactory annual plans for the (incl. % municipal block grants to the MoUD before November 15 in each fiscal year, starting Achievement) from Year 3. Number of municipalities submitting satisfactory annual progress reports for the Indicator 3 : municipal block grants to MoUD by August 15 (one month after the end of the Fiscal Year) Value (quantitative or 0 6 6 Qualitative) Date achieved 06-04-2011 31-07-2016 31-01-2017 Comments Target Achieved. All six municipalities submitted satisfactory annual progress reports (incl. % for municipal block grants to the MoUD before August 15 in each fiscal year, starting Achievement) from Year 3. Component Capacity Building for Municipal Infrastructure Development Two Number of municipal infrastructure sub-projects successfully appraised and ready Indicator 1 : for bidding Value (quantitative or 0 18 16 16 Qualitative) Date achieved 06-04-2011 31-07-2016 31-07-2016 31-01-2017 Target Achieved. Of the identified 18 municipal sub-projects, 16 sub-projects were Comments appraised successfully. One identified sub-project in Mechinagar (Agriculture Market) (incl. % was dropped due to land issues and a sub-project in Baglung (Road construction) was Achievement) consolidated with another road sub-project at the bidding stage. Invitation notices for bidding for all 16 sub-projects were published in Year 3. Indicator 2 : Percentage of funds for municipal sub-projects disbursed. Value (quantitative or 0 100% 100% 86% Qualitative) Date achieved 06-04-2011 31-07-2016 31-07-2016 31-01-2017 Comments Not achieved. (incl. % viii Achievement) Component Institutional Development Three Indicator 1 : TDF’s collection ratio meet prescribed thresholds Value (quantitative or 75% 90% 90% 90% Qualitative) Date achieved 06-04-2011 31-07-2016 31-07-2016 31-01-2017 Comments Target Achieved. The TDF restructured due loans in FY 2016 and the collection ratio (incl. % increased to 90% thereafter. Achievement) Indicator 2 : Standard lending policies and procedures applied to all ETP projects Value (quantitative or No Yes Yes Yes Qualitative) Date achieved 06-04-2011 31-07-2016 31-07-2016 31-01-2017 Comments Target achieved. The TDF prepared standard lending policies and procedures in Year 2 (incl. % and applied them for all ETP project activities. Achievement) Number of municipalities that have developed and approved planning norms and Indicator 3 : building byelaws based on the guidelines by MoUD Value (quantitative or No Yes 6 6 Qualitative) Date achieved 06-04-2011 31-07-2016 31-07-2016 31-01-2017 Comments Target Achieved. All Municipalities prepared and approved planning norms and (incl. % building bylaws in Year 5. Achievement) Policy guidelines and procedures for municipalities on governance and budget Indicator 4 : planning updated and implemented by MoFALD. Value (quantitative or No Yes (implemented) Yes (implemented) Qualitative) Date achieved 06-04-2011 31-07-2016 31-01-2017 Comments Target Achieved. The MoFALD updated budget planning guidelines in Year 4 and (incl. % implemented them thereafter. Achievement) Policy guidelines and procedures for municipalities on physical planning and Indicator 5 : infrastructure development developed/ updated and implemented by MoUD Value (quantitative or No Yes (implemented) Yes (Implemented) Qualitative) Date achieved 06-04-2011 15-07-2016 22-01-2017 Comments Target Achieved. The Nepal Urban Development Strategy (NUDS) was prepared in (incl. % Year 4, and was updated and approved by the GoN in Year 6. Achievement) ix G. Ratings of Project Performance in ISRs Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 12/21/2011 Moderately Satisfactory Moderately Satisfactory 0.06 2 06/12/2012 Moderately Satisfactory Moderately Satisfactory 0.06 Moderately Moderately 3 12/14/2012 5.06 Unsatisfactory Unsatisfactory Moderately Moderately 4 03/13/2013 5.06 Unsatisfactory Unsatisfactory Moderately Moderately 5 09/18/2013 5.06 Unsatisfactory Unsatisfactory Moderately Moderately 6 10/30/2013 5.06 Unsatisfactory Unsatisfactory Moderately Moderately 7 01/19/2014 7.15 Unsatisfactory Unsatisfactory Moderately Moderately 8 05/10/2014 7.68 Unsatisfactory Unsatisfactory Moderately Moderately 9 08/10/2014 8.15 Unsatisfactory Unsatisfactory Moderately Moderately 10 12/20/2014 8.31 Unsatisfactory Unsatisfactory 11 03/09/2015 Moderately Satisfactory Moderately Satisfactory 8.74 12 09/28/2015 Moderately Satisfactory Moderately Satisfactory 10.27 13 05/21/2016 Moderately Satisfactory Moderately Satisfactory 11.00 14 12/22/2016 Moderately Satisfactory Moderately Satisfactory 12.06 H. Restructuring (if any) ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in USD millions Change in the executing agency of the Project, with the 01/21/2013 MU MU 5.06 establishment of the MoUD in May 2012. Key changes include: (i) re- aligning the PDO and key indicators to the institutional capacity of the participating 07/19/2013 Y MU MU 5.06 municipalities; (ii) reducing the scope of municipal infrastructure sub-projects in line with the capacity of the municipalities; and (iii) enhance x ISR Ratings at Amount Board Restructuring Disbursed at Restructuring Reason for Restructuring & Approved Restructuring Date(s) Key Changes Made PDO Change DO IP in USD millions municipal support. Changes include: (i) extension of the closing date by six months from July 31, 2016 to January 31, 2017; (ii) 07/18/2016 MS MS 12.06 cancellation of US$3.45 million equivalent of financing proceeds; and (iii) update of the disbursement forecast and implementation schedule. If PDO and/or Key Outcome Targets were formally revised (approved by the original approving body) enter ratings below: Outcome Ratings Against Original PDO/Targets Moderately Unsatisfactory Against Formally Revised PDO/Targets Moderately Satisfactory Overall (weighted) rating Moderately Satisfactory I. Disbursement Profile xi 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal Country and Sector Background 1. At the time of appraisal, two important developments were reshaping Nepal’s development paradigm. The first was urbanization—whereby unprecedented numbers of Nepalese were moving from remote villages to small towns and larger cities in search of peace, economic opportunities and social well-being. The second development was the political, social and economic transformation of Nepal into a federal state—the bedrock of which would be a democratic and inclusive local governance system that maximizes people's stake in the state by making the government downwardly accountable and by ensuring equitable distribution of resources across localities. Regional and social inequality was a major political issue in the country, which led to prolonged political instability that hampered development. 2. The rapid growth of urban areas and their growing economic importance were setting off changes in the Government of Nepal’s (GoN)’s policy focus. The National Urban Policy (NUP), adopted in 2008, included the objectives of balanced national urban structure and poverty reduction; clean urban environment; and effective urban management. The 12th Three Year Interim Plan (TYIP) for 2010-13 also called for developing large urban centers as regional economic centers and linking them with medium and small growth centers through improved infrastructure; and developing small towns by improving their linkages with the hinterlands. The Government’s commitment to decentralization at the highest level was also well documented. The TYIP emphasized: strengthening local governments and making them the primary implementers of urban plans, and transitioning central agencies into focusing on policy formulation and monitoring; directly transferring funds to local governments; and mobilization and sharing of revenues between local bodies. 3. The Project marked the re-engagement of the World Bank in Nepal’s urban sector in the country after an absence of more than two decades. It was widely recognized at the time of project appraisal that urban local governments had a pivotal role to play in the country’s decentralization and urbanization transition, in improving service delivery and in local economic development. In this context, the GoN requested Bank support for the Urban Governance and Development Program: Emerging Towns Project (UGDP: ETP). The Project provided an opportunity to strengthen the World Bank’s partnership with GoN, to demonstrate the implementation of the decentralization and urban development program, and further improve municipal infrastructure and basic urban services. The Project was expected to enable the World Bank to potentially expand to additional municipalities, and wholesale support for municipalities. Rationale for Bank involvement 4. Both decentralization and municipal development are areas where Bank assistance had been active and successful around the world. The Bank had a definite comparative advantage in helping the Government to develop a comprehensive approach, combining a wide range of advisory and technical assistance initiatives with appropriate forms of investment support. In 2009/10, a programmatic Non-Lending Technical Assistance (NLTA) on Emerging Towns was undertaken by the Bank to re-engage in the sector, scope out key issues, and identify challenges 1 and opportunities1. A number of studies, consultations and field visits were carried out under this rubric. Contribution to higher level objectives 5. In addition to being fully consistent with and supportive of Government’s NUP and TYIP priorities for urban development and local governance, the Project was expected to contribute to three key pillars of the Bank Group Nepal Interim Strategy Note (ISN) — promoting capable state structures and systems, fostering accountable institutions, laying the foundation for sustainable and inclusive economic growth, and enhancing equitable access to services. Weak and unaccountable institutions that could not provide basic services to citizens, and constraints to connectivity and movement of people, goods, and services had been identified as key causes of conflict and low growth. Furthermore, focusing initially on smaller and emerging towns was expected to help address grievances about unbalanced development, as most resources and the elites were located in the Kathmandu Valley. Support for emerging municipalities along key economic and transportation corridors was also expected to complement other World Bank interventions that strengthen marketing and transportation links around the country. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) 6. The original Project Development Objective (PDO) was to improve delivery and sustainable provision of basic services and priority infrastructure in the participating municipalities. The approved indicators for measuring the PDO were: (i) Percent increase in citizens who say that the infrastructure services offered by the municipality better meet their needs than the previous year; (ii) Percentage increase in citizens who report that they have participated in planning meetings at the ward level than the previous year; and (iii) Total number of people benefited from urban services and infrastructure improvements, of which females and from disadvantaged groups. 1.3 Revised PDO and Key Indicators, and reasons/justification 7. The PDO was modified during a level-1 restructuring on July 4, 2013 due to the difficulties encountered in implementation, mainly due to the limited borrowing and implementation capacities of the participating municipalities. The change in the PDO and the PDO indicators were aimed to shift the Project’s focus towards improving the basic capacity of participating municipalities in service delivery and municipal management. It also realigned the Project better with the institutional and implementation capacity of the municipalities. 1 The NLTA noted that: (i) stand-alone policy dialogue and technical assistance has limited chances of sustainable impact in the sector unless accompanied by on-the-ground interventions that can demonstrate positive results; and (ii) the ADB was supporting infrastructure development in several large cities (Kathmandu valley, Biratnagar, Birganj and Butwal), while the GIZ/WB was providing technical assistance to municipalities across the country. Bank assistance, it was deemed, should target fast growing secondary towns which would support and complement the larger cities in their region; Bank support should be long-term and programmatic, in line with GoN’s move towards consolidating support in the urban sector, and comprehensive in nature, supporting both infrastructure and institutional development. 2 8. The revised objective was to improve the capacity of the participating municipalities to plan, implement and fund urban development activities. The achievement of the revised PDO was expected to be measured in terms of the following key indicators: (i) Number of participating municipalities with funded investment and Operation & Maintenance (O&M) plans; (ii) Municipal infrastructure sub-projects under implementation with construction works on track as per the signed contracts; and (iii) Increase in municipal own-source revenues in the participating municipalities. In line with the change in the PDO, intermediate outcome indicators were also revised to measure improved municipal capacity, which could contribute to the higher-level objective of improving service delivery in the participating municipalities. 1.4 Main Beneficiaries 9. At appraisal, 280,000 citizens of six municipalities (Mechinagar, Dhankuta and Itahari in the East, and Lekhnath, Baglung and Tansen in the West) were expected to benefit directly from the UGDP: ETP. The Project also expected to benefit the participating municipalities including municipal councils and relevant departments, which received the municipal grants, municipal infrastructure investments, and technical assistance from the Project. Key institutions at the central level, namely the Ministry of Urban Development (MoUD), the Ministry of Federal Affairs and Local Development (MoFALD), the Department of Urban Development and Building Construction (DUDBC), the Town Development Fund (TDF), and the Urban Development Training Center (UDTC) were also important beneficiaries of the Project. 1.5 Original Components 10. The Project consisted of three components with a total budget of US$35.13 million.2 11. Component 1: Service Delivery Improvement (US$5 million). This component was designed to provide municipal grants to the participating municipalities to improve municipal service delivery, operation and management of infrastructure, social mobilization, community development and capacity building. 12. Component 2: Socio-economic Infrastructure Development (US$23.5 million). This component was designed to provide a blend of grants and loans for high-value social and economic infrastructure sub-projects which would be selected, structured, and implemented by the participating municipalities. Sub-projects could be clubbed into three broad categories, namely social infrastructure, urban or utility infrastructure, and revenue generating or commercial infrastructure.3 Social infrastructure will receive the highest share of grants (up to 80%), followed by urban/utility infrastructure (up to 60%) and revenue generating or commercial infrastructure (up to 30%). 2 At appraisal the US$ equivalent of the IDA Credit and Grant was estimated at US$25 million. 3 Social infrastructure refers to sub-projects in social sectors like basic health centers, community centers, public toilets, green spaces, slum upgrading, etc.; Urban/utility infrastructure includes water, sewerage, solid waste and municipal roads, etc.; and Revenue generating and Commercial infrastructure comprises markets, tourism facilities, parking spaces, transportation terminals, etc. 3 13. Component 3: Institutional Development (US$6.63 million). This component was aimed to support the institutional strengthening of, and provision of project management assistance to, the participating municipalities, the Ministry of Physical Planning and Works (MPPW), the Ministry of Local Development (MLD, later “MoFALD�), the Department of Urban Development and Building Construction (DUDBC), the Town Development Fund (TDF), and various project implementing units established for implementing the Project. 1.6 Revised Components 14. During the level-1 restructuring on July 4, 2013, the components were revised in line with the changes in the PDO. The revised components reduced the scope of Component 2 (‘Capacity Building for municipal infrastructure development’) and strengthened support to the participating municipalities. The revised components were: 15. Component 1: Strengthening Municipal Planning Capacity for Urban Development (US$4.43 million). In line with the revised PDO, the component name was changed from “Service Delivery Improvement� to “Strengthening Municipal Planning Capacity for Urban Development�. The component aimed to provide municipal grants to the participating municipalities to finance eligible activities with the objective of improving the capacity of the municipalities to effectively plan and carry out urban development activities. 16. Component 2: Capacity Building for Municipal Infrastructure Development (US$5.10 million). The scope of component activities was substantially reduced in line with the borrowing and implementation capacity of the participating municipalities from original allocation of $23.5 million to $5.1 million. The component name was changed from “Socio-economic Infrastructure Development� to “Capacity Building for Municipal Infrastructure Development�. The component aimed to provide funds to the participating municipalities to finance sub-projects, including engineering and advisory consulting services, as well as associated social and environmental management activities, with the objective of improving the capacity of the participating municipalities to plan and implement municipal infrastructure investments. 17. Component 3: Institutional Development (US$3.38 million). This component was strengthened in line with the change in the PDO to focus on institutional capacity building for the participating municipalities and Project Coordination Office (PCO), and to replace GIZ-funded institutional development support that was phased out. The component was designed to support the institutional strengthening of, and provision of project management support to, the participating municipalities, MoUD, MoFALD, DUDBC, TDF, and UDTC. 1.7 Other significant changes 18. Implementation Arrangements. As the MoUD was established in May 2012 as a new dedicated ministry for urban development, replacing the MPPW, the implementation arrangements were changed during a level-2 restructuring on January 21, 2013. The MoUD became the executing agency of the Project. The main project agencies including the TDF, DUDBC, and PCO that were previously under the purview of the MPPW were placed under the MoUD. 4 19. Extension of Project Closing Date. The closing date of the Project was extended from July 31, 2016 to January 31, 2017 to complete on-going municipal sub-projects and institutional development activities which were impacted, in large part, by the earthquake in April 2015 and political instability that led to disruptions in the supply of essential commodities, including fuel and construction materials. 20. Credit Cancellation. There were two cancellations during the life of the Project. In July 2013, due to the reduced scope of the Component 2 (‘Capacity Building for Municipal Infrastructure Development’), US$6.55 million was canceled from the Credit portion of IDA funds. In July 2016, US$3.45 million was canceled as these funds were not likely be used by revised project closing date. 21. Reallocation of Credit. In July 2013, US$1.96 million of the Grant, comprising the unutilized Grant (US$1.8 million) from the Capacity Building for Municipal Infrastructure Development component and the remaining unutilized Grant (US$0.16 million) previously allocated to the Project Preparation Facility, was reallocated to the Institutional Development component to provide additional funds required to hire the IDA-funded MST and strengthening of the PCO. Table 1: Project Financing by Component (US$ million) Original (2011) After Restructuring (2013 and 2016) GoN GoN Component % of and % of and IDA GIZ* IDA GIZ project Munici project Munici palities palities 1. Strengthening Municipal Planning 5.00 20% - - 4.43 34% - - Capacity for Urban Development 2. Capacity Building for Municipal 16.37 65% - 7.13 5.10 40% - 6.64 Infrastructure Development 3. Institutional 3.63 15% 3.00 - 3.38 26% 2.66 - Development Total 25.00 100% 3.00 7.13 12.91 100% 2.66 6.64 Total cost 35.13 22.21 *GIZ contribution to the project was done through parallel financing. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry 22. Relevant lessons and experiences were incorporated in the project design. Project design incorporated relevant lessons from global experience, as well as lessons from similar programs and projects in Nepal, including the Local Governance and Community Development Program (LGCDP) and the Small Towns Water Supply and Sanitation Projects (STWSSP). The following key elements were factored into the project design: (i) greater clarity on functional assignments and modalities through deeper dialogue, more programmatic engagement and use of multiple 5 instruments; (ii) support for improving systemic capacities by mainstreaming implementation through existing institutions and systems, and strengthening them incrementally; (iii) strengthening the national financing frameworks for local government finance as an overarching goal; and (iv) devoting considerable attention to ensure broad and deep stakeholder buy-in at all levels. 23. However, the scope and design of the project was too ambitious and complex for the project agencies and participating municipalities charged with its implementation. Detailed technical assessments and preparatory work were carried out in the participating municipalities and implementing agencies. Yet, the ambitious original PDO and complex project design overwhelmed a new borrower who had no prior experience in implementing a World Bank- financed project, and the participating municipalities, which lacked institutional and technical capacity. In particular, the Project’s focus on municipal borrowing for infrastructure was unrealistic given the very limited capacity of the participating municipalities in revenue generation and financial management. The lack of borrowing capacity of the participating municipalities became a major constraint in selecting integrated and more impactful municipal infrastructure sub-projects. Though the municipalities had large-scale integrated sub-projects as priorities, these had either not been implemented or were only partially implemented. 4 In addition, despite the differences in the fiscal capacities of the participating municipalities, the Project applied a uniform loan proportion across all municipalities. 24. There were multiple interlocutors5 involved in project design and implementation that increased complexity and required significant efforts and resources for coordination and project management. There were a multitude of institutions involved in the urban sector with unclear roles and responsibilities. The Project faced a challenge in balancing the roles of the various implementing agencies, particularly MoUD, MoFALD, TDF, and the participating municipalities. Coordination arrangements for the implementation of the municipal sub-projects, for example, lacked clarity with respect to the role of the PCO and TDF. Prior to the restructuring, there was no coordination mechanism among the PCO, the project agencies, the participating municipalities, and the Municipal Support Team (MST). 25. Risk Assessment and Mitigation. The project design took into consideration critical risks associated with the political and institutional environment of the Project. Critical risks identified included: (i) uncertainty surrounding federalism and change in state structures; (ii) weak accountability at the local level, particularly in the absence of elected local officials at the municipal level; and (iii) limited capacities at all levels. Relevant mitigation measures were identified, including: (i) embedding project implementation arrangements within prevailing institutional structures and systems; (ii) carrying out political economy analysis and institutional assessments for each participating municipality to pilot risks at every stage and design mitigation measures; and (iii) undertaking a detailed fiduciary and institutional assessment for the participating entities and municipalities and reflecting them in the project design. Overall, risk assessment and mitigation at project appraisal are deemed adequate to address the risks perceived 4 The borrowing capacity, and the willingness to borrow, of the participating municipalities was found to be insufficient to absorb the available loan financing for municipal infrastructure sub-projects under the IDA credit, and two of the six participating municipalities (Itahari and Dhankuta) were in default with the TDF. Even those municipalities with a stronger revenue base showed limited willingness to borrow for municipal revenue-generating sub-projects. 5 At the time of project design, the project involved 11 agencies, including MPPW (which was replaced by MOUD), DUDBC, Ministry of Local Government (which was renamed as MOFALD), TDF, UDTC, Local Bodies Fiscal Commission (LBFC), Municipal Association of Nepal (MuAN), and the six participating municipalities. 6 at the time of appraisal. However, during implementation the institutional, political and governance risks proved to be greater than anticipated at appraisal. As a result, migration measures included in the project design were ultimately not sufficient to address the risks to achieving the PDO. 26. Overall, quality at entry is rated as Moderately Unsatisfactory. 2.2. Implementation 27. The Project was implemented by the DUDBC, MoUD of GoN. The PCO created under the DUDBC was responsible for day-to-day project management, supervision and reporting. The MST was hired to support the PCO in institutional strengthening and capacity building of the participating municipalities for major project activities. The regional coordination offices set up in the eastern and western parts of the country facilitated project implementation and managed local teams. The operation was designed to be a five-year operation from 2011 to 2016 and was extended by six months. A Mid-term Review (MTR) of the Project was conducted as planned in March 2014, at which time 42% of the total IDA allocation had disbursed. 28. The Project was implemented in a difficult and fragile political and institutional environment. The transition to federalism and the formulation of the new Constitution, which were anticipated at the time of project preparation, were stalled due to the shifting political economy. Unclear mandates and fragmented responsibilities between MoFALD and MoUD over local governments and urban development also resulted in the lack of strong leadership and ownership over the Project during the early stage of project implementation. Political instability and subsequent changes in government, coupled with frequent changes in project staff, also added to implementation difficulties. In addition, the Project involved multiple stakeholders that had no prior experience in working with the Bank and did not have well-established coordination mechanisms among them. Moreover, due to the annexation of adjacent rural local governments, i.e., Village Development Committees (VDCs), within the municipal boundaries of Dhankuta, Lekhnath, and Itahari, additional time and efforts were required to reflect these changes in project activities, e.g., Revenue Enhancement Plans (REPs), GIS mapping, and Performance Agreement. 29. The cumulative impact of multiple factors that were beyond the control of the project ultimately led to significant delays. Project implementation was affected by the major earthquake on April 25, 2015 and the subsequent aftershocks. Although none of the project municipalities was severely impacted by the earthquake, the PCO staff had to divert their time to support post disaster recovery and reconstruction efforts. In addition, political unrest and disruptions in the border areas with India paralyzed the country and led to a transport blockage that resulted in a fuel crisis and affected the timely procurement of construction materials and equipment for several months. Most construction activities had to be suspended during this period and the Project had to be extended by six months to complete the delayed sub-projects and institutional development activities. 30. The original Component 2 (Socio-economic infrastructure development) faced difficulties in implementation despite the considerable efforts to support municipalities in financing municipal infrastructure through the grant/loan mix as per the project design (see Para 12). The participating municipalities had a very low revenue base to start with as well as weak financial 7 management capacity to manage revenues and expenditures 6 . It was necessary to strengthen municipalities’ own revenue mobilization/resources management first, before considering borrowing for service delivery. In addition, almost all municipalities had limited experiences in planning, financing, and implementing municipal investments, and required substantial capacity building. 31. Mobilizing the critical consultancy of Municipal Support Team (MST) for Component 2 was delayed considerably. The MST was expected to be financed by GIZ through parallel financing. However, the GIZ’s financing was unexpectedly reduced due to a shift in GIZ’s development priorities. It took some time for the government to mobilize the MST under IDA financing, resulting in a gap in provision of the needed support to municipalities, in particular the lack of proper contract management during the initial project implementation period.7 32. Despite these external factors as well as the challenging internal environment, the project’s implementation turned around significantly after the restructuring in July 2013. The restructuring allowed the Project to focus on a smaller number of sub-projects that had been already appraised and to reorient Component 2 to strengthen the capacity of municipalities to plan and implement municipal infrastructure investments. It also helped the Project to shift attention to capacity building and institutional strengthening where results and impacts could be achieved. The Project supported basic municipal management functions, such as capital investment planning, own source revenue generation, and asset management. The Project also strengthened the capacity of municipalities in implementing the selected municipal investments through the provision of close support during the entire project cycle, including the selection of municipal investments through public consultations, technical designs, public procurement, financial management, and safeguards management. Participating municipalities were also provided close support in implementing the institutional development component. Support for institutional development paid off and resulted in positive outcomes towards the end of the Project (see Assessment of Outcomes). 33. The streamlined project design strengthened implementation capacity and the coordination role of the PCO. Project agencies and participating municipalities were able to enhance their institutional and implementation capacity for urban development significantly. A full-time Project Director (PD) was dedicated to the project and the PCO increased its staffing. The recruitment of the IDA-funded MST provided the necessary technical and institutional development support to the PCO and the participating municipalities. Finally, project restructuring served as a turning point for the Government to demonstrate commitment and ownership of the Project. Institutional arrangements were further clarified and coordination among participating municipalities, agencies and the PCO improved significantly after the restructuring. In March 2015, project performance - in terms of both progress towards achievement of the PDO and overall implementation progress - was upgraded to Moderately Satisfactory. 6 For instance, subnational spending in 2014/25 was only about 9% of the general government expenditure 7 Contract management issues of municipal sub-projects included: (i) poor quality of detailed designs, which required revisions to the designs of the Itahari Bridges, Tansen Amarnarayan Temple, and Tansen Multi-purpose building; (ii) lack of adherence to National standards, e.g., in the case of the Itahari road upgrading sub-project, the municipality unilaterally increased the width of the road; and (iii) long time taken in addressing variations to contracts. 8 Overall implementation is rated as Moderately Satisfactory. 2.3 Monitoring and Evaluation 34. M&E Design. The original results framework of the Project had three PDO indicators and 11 intermediate results indicators; these were revised during the level 1 restructuring.8 The revised results framework had four PDO indicators and 10 intermediate results indicators corresponding to the three components. Annual target values were set progressively for the project period. Institutional arrangements for M&E were established at the PCO to obtain information from the project implementation agencies, analyze and present the status as part of monthly, quarterly and annual progress reports. An M&E reporting format was designed for the municipalities to collect information from the field with sufficient details for data collection, analysis and presentation. 35. M&E Implementation: The PCO established a system to obtain the data needed for measuring and tracking the outcome and intermediate results indicators. The PCO mobilized MST to obtain reports from the participating municipalities, as well as the central level project implementing agencies, i.e., MoFALD, MoUD, and TDF. Bank Implementation Review and Support missions regularly updated the results framework based on the reports provided by the PCO as well as on mission findings. The PCO provided standard monthly and annual progress reports, covering all aspects of project implementation. The Project's M&E system was implemented adequately to monitor the agreed outcome indicators. 36. M&E Utilization: The M&E reports were utilized by the PCO, project implementing agencies, and the Bank team to make corrections and improvements in the work program. The Bank team utilized the progress reports for project monitoring and evaluation. 2.4 Safeguard and Fiduciary Compliance 37. Environmental and Social Safeguards. The Project was assigned environmental Category “B� as the assessments indicated that project investments would have limited environmental and social impacts. Six safeguards policies were triggered: Environmental Assessment (OP/BP 4.01); Natural Habitats (OP/BP 4.04); Indigenous Peoples (OP/BP 4.10); Physical Cultural Resources (OP/BP 4.11); Involuntary Resettlement (OP/BP 4.12); and Forests (OP/BP 4.36). The Environmental and Social Management Framework (ESMF), which was consistent with the Government’s and the Bank’s requirements, was prepared to mainstream environmental and social aspects in the planning and implementation of infrastructure activities under Components 1 and 2. 8 The two initial PDO indicators, i.e. (i) Percent increase in citizens who say that the infrastructure services offered by the municipality better meet their needs than the previous year; (ii) Percentage increase in citizens who report that they have participated in planning meetings at the ward level than the previous year, were meant to measure the original project objectives before the level-1 restructuring. These indicators, which were to be collected through surveys, had never been monitored. The survey was planned in Year 3 as per the original M&E framework but it was never carried out due to the level 1 restructuring in Year 3 which had revised PDO indicators. 9 38. The Project supported the capacity building of various agencies to adhere to the ESMF during implementation. Social and environment screening was carried out for each sub-project in line with the ESMF to identify adverse impacts; sub-project specific ESMPs were prepared to design mitigation measures based on the findings of screening; indigenous and vulnerable peoples were consulted on each sub-project and in each participating municipality. The sub-project- specific ESMPs identified mitigation measures to respond to the site-specific conditions. Assessments made during preparation of ESMPs of the sub-projects confirmed that the environmental impacts would be limited; relevant and specific mitigations were designed and implemented adequately. The PCO’s safeguards staff followed up frequently on the implementation of ESMP and provided close support to the municipalities. In some cases the PCO had to expedite follow-up with the safeguards implementation and provide more proactive support to municipalities. Safeguard performance is considered Moderately Satisfactory. 39. Procurement. Procurement under the institutional component consisted of Goods and Services required by each of the central agencies and the PCO. Procurements under the municipal grant component and the municipal infrastructure component were implemented by the municipalities, including Works contracts related to municipal socio-economic infrastructure and small value Goods contracts. Detailed capacity assessments of the central agencies and municipalities during project preparation revealed that while the three central agencies had dedicated procurement sections/units and some familiarity with procurement under donor-funded projects, the municipalities were very weak in this regard. To address this, the PCO took a lead role in building the capacity of the municipalities through the organization of procurement training, guidance, on-demand assistance in the development of bid documents and evaluation, and review of select transactions to ensure compliance with the legal agreement. Overall, compliance with the Bank procurement policies is considered Moderately Satisfactory. 40. Financial Management. A detailed institutional assessment was conducted during project preparation and the findings were used to finalize the financial management arrangements of the project. The assessment highlighted shortcomings in financial management capacity of each relevant agency and municipality, which was addressed through the institutional development component. Over the course of the project, the PCO was responsible for the overall accounting and reporting of project expenditures and the preparation of consolidated Implementation Progress Reports and Project Financial Statements. While there were moderate shortcomings in financial management and delays in audit reports, they did not hinder the timely and reliable provision of information required to manage and monitor the implementation of the project. Each project component maintained accounts as per the guidelines specified in the Project Operations Manual (OM). Each municipality adhered to the financial and accounting systems prescribed in the Local Entities Financial Administration Regulation (LEFAR) and the Local Self Governance Act (LSGA), and Municipality Grant Operation Procedure (MGOP) 9 . Compliance with Bank financial management requirements is rated Moderately Satisfactory. 9 All funds were disbursed to the “B� account of the municipality, which is a non-operating account. On approval of the annual budget and work plan, the amounts were transferred to the “C� accounts of the municipality, which were operating accounts, under five heads. The total unspent amount at the year-end is transferred to main account and, out of this, the amount to be frozen is refunded back to the District Treasury Controller Office. Overall, there was a system which allowed tracking of funds, including Bank funds, which was further clarified in the POM, to address any gap or weakness. 11 The GoN has requested the World Bank to continue supporting the provision and improvement of basic service delivery in secondary cities, while also supporting the new federal structure and inter-governmental fiscal transfer mechanisms. It was agreed that the proposed project would cover 16 new municipalities selected on the basis of 10 2.5 Post-completion Operation/Next Phase 41. Completion of Project Activities and Sustained Project Outcomes. One sub-project under Component 2 in Itahari was not completed by project closing date10; the remaining works will be financed by the Government and will be closely supervised to ensure good construction quality and compliance with the Bank’s safeguards policies. All other sub-projects have been successfully completed and are in operation. The municipalities are committed to cover the O&M costs of all completed infrastructure and physical assets from their budgets. Through the adoption of REPs, O&M plans, as well as investment plans (IPs), the municipalities have established a system that increases their own source revenues and institutionalizes planning, financing, and managing of urban development projects. 42. Follow-on Operation. There is a request from the GoN to develop a follow-on lending operation11 to continue support for integrated infrastructure development and municipal capacity building, aligned with the ongoing transition to fiscal federalism.12 The Government is also keen to structure this lending through a Program-for-Results (PforR) instrument (or IPF with disbursement-linked indicators). 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation Rating: Modest for the Original Project and Substantial for the Restructured Project 43. Relevance of Objective is rated Substantial for the original project and High for the restructured project. The project’s original objectives were highly relevant to both the country’s and the World Bank’s priorities for local governance and urban development. At the time project preparation, the GoN was moving towards further decentralization and federalism; it was also anticipated that the GoN would adopt a new constitution to transition to a federal state. The GoN objectively verifiable criteria. These municipalities include: Koshi Haraicha, Birtamod, Damak, and Urlabari in the Eastern Cluster; Gaur, Jaleshwor, Dhanushadham, Rajbiraj, and Triyuga in the Mid Terai Cluster; Byas, Putalibazar, Pokhara, and Shuklagandaki in the Western Cluster; and Tilottama, Ramgram, and Jiri in the Mid and Western Nepal and other Clusters. 10 The government made a commitment to finance the remaining works after the project closing. The Bank team will monitor the progress of works as well as safeguards management 12 The first phase of local elections was held in Nepal on May 14, 2017 and the second phase was held on June 14, 2017. These elections cover all levels of local governments - four metropolitan cities, 13 sub-metropolitan cities, 241 municipalities, and 486 village councils. 11 also saw urbanization as an opportunity for economic growth and prosperity and had articulated the National Urban Development Strategy (NUDS) and an implementation plan for NUDS. Despite the high relevance of the original objectives in the country context, the initial PDO had to be revised to rebalance its focus on institutional strengthening of local governments for municipal management. 44. The restructured PDO, which was to improve the capacity of the participating municipalities to plan, finance and manage their urban development, remains highly relevant for the country and serves as the adequate entry point to support weak institutions at the local level. The on-going political transition to federalism, including the adoption of the new constitution in September 2015 and the first local elections in 2017, calls for continued support to build local institutions and to strengthen the capacity of local governments for basic service delivery and municipal management. The Project remains consistent with the Bank Group’s Country Partnership Strategy (CPS) for 2014-2018 and contributes to outcome indicators across two strategic areas of engagement, competitiveness and inclusion. 45. Relevance of Design and Implementation. The initial project design before the level-1 restructuring had the integrated approach of addressing both fiscal support via block grants and support for capital expenditure financing of local governments, based on international good practice. However, it was overly ambitious in scope, given the limited capacity of the project agencies and municipalities (see Section 2.2) and the original project faced considerable setbacks. Component 2 faced significant implementation challenges during the initial implementation period. However, Component 1 made good progress in implementation in accordance with the original design and showed good disbursement 13 . In addition, while the original results framework established clear links between activities and outcomes (see Section 3.2), the targets were set too high. On balance, relevance of Design and Implementation for the original project is rated Modest. 46. At the time of restructuring, the project components and targets were revised realistically in line with the changes in PDO. The restructured project successfully improved the capacity of the selected municipalities to manage their municipal finances, service delivery planning and investments. In addition, the restructured design focused on strengthening the capacity of municipalities to consider all aspects of urban development in an integrated manner (including planning, engineering, social and environmental safeguards, and procurement) to ensure sustainability. The Project also promoted the participation of local communities and successfully benefited women and disadvantaged groups. The project design included provisions to link municipalities with higher levels of the Government to continuously strengthen their capacity. The Results Framework established clear linkages between outputs and outcomes. The indicators adequately measured progress towards achieving the PDO. In addition, the M&E system design was robust, providing scheme-level data at each stage of scheme design, implementation and maintenance. 47. The relevance of project design was confirmed by the achievement of the end-of-project targets of the outcome indicators. More importantly, the GoN has requested Bank support for a follow-on operation to mainstream support to local governance and to enhance basic services and 13 At the time of project mid term review, the project disbursed about 42% of the total IDA allocation. 12 infrastructure delivery in a larger number of municipalities. The relevance of Design and Implementation for the restructured project is therefore rated Substantial. 3.2 Achievement of Project Development Objectives Rating: Modest (Original project) and Substantial (Restructured project) 48. Achievement of the original PDO. Achievement of the original PDO ("to improve delivery and sustainable provision of basic services and priority infrastructure in the participating municipalities") was to be measured by three PDO indicators, based on a combination of citizen satisfaction and sector performance indicators 14 . At the time of project restructuring, the objective of improving service in target municipalities (measured by the indicator of “total number of people benefited from urban services and infrastructure improvements, of which females and from disadvantaged groups�) had been fully achieved; it remained relevant and was monitored under the restructured project. The Project exceeded targets by directly benefiting over 124,000 females and people from disadvantaged groups. The two remaining PDO indicators required surveys that had been planned for Year 3; however, as the project was restructured in Year 2 and these indicators were dropped, the surveys were not carried out. However, the stakeholder workshop and interviews 15 suggest that the Project effectively contributed to meeting these two PDO indicators. The stakeholder interview indicated that the Project addressed the needs of citizens effectively by providing much needed basic infrastructure (relevant to PDO indicator 1, “percent increase in citizens who say that the infrastructure services offered by the municipality better meet their needs than the previous year�) . The workshop also highlighted that participatory planning processes at community and ward-levels were among the key outcomes (relevant to PDO indicator 2, “percentage increase in citizens who report that they have participated in planning meetings at the ward level than the previous yea r�). On balance, efficacy of the original project is rated as Modest. 49. Achievement of the revised PDO. Achievement of the revised PDO ("to improve the capacity of the participating municipalities to plan, implement and fund urban development activities") was measured by four outcome indicators in the Results Framework: (i) number of participating municipalities with funded investment and O&M plans; (ii) municipal sub-projects under implementation with construction works on track as per the signed contract; (iii) increase in municipal own source revenues in the participating municipalities; and (iv) total number of people (of which females and people from disadvantaged groups) benefiting from the project activities. 50. The Project achieved all four PDO-level indicators. The capacity of the participating municipalities to plan and implement municipal infrastructure projects has been significantly improved, and this in turn has contributed to the higher-level objective of improving service delivery at the local level. In addition to the four PDO-level indicators, the project also achieved 90% of the intermediate results indicators of the three components (See Section F: Results 14 The original PDO indicators included: (i) Percent increase in citizens who say that the infrastructure services offered by the municipality better meet their needs than the previous year; (ii) Percentage increase in citizens who report that they have participated in planning meetings at the ward level than the previous year; and (iii) Total number of people benefited from urban services and infrastructure improvements, of which females and from disadvantaged groups. 15 The stakeholder workshop was carried out in January 2017 with participation from the project agencies and participating municipalities. As comprehensive and systematic surveys were not carried out, interviews with participating municipalities and their citizens were conducted from January - March, 2017 13 Framework Analysis of the ICR Data Sheet). The key achievements of the project against the project targets and objectives are:  Number of participating municipalities with funded investment and O&M plan. This target was fully achieved by all six municipalities. The municipalities prepared O&M plans and updated them annually. The identified O&M activities are included in the municipalities’ annual plans and budgets for implementation to ensure the sustainable operation of the constructed municipal infrastructure. People in the participating municipalities are now served by more capable municipal institutions that are responsive to their needs and benefit from improved infrastructure and services. The capacity of the municipalities has been enhanced to plan for urban development in a sustainable and effective manner.  Municipal sub-projects under implementation with construction works on track as per the signed contract. The target for this indicator has been exceeded: 93 percent of the construction works were on track at project completion, against the target of 90 percent. The Project has established a more decentralized service delivery system, and has empowered the municipalities in planning, implementing, and maintaining municipal infrastructure.  Increase in municipal own source revenues in the participating municipalities. This target was exceeded in each year of implementation. All six municipalities prepared and implemented REPs. In addition, an Integrated Revenue Billing and Accounting Software (IRBAS) was developed and is established in the six municipalities. Own source revenue growth in Year 5 was 33 percent against the target 25 percent. The participating municipalities have improved their fiscal capacity by leveraging municipal resources to fund urban development activities.  Total number of people (of which females and people from disadvantaged groups) benefiting from the project activities. This target was exceeded by 34 percent. Of the total beneficiaries, 44 percent are women and 50 percent are from disadvantaged groups. 51. Under Component 1, a total of 1,683 small community development schemes financed by the block grants were planned, implemented, and monitored by the municipalities and local communities. Communities participated actively in the process and addressed their immediate needs, demonstrating empowered capacity for planning, managing and contributing to urban development. Communities also significantly contributed towards the cost of the investments.16 Community-level investments and O&M activities were selected through a participatory planning process, which helped to build a more transparent and inclusive local governance system. The approved plans were reflected in the annual planning process in a format prescribed by the PCO. Municipalities submitted progress reports to the MoUD on time. 52. The TDF and the PCO provided technical support to plan, procure, implement, and supervise municipal infrastructure sub-projects under Component 2. Participating municipalities appraised 16 sub-projects and successfully carried out the bidding and procurement processes. One project was dropped due to a land clearance issue. All but one of the remaining 15 sub- projects were completed at the project closure. Despite the devastating earthquake in 2015 and 16 Community contribution towards the cost of the project activities under the Component 1 – 30% (Mechinagar), 50% (Itahari), 20% (Dhankuta), 15% (Lekhnath), 20% (Tansen), and 20% (Baglung). 14 the four months of economic blockade after the earthquake, the municipalities completed 99 percent of construction works at project closure. 53. The Project had a positive impact on empowering municipalities to plan and implement infrastructure investments in close consultation with the local communities. Local communities played an important role in achieving the objectives of the Project by supporting project activities under Components 1 and 2; as an example, in Lekhnath, a beneficiaries’ support committee was formed to enhance the implementation and quality of sub-projects. This support was also valuable in environmental and social safeguard activities. 54. On balance, despite the external factors and difficult political and institutional environment, the restructured Project has achieved considerable outcomes and delivered important results on the ground. The efficacy of the restructured Project is therefore rated Substantial. 3.3 Efficiency Rating: Modest (Original project and Restructured project) 55. At appraisal, conventional economic analysis was not carried out because the Project was prepared on a framework approach and the use of municipal grants would only be known during implementation17. The Project Operations Manual specified the requirements for financial and economic analysis of infrastructure sub-projects18. None of the 16 sub-projects considered for financing during implementation required a full cost-benefit analysis, given the size and nature of the investments19. Overall, the use of block grants under Component 1 was monitored closely and was found to be effective and consistent with the initial design of the Project. Sub-project selection for Component 2 was, in addition, based on a demand driven process. Economic efficiency of the original project is deemed Modest as a significant amount of IDA funds had to be cancelled at the time of restructuring. 56. Economic benefits of the restructured Project mainly comprise improved capacity of basic municipal management and are qualitative in nature. A comprehensive ex-post economic analysis was not carried out at project completion due to the lack of reliable data or robust methodology, given the project objectives and the nature of the sub-projects. 17 For Component 1, the spending choices of the participating municipalities using municipal grants could not be determined a priori. For Component 2, the identification and prioritization of sub-projects was made by each participating municipality on a demand-driven basis, reflecting its infrastructure priorities and borrowing capacity during project implementation. 18 A full cost-benefit analysis was required for all commercial/revenue-generating infrastructure sub-projects over US$1 million and all urban/utility infrastructure sub-projects over US$ 1 million with quantifiable benefits (water, roads and solid waste). These sub-projects would be considered economically viable if they demonstrate an Economic Rate of Return (ERR) equal or greater than 12 percent. But, any road sub-project aiming to rehabilitate the existing municipal road network or to build one or two lane municipal roads is considered a basic needs sub-project and is therefore exempted from a full cost–benefit analysis. 19 There was one sub-project, Baglung upgrading of access road, which cost was over one million. However, a full cost benefit analysis was not carried out because the sub-project addressed basic needs to rehabilitate deteriorated municipal road that provided critical access to the town center. 15 57. A unit cost analysis indicates that the municipal infrastructure sub-projects are cost effective. A general unit cost analysis of a sample of completed road improvements and public parks indicates that the unit costs of these investments are reasonable and are comparable to other donor funded and locally financed investments. For instance, the average cost per km of civil works for road upgrading (under 5 sub-projects) was US$145,000 per km, which is comparable to other relevant projects in the country and other countries.20 58. Urban infrastructure and basic services supported under the Project brought substantial benefits to the participating municipalities. Key achievements in service provision and infrastructure under Components 1 and 2 include municipal roads (30.4 km) and community roads (134.75 km), bridges (48 meters), drainage lines (17.05 km), public parks (44,374 sq.m), local markets (18,061 sq.m). These are highly beneficial investments as the municipalities have chronic problems of access to basic services and inadequate infrastructure. The Project financed the only substantial capital investments in critical infrastructure in these municipalities. The Project infrastructure investments were identified and prioritized through close community consultations and respond to local priorities and needs. The technical designs of the selected sub- projects have adopted least cost solutions, taking into account national standards. 59. The principal qualitative benefits of the project components are: a) Component 1: Strengthening municipal capacity planning for urban development. The Project financed 1,683 community development schemes through block grants (Annex 3). These schemes can be grouped under seven major categories: (i) road improvement (about 28 percent of total investment); (ii) construction/maintenance of other community assets (about 27 percent); (iii) social development programs (about 13 percent); (iv) public/community buildings (about 12 percent); (v) municipal capacity development activities (about 12 percent); (vi) drainage improvements (about 5 percent); and (vii) rehabilitation of water supply schemes (around 4 percent). The benefits of these investments include: reduced transport costs, reduced flood damage, improved health benefits, and improved economic opportunities. Increased capacity of cost effective planning approaches, mobilization of community funds for urban development, O&M planning, and improved local government fiscal systems contributed to the enhanced efficiency of governance in the participating municipalities. b) Component 2: Capacity building for municipal infrastructure investments. The direct economic benefits from the investments include: (i) vehicle operating cost savings and travel time savings from improved road conditions; (ii) job creation from improved tourism and recreational facilities from temple conservation and gate beautification; (iii) increased municipal revenue by levying service charges on the users of the multi-purpose building and slaughter houses; (iv) local economic benefits from the improved local market; and (v) preservation of the natural environment as a result of the park improvement sub-projects. In addition, better management of urban expansion in peri- 20 As an example, for the Road Sector Development Project (RSDP) additional financing 2016, which is the most recent comparable project in Nepal, the average cost per km of road upgrading was estimated at US$ 150,000 per km. Based on the findings of the unit costs analysis for African countries (AfDB, 2014), the median unit rate for road upgrading projects was US$ 147,100 per km. (The unit cost of the municipal road upgrading is compared with other projects that are similar (in terms of type of work, i.e. upgrading of paved roads). 16 urban areas and increased municipal own source revenues contributed to efficiency in urban management (Annex 3). Qualitative evidence of economic benefits include: Transportation: Five road sub-projects upgraded 30.4 km of existing municipal roads, and two bridges were constructed under one sub-project. About 79,000 municipal residents benefited directly from these transportation sub-projects. Vehicle operating cost savings, time savings, and savings in health expenditure are some of the main direct economic benefits for the population served. Tourism, culture, recreational and local market: Seven sub-projects (Temple conservation - 1, Gate beautification - 1, Multi-purpose building -1, and Parks improvement – 4) were implemented to promote internal tourism and recreational activities. These sub-projects generated employment and helped to increase municipal revenues through service charges on the users of these facilities. As an example, the Lekhnath park improvement sub-project resulted in doubling the number of tourists. It also significantly improved lake water quality by preventing wastes on the lake banks from being washed down to the lake. Improvement of the local market contributed to increase in business and trade. 60. Administrative Efficiency. The restructured project required only a six-month extension21 to complete the remaining on-going municipal sub-projects, despite the impact of the earthquake and the transport blockage on the border with India. A substantial portion of the Credit/Grant was cancelled at the time of restructuring, when it was recognized that the IDA funds could not be utilized for Project purposes. Similarly, once the decision was made to not extend the closing date of the restructured Project beyond the six months required to complete on-going sub- projects, IDA funds that could not be utilized were identified and canceled as part of the second restructuring(see Section 1.7)22. 3.4 Justification of Overall Outcome Rating Rating: Moderately Satisfactory 61. Based on the ratings of the original Project for relevance (Substantial/Modest), efficacy (Modest), and efficiency (Modest) in sub-sections 3.1, 3.2, and 3.3 above, the overall outcome of the original Project is rated Moderately Unsatisfactory. For the restructured Project, based on the ratings for relevance (High/Substantial), efficacy (Substantial), and efficiency (Modest), the overall outcome of the project is rated as Moderately Satisfactory. 62. The overall assessment considered the ratings against both the original and revised PDO and weighed this assessment against the proportion of funds disbursed before and after the restructuring, as shown in Table 2. 21 Originally the Government of Nepal made a one-year extension to be able to finish all the remaining physical works. However, it was decided by the country management unit to grant a six-month extension only in line with the country’s portfolio level decision. 22 About $1.6 million was unutilized by the end of project implementation, mainly because of the depreciation of Nepalese currency and final bid price that came out to be much lower than originally estimated. 17 Table 2: Overall Outcome Rating Original Outcome Revised Outcome Combined Rating Rating 3.1 Relevance Substantial High Relevance of Substantial High Objectives Relevance of Design Modest Substantial and Implementation 3.2 Efficacy Modest Substantial 3.3 Efficiency Modest Modest Moderately Overall rating Moderately Satisfactory Unsatisfactory Rating value 3 4 Weight (% disbursed before and after PDO 46 54 revision) Weighted value 1.38 2.16 3.54 Moderately Final rating Satisfactory Note: Assigned value for each rating: Highly Satisfactory = 6; Satisfactory = 5; Moderately Satisfactory = 4; Moderately Unsatisfactory = 3; Unsatisfactory = 2; Highly Unsatisfactory = 1. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 63. The Project was effective in targeting the poor, women, children and disadvantaged groups in the participating municipalities as intended at project design. More than 35 percent of the capital expenditure from the block grants under Component 1 was set aside for pro-poor and community-oriented schemes. The communities, including the poorest and vulnerable groups, actively participated in identifying, planning, implementing, and managing schemes, and also contributed to capital costs and full O&M cost for improved services. The relevant PDO indicator targets were exceeded, i.e., the annual average percentages of female and disadvantaged group beneficiaries were 46 percent and 53 percent, much higher than the targeted percentages of 35 percent and 10 percent respectively. (b) Institutional Change/Strengthening 64. Institutional strengthening is part of the core development objective of the Project and is considered one of the most important impact of the Project. The Institutional Development component, i.e., Component 3 and implementation of urban development activities under Components 1 and 2 measurably enhanced institutional capabilities, behavior, and functionalities of all project agencies and participating municipalities. The highlights of institutional change/strengthening brought by the Project are: (i) enhanced fiscal capacity of the participating municipalities from increased own source revenues; (ii) policy provisions and procedures relating to NUDS, municipal finance framework, O&M plans, and IPs, as well as training, mentoring support and need-based assistance to municipalities, have strengthened planning, implementation and reporting capacity of municipalities for urban development; (iii) implementation of municipal sub-projects as a learning-by-doing process has increased the capacity of the participating municipalities to comply with environmental and social safeguards, and procurement procedures; 18 and (iv) community involvement and inclusion of vulnerable groups in selecting and implementing grant schemes and municipal sub-projects have improved local governance systems. (c) Other Unintended Outcomes and Impacts 65. Community involvement in project selection, design, implementation, fund raising, and operations and maintenance has been strengthened. Communities contributed towards the cost of the Project. In addition, during project implementation, community engagement and feedback mechanisms were strengthened, supported by more responsive mechanisms between municipalities and citizens. Increased community participation helped to enhance effective utilization of block grants under Component 1. The participatory approach and community involvement have had a positive impact on local governance, and project design and implementation. 66. As part of the Project, the Bank team provided technical support to the GoN for the development of NUDS. The GoN has prepared a mid-term nation-wide blueprint for urban development, i.e., NUDS. Urban development programs in Nepal had been practiced in ad-hoc and disintegrated ways. The country did not have a solid strategic national urban development strategy that could guide urban investments across municipalities. 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops 67. A consultation workshop was organized during the ICR Mission in January 2017. Key project agencies and participating municipalities participated. Key messages from the workshop included: (i) there is a high level of satisfaction with the project interventions; (ii) there is a change in the mindset in the urban sector as a result of the Project; (iii) community involvement contributes to urban governance and development; and (iv) project agencies and participating municipalities have developed confidence as a result of working on the Bank Project and can now take on other Government and donor funded urban development projects. 4. Assessment of Risk to Development Outcome 68. The major development outcomes of the Project are improved capacity and performance of the participating municipalities to plan, implement, and fund urban development activities, as well as improved local urban service delivery. The former outcome could be further specified as the combination of: (i) enhanced fiscal capacity of the participating municipalities from an increase in their own source revenues; (ii) strengthened planning, implementing, and reporting capacity of the participating municipalities for urban development; (iii) increased capacity of the participating municipalities in complying with environmental and social safeguards, and procurement procedures. The latter outcome could be composed of: (i) improved municipal infrastructure provided under the Component 2; (ii) improved basic service delivery financed by block grants under the Component 1. The risk that these development outcomes will not be sustained is rated Substantial, as explained in Table 3. Table 3: Assessment of Risk to Development Outcomes by Individual Criterion Rating and Development Outcomes Major Risk Rationale for Rating Criteria 19 Improved (i) Enhanced Modest. The REPs were approved by the Municipal Councils capacity and fiscal capacity of Institutional and have been updated every year. Revenue performance the participating support and enhancement practices are supported by the of the municipalities Technical development and implementation of an integrated participating from increased risks billing system. A special unit will be established in municipaliti OSR. the PCO to support operation of the system in the es to plan, six participating municipalities as well as 16 newly implement, selected municipalities. Municipal staff may need to and fund be trained periodically to operate and sustain the urban system. development (ii) Strengthened Modest. The relevant policy guidelines and procedures have activities. planning, Institutional been developed. Agencies at the central and implementation support and municipal levels may not update the guidelines and and reporting Technical procedures regularly. Guided by the O&M plans capacity of the risks developed under the Project, the municipalities are municipalities committed to cover O&M costs from their budgets. for urban Despite their improved capacity and institutions, development. there is still a risk in expanding municipal infrastructure development as the municipalities lack incentives and capacity, given delays in local elections and staffing issues at the local level. (iii) Increased Modest. The system is in place, but will face some capacity of the Institutional institutional changes as the federal governance participating support and system is set up. Training will need to be provided municipalities in Technical to the municipal staff on an on-going basis. complying with risks environmental and social safeguards, and procurement procedures. Improved (i) Improved Substantial. All sub-projects (except one) have been completed urban municipal Social, and are operating successfully. Some of the assets service infrastructure. Financial (i.e., local market, slaughter house, multi-purpose delivery. and building) can generate revenues to recover O&M Economic costs. O&M of other infrastructure, such as roads Risks. and drainage systems, would require financial support from the municipalities. (ii) Improved Modest. Basic service delivery has been financed by the basic service Financial block grants as well as community contributions. delivery financed and The municipalities and communities will need to by block grants Economic sustain the effective O&M of the facilities that through inclusive Risks. provide the services. approach. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry 20 Rating: Moderately Unsatisfactory 69. The Project marked the re-engagement of the Bank in the urban sector in Nepal since the late-1980s - an important first step of a longer term and programmatic engagement by the Bank to support the country’s decentralization and urbanization. Overall, the project was strategically relevant, and consistent with Government policies and priorities. Key lessons learned from international experience and other lending operations in Nepal were integrated in the design of the Project. The Bank team also proactively engaged with a number of stakeholders for project design and scope and sought consultation and technical buy-in. However, the project design and scope before a level-1 restructuring were too complex and ambitious relative to the capacity of the project agencies and participating municipalities, and could have been simplified (see Sections 2.1, 2.3, and 2.4 for more). The Bank carried out detailed institutional and technical assessments for project agencies but this assessment did not translate into adequate and realistic project design. (b) Quality of Supervision Rating: Moderately Satisfactory 70. The Bank conducted a total of 14 ISRs during the life of the Project, and the MTR was completed 24 months after effectiveness as stipulated in the Financing Agreement (FA). Most missions included joint field visits with the Government team, and the missions were effective in identifying and addressing any implementation issues. In addition, the Bank provided rapid day- to-day responses to the Government’s requests and queries on key issues. 71. During the first two years of implementation, the Project experienced significant delays due to the overly ambitious project design and limited capacity at the municipal level. As a result, the project’s performance was rated to Moderately Unsatisfactory until 2014. This prompted the GON and the Bank to take proactive measures and to restructure the Project in July 2014 to systematically address factors impeding implementation. The Project was restructured in a timely manner and the new arrangements triggered a turnaround in implementation. Supervision and mid-term review documentation, including the Aide Memoires and management letters, were appropriate with the right level of detail. The ISR ratings candidly reflected the state of the project at the time of their approval. 72. During the peak of implementation challenges (see Section 2.2 for more detail), the Bank team intensified its presence and supervision activities by providing proactive hand-holding support to key project activities and by mitigating risks. The Bank was responsive to the Government’s request for project restructuring. The Bank provided technical support for developing urban policy and regulations at both central and local levels, and facilitated knowledge sharing of relevant successful practices with trust fund support. 73. During the second half of the Project, the Bank was actively engaged in discussions with the Government to operate and manage municipal infrastructure and assets created by the Project and to mainstream institutionalize various activities under the institutional development component. Based on the strong leadership of the Government and proactive actions of the Bank, a follow-on lending operation is under discussion, which will support integrated infrastructure development and municipal capacity building, aligned with the ongoing transition to fiscal federalism. 21 (c) Justification of Rating for Overall Bank Performance Rating: Moderately Satisfactory 74. Taking into account the ratings of Bank Performance in Ensuring Quality at Entry (Moderately Unsatisfactory) and Quality of Supervision (Moderately Satisfactory), as well as the overall Outcome rating of Moderately Satisfactory, overall Bank Performance is rated Moderately Satisfactory. 5.2 Borrower Performance (a) Government Performance Rating: Moderately Unsatisfactory 75. The GoN’s commitment to improve capacity of the participating municipalities gradually increased over the course of the Project. The Government issued a number of policy directives and established strong ownership of the project design and objectives including setting up the steering committee chaired by both MoUD and MoFALD, changing the mindset of implementing agencies, and institutionalizing the gains from the Project. The role of the DUDBC was pivotal in maintaining coordination with the project stakeholders and synergy among agencies. However, there were significant delays in the early project implementation due, in large part, to the Government’s leadership and ownership issues such as the frequent turnover of Project Directors (PD)and other staff. The lack of strong project management by the PCO and the Executive Officer (EO) of the municipality through the life of the project was the major challenge in ensuring consistency and facilitating dialogue on the project activities. (b) Implementing Agency or Agencies Performance Rating: Moderately Satisfactory 76. Project agencies include: PCO, MoUD/DUDBC, MoFALD, TDF, UDTC, and the participating municipalities. Over the course of the Project, the roles of the project agencies became better defined to avoid any confusion of the project activities, and they worked collaboratively to achieve project targets. Although implementation was substantially delayed at the beginning, the subsequent follow up of activities ensured that almost all activities were satisfactorily completed at project closure. Since the restructuring, the ownership by the MoUD significantly improved, thereby demonstrating strong project management. The PCO and implementing agencies carried out frequent site visit and provided tight supervision, and technical support to ensure the project’s progress. The PCO also brought in a series of technical consultants to support the implementation and was staffed adequately, headed by a project director who oversaw the overall implementation and progress. In addition, participating municipalities also demonstrated strong commitment and interest in implementing the project as the project implementation picked up. As the knowledge and capacity to implement the project increased, the implementation agencies performed in a satisfactory manner. 77. Table 4 assesses the implementation performance of each agency. 22 Table 4: Implementing Agency Performance Implementing Performance agencies PCO Moderately Satisfactory. The PCO had overall responsibility for day-to-day project management, coordination, and monitoring of the project performance. Delays in hiring a capable MST were a major challenge and significantly impacted project progress. The lack of clarity in the roles of component managers and the PCO was a factor during the initial stages of the project. The PCO established strong accounting and financial systems, which were regularly updated. The PCO supported the other implementing agencies in building capacity for urban development activities. Reporting on all project activities and coordination with other agencies was strong. Capacity building activities for the municipalities were carried out regularly. MOUD Moderately Satisfactory. The performance of MoUD and DUDBC as & implementing agency, particularly for Component 2 and 3, was moderately DUDBC satisfactory. The ministry guided the PCO and promptly addressed project issues and provided comprehensive and timely implementation support on capacity building activities. The ministry also resolved implementation challenges and effectively coordinated work between the agencies involved in the project implementation. Nevertheless frequent changes in PDs were a major impediment to the smooth and timely delivery of project output. TDF Moderately Satisfactory. TDF played a key role in managing Component 2 and designated a full-time component manager in the PCO. The TDO’s functional and good working relationship with the municipalities was a strategic benefit for fostering necessary coordination required for the smooth implementation of municipal sub-projects. MOFALD Moderately Unsatisfactory. MoFALD provided support to the project, in particular, in coordinating activities under the Institutional Development Component in the municipalities. Institutional development activities for the ministry were implemented with delays and frequent changes. The ministry was not able to retain the EOs, who acted as the Mayors of the municipality during the project period. This was a major challenge in project implementation. UDTC Moderately Satisfactory. UDTC provided budget for conducting training, curriculum development and revision. Overall, training provided by UDTC was satisfactory. Going forward, UDTC will need to strengthen its capacity for technical training, especially in urban development. Municipalities Moderately Satisfactory. The lack of full ownership of the project by municipalities and frequent changes of municipal executive officers was a major factor for slow progress. Municipalities had lack of confidence in implementation of sub-projects in initial years of project because of very slow pace of preparation works and changes in sub-projects due to borrowing capacity added to slow progress. The municipalities did not have prior experience of working with the Bank and so required some time to understand the Bank guidelines and implement them. Despite all these, the municipalities proactively participated in the project activities to ensure the achievement of the project outcomes, and strengthened their capacity in planning, procurement, and project management. (c) Justification of Rating for Overall Borrower Performance Rating: Moderately Satisfactory 23 78. Based on ratings of Borrower Performance in Ensuring Quality at Entry (Moderately Unsatisfactory) and Quality of Supervision (Moderately Satisfactory), as well as the overall Outcome rating of Moderately Satisfactory, overall Borrower Performance is rated Moderately Satisfactory. 6. Lessons Learned 79. The Bank’s support to local governments in a fragile political environment and weak governance structure would benefit from a realistic and simple project design and clear implementation arrangements. The Project was the first Bank urban operation since the late 1980s and the project agencies and municipalities did not have prior experience of working with the Bank. It faced initial challenges in local-level implementation, including supervision, procurement, and safeguards, which resulted in early implementation delays. The initial project design could have been simpler and more realistic. In addition, the project implementation experience demonstrates that strong leadership, incentives, and clear implementation arrangements are key to effective project implementation. 80. A local governance program can achieve desired outcomes by taking the integrated approach of strengthening of local institutional capacity and supporting capital investment programs for access to service and for infrastructure provision. Stakeholder consultations suggested that the unique nature of the Project was the combination of improving infrastructure and basic services (which the municipalities lack) on the one hand, and strengthening institutional capacity to plan and implement infrastructure investments, on the other hand. By strengthening institutions in tandem with implementing physical infrastructure investments, the Project could demonstrate the benefits of sustained institutional development at the local level while addressing critical infrastructure needs. 81. Local government strengthening and institutional development is a slow and incremental process, especially in a fragile environment, and requires time to show results. During the initial implementation period, the Project required close support and follow up with participating municipalities, a strong socialization process, as well as institutional support before benefits materialized. This lead-time however had a pay back and resulted in improved sustainability of urban development. 82. An effective urban governance program requires institution building at both national and local levels. To improve decentralized urban infrastructure and service delivery, the Project strengthened institutions at the national level (including MoUD, MoFALD, and TDF) as well as the participating municipalities. This approach enabled scaling up or evolving to wider replication of programs built on strengthened policies and institutions at both national and local levels. 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies 83. Annex 7 provides a summary of the borrower’s ICR. The report is well prepared and draws on strong evidence-based facts based on independent reviews at the ICR stage. There were several issues were identified by the borrower during interactions with implementing agencies, municipalities, and stakeholders, which are very useful in informing project design of other similar projects in the future. 24 (b) Cofinanciers Not Applicable. (c) Other partners and stakeholders Not Applicable. 25 Annex 1. Project Costs and Financing Revised Appraisal Percentage Estimate at Actual Percentage Estimate at Components Restructuring (US$ m) of Revised (US$ m) Appraisal (US$ m) (IDA) (% of IDA) (IDA) (% of IDA) (IDA) Component 1: Block 20 41 5.00 4.43 4.73 Grants Component 2: Municipal 65 39 16.37 5.10 4.59 sub-projects Component 3: 15 20 3.63 3.38 2.34 Institutional Development Total Baseline Cost 25.00 12.90 11.66 Physical Contingencies Price Contingencies 0.00 0.00 0.00 Total Project Costs 0.00 0.00 0.00 Front-end fee PPF Front-end fee IBRD Total Financing 25.00 12.90 11.66 Required (b) Financing Appraisal Actual/Latest Type of Estimate Estimate Percentage of Source of Funds Cofinancing (USD (USD Appraisal millions) millions) Borrower 5.00 0.00 0 Local Communities/Municipalities 2.13 1.78 83.57 GERMANY: GTZ 3.00 2.66 88.67 International Development 25.00 11.66 46.64 Association (IDA) 26 Annex 2. Outputs by Component The project output’s by component is provided as below. Component 1: Strengthening Municipal Planning Capacity for Urban Development (US$4.43 million – IDA) Outputs: 1. Municipal block grants from IDA. Six participant municipalities were provided municipal block grants from FY 2012 to FY 2017. The table below summarizes Component 1 outputs by category. Outputs of Component 1 Sub-projects by Category S.N Project/Sectors Output Quantity 1 Roads Improvements 134.75 Km 2 Drainage improvements 17.05 Km 3 Water Supply Rehabilitation 80 Schemes/taps Public/Community Building Construction/Maintenance (Municipal 4 151 Nos office, community buildings, schools, hospital etc) Other Community Assets Construction/Maintenance (Parks, toilets, 5 temples, slab culverts, protection walls, play grounds, river trainings, 389 Nos electrification etc) Other Social Development Programs (Community level trainings, 6 695 Activities orientation, solid waste management, public health, conservation etc) Municipal Capacity Development: Including project management 7 expenditure and matching contribution for Component II Sub- 39 Activities projects 1,683 Sub- Total projects/activities 2. Planning and monitoring capacity development. The project provided technical support to enhance municipal capacity in: effective planning; implementing urban development activities; reporting on results and the use of the funds; and ensuring compliance with safeguard requirements. The municipalities adopted improved planning and reporting systems for the use of municipal block grants and submitted reports to the MoUD and PCO in a timely manner. Successful submission of the annual plans and progress reports shows strengthened capacity of the municipalities in planning and monitoring. Outcomes/Results: Over 124,000 people benefitted from Component 1 activities, of whom 44% were Female and 50% were from disadvantaged groups. Component 2: Capacity Building for Municipal Infrastructure Development (US$5.10 million – IDA, US$6.34 million - GoN and Municipalities) 27 Outputs: 3. Socio-economic infrastructure development: Capacity building for municipal infrastructure development component strengthened municipal capacity to plan, tender, implement and operationalize large scale urban infrastructure development sub-projects, as well as to deal with loan financing from the TDF. The participating municipalities implemented 15 sub- projects financed by the Project grant, TDF loan and municipal counterpart matching fund, as summarized in the table below. Socio-economic Infrastructure Development Outputs by Category S.N Project/Sectors Output Quantity 1 Roads Improvements (Black Top) - 5 Sub-projects 30.4 KM 2 Parks Improvement – 4 Sub-projects 44374 SqM 3 Local Market Improvement - 2 Sub-projects 18061 SqM 4 Bridges - 1 Sub-project 48 M 5 Multipurpose Building Construction - 1 Sub-project 355 SqM 6 Temple Conservation 1 Sub-project 7 Entrance Gate Beatification 1 Sub-project Total 15 Sub-projects 4. O&M system: The project provided technical support to prepare O&M plans for the Dhnakuta weekly market and two parks in Lekhnath. Outcomes/Results: 14 out of 15 construction contracts were completed (the final sub-project is 99% complete) at project closure even though several obstacles occurred during the project implementation period such as shortage of supply of construction materials, devastating earthquake, economic blockade etc. One sub-project was dropped after signing of the contract due to land clearance issues. Component 3: Institutional Development (US$ 3.38 million – IDA, US$ 2.66 million - GIZ) 5. This component supported institutional strengthening of participating municipalities and central level agencies, such as the Ministry of Urban Development (MoUD), Ministry of Federal Affairs and Local Development (MoFALD), Department of Urban Development and Building Construction (DUDBC), Town Development Fund (TDF) and Urban Development Training Centre (UDTC). Component outputs are summarized below. Outputs: 6. Institutional strengthening of MoUD: The project provided support to MoUD to prepare the Nepal Urban Development Strategy (NUDS), which was approved by the GoN in 2017. This sub-component strengthened UDTC to develop capacity of municipalities in Nepal. A total of 635 municipal staff (including those from non-UDGP/ETP municipalities) were trained under 17 different training programs. 7. Institutional strengthening of MoFALD: Governance and budget planning guidelines were prepared and implemented by the MoFALD for planning, programming, and budgeting by the municipalities. The project also provided support to the MoFALD to publish compiled legal and policy document related to municipal governance and supported implementation of capacity development programs in non UGDP – ETP municipalities. 28 8. Institutional strengthening of TDF: A Business Restructuring Action Plan (BRAP) was prepared by the TDF and institutional development activities were carried out in line with the BRAP and TDF’s 4-year Business Plan (2013-2016). TDF has developed and applied standard operating procedures (SOPs) contributed to improve loan recovery rates over time. Institutional development support contributed to enhance TDF capacity in project finance, fund and risk management, business development, MIS, and social and environmental safeguards by in-sourcing experts of concerned field to the TDF. Standard lending procedures were defined and implemented by the TDF. TDF’s outreach to all 217 local governments was improved by organizing seven orientation programs in the various regions of Nepal. More than seven in-depth studies and system design support contributed to strengthen capacity in terms of loan appraisal, loan processing, IMS, business promotion, urban financing, loan and grant mix design, and total quality management. Four training programs were implemented by the TDF for 125 persons participants. 9. Institutional strengthening of participating municipalities. Revenue Enhancement Plans (REPs), Operation and Maintenance (O&M) Plans, and Investment Plans (IP) were prepared, implemented and reviewed and updated on an annual basis for project municipalities. The municipalities introduced a system to allocate budget for O&M as per the O&M plans. An Integrated Revenue and Accounting Software (IRAS) has been developed and is being implemented. Seven training programs in key capacity gap areas were organized for 275 municipal staff, and six training manuals were prepared to organize the training programs. GIS maps of all six municipalities have been prepared to facilitate planning and revenue mobilization activities. Planning and building by-laws of all six municipalities have been prepared and are being implemented after approval by the concerned municipal councils. 10. Project management. A project management team was in place in PCO; however, the delayed recruitment of MST (after the closure of the GIZ funded MST) and frequent changes in project management concept became an issue. Critical areas for managing project activities included: the role of TDF in project implementation support: the PCO's institutional capacity to coordinate all central level activities; natural calamities; and political uncertainty. e.g., creation of new MoUD, changes in municipal boundaries, absence of elected municipal representatives, . The PCO functioned well until the end of the project. 11. Project reporting. All trimester, annual, mid-term and final reports, as well as reports of studies were issued on time. Outcomes/Results. All six participating municipalities prepared and implemented O&M Plans and Investment Plans. Municipal own source revenue growth rate in the last year of the Project exceeded the target of 25% and reached 32%. 29 Annex 3. Economic and Financial Analysis Economic Analysis 1. The objective of the Project was to improve the capacity of the participating municipalities to plan, implement and fund urban development activities. Economic benefits of the Project comprised of benefits from increased planning, implementing and financing capacity of municipalities, measured by qualitative benefits. Cost-benefit analysis was noted carried out because of lack of reliable data or analytical tools given the project objective and nature of the sub-projects. Component 1: Municipal capacity for planning urban development 2. Over the course of the Project (FY 2012 to 2017), 1,683 sub-projects and activities were carried out by using block grants. The table below provides a summary of investments under Component 1. Summary of Investments Using Block Grants Percentage of total Investment Investment Output amount S.N Project/Sectors (NPR (USD Quantity under Million) Million)* Component 1 (%) 1 Roads improvements 134.75 Km 137.6 1.45 28% 2 Drainage improvements 17.05 Km 22.5 0.24 5% Water supply schemes 80 3 19.5 0.20 4% rehabilitation Schemes/taps Public/community building construction/maintenance 4 151 Nos 60.1 0.63 12% (Municipal office, community buildings, schools, hospital etc.) Other community assets construction/maintenance (Parks, 5 toilets, temples, slab culverts, 389 Nos 133.6 1.41 27% protection walls, play grounds, river trainings, electrification etc.) Social development programs (Community level trainings, 6 orientation, solid waste 695 Activities 64.3 0.68 13% management, public health, conservation etc.) Municipal capacity development activities (Including project 7 management expenditure and 39 Activities 59.1 0.62 12% matching contribution for Component 2: Sub-projects) 1,683 Sub- Total projects 496.7 5.23 100% /activities * Assumed 1 USD = NPR 95 in average 30 3. Economic benefits to poor and disadvantaged groups. The Project targeted disadvantaged groups (women, children and disadvantaged community) to improve their socio-economic conditions through preparing annual investment plans of the block grant. About 35% to 45% of the grant amounts were allocated to these groups and contributed to the social and economic development of about 62,000 persons in these groups. Benefits of these investments include reduced transport costs, increase awareness and social harmony, reduced flood damage, reduced incidence of disease, and increased job creation. 4. Cost effectiveness. Participatory planning processes adopted to identify sub-projects contributed to cost-effective investments and more efficient use of public funds. The planning and reporting format developed by the Project for block grants reflected sub- project details, including the number of beneficiaries. Efficiency, ownership and sustainability of investments were enhanced by mobilizing user committees to implement project activities. The adoption of direct fund transfers reduced transaction costs associated with centralized financing of municipal infrastructure. 5. Leveraging community fund mobilization. Mobilization of users contributed to additional investment in development activities. It is estimated that additional funds (as a percentage of block grants) mobilized by the community were as follows: (i) Itahari - 50%; (ii) Mechinagar - 30 %; (iii) Dhankuta, Tansen and Baglung - 20%; and (iv) Lekhnath - 15%. 6. Economic sustainability. Establishing O&M planning and funding mechanisms enhanced municipal O&M capabilities for the sustainable operation of municipal assets. 7. Improved scale economy. The availability of additional untied block grants enabled participating municipalities to consolidate funds from different sources to undertake small scale community level infrastructure development sub-projects and socio-economic development activities. More efficient use of government funds also contributed to possible access to better sources of funding for investment in the longer-term. Component 2: Municipal Capacity for Implementing Infrastructure Investments 8. A total of 15 sub-projects were implemented under Component 2. TDF had carried out cost effectiveness analysis at sub-project appraisal. The table below presents a summary of investments under Component 2. Summary of Component 2 Investments Percentage of Investment Investment total amount Output S.N Projects (NPR (USD under Quantity Million) Million)* component 2(%) Roads improvements (Black 30.4 KM (5 1 416.2 4.38 64% Top) Sub-projects) Parks improvement 44374 SqM 2 (4 Sub- 37.9 0.40 6% projects) Local market improvement 18061 SqM 3 53.6 0.56 8% (2 Sub- 31 projects) Bridges 48 M (1 Sub- 4 61.3 0.65 9% project) Multipurpose building 355 SqM (1 5 28.5 0.30 4% Sub-project) 6 Temple conservation 1 Sub-project 38.3 0.40 6% 7 Entrance gate beatification 1 Sub-project 10.4 0.11 2% 15 Sub- Total 646.3 6.80 100% projects * Assumed 1 USD = NPR 95 in average 9. Increased project implementation capacity. With technical support from the TDF and PCO, implementation capacity for large scale municipal infrastructure development project has been enhanced. This has resulted in lower implementation costs and improved efficiency through streamlined and timely implementation processes; more effective investment supervision through: improved procurement; and increased transparency and accountability borne out of systematic reporting. 10. Cost effectiveness. The TDF ensured the selection of least cost options and technology. All sub-projects are considered the most cost effective options to maximize economic benefits to citizens. 11. Economic benefits. The selected sub-projects are considered most economically efficient subprojects, contributed to enhance local economy. Economic benefits of the major sub- projects are: (i) Transportation. About 79,000 people benefited directly from the transportation sub- projects. Vehicle operating cost savings, time savings and health expenditure savings are the direct economic benefits for the population served. (ii) Tourism, culture and recreational. The seven sub-projects in this group (2, 6, and 7 in the table above) improved tourism and recreational facilities and contributed to private sector employment generation. These sub-projects also enhanced municipal revenue through service charges levied on the users. Park sub-projects also contributed to the protection of the natural environment. (iii) Local market development. The two market improvement sub-projects provided a more comfortable and safer trading environment to vendors and customers. As a result of the permanent structures constructed in the market, the frequency of selling vegetables increased from weekly to daily. The project also contributed to a cleaner market environment and the provision of slaughter houses. 12. Economic sustainability. The project has put in place mechanisms for the sustainable operation of project financed assets. O&M plans for the weekly market and parks were prepared to ensure sustainable operation, with the participation of the private sector. Component 3: Institutional Development - Municipal revenue enhancement capacity 32 13. Increased generation of OSR. Component 3 provided support to prepare and implement Revenue Enhancement Plans (REPs) and the development and implementation of an Integrated Revenue Billing and Accounting Software (IRBAS). Own source revenues of the six participating municipalities increased by 235% in the five-year period (FY 2010/11 to 2015/16) and improved municipal capacity to finance O&M of municipal assets, respond to urgent local needs, increased borrowing capacity, and created increased space for investments. Financial Analysis 14. The TDF carried out a borrowing capacity assessment of the municipalities at appraisal to ensure their financial capacity for operations and maintenance and loan repayment. All sub-projects were selected within the financial capacity of the participating municipalities, i.e., debt service coverage ratio of 0.3 or less and total revenue to expenditure of at least 1.0. 33 Annex 4. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Responsibility/ Names Title Unit Specialty Lending Balakrishna Menon Program Leader MNC03 Task Team Leader Parameswaran Tashi Tenzing Sr. Sanitary Engineer SASDU Co-Task Team Leader Elisa Muzzini Senior Economist GSU10 Economic Analysis Mihaly Kopanyi Sr. Infrastructure Specialist GGO19 Municipal Finance Rohan G. Selvaratnam Operations Analyst GFA12 Aly Zulficar Rahim Asst. to the President EXC Aditya Adhikari Political Economy Expert Political Economy study Gabriela Aparicio Junior Professional Associate Bigyan Pradhan Sr. FM Specialist SARFM Financial Management Krishnaswamy Rajivan Municipal Finance Specialist Municipal Finance Silva Shrestha Research Analyst SASDU Operations Bandita Sijapati Political Economy Expert Political Economy study Rajashree Paralkar Sr. Country Officer SACNP Jeff Thindwa Lead Social Development Specialist WBI Satya N. Mishra Social Development Specialist SASDS Social Riaz Khan Institutional Development Expert Institutional Review Mei Wang Sr. Counsel LEGES Legal Drona Raj Ghimire Environmental Specialist SASDI Environment Junxue Chu Sr. Finance Officer CTRFC Finance John Bevan Conflict Expert Kiran Ranjan Baral Sr. Procurement Specialist SARPS Procurement Sunita Gurung Program Assistant SACNP Sumbo Adeyemo Program Assistant SASDU Supervision/ICR Yoonhee Kim Sr. Urban Economist GSURR Task Team Leader Water Supply and Sanitation Silva Shrestha GWADR Co-Task Team Leader Specialist Urban Planner/ICR Sangmoo Kim Urban Specialist GSURR author Bigyan Pradhan Sr. FM Specialist SARFM Financial Management Yogesh Bom Malla Financial Management Specialist GGODR Financial Management Shambhu Prasad Uprety Sr. Procurement Specialist GGODR Procurement Tashi Tenzing Consultant/Urban Development GSURR Urban Development Noor Tamrakar Consultant/Municipal Engineer GSURR Municipal Engineer Municipal Finance/ICR Pawan Lohani Consultant/Municipal Finance GSURR economic analysis Prakash Awasthi Consultant/Environment GENDR Environment Hari Bhattarai Consultant/Social Development GSURR Social Development 34 Sushila Rai Program Assistant SACNP Michelle Chen Program Assistant GSURR (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) Stage of Project Cycle USD Thousands (including No. of staff weeks travel and consultant costs) Lending FY10 81.68 216.5 FY11 0 144.5 Total: 81.68 361.0 Supervision/ICR FY12 227.17 832.2 FY13 0 200.8 FY14 0 15.3 FY15 0 14.3 FY16 0 7.5 FY17 3.99 13.9 Total: 231.16 1084.3 35 Annex 5. Beneficiary Survey Results N/A 36 Annex 6. Stakeholder Workshop Report and Results N/A 37 Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR 15. Urban Governance and Development Program: Emerging Town Project (UGDP: ETP) is one of the most important urban development programs of the Government of Nepal launched in 2011 with the support from World Bank. The original schedule of completion of the project in 5 years (July, 2011 – July, 2016) was extended by 6 months (until January, 2017). Supporting the development efforts of six of the fast growing secondary towns referred as the Emerging Towns is an appropriate and timely steps towards overall urban development initiatives of the country. UGDP: ETP was driven with a concept of urban governance in local institutions, so that these institutions become more capable and self sustainable in long run in urban development of their respective municipalities. This conceptual framework was supported by infrastructure projects as a component of the process of ‘learning by doing’. Restructuring of the Project 16. During the implementation and at the middle of the project certain changes were introduced in January 2013 to enhance the efficiency and output of the project. The restructuring in general did mitigate certain impediments and brought about a clarified course of action. These changes were done based on the factors related to the changes in ground reality and new development during the implementation phase. These factors are:  Establishment of Ministry of Urban Development (MoUD) in May 2015,  Borrowing capacity of municipalities lower than assessed earlier,  Institutional capacity of municipalities not adequate as was assessed earlier,  Coordination mechanism among the PCO, participating municipalities, project agencies, and MST lacked clarity, and  TDF’s financial situation improvement was required as it had accumulated overdues to GoN. 17. The changes addressed the above challenges and enabled TDF to focus on its primary function of a lender contributing to its financial situation. The changes are reflected in:  Re-alignment of the Project Development Objective (PDO) and consequently in the PDO indicators of the Result Framework and Monitoring,  Reduction in the scope of the municipal infrastructure sub- projects, and  Enhancement in support to municipalities. 18. The summary of the changes is listed below. List of changed items in restructuring:  Project Development Objectives (PDO)  Result Framework (Based on the new PDO)  Financial Plan–The cost was scale down to $US 25.00 m from $US 35.1 m.  Reallocation between Disbursement categories (based on the new Financial Plan)  Disbursement estimates (based on the new Financial Plan)  Cost and components (based on the new Financial Plan)  Economic and Financial Analysis 38 Major Achievement and Project Development Objectives 19. Reviewing the overall outcome of the project and observing the present performance approach of the six participating municipalities, it can be safely stated that the achievement of the project is good and encouraging. The objectives of the project are well accomplished. The project has achieved 124,224 people benefitted against the target 92,000 from the project activities. 20. The six participating municipalities got significant stimulus in urban development activities through the project's program. The achievement comprises the knowledge gained by the municipality staff in various disciplines of urban development viz. planning, implementation, and municipal financing, competence in implementing urban infrastructure works, promoting inclusive approach, working with national and international development partners, and empowering communities in project planning and implementation. At the same time the direct impact of UGDP: ETP in the municipalities other than the improvement in urban governance is the project's role in the increase of own source revenue, increase in their infrastructure asset thereby affecting the efficiency of the population and supply of more urban plots in the land market. 21. The major achievements of UGDP: ETP are explained in detail in the following paragraphs. Municipal Planning Capacity for Urban Development Strengthened 22. An original way of strengthening municipal planning capacity for urban development, shortly called 'Block Grant' under 'Component I' was highly successful. In total, 1,245(Mechinagar -220, Itahari-296, Dhankuta -224, Lekhnath -189, Tansen -166, and Baglung -150) number of projects were planned, implemented and monitored by the local communities. These projects could address directly and quickly the important but small scale immediate needs of the communities. Moreover, projects under this component are spatially widely distributed inside the municipality. This component also provided the community to demonstrate their capability of planning, management and contributing to the overall urban development. In western cluster of municipalities projects priorities were roads, training and public awareness, whereas, in the western cluster it was drinking water, buildings and public awareness. Community Involvement 23. The other achievement is the sustainability reflected in the community's involvement in project selection, design, implementation, fund raising, operation, maintenance and further enactment required for the desired outcome of this component. Communities contributed towards the cost of the project which differed from municipality to municipality. It was 30 % in Mechinagar, 50% in Itahari, 20% in Dhankuta, 15% in Lekhnath, 20% in Tansen, and 20% in Baglung. It is interesting to note that, although the fund available to each projects through grant and community contribution were a fixed amount; in most of the cases for many reasons whenever more funds were required for completion of the projects, community bore the additional fund estimated to be 50% in general, thereby increasing the worth of the project. Beneficiaries and Social Inclusion 24. The project has achieved 124,224 people benefitted against the target 92,000 from the project activities. This achievement could be attributed to the fact that more communities 39 were encouraged to participate in the project and the projects were very widely scattered around the municipalities. Women, children and the Disadvantaged groups 25. The project was very successful in benefiting the female group, the children and other disadvantaged groups of the society. The percentage of female beneficiaries as the percentage of total beneficiaries was higher every year than targeted percentage of 35. The percentage achieved was 51, 45, 43 and 44.1 corresponding to the second, third, fourth, and fifth year of the project. This was achieved as more female participated and demonstrated their devotion, enthusiasm and strength in planning and implementation of the projects. 26. The percentage of disadvantage group beneficiaries as the percentage of total beneficiaries was higher every year than targeted percentage of 10. The percentage achieved was 59, 53, 51 and 49.6 corresponding to the second, third, fourth, and fifth year of the project. 27. This achievement was made possible because among others, municipalities could allocate 35 percent of the grant fund every FY for women children and disadvantage groups as was the target of the project. The grant allocated to this group was 35, 34, 34, 34.97 and 45.37 percent every corresponding year since 2012/13 to 2016/17. Despite minimal deficiency in the third and the fourth FY, this is considered as an achievement in the light of inclusive development efforts and a part of the urban governance objectives. Capacity for Municipal Infrastructure Development Enhanced 28. Under Project Component II: Capacity Building for Municipal Infrastructure Development, which was managed by TDF having designated full-time Component Manager, is capital intensive in nature and provided opportunity for big scale and municipal wide infrastructure development. It also provided the opportunity for heritage conservation in Tansen and Dhankuta. Although there have been few instances of under achievements, this component in totality is considered satisfactory taking into account of the percentage of progress made, and considering the initial weak delivery capacity of the municipalities. The whole process of procurement of big scale construction projects and working side by side with GoN and international development partners has boosted the capacity of municipalities in planning and implementation of city wide infrastructure projects. Out of 15 such projects all but one achieved less than hundred percent of completion. However, the overall completion of this component in average is 99%. 29. Although, considerable technical support was provided to municipalities in the whole process in the implementation of this component by PCO, the ultimate success lies in the achievements related to urban governance and attainment of the PDO. Procurements 30. Bidding process for construction contract of the sub-projects was successfully completed in all the six municipalities before the targeted date. The completion was planned in the 4th FY but was achieved in the 3rd FY of the project. In total, 16 numbers of sub-projects were awarded in the 3rd year; one of them has to be dropped for the lack of support from 40 the local beneficiaries. All the process in awarding the contracts followed the guidelines of World Bank and GoN. Project Monitoring and Supervision 31. The total number of sub-projects under Component II was 16 in number, out of which one was dropped for the lack of support from the local community. Fourteen sub-projects were completed by the end of the project. Despite the disturbances due to the Great Earthquake of April 25 and May 12 and four full months of economic blockade immediately following it, the overall achievement should be considered good although with few lapses of small percentage of uncompleted work in one municipality and inconsistent speed of progress work in few cases. The overall completion of this component is 99 percent in total including additional project of Upgrading of Hawaii Chowk to Tengra Khola Bridge Road, Itahari with the contract amount of Nrs. 1,485,900.19. The project municipalities had never implemented big scale projects before UGDP: ETP which is one of the reasons of lapses in the progress. Difficulties faced by municipalities in the sub-projects were observed during all stages of implementation. In spite of this, the objective of improvement and strengthening capacity of municipalities in general was substantially realized. 32. It is noteworthy that all the municipalities did prepare an Operation and Management (O&M) Plan for all the sub-projects and some of them are being implemented successfully contributing to the OSR. Implementation of the O & M for ensuring sustainability of the infrastructure assets created under UGDP: ETP is a major concern for its loan recovery, for which TDF will be involved in close monitoring of the assets in post-construction phase. Reporting Capacity Enhanced 33. Periodic reporting and information sharing by the municipalities gradually improved during implementation of UGDP: ETP. In general, there was regularly and timely submission of annual plans for the municipal block grant to MoUD for approval. These plans were submitted after the approval from the Municipal Council. Based on these plans GoN released the fund to the municipalities. All six participating municipalities also submitted regularly annual progress reports to PCO. These reports contained the information related to the achievements in relation to the target expressed in volume and cost. These information included the total number of beneficiaries, and also number of disadvantage people (male, female, and children). Environment and Social Safeguard 34. Environmental and social safeguard aspect was handled excellently. UGDP: ETP was an opportunity for the municipalities to understand the importance of environmental and social safeguard issues and act accordingly. No major environmental issues were observed and minor issues were mitigated by the initiation of the communities and municipalities (case of tree plantation in Tansen).Other small environmental issues in road construction were also mitigated with high professional standard. Social issues related to land for road was also resolved in an excellent way with full cooperation from the community (Baglung and Itahari) with support from municipalities. 41 Institutional Development 35. Institutional development although is a continuous process, the effort during UGDP: ETP in strengthening of institutions of all level and specifically of the participating municipalities were very successful. The other central level institutions are MoUD, MoFALD, TDF, and DUDBC. Various activities for the capacity development of these institutions were undertaken with a goal to enhance urban governance and sustainability of institutional changes brought by the project with better understanding of ownership and outcome of UGDP: ETP. This included improvement of working environment (Office spaces, Furniture and IT Equipment), preparation of policy guidelines, enhancement of municipal financial management capacity, training the staff for financial management, community development, environmental and social safeguard, strategic urban planning and building among others. Policy Guidelines and Procedures for Municipalities  Policy Guidelines and Procedure for municipalities on governance and budget planning was updated by MoFALD and the implementation is continuing since the 4th year of the project. Based on its importance and demand, these documents are in need of further production in greater number.  Nepal Urban Development Strategy was prepared by MoUD and revised after the Gorkha Earthquake, 2015 and has already been approved by GoN.  Municipal Finance Framework, a component of the National Urban Development Strategy (NUDS) of Nepal was prepared and is in process for approval by GoN.  The application of standard lending policies and procedures to all ETP municipal sub- projects was achieved in 3rd year of the project period. Strengthening of TDF 36. Under the ID component, TDF underwent major refurbishment by implementation of its Business Restructuring Action Plan (BRAP), approved by the GoN, and institutional development activities were carried out in line with the BRAP and TDF’s 4 -year Business Plan (2014-2016), ensuring sustainability of institutional changes brought by UGDP: ETP. 37. The major institutional development activities were carried out to achieve following areas;  Restructuring and work-out problem loans in the TDF;  Establishing/ strengthening units, systems, procedures, skills and capacities for project finance, fund and risk management, business development, human resources, financial management, procurement, MIS, and social and environmental safeguards;  Improving TDF’s outreach to local governments; and  Essential equipment, vehicles and office refurbishment. 38. Successful implementation of BRAP helped TDF to strengthen itas a long-term financing institution for municipality infrastructure. Fundamentally, it had improved capacity in whole project cycle, including project appraisal system by standardizing its appraisal procedure and also improved collection efficiency. At the same time, TDF has developed and applied standard operating procedures (SOPs) to efficiently process its business, which has resulted improved loan recovery rates over the time. TDF by rescheduling the 42 collection plan has been successful in achieving the collection ratio of 90 % by the end of project time. In addition, TDF management could engage in further improvement and formalization of the project appraisal manual and is in process of preparing BRAP II under its Business Plan (2016/17-2019/20). Municipal Own Source Revenue Increased 39. For increasing and strengthening the financial capacity and thereby increase in fund management capacity, various actions were undertaken by municipalities. Municipalities prepared Revenue Enhancement Plan (REP) which was approved by Municipal Council and updated every year to address the changed context. The annual increase in Own Source Revenue (OSR) is a clear indication of the progress made in this direction. Cumulative increase of 33 percent at the end of the project period was achieved, while the target for this period was 25 percent. Increase in the per capita OSR was 235 percent in average as is shown in the table below. Per Capita OSR progress in project period Municipality Base Yr 2010/11 Final Yr 2015/16 Increase % Mechinagar 323 526 163% Itahari 274 676 247% Dhankuta 263 508 193% Tansen 220 455 207% Baglung 209 447 214% Lekhnath 158 570 360% Average Total 246 577 235% 40. Although it is not absolutely correct to state that this increase is associated solely with the effort of the project, as many other factors also helped in this increase, nevertheless, UGDP: ETP's important role has been widely accepted. Other activities like public awareness, capacity development of the staff were also undertaken for this purpose under UGDP: ETP. Integrated Billing System 41. The REP prepared did proposed a tax administration reform through use of Integrated Billing System (IBS) and dissemination of information to the tax payers. Revenue enhancement was thus supported by development and implementation of an Integrated Revenue Billing and Accounting Software (IRBAS) as was prescribed by REP. This made the revenue collection a smooth process both for the taxpayer and the municipalities. The newly developed IRAS integrated various 17 different tax and fees modules into this system i.e. Integrated Property Tax (IPT), Business tax, House/Land Rental Tax, Vehicle tax, Sewerage fees and Solid Waste Management Fee. In addition to this, with the request from the municipalities, Deposit Module has been integrated to the Integrated Billing System. For the smooth operation of the Integrated Billing System in the 6 existing as well as 16 newly selected municipalities, special unit termed as 'IRBAS Unit' is going to be established in the PCO. 43 Investment and O& M plans: 42. Preparation of Investment Plan (IP) and O&M plan were prepared by all six participating municipalities for the first time. These were implemented after the approval by the Municipal Council and were updated annually to address the changing context. Accordingly, Municipalities started to allocate fund for maintenance of the infrastructures in their annual budget. Capacity Development Trainings 43. Trainings covering various topics for urban governance were intensive and successfully undertaken. The training method adopted was basically of class room method, but site visits to more developed countries were also undertaken. Participants in the training covered all the stakeholders of the project and the subjects covered ranged from urban planning, National Building Codes and by-laws, environment and social safeguard, project management, municipal finance, municipal Information management, social inclusion, solid waste management to disaster risk management, and others. Six training manuals were produced during the training program. And booklets on 'Training Series for Local Bodies in Nepal' were also published that can be used by other municipalities as well. This whole training was conducted by UDTC, Pokhara and PCO. 635 participants which include staff from other than the UGDP: ETP municipalities benefitted in the training conducted by UDTC. PCO conducted the training in different municipalities and 275 staff was benefitted. 44. Indigenous People and Vulnerable Community (IPVC). Further to the training mentioned above, trainings related to employment generation and livelihood for the IPVC groups living in the vicinity of the sub-projects were also undertaken in which 227 people participated in this training. Municipalities acquired GIS maps 45. All the six participating municipalities now possess GIS map of their municipalities prepared under UGDP: ETP. This map will be helpful for them for municipal development planning. But, as the area of Itahari, Dhankuta and Lekhnath was expanded after the preparation of the maps, inclusion of the increased area in the maps needs to be undertaken in future. Planning norms and building bye-laws 46. All the six participating municipalities successfully developed the planning and building By-laws and were approved by the respective municipal council. These by-laws are now being implemented. Although by-laws for Tansen, Dhankuta, and Mechinagar were prepared in the 3rd year, because of the great 2015 April earthquake these were revised following the guidelines of MoUD. Management Support Team (MST) 47. The objective to enhanced project management and technical support to municipalities and PCO through MST was well achieved. Municipalities were benefitted in the field of, 44 among others, project planning, and procurement, compliance with environmental and social safeguard, monitoring, revenue enhancement, and reporting. 48. Problems occurred when GIZ funded MST was withdrawn and new MST later funded by IDA started without any overlapping with previous MST and with a break of six months period. Compounded with other national issues referred in this report, great efforts had to be exercised by PCO to keep the MST in function and to continue its support to the PCO and municipalities. Support of Participating Agencies  The project received all necessary support from MoUD and DUDBC in guiding the PCO and promptly responding positively to the issues in the project. Interaction in the Steering Committee and initiating decision making actions has helped UGDP: ETP in many fronts in approving adequate budget and other administrative matters. Nevertheless frequent change of Project Directors had been a big impediment to the smooth, faster and timely delivery of the project output.  MoFALD has also been a support to the project especially in Institutional Development Component and specifically in revenue enhancement activities. MoFALD had been instrumental in the implementation of integrated billing system referred as ‘Integrated Revenue Billing and Accounting Software (IRBAS)'. One field where MoFALD could not be effective is in retaining Executive Officers (EO) for longer duration. In the absence of elected Mayor and other people's representatives, EO plays a dominant role in the urban governance of municipalities but they were transferred frequently.  TDF played a good role in managing the Component II: i.e. Socio-economic Infrastructure Development, having designated full-time Component Manager, and overall fund management. TDF’s functional and good working relations with the municipalities was a strategic benefit for fostering necessary coordination required for smooth implementation of sub-projects. At the same time, TDF’s business was restructured with implementation of Business Restructuring Action Plan (BRAP), ensuring sustainability of institutional changes brought by UGDP: ETP. Based on BRAP achievements, TDF has further planned BRAP II, under its new Business Plan (2016/17- 2019/20) to transform TDF from business as usual to strong financing intermediary.  Despite very many instances when Municipalities could not perform as required, they did show the zeal and sufficient participation in achieving the objectives of the different components of the project. Because of this municipalities could cope with the more sophisticated procurement system and acquired knowledge, and experiences of the complexity of project management; and could find ways to enhance own source of revenue.  The community played a good role in achieving the objectives of the project. They did show their support with none or minimal reservation to the activities of the project. This was more visible in component-I (Block Grant). In some cases beneficiaries support committees were also formed (Lekhnath) to enhance the implementation of sub -projects. Their support was valuable in environmental and social safeguard activities also. 45  World Bank apart from supporting with the loan and grant fund did extremely well in supporting the output of the project. Regular review of the project and guidance from a wide range of national and international experienced experts played an important role in moving the project despite different odds it faced. At the same time, its role in transferring management skill and procedures enhanced the capacity of PCO and DUDBC.  Performance and support from consultants and contractors was not so good and not so bad. Some of the contractors performed professionally well while some were not consistent in their deliveries. International consultants also could not impact much in the performance of the project. Capacity development need for consultants and contractors was starkly observed during their functioning. Issues and Problem during Implementation 49. UGDP: ETP, during its implementation phase faced quite a number of challenges in addition to the issues that were observed in appraisal. In spite of the conclusion of WB on the increase in risk from moderate to significant during restructuring, PCO was successful in moving the project to a substantially good position and achieved the objective of the Project Development. Problems that came up during the implementation are:  Executive officers that are assigned the role of mayor and chief administrator by MoFALD in the municipalities are de facto the leader and the one who is supposed to feel the ownership of the project. It happened that EOs was transferred frequently and most participating municipalities were led by five different EOs during the projects life time. This break in command had proved to be difficult moments for the project.  Project Directors (PD) of PCO were also changed quite frequently. PCO got four PDs during the implementation of the project.  Generally, coordination is usually said to be weak in Nepal. This has also been a problem in the project because of presence of many agencies and stakeholders without any specified defined duties and responsibilities. This has made coordination more sophisticated that it should have been.  PCO, although the main leading part of the Project does not have strong position in the fund flow system. This is one of the important problems in overall operation and management of the project.  New and unexpected problems arose as a natural and political disaster. The great earthquake of April 25 and May 12 stopped the country for more than a month having a domino effect in the life of the people for a longer period. The problem was compounded by a longer economic blockade immediately after the earthquake. The effect of this was reflected in restricted movement of people, scarcity of resources and manpower and a big break in all sectors of development activities of the country. In addition to this, there were number of agitation that affects the project work of few participating municipalities such as Tansen Municipality. Lesson Learnt 46  It was once more providing UGDP: ETP that continuation of management leadership is critical to make projects a success and to retain institutional memory. This refers to the EO and PD.  Establishment of Project Implementation Office in Municipality (something of this nature) with continuous support from DUDBC (PCO) can help in smooth management of projects in municipalities. PIO may be staffed with a combination of hired and permanent municipal staff specially assigned for the Project.  Block grant project should be selected under certain criteria and should not be taken in a free to all basis. Follow up of each and every such single project, reporting, and final outcome need to be documented and reported.  Selection of projects is to be supported by a comprehensive urban planning of the municipalities. This is a very important lesson learned during the interaction with the local people and also is the view of national urban governance experts. Provision of access to experts for guidance to the community in selecting the projects should be taken as an inseparable part. This will enhance the ownership and opportunity for realization of the vision of development of municipality. Furthermore, and will also help in sustainability.  Communities' involvement and social inclusiveness has been proved to give positive impact in urban governance in project formulation, and implementation.  A project cannot be an end in itself, so mechanism of continued project initiatives and extended support is necessary for sustainability of the achievement. It is more so for small and medium sized emerging towns.  Sub-projects in UGDP: ETP were not so big enough in volume that the municipalities could not have been able to fund by itself. However, UGDP: ETP project provided a totally different approach than the prevailing practice of selecting, implementing, monitoring and evaluation and above all introducing quality standards and other high technical requirements.  Creation of urban infrastructure assets in municipalities for improved service provision through debt financing from TDF was further enhanced by adopting standardized project appraisal manual, including O & M plan.  TOR of the participating agencies of the project was missing in UGDP: ETP. This has been stated in para 3.8 c above.  Using UDTC, Pokhara for training was good, but its weakness in the capacity of technical training was also noted down.  The restructuring of UGDP: ETP in 2013 was a timely intervention. It saved the project by providing judicial fund utilization, mitigating risks developed during implementation and by realization of ground reality in the changed context. 47 Annex 8. List of Supporting Documents  AfDB. 2015. Study on Road Infrastructure Costs: Analysis of Unit Costs and Cost Overruns of Road Infrastructure Projects in Africa, African Development Bank (AfDB).  Government of Nepal. 2007. National Urban Policy, Ministry of Physical Planning and Works, Department of Urban Development and Building Construction.  Government of Nepal. 2010. 12th Three Year Interim Plan. 2010/11-2012/13. National Planning Commission. Singhadurbar, Kathmandu, Nepal.  Government of Nepal. 2017. National Urban Development Strategy, Ministry of Urban Development.  Implementation Status and Results Reports Series of UGDP-ETP. December 21, 2011; June 12, 2012; December 14, 2012; March 13, 2013; September 18, 2013; October 30, 2013; January 19, 2014; May 10, 2014; August 10, 2014; December 20, 2014; March 9, 2015; September 28, 2015; May 21, 2016; December 22, 2016.  Implementation Completion and Results Report. Small Towns Water Supply and Sanitation Projects (STWSSP).  Local Governance and Community Development Program (LGCDP) - II. Available at: http://lgcdp.gov.np/  Project Appraisal Document of UGDP-ETP. April 6, 2011.  Restructuring Paper (Level-II). Report No: 74610 – NP. January 21, 2013.  Restructuring Paper (Level-I). Report No: 78929-NP. July 4, 2013.  Restructuring Paper (Level-II). Report No: RES22068. July 18, 2016.  Urban Governance and Development Program-Emerging Towns Project: procurement plan.  World Bank. 2007. Nepal - Interim Strategy Note. Washington, DC: World Bank. Available at: http://documents.worldbank.org/curated/en/936071468323683173/Nepal- Interim-Strategy-Note  World Bank. 2010. Draft report of environmental management framework: main report. Vol. 1 of Urban Governance and Development Program Project: environmental assessment. s.l.; s.n.  World Bank. 2013. Urban Growth and Spatial Transition in Nepal. Washington, DC: World Bank.  World Bank. 2013. Nepal Country Partnership Strategy (CPS) for 2014-2018.  World Bank. 2014. Urban Governance and Development Program-Emerging Towns Project – Mid-term review: March 19 to 31, 2014. Washington DC; World Bank Group.  World Bank. 2016. Leveraging Urbanization in South Asia: Managing Spatial Transformation for Prosperity and Livability. Washington, DC: World Bank.  World Bank. 2017. Note on Strategic Urban Engagement in Nepal. Washington, DC: World Bank.  World Bank. 2017. Official Memorandum: Proposed Urban Governance and Infrastructure Improvement - Request for Project Preparation Advance Facility (IDA V071-NP)  Reports developed under the Project - the Revenue Enhancement Plans, Operation and Management Plans, Investment plans, Project Operations Manual, Performance Agreement, and Municipal finance for NUDS. 48 49