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Countries and Regions Country Partnership Strategies Document
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Country Strategy and Program 2005-2009: Nepal
III. ADB's Development ExperienceA. Impact of Past Assistance51. ADB began lending to Nepal in 1969. As of 31 December 2003, 104 public sector loans had been approved totaling about $2.1billion, all from the Asian Development Fund (ADF) resources, except for one small loan ($2 million) from ordinary capital resources approved in 1970. Of these, 81 loans are closed with a total of about $1.1 billion disbursed (84% of the approved loan amount). As of 30 June 2004, 21 public sector loans were ongoing with a total net loan amount of about $615.7 million. In addition, there were five private sector loans (including one supplementary loan) totaling about $59 million, including three equity investments amounting to about $3 million, all of which have been completed. 52. The first technical assistance (TA) to Nepal was approved in 1968, and as of 30 June 2004, 238 TAs had been approved totaling about $109.5 million. Of these, 90, worth $33 million, were project preparatory TAs. The remaining 146, worth $76.5 million, were advisory and operational TAs, most of which were for capacity building and institutional strengthening of ministries implementing ADB-supported projects; others were mainly for sector reviews. As of 30 June 2004, there were 35 active TAs for a total of about $32.4 million. 53. The country operational strategy of 1999 focused on building effective institutions, in recognition of the serious constraints posed by weaknesses in institutional capacity and governance for economic and social improvement. ADB provided support to build effective institutions through assisting the Government with: (i) generation of productive employment opportunities and increased rural incomes resulting from faster and broad-based economic growth, (ii) equitable improvements in basic social services to enhance human development resulting in reduction of population growth, and (iii) protection and improvement of the environment to sustain gains. The 1999 country operational strategy assumed that peace and political stability would prevail. 54. ADB assistance to Nepal has been focused. Three sectors accounted for 82% of ADB’s public sector loans: social infrastructure (38.7%), energy (25.4%), and agriculture and natural resources (17.9%). There have been important shifts in the composition of ADB lending over time: in the past decade, lending for social infrastructure has doubled, and increased by about a third for energy; lending has approximately halved for two sectors, namely agriculture and natural resources, and transport and communications. Lending in other sectors, including finance, remains relatively small, although these other sectors have been accorded more emphasis in recent years. 55. Some 16 projects and seven TAs were postevaluated through project performance audit reports from 1996 to 2003. Half of the projects were rated successful or highly successful, 37.5% were rated partly successful, and 12.5% were rated unsuccessful. The agriculture and natural resources sector was the poorest performer: only two of six projects evaluated were rated successful, while three were rated only partly successful, and one was rated unsuccessful. The performance of the energy sector was mixed, with two of the three evaluated projects rated successful, and the other one rated unsuccessful. In contrast, the transport and communications sector showed good performance: of the two projects evaluated, one was rated highly successful and the other one was rated successful. The post evaluation findings suggest that significant improvements can be achieved by the following: better capacity building of key development institutions; more rigorous and in-depth project feasibility studies; more extensive sector and policy analysis; increased beneficiary participation; more careful assessment of the absorptive and financial capacity of the executing agencies to implement projects; adequate provision of operation and maintenance mechanisms; increased frequency and duration of ADB review missions; detailed midterm review missions; and improved monitoring and evaluation systems. 56. At the broader sector and macro level, it is difficult to isolate the impact of ADB assistance from that of other development partners' support; from government-funded development activities; and from the effects of Nepal’s volatile political, economic, and security environment. A recent country assistance program evaluation (CAPE)18 concluded that most projects have been relatively successful and some have been very successful. The CAPE found that the overall development assistance impact, in areas in which ADB’s share was high, has been positive in terms of social, environmental, economic, and direct poverty impact. The CAPE noted that ADB, besides contributing to poverty reduction and to progress in achieving the Millennium Development Goals, has helped formulate several successful and replicable development models, most notably in the water supply and sanitation sector, irrigation subsector, and livestock subsector; and that there has been notable improvement in the policy and institutional environment, especially in the agriculture and natural resources and energy sectors. The CAPE cautioned, however, that a number of factors impede effective delivery of development results, including poor implementation performance in certain subsectors (including water supply and sanitation), inadequate attention to transport and rural development, inadequate time-horizons for capacity building, excessive project complexity, and numerous limitations to performance posed by the unfolding conflict.B. Portfolio Performance and Status57. Portfolio performance in recent years has been adversely affected by political, economic, and security uncertainties. The contract award ratio in Nepal was well below the ADB average in 2002 and 2003, and disbursements fell sharply. Nonetheless, from 1997 to 2000, portfolio performance was strong: the average disbursement ratio steadily increased from 22% to 37%. However, starting in 2001, disbursement and contract award ratios substantially deteriorated. ADB committed more than $619.4 million in ADF resources for the ongoing public sector loans to Nepal, of which $94.6 million had been disbursed as of end-June 2004 (Table 1).
58. Poor portfolio performance has been the result of a combination of factors—political instability, the conflict, and the unintended effect of stronger oversight by the Commission for Investigation of Abuse of Authority. A few relatively large loans are progressing slowly and contributed to poor portfolio performance. Since the escalation of the conflict in 2001, some of the projects have been facing difficulties in (i) fielding consultants, (ii) using explosives for construction, (iii) government participation in field activities, and (iv) ensuring delivery of project inputs. Frequent staff changes in government have also adversely affected a large number of projects. Long start-up delays for projects, delays in consultant recruitment, and delays in loan effectiveness are some of the generic concerns. By 2003, an average delay of 17 months was experienced between loan approval and effectiveness. Project monitoring, accounting, and auditing have also been weak. Many projects located in remote areas are difficult to supervise and implement. In many sectors, underfunding of operation and maintenance compromises project sustainability. 59. However, projects that combine community-based approaches to delivery of basic services, simple project designs, and carefully designed participatory processes appear to perform well in this conflict setting (see Box). 60. Performance of the private sector portfolio in Nepal has been mixed. Of four projects, the two earliest, both in manufacturing, have encountered financial problems since their completion in 1992. Both have been restructured, and a loan to one has been fully repaid after an agreement to waive interest due. The third project suffered significant construction delays with cost overruns of more than 25% and has also suffered operational losses due to the downturn in the tourism industry since 2000. Repayment of the loan for the project is currently in arrears. The fourth project, a hydropower plant approved in 1996, was completed on time and within budget, and has been operating satisfactorily since July 2000, with loan repayment as agreed.
61. Various measures are undertaken to improve portfolio performance. Bimonthly meetings are held with all executing and implementing agencies to identify and act on impediments to implementation. Quarterly high-level meetings are held with senior government officials to seek resolution of implementation issues that require policy-level intervention. ADB has increased delegation of projects to the Nepal Resident Mission (NRM) in 2004, and NRM provides more frequent advice on improving portfolio performance to executing agencies. Senior project staff also participate in project review missions. Resource savings have been identified and are being realized by closing projects with implementation delays and loan cancellations as appropriate. The High-Level Project Review Committee, chaired by the Chief Secretary and comprising secretaries of key ministries, also meets regularly to review key policy and institutional constraints that hinder project implementation. 62. ADB actively participates in the annual portfolio performance review jointly conducted by the Government, ADB, Japan Bank for International Cooperation (JBIC), and the World Bank. This aims at improving portfolio performance for all major development partners. In 2003, the following was agreed with the Government: quality-at-entry procedures would be improved to avoid premature entry of new projects in the portfolio;19 a new Public Procurement Law would be passed; a policy statement about project staffing, transfers, and appointments would be issued in 2004; the National Vigilance Center would implement technical audits; and external assistance would be consistent with the Government’s Foreign Aid Policy 2002. C. Conclusions and Lessons for the Country Strategy and Program63. ADB’s development assistance in key sectors has contributed to steady progress, particularly in transport, agriculture and rural development, education, energy, and water supply and sanitation. However, there is room for ADB’s assistance to achieve more broad-based growth and to enhance development impact. 64. Restoring peace and security as well as resolving the political impasse are Nepal's most important priorities. It is critically important, however, to continue development assistance even in the conflict environment, where it is feasible to do so. ADB assistance can contribute to peace by helping spread the benefits of development to less advanced regions, by addressing exclusion of women and disadvantaged groups in its assistance program, and by tackling other key impediments to poverty reduction. 65. At the start of the last country operational strategy, substantial improvements in institutional capacity and governance were anticipated, but the combination of slow overall growth, political instability, and the conflict has constrained results. However, the crisis also presents Nepal with a unique opportunity to address the conflict and accelerate reform and development. The Government must therefore seize this opportunity and emerge economically stronger, institutionally more robust, and socially more inclusive. If the root causes of the conflict and chronic poverty are to be addressed, the Government must also ensure that development assistance delivers quick and tangible benefits to those who have been excluded from economic and social progress. 66. Past experience suggests that government leadership and stakeholder participation in the design and implementation of ADB’s assistance programs is as important as the choice of sectors and project modalities. Ensuring that ADB projects are technically sound and that their covenants are realistic, focused, and sequenced is essential but not enough. Strong capacity building and an appropriate policy environment are critical, along with a strong sense of ownership and commitment to projects and reforms by the Government, civil society, and grassroots communities if sustainable progress is to be achieved.20 67. The sharp decline in disbursements, at a time when the country must continue development work, is of concern. Several steps can be taken to improve financial performance and enhance project impact, including: : (i) reducing start-up delays of new projects; (ii) maintaining project staff in place during implementation; and (iii) designing fewer projects that are less complex, are more closely integrated with government sector programs, are more process oriented, have more realistic conditionalities and covenants, and reflect local knowledge in project design and implementation. ____________________
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