Nepal: Rural Water Supply and Sanitation Improvement Project (IDA Credit No. 5446-NP and IDA Grant No. H945-NP) Implementation Support Review (January 21 – 31, 2019) Aide Memoire 1. During January 21 – 31, 2019, a Bank Team1 led by Joep Verhagen (Task Team Leader) carried out the Implementation Support Review of the Rural Water Supply and Sanitation Improvement Project (RWSSIP). This Aide Memoire (AM) summarizes the findings on the status of the project implementation and agreements reached with the relevant agencies at the wrap-up meeting held on February 01, 2019 which was chaired by Mr. Mr. Tej Raj Bhatta, Joint Secretary, Ministry of Water Supply (MoWS). The Team also met separately with Honorable Minister of Water Supply Ms. Bina Magar and Dr. Rajan Khanal, Secretary of Ministry of Finance (MoF) on January 31, 2019 and debriefed them about the current status. As agreed during the wrap-up meeting, the AM will be publicly disclosed as required by the Bank’s Access to Information Policy. Annex 1 presents a list of people met during the review; Annex 2 presents the updated Result Framework. I. OVERALL STATUS AND KEY PROJECT DATA Project Data Ratings Previous New Approval Date May 29, 2014 Achievement of PDO U U Credit/Grant Signing Date July 11, 2014 Implementation Progress U U Effectiveness Date November 10, 2014 Project Management U U June 30, 2020 U Closing Date Procurement U SDR 32.4 m, US$ 50 m Financial Management U MU Credit Amount SDR 14.3 m, US$ 22 m Grant Amount Environmental / Social U MU Credit Amount Disbursed US$ 28.16 m (62.3%) Safeguards Grant Amount Disbursed US$ 12.95 m (64.9%) Monitoring and (as of January 31, 2019) Evaluation Cumulative Disbursement US$41.11 million Counterpart Funding S MS (As of January 31, 2019) (SDR 29.47 million, 63.2%) Ratings: S=Satisfactory; MS = Moderately Satisfactory; MU= Moderately Unsatisfactory; U=Unsatisfactory 2. Notice of Threat of Suspension. As the Implementing Entity (IE) of the Project, the Rural Water Supply and Sanitation Fund Development Board (the “Fund Board”), was dissolved following a Cabinet decision, dated July 15, 2018, that required all Development Boards should be dissolved, and if they need to continue should request the Cabinet with justification for reinstatement. Since the MoWS did not pursue any action for reinstatement and the Executive Director (ED) of the FB no longer possessed any budget authority, the Fund Board (FB) de facto was considered dissolved, although no official communication to the Bank has been made in this regard. Pursuant to Section 4.01 and 4.02 of the Financing Agreement (dated July 11, 2014) and Section 6.02 of the General Conditions, a Notice of Threat of Suspension was issued by the World Bank to the Government of Nepal on December 18, 2018, as the aforementioned events materially and adversely impacted the ability of the Project IE to perform its obligations under the Project Agreement. 1 The team comprised of Joep Verhagen (Sr. WSS Specialist), Chandra Kishor Mishra (Procurement Specialist), Yogesh Bom Malla (Sr. Financial Management Specialist), Annu Rajbhandari (Environment Specialist), Dron Pun (Environment Specialist-Consultant), Ishwor Neupane (Social Development Specialist-Consultant) and Sushila Rai (Program Assistant). 1 3. Implementation Remedial Actions: The Notice to MoF makes mention of the following four remedial actions to be implemented by the GoN in order to avoid the Project’s suspension: (a) reinstate the Fund Board through a new formation order that is identical in substance to the original Formation Order within thirty (30) calendar days of the date of this notification letter; (b) provide the Executive Director of the Fund Board with the required budget authority within thirty (30) calendar days of the date of this notification letter; (c) commit to restructure the Project in a manner ensuring that (i) existing contractual commitments are satisfied; (ii) no new contracts are entered into by the Recipient; and (iii) the Project development objectives and activities are adjusted for the rest of the Project implementation period within thirty (30) calendar days of the date of this notification letter; and (d) ensure that all outstanding payments of Fund Board staff and other liabilities have been immediately settled within sixty (60) calendar days of the date of this notification letter. In two letters to the Bank (dated January 14, 2019 and January 19, 2019), the MoF confirmed that the FB had been reinstated, an interim ED had been appointed and had been provided with Budget Authority. In addition, the MoF committed to restructure the project. 4. The team assessed that the first three remedial actions mentioned in the Notice of Threat of Suspension have been implemented to satisfaction of the Bank. The fourth remedial action is under implementation. A final assessment will be carried after February 18, 2019. 5. Progress towards Project Development Objective (PDO) has slowed very significantly. In view of the prolonged uncertainty of the FB, very limited progress has been made towards the PDO targets of Component 1 since June 2018. Limited progress towards PDO 3 (# of schemes visited by the backstopping facility at the District level) was made by Component 2 of the Project as a total of 270 schemes – up from 27 schemes in June 2018 – have been visited. Considering the overall lack of progress and inability to achieve the PDO by project closure in June 2020, the progress towards PDO has been retained at Unsatisfactory. 6. Implementation progress has come to a virtual standstill. The FB has not been able to provide fiduciary, environmental and social safeguards, and implementation oversight since July 17, 2018 and has only started to return to ‘business as usual’ recently. The staffing of the PMU has been completely changed since June 2018 and the senior procurement/contract management specialist to support PMU with the management of 5 large contracts (total value approximately US$ 4 million) has not been hired as was agreed in June 2018. Finally, none of the major procurements agreed for Component 2 has progressed. The overall implementation progress has been retained at Unsatisfactory. 7. Component 1: Access to Improved Water Supply and Sanitation and Promotion of Improved Sanitation and Hygiene Practices. The delayed re-instatement of the FB has had significant negative impacts on the Component 1: • Most contracts with Support Organizations (SO) and Support Agencies (SA) expired in 2018 and could not extended prior to the reinstatement of the FB. In consultation with the Bank, these contracts are currently being extended. • Salaries of FB staff, and dues to SOs and SAs were not paid during between July and December 2018. At the end of the mission, all outstanding dues to FB staff had been paid. FB is in the process of paying the outstanding dues to those SOs whose final reports and claims have been fully audited and verified as required by FB regulations. Verification and auditing of remaining SO claims is being initiated. • The 6-month halt in implementation has resulted in the loss of investments – for instance, due to the collapse of bore holes – a detailed, scheme-wise, damage assessment has been initiated. 2 • The FB’s capacity has been depleted during past 6 months as staff has left and need to be replaced. • A meeting with SOs identified following priorities: (1) make payments to the SOs as soon as possible; (2) FB to meet with all SOs; (3) amendment of contracts to accommodate for increase of costs. 8. Component 2: District Level Institutional Strengthening. Implementation of Component 2 of the Project has significantly slowed down during the past 6 months: • The entire PMU has been replaced since June 2018 and it appears the new staff are struggling to understand the Project. At the start of the consultation, the PMU had no procurement specialist and no access to Systematic Tracking of Exchanges in Procurement (STEP). • Two key agreed procurements –training of 7,000 local water supply and sanitation professionals (approximately US$2.2 million) and capacity support to three additional provinces (approximately US$0,76 million) – were not taken forward and can no longer be completed with the remaining project period. • A total of 100+ STEP actions are outstanding. Moreover, the Project Support Team-contract was amended without the Bank’s no objection, and reimbursable expenses are not paid on the basis of actuals as specified in the contract. • No procurement/contract management specialist was hired leaving a significant gap in the PMU’s capacity to management the implementation of five large, time-based contracts, contracts with a total value of approximately US$4 million. 9. Component 3: Technical Assistance/Capacity Building and Project Management. As argued above the implementation capacity of both Component 1 and Component 2 have been severely eroded since June 2018. II. KEY POINTS DISCUSSED AND AGREED ACTIONS 10. Project restructuring: As discussed and agreed with the Ministry of Finance, the Honorable Minister of Water Supply and re-confirmed during the wrap-up meeting, the Project will be restructured as follows: • Post Construction Support will only be provided to Batch IX and X schemes that are fully completed at the end of February 2019. Estimated budget reduction US$ 1.5 million. • Phase 2 of rehabilitation earthquake-affected schemes will be reduced to a maximum of 200 schemes (down from 325). Only those schemes for which an SO is contracted in March 2019 will be rehabilitated. • The proposed training for 7,000 local water and sanitation practitioners will be cancelled. (estimated budget US$ 2.2 million). Training for Village Maintenance Workers (VMW), Water and Sanitation User Committees (WSUC) and representatives of Local Government (LG) in the 8 focus municipalities will be done by the project support team (PST. • The capacity building support in additional three Provinces will be cancelled (estimated budget US$ 0.75 million). Component 2 will now cover 8 municipalities, in 5 districts and 4 provinces. • Rehabilitation of 100 schemes under Component 2 by FB will be fully cancelled (estimated budget US$ 1 million). • Procurement tables/smart phones to be cancelled (US$ 150,000). VMW toolkits to be discussed during next consultation. A technical consultation has been planned for March 2019 to restructure the project. 11. Component 1: Access to Improved Water Supply and Sanitation and Promotion of Improved Sanitation and Hygiene Practices. Summary of agreed actions: 3 • Ensure that all outstanding payments of Fund Board staff and other liabilities settled and provide WB with supporting documentation. In total, 25 SOs have submitted requests for the payment (total US$1.39 million) supported by documentation and audits. (February 18, 2019). • Carry out detailed, scheme-wise, damage assessment of 6-month interruption in project implementation. Assessment to estimates of additional investments. (March 1, 2019). • Address all outstanding social and environmental safeguard issues on a priority basis and fill the vacant positions of the environmental, and communication and livelihood specialists. (March 01, 2019) • Ensure full physical verification and/or financial review of remaining 37 schemes of Batch IX and propose remedial action against SOs that have not submitted full documentation. (March 31, 2019) • Update and initiate implementation of the action plan to address audit observations. (February 15, 2019) • Develop a draft detailed implementation plan, including budget projections, for the remaining project period (March 15, 2019). 12. Component 2: District Level Institutional Strengthening. Summary of agreed actions: • Hire on a priority basis a procurement specialist/contract management specialist to support PMU in the management of 5 large contracts. (March 1, 2019) • Finalize the selection of 8 municipalities in 5 districts (5 provinces) and sign a MOU with these municipalities. (March 15, 2019) • Provide details and justification for the amendment of the PST contract and provide the Bank team with details on the reimbursement of costs incurred by PST. (March 15, 2019). • Develop a draft detailed implementation plan, including budget projections, for the remaining project period (March 15, 2019). III. FIDUCIARY COMPLIANCE 13. Procurement and Contract Management Status of the Project: The past 6-month affected planned and ongoing procurement, and contract management in both Components. In total, there are more than 200 ‘STEP activities’ pending for the two components combined. Moreover, the Bank has not yet received the list of contracts awarded in the period of July 01, 2017 to June 30, 2018 which is required for the procurement post review by the Bank. The team advised both the implementing agencies to update the status of approved procurement activities and initiate procurement processes every first week of the English calendar month. 14. PMU has not hired a senior procurement/contract management specialist to provide support to PMU for the management of five large contracts. Further, it was noted that the terms of contract of the PST has been amended without obtaining No Objection from the Bank. Under the same contract, the reimbursable expenditures seem to be paid on flat rate instead of on the basis of actuals as stipulated in the contract. 15. Overall procurement performance rating has been retained to Unsatisfactory. Financial Management (FM) Performance 16. During FY19 (up to January 14, 2019), the expenditure incurred by FB and MoWS PMU components are NPR 20.13 million (0.84%) and NPR 37.10 million (10.05%) respectively. The total expenditures are about NPR 57.23 million. Total disbursement as of January 29, 2019 is US$41.11 million (SDR 29.47 million) including initial deposit, which is about 63% of the total allocation. 17. The Fund Board has been maintaining books of accounts as required by the Government rules and regulations. The team reviewed payment vouchers on a sample basis and it was found to follow the financial regulations. The Project has also maintained required ledgers such as main credit/grant register, subsidiary 4 credit/grant register, designated accounts. The authorized signatories for the IEs for both components have changed and revised signatory letters need to be submitted to the Bank. PMU project team has been advised to comply with terms and conditions of agreement signed with consultants and obtain insurance policies as required. 18. For FY18, the internal audit was carried out for both components. In case of FB, the internal auditor has raised some internal control weaknesses. The review team suggests preparing action plan to address these observations. For FY18, the Office of the Auditor General (OAG) has conducted the audit and issued preliminary audit observations to components. For FY19, the internal auditor for FB has not been appointed and the first trimester Financial Monitoring Report of FY19 is outstanding for FB. 19. Out of total 544 Batch IX schemes, 37 schemes implemented by 9 SOs could not be audited due to non- availability of financial information from SOs. The cumulative costs of these 37 schemes is NPR 69.17 million. The FB needs to take appropriate action to verify that these funds have been used for intended purpose. Physical verification is required. Further, FB need to take appropriate remedial measures to these non-responsive SOs. The FB has appointed the auditors for review of Batch X schemes under implementation phase. 20. The rating for FM is Moderately Unsatisfactory and for counterpart funding Moderately Satisfactory. IV. ENVIRONMENT AND SOCIAL SAFEGUARD MANAGEMENT Environmental Safeguards 21. The safeguard team noted significant delays in the completion of the previously agreed actions such as: final payment to SOs to be made conditional to environmental and social compliance; amendment of the existing ToR of SAs to include compliance monitoring; and, improvement of safeguard performance through increasing the frequency of monitoring by FB. 22. The team noted that since last four months, FB has no environmental specialist and regular site visits to verify the Environmental and Social Management Plans (ESMP) compliance has been stopped. Out of the 136 schemes (batch X) with high coliform contamination, only 35 Water Safety Plans (WSP) have been submitted for approval. 23. The team requested the FB to: hire environment specialist/consultant at the earliest possible; share sample copy of ESMP compliance monitoring report with the Bank; carry out water quality test/water safety plan; and, monitor compliance of ESMPs for remaining schemes proposed and under construction. 24. The environment safeguard rating has been downgraded as Moderately Unsatisfactory. Social Safeguards 25. The Social Safeguards team noted significant delay in planning and implementation of agreed actions in the past 6 months affecting the performance of RWSSIP schemes adversely. 26. The Bank has repeatedly emphasized the importance of the implementation of a community score card system by the Jagaran – social accountability – committees. No progress was made since June 2018. Following the reinstatement of FB, the Project has made fresh commitment to finalize the indicators and expand the use of score cards in the Batch-X schemes (minimum 125 schemes by June 2019) and report in details as part of grievance mechanism. 27. The team further observed considerable delay in finalizing and enforcing two guidelines that have been pending for long. These are i) Jagaran - social accountability – guideline, and ii) Women Technical Support Group/ 5 Jeevika guideline. The Bank advised the Project to finalize and implement the guidelines beginning 28 February 2019. The enforcement of Jagaran guideline is expected to bring improvement in planning and implementation of the schemes. 28. The social safeguards rating has been rated Moderately Unsatisfactory. 29. Next Review: A technical consultation is planned for March 2019 to restructure the project. Next implementation support review is planned for June 2019. Table 1: Summary of Agreed Actions Project (Fund Board and PMU) Submit revised signatory letters. February 15, 2019 March 15, 2019 Develop a draft detailed implementation plan, including budget projections, for the remaining project period (March 15, 2019). Updating timelines of procurement activities and uploading all documents in STEP. March 01, 2019 Fund Board Agreed Actions Due Date Ensured that all outstanding, eligible, payments to FB staff and other liabilities have are February 18, 2019 settled and provide WB with supporting documentation. Fill positions of environment, and communication and livelihood experts. March 01, 2019 Monitor compliance of ESMPs for remaining schemes proposed and under construction. Continuous Implement community scorecards in Batch-X (150 schemes) and report on findings. June 30, 2019 Finalize and implement the Jagaran and WTSS/Jeevika Guidelines. March 01, 2019 Complete physical verification and financial review of remaining 37 schemes (Batch IX). March 31, 2019 Update action plan and progress on audit observations. February 15, 2019 Appoint internal auditor for FY19. February 15, 2019 Finalize assessment of impact of 6-month interruption including estimates of additional March 01, 2019 investments. Assessment of progress and field visits. Remaining 14 Batch IX schemes to be completed. June 15, 2019 Develop proposal for documentation of grievances and recording of corrective actions. April 01, 2019 Document the total sanitation component, including mobile monitoring app and sanitation April 30, 2019 marketing. Fund Board to complete data collection of all Batch IX and X schemes using the mobile Continuous monitoring app. Fund Board to revise planning for the implementation of Batch IX and earthquake affected April 30, 2019 schemes including a risk assessment PMU Compile a list of contracts awarded during past 12 months by Component 2 February 15, 2019 Appoint/depute a procurement specialist and ensure access to STEP. March 01, 2019 Hire 1 contract management specialist. March 01, 2019 Approval of selection of 8 municipalities in 5 districts (5 provinces) and for support by March 15, 2019 Component 2. And MOU with Municipalities to be signed. PMU to share action plan, budget, and updated procurement plan. March 15, 2019 6 Annex 1: List of People Met Participant Wrap Up Meeting (February 01, 2019 at Ministry of Water Supply) 1. Mr. Tej Raj Bhatta, Chair (authorized by Secretary MoWs), Joint Secretary, Planning Monitoring and Foreign Aid Coordination Division, MoWS 2. Mr. Manoj Ghimire, Joint Secretary/Project Director, MoOWS 3. Mr. Chok P. Dhital, Sr. Divisional Engineer/Deputy Project Director, MoWS 4. Mr. Bishnu Prasad Gyawali, Under Secretary (Finance), MoWS 5. Mr. Lila Prasad Dhakal, Executive Director, RWSSFDB 6. Mr. Sanjay Kumar Mishra, Deputy Executive Director, RWSSFDB 7. Mr. Gautam Prasad Shrestha, Team Leader, PST 8. Mr. Krishna Rana, Deputy Team Leader, PST 9. Mr. Khem Dallakoti, Procurement Specialist, PST 10. Mr. Joep Verhagen, Task Team Leader/Sr. Water Supply & Sanitation Specialist, World Bank 11. Ms. Annu Rajbhandari, Environment Specialist, World Bank 12. Mr. Ishwor Neupane, Consultant (Social Development), World Bank 13. Ms. Sushila Rai, Program Assistant, World Bank Ministry of Water Supply 14. Honorable Minister Ms. Bina Magar 15. Mr. Gajendra Kumar Thakur, Secretary 16. Mr. Tej Raj Bhatta, Joint Secretary, Planning Monitoring and Foreign Aid Coordination Division 17. Mr. Manoj Ghimire, Joint Secretary/Project Director 18. Mr. Chok Prasad Dhital, Sr. Divisional Engineer/Deputy Project Director 19. Mr. Bishnu Prasad Gyawali, Under Secretary (Finance) Ministry of Finance 1. Dr. Rajan Khanal, Secretary Ministry of Finance Board of Directors of the Rural Water Supply & Sanitation Fund Development Board 1. Mr. Bhim Prasad Dhungana, Member 2. Mr. Dhundi Raj Dahal, Member 3. Mr. Sanjeeb Yadav, Member 4. Mr. Sahadev Bogati, Member Rural Water Supply & Sanitation Fund Development Board 1. Mr. Lila Prasad Dhakal, Executive Director 2. Mr. Sanjay Kumar Mishra, Deputy Executive Director 3. Mr. Binod Dhital, Chief of the Planning and Operations Division 4. Mr. Pravesh Niraula, Chief of the Project Monitoring and Evaluation Division 5. Mr. Tika Prasad Adhikari, Chief of the Human Resource/Program Development Division 6. Mr. Kapil Dev Gyawali, Chief of the Technical Division 7. Mr. Chudamani Pokharel, Chief of the Administration Division 8. All Professional Staff 7 Project Support Team 1. Mr. Gautam Prasad Shrestha, Team Leader 2. Mr. Krishna Rana, Deputy Team Leader 3. Mr. Khem Dallakoti, Procurement Specialist Support Organizations 1. Dr. Kal Bahadur Rokaya, Chairman, KASDA, Jumla 2. Mr. Yubaraj Siwakoti, Program Director, SAMARA-Nepal, Jhapa 3. Mr. Rajendra Bahadur Pradhan, Executive Director, SOLVE-Nepal 4. Mr. Shankha Buddha Lama, Chairman, STASK 5. Mr. Kamal Yonjan, Program Coordinator, Community Development Society 6. Ms. Nirmala Thapa, Secretary, Social Workers Group (SWG) 7. Mr. Rampratap Yadav, Executive Director, Helpline Nepal 8. Mr. Madan B. Thapa, Director, NED-Nepal List of People Met During Field Visit (Component 1) SO: DECON-NEPAL Scheme Name: Batch-X, Arubote, Yard Connection District: Nuwakot, Location: Tarkeshwar Village Municipality, Ward No. 4 1. Mr. Chok Raj Shakya, SO Team Leader 2. Ms. Sabina Bhandari, WASH Motivator 3. Mr. Arjun Shrestha, WASH Technician 4. Mr. Kul Bahadur Magar, WSUC Chairman 5. Mr. Keshav Bahadur Magar, WSUC Vice-Chairman 6. Mr. Hasta Bahadur Magar, Jagaran Committee Chairman 7. Ms. Bimala Thapa Magar, WSUC Treasurer 8. Ms. Mana Kumari Darlami, WTSS Chairman 9. Ms. Mana Kumari Magar, VHP 10. Mr. Shankar Magar, VMW 8 Annex 2: Updated Results Framework, as of January 31, 2019 (Includes Indicators for New Sub-category under Restructured Project) Project Development Objective (PDO): Increase sustainable access to improved water services and promote improved sanitation and hygiene practices in rural areas; and (ii) Develop and implement a long-term support mechanism to promote the sustainability of water supply schemes in selected Districts. PDO Level Results Indicators Cumulative Cumulative Achievement Responsibility Unit of Base Achievement Data Source/ Result Indicators End Target Against Frequency for Data Description Measure line (Nov 16, 2018) Methodology Value Target Collection People provided with access to Number 0 474,002 810,000 58.52% Every 6 Fund Board Batch-X 369 improved water points; of (F 49%) months schemes which, female (percentage). population 353,105 and Batch-X 204 physically completed schemes population 120,897 Number of VDCs declared Every 6 Number 0 121 130 93.07% See above Fund Board ODF by the Districts. months Number of schemes visited by the backstopping facility at the Every 6 District Level D-WASH Unit, District level; of which Number 0 270 1,000 27% months MIS PMU-MoWS (percentage of schemes non- functioning). Intermediate Results (Component One): Access to Improved Water Supplies and Promote Improved Hygiene Practices Improved community water On average 20 points constructed (new, Every 6 Fund Board Fund Board Number 0 10,103 11,170 90.44% water points per expansion, rehabilitated under months scheme the project). Number of water supply Includes 424 schemes completed and in Every 6 schemes in Batch- Number 0 573 954 60.01%% See above Fund Board operation; of which (Jagaran months IX retroactively Committee established). financed Number of WSUCs formed; Every 6 (those with at least 3 women Number 0 913 854 106.90% See above Fund Board months members). 9 Improved public latrines On average 3 constructed under the project Every 6 Number 0 122 200 61.00% See above Fund Board public toilets are (number) in schools and health months built in each VDC posts. 2,478 2,400 People trained on improved Number 72.08% Every 6 See above Fund Board (F 49%) (F %) hygiene behavior, and (000) months (S 6%) (S %) sanitation practices; of which, 0 female (%) and school children (%). Data on this sub- Households provided with indicator was not improved and rehabilitated Every 6 captured and it was Number 0 12,924 22,000 58.75% See above Fund Board latrines in the earthquake months omitted during the affected districts. Mid-term Mission, Feb 2018 People provided with improved Populations of 364 water supply through Every 6 Number 0 240,763 372,000 64.72% See above Fund Board physically rehabilitation of schemes in months completed schemes earthquake affects districts Number of household yard Every 6 connections (new or Number 18,158 48,000 37.83%% See above Fund Board months rehabilitated under the project) Number of newly constructed schemes provided with post- Every 6 Number 854 0 0.00% See above Fund Board To be started construction support by the months project Number of HHs to achieve total Every 6 Number 134,599 150,000 89.73% See above Fund Board sanitation months Intermediate Result (Component Two): District Level Institutional Strengthening Water and Sanitation Units in Municipalities (MWASH Every 6 PMU- Units) formally established Number 0 5 8 62.50% Project MIS months MoWSS under the Local Government with defined functions Local Government Level M&E System established and 25% of Every 6 PMU- Number 0 0 8 0.00% Project MIS detected functionality issues months MoWSS addressed 10 Number of community, municipal, private sector Every 6 PMU- Number 0 1,159 7,000 16.56% Project MIS WASH stakeholders trained by months MoWSS the project 11