Technical Assistance Consultant’s Report · The guidance provided by the, Mr. Krishna Prasad Acharya TA Coordinator, Joint Secretary, Ministry Physical Planning and Works was essential

Technical Assistance Consultant’s Report

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and th e Gove rnment can not be held lia ble f or its contents. (Fo r p roject p reparatory techni cal assistance: All the views expressed herein may not be incorporated into the proposed project’s design.

Project Number: 34304 December 2006

NEPAL: Kathmandu Valley Water Distribution, Sewerage, and Urban Development Project (Financed by the: Technical Assistance Special Fund, Danida Grant, Cooperation Fund for the Water Sector, and Public-Private Infra. Advisory Facility)

Prepared by:

GHD Pty Ltd., Australia in assn with Integrated Consultants Nepal (ICON) Pvt. Lt. Nepal

Metro Manila, Philippines

For the Ministry of Physical Planning and Works

Government of Nepal Ministry of Physical Planning & Works Kathmandu Upatyaka Khanepani Limited

KATHMANDU VALLEY WATER SUPPLY & WASTEWATER SYSTEM IMPROVEMENT

(PPTA 4893 – NEP)

PROJECT FEASIBILITY STUDY

FINAL REPORT

MAY 2010

COPYRIGHT: The concepts and information contained in this document are the property of ADB & Government of Nepal. Use or copying of this document in whole or in part without the written permission of either ADB or Government of Nepal constitutes an infringement of copyright.

ADB

TA 4893 –NEP: Kathmandu Valley Water Supply & Wastewater System Improvement Project Feasibility Study

TA4893-NEP Final Report Page i

Acknowledgements The Project Team gratefully acknowledges the Government of Nepal support in completion of the Feasibility Study Final Report. The team also acknowledges the support provided by the Mr. Suman Sharma, Project Director of KUKL PID for extending help and guidance throughout the PPTA. The guidance provided by the, Mr. Krishna Prasad Acharya TA Coordinator, Joint Secretary, Ministry Physical Planning and Works was essential with regard to governance aspects of the Project.

The Technical Assistance Team also wishes to acknowledge the support of KUKL PID, Deputy Project Directors, particularly in assisting in facilitating access to senior executives, institutions and relevant documentation. The support and guidance provided by the executive officers in various Departments of the Government is greatly appreciated. The assistance and advice of the Chairpersons and staff of the KVWSMB and HPCIDBC is also gratefully acknowledged.

Particular gratitude is expressed to the technical and operations staff of KUKL branch offices for their dedication in gathering data and assistance during field visits.


TA4893-NEP Final Report Page ii

Kathmandu Valley Water Supply & Wastewater System Improvement

Project Feasibility Study Final Report

Contents 1. Background and Scope 1

1.1 Introduction 1

1.2 Project Goal and Purpose 2

1.3 Scope of the Report 2

2. Urban Water Sector in Nepal 3

2.1 Socio-Economic Context 3

2.1.1 Population and Urbanisation 3 2.1.2 Economic Development 3 2.1.3 Social Profile in Nepal 5 2.1.4 Poverty 5 2.1.5 Socio-Economic Outlook 6

2.2 Water Sector Management 6

2.2.1 Policies, Targets and Programmes 6 2.2.2 Legal Framework 8 2.2.3 Institutional Structure and Roles 9

3. Kathmandu Valley Socio-Economic Context 12

3.1 Population and Urbanization 12

3.1.1 Overview 12 3.1.2 Urban Growth Patterns 12 3.1.3 Population Growth Projections 13

3.2 Socio-Economic Context 15

3.2.1 Social and Household Profile 15 3.2.2 Employment 16 3.2.3 Slums and Squatter Settlements 18

3.3 Economic Development and Prospects for Growth 19

3.3.1 Economic Potential 19 3.3.2 Constraints to Economic Development 19

4. Project Rationale – Need and Demand 21

4.1 The Project Drivers 21

4.1.1 Introduction 21 4.1.2 Economic, Health and Social Drivers 21 4.1.3 Melamchi Water Supply Project Links 22 4.1.4 Consistency with ADB‟s Country Partnership Strategy 23 4.1.5 Urban Investment Priority 24 4.1.6 National Urban Water Supply and Sanitation Sector Policy (2009) 25

4.2 Problem Analysis of Water Sector Services 25

4.2.1 Overview of Water Sector Services 25 4.2.2 Water Supply 26 4.2.3 Wastewater System Problems 28


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4.3 External Assistance and Lessons Learned 30

4.3.1 Overview 30 4.3.2 ADB in the Nepal Water Sector 30 4.3.3 Lessons Learned 30

5. Selection of Physical Components 33

5.1 Methodology and Approach 33

5.2 Underlying Principles 33

5.3 Component Selection Criteria 34

5.4 Least Cost Solutions 36

5.5 Evaluation and Selection of Components 36

5.5.1 Basis of Component Selection 36 5.5.2 Water Supply Component Selection 36 5.5.3 Wastewater Component Selection 40 5.5.4 Project Selected Components 40

6. Water Sector Management in Kathmandu Valley 42

6.1 Institutions and Capacity 42

6.1.1 Policy and Legal Context 42 6.1.2 Operator License Performance Standards 43

6.2 Improving Water Sector Management 44

6.2.1 Existing Situation 44 6.2.2 Water Utility Operator (KUKL) Responsibilities 46 6.2.3 Asset-centric Management Approach 47

6.3 KUKL Financial Management Assessment 49

6.3.1 Introduction and Objective 49 6.3.2 Accounting Policies and Procedures 49 6.3.3 Auditing 50 6.3.4 KUKL FMA Strengths and Constraints 50 6.3.5 KUKL FMA Recommendations 51

6.4 KUKL Finances 52

6.4.1 Background 52 6.4.2 Capital Account 52 6.4.3 Revenue and Expenditure 53 6.4.4 Tariff Structure 54

6.5 Planned Water Sector Management Development Activities 55

7. Outline Implementation Arrangements 57

7.1 Project Management and Administration 57

7.1.1 Executing Agency 57 7.1.2 Implementing Agency 57 7.1.3 Project Steering Committee 57

7.2 Project Implementation Directorate (PID) 57

7.2.1 Staffing Structure 57

7.3 PID Financial Management Assessment 60

7.3.1 FMA Introduction and Objective 60 7.3.2 Accounting Information Systems 60 7.3.3 PID FMA Strengths and Constraints 61

7.4 Project Implementation Support Services 62

7.5 Procurement and Disbursement Procedure 63

7.5.1 Procurement of Goods and Works 63 7.5.2 Disbursement Procedures 63


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7.6 Fund Flow 64

7.7 Procurement Packages and Implementation 64

7.7.1 Implementation Schedule 64 7.7.2 Procurement Packages 68

7.8 Reports, Accounting and Audit Requirements 68

7.8.1 Reporting Requirement 68 7.8.2 Accounting 68 7.8.3 Auditing 69

7.9 Project Review 69

7.10 Project Performance Monitoring System 70

7.11 Long-Term Sustainability 70

8. Financial and Economic Analysis 71

8.1 Project Cost Estimate 71

8.1.1 Investment Plan 71 8.1.2 Financing Plan 72

8.2 Economic Analysis 72

8.3 Economic Rationale 73

8.4 With and Without Project Situations 74

8.4.1 „Without-Project‟ Situations 74 8.4.2 „With-Project‟ Situations 74

8.5 Methodology 75

8.5.1 Water Demand 76 8.5.2 Economic Costs 76 8.5.3 Valuing Economic Benefits 77 8.5.4 Avoided Economic Costs 77 8.5.5 Exclusions 78

8.6 Analysis Results 78

8.7 Financial Analysis 79

8.7.1 Summary of Financial Management Assessment (FMA) 79 8.7.2 Financial Performance of KUKL 79

8.8 Methodology and Assumptions 80

8.8.1 Tariff Structure 80 8.8.2 Proposed Tariff Structure 81 8.8.3 Cost Recovery Analysis 82 8.8.4 Analysis Results 82 8.8.5 Changes in Property Values 82 8.8.6 Affordability 83 8.8.7 Willingness to Pay (WTP) 83 8.8.8 Financial Subsidy 84 8.8.9 Cross Subsidy 84 8.8.10 Poverty Situation 85 8.8.11 Poverty Impact Assessment 85 8.8.12 AIFC & AIEC 86

8.9 Sensitivity Analysis 86

8.10 Financial Sustainability 86

9. Social Impacts and Safeguards 88

9.1 Resettlement and Rehabilitation 88

9.1.1 Review of Resettlement Policies and Legal Framework 88 9.1.2 The Asian Development Bank Policy 88 9.1.3 Government of Nepal Legislation and Guidelines 89


TA4893-NEP Final Report Page v

9.1.4 Nepal and ADB Resettlement Policy Differences 89

9.2 Social Objectives in Project Formulation 90

9.2.1 Project Scoping Issues 90 9.2.2 Mitigation Actions 91

9.3 Indigenous Persons 92

9.4 Gender 93

10. Environmental Assessment 94

10.1 Purpose of Environmental Examination 94

10.2 ADB Environmental Safeguard Policy 94

10.3 Government of Nepal Environmental Safeguards 95

10.4 Environmental Background to the Project 95

10.5 Environmental Impacts and Mitigation 96

11. Project Risks, Assumptions and Advance Actions 98

11.1 Institutional and Governance Risks 98

11.2 Policy Risks 99

11.3 Physical Component Risks 99

11.4 Social Risks 100

11.5 Environmental Risks 100

11.6 Financial Risks 101

11.7 Economic Risks 101

11.8 Advance Actions 102

Appendices (Under separate covers) Appendix 1 Design and Monitoring Framework (Draft) Appendix 2 Sector Analysis and Lessons Leaned Appendix 3 CIAMP - Proposed Capital Investment Plan (2010 – 2025) Appendix 4 Financial Management Assessment Appendix 5 Outline Terms of Reference for Consulting Services Appendix 6 Procurement Capacity Assessment and Procurement Plan Appendix 7 Financial and Economic Analysis Appendix 8 Social Safeguards Appendix 9 Initial Environmental Examination Supplementary Annex: Stakeholder Consultations

Other related TA 4893-NEP output reports

1. Capital Investment and Asset Management Program, February 2010.

2. Conceptual Wastewater Master Plan, February 2010.


TA4893-NEP Final Report Page vi

List of Tables Table 2-1: Nepal Population Growth 3 Table 2-2: Regional Population Densities in 2001 3 Table 2-3: Key Macro-economic Indicators for Nepal 4 Table 2-4: Change in Poverty between 1995/96 and 2003/04 5 Table 2-5: Targets and achievement of drinking water supply and sanitation programs 7 Table 2-6: Role of Institutions in Water Sector Management and Development 10 Table 3-1 Population Projection for Kathmandu Valley under "Do-nothing Scenario" 13 Table 3-2: Comparative Projected Population of KUKL Water Supply Area (000‟s) 13 Table 3-3: Projected Population for Kathmandu Valley and KUKL Service Area 14 Table 3-4: Household Profile in Kathmandu Valley 16 Table 3-5: Household in Non-Farm Economic Activities in Kathmandu Valley 17 Table 3-6: Kathmandu Valley Development Indicators 17 Table 3-7: Slums and Squatter Settlements in Kathmandu Valley 18 Table 4-1: Water Supply – Problems and Causes 26 Table 4-2: Wastewater – Problems and Causes 28 Table 5-1: Least Cost Solutions 36 Table 5-2: Water Supply and Wastewater Infrastructure Project Components 40 Table 6-1: KUKL Licence Service Performance Standards 44 Table 6-2: KUKL Balance Sheet at Hand Over from NWSC (February 2008) 52 Table 6-3: KUKL Profit & Loss Account (July 2008) 53 Table 6-4: KUKL Existing & Proposed Tariff Structure (effective December 2009) 54 Table 8-1: Project Cost Estimate by Components 71 Table 8-2: Summary of Investment Costs 71 Table 8-3: Financial Plan 72 Table 8-4: Economic Analysis Summary Results 78 Table 8-5:Tariff Structure 81 Table 8-6:Tariff Structure – On-lend situation 81 Table 8-7: Financial Analysis Summary Results 82 Table 9-1: Losses and Potential Social Effects Associated with the Project 91 Table 11-1: Institutional and Governance Risks 98 Table 11-2: Policy Risks 99 Table 11-3: Physical Component Risks 99 Table 11-4: Social Risks 100 Table 11-5: Environmental Risks 100 Table 11-6: Financial Risks 101 Table 11-7: Economic Risks 101


TA4893-NEP Final Report Page vii

List of Figures Figure 3-1: Kathmandu Valley and KUKL Water Supply and Wastewater Service Areas 14 Figure 3-2: Comparison of Population Projections 15 Figure 5-1: Map of Frequency of Water Supply Service 37 Figure 5-2: Area Inhabited by Low Income Groups 38 Figure 5-3: Proposed Water Supply Investments 39 Figure 5-4: Proposed Wastewater System Improvements 41 Figure 6-1: Steps for Developing an Asset Management Program 47 Figure 7-1: PID Structure and Reporting Framework 58 Figure 7-2: Water Supply - Capital Investment Plan 65 Figure 7-3: Wastewater - Capital Investment Plan 66 Figure 7-4: Proposed Project Loan Implementation Schedule 67


TA4893-NEP Final Report Page viii

List of Abbreviations and Acronyms ADB – Asian Development Bank APs – affected persons asl – above sea level BAP - Bagmati Action Plan BCIDC – Bagmati Civilisation Integrated Development Committee (also known as the High

Powered Committee for Integrated Development of the Bagmati Civilisation) BORDA – Bremen Overseas Research and Development Association BDS – bulk distribution system BPL – Below poverty line CBS - Central Bureau of Statistics CBP Team – Capacity building and public-private partnership support team CI – Cast Iron CIAMP – Capital Investment and Asset Management Program CPS - Country Partnership Strategy (ADB) DDC - District Development Committee DI - Ductile Iron DNI – distribution network improvement DSC – design and supervision consultants DUDBC - Department of Development and Building Construction DWSS - Department of Water Supply and Sanitation EA – Executing Agency EIA – environmental impact assessment EIRR – economic internal rate of return EMP – Environmental Management Plan ENPHO – Environmental and Public Health Organisation ESCAP - UN Economic and Social Commission for Asia and Pacific FMA - financial management assessment FMIS – financial management information system FIRR – financial internal rate of return GDP - Gross Domestic Product GI – Galvanized Iron GoN – Government of Nepal HDI - Human Development Index HDPE – High Density Polyethylene HPCIDBC – High Powered Committee for Integrated Development for Bagmati Civilization HWUSRUKV – Household Water Use Survey and Research in Urban Kathmandu Valley lpcd – litres per capita per day ICB – international competitive bidding ICM – Indian Cooperation Mission ICIMOD – International Centre for Integrated Mountain Development IDA – International Development Agency IDP - internally displaced population IEE – Initial Environmental Examination IR – involuntary resettlement IRR – internal rate of return IS – international shopping IUCN – International Union for Conservation of Nature


TA4893-NEP Final Report Page ix

JICA – Japanese International Cooperation Agency JBIC – Japanese Bank for International Cooperation KUKL – Kathmandu Upatyaka Khanepani Limited KVTDC – Kathmandu Town Development Committee KVWSMB – Kathmandu Valley Water Supply Management Board LICSU – Low Income Consumer Support Unit (KUKL) MDG - Millennium Development Goals MIS – Management Information System MLD – mega litres per day (1 mega litre = 1000m3) MOE – Ministry of Environment MPPW – Ministry of Physical Planning and Works MWSDP - Melamchi Water Supply Development Board MWSP – Melamchi Water Supply Project NCB – national competitive bidding NGO – non-government organization NWSC – Nepal Water Supply Corporation O & M – operation and maintenance PID – Project Implementation Directorate PPMS – project performance monitoring system PPP - Public-Private-Partnership PPTA – project preparation technical assistance PVC – poly-vinyl-chloride R&R – resettlement and rehabilitation RBTS – Reed Bed Treatment System RP – resettlement plan RWSSFDB – Rural Water Supply & Sanitation Fund Development Board SAPI – Special Assistance for Project Implementation SDP – Kathmandu Valley Water Services Sector Development Program Sl – Steel (pipe) TA – technical assistance UN – United Nations VDC – Village Development Committee WSI – wastewater system improvement WSS – water supply and sanitation WSTFC – Water Supply Tariff Fixation Commission WTP – water treatment plant WUO – Water Utility Operator WUSC - Water User and Sanitation Committee WWTP – wastewater treatment plant


TA4893-NEP Final Report Page 1

Kathmandu Valley Water Supply & Wastewater System Improvement

Project Feasibility Study Final Report

1. Background and Scope 1.1 Introduction 1. ADB TA 4893-NEP: Preparing the Kathmandu Valley Water Distribution, Sewerage, and Urban Development Project was processed in late 2006. Its main purpose was to provide support to Government of Nepal (GoN) to continue the urban infrastructure development endeavours subsequent to three ongoing ADB loans1. Implementation of this technical assistance (TA) did not commence as originally envisioned due to the overall delay in implementing ongoing loans and their restructuring. TA 4893-NEP is to develop a Capital Investment and Asset Management Program, detail design documents for improving water supply distribution in a selected area and for preparing an ensuing loan in the ADB financing pipeline for 2011.

2. The Final Report is the sixth main output from the TA 4893-NEP for the preparation of a project to attract loan funding from the Asian Development Bank for improving water sector infrastructure services in the Kathmandu Valley in Nepal. The main urban concentrations within the valley consist of the twin cities of Kathmandu and Lalitpur followed by Bhaktapur, Madhaypur and Kirtipur. The project will focus on investment in physical infrastructure. Suggestions are also provided, where appropriate, for reinforcing the capacity building and institutional strengthening program of the water utility operator (KUKL) and state authorities being undertaken under SDP Project Loan 2059-NEP.

3. An Inception Report submitted to the Government and ADB in June was followed by a Draft Capital Investment and Asset Management Program (CIAMP) in October 2009, the Feasibility Study Interim Report in November 2009, the CIAMP Final Report in February 2010 and the Feasibility Study Draft Final Report in March 2010. The Project preparation has continued with a high level of participation of stakeholders from KUKL, Government departments and the private sector. During 2008 baseline socio-economic surveys were conducted, which have been updated to provide data on water use plus community and business perceptions on water sector services delivery.

4. The project design has learnt from ADBs experiences from past and on-going water sector projects in Nepal, in particular the Melamchi Water Supply Project. The design has also capitalised on the GoN‟s own initiatives in institutional reform in the water sector. Based on this knowledge, the Project has been designed for ADB funding as a Project Loan since it would de facto be a supplementary to Loan 1820-NEP: Melamchi Water Supply Project, Subproject 2.

1 Loans 1820-NEP(SF): Melamchi Water Supply Project (MWSP) and Loans 2058/2059-NEP(SF):

Kathmandu Valley Water Services Sector Development Program (SDP).



5. The Government has already taken the first steps of:

implementing new legislation for managing water sector assets;

transferring functions and finances to the water utility operator, KUKL; and

improving priority water supply infrastructure (rehabilitation) through the ongoing Loan 1820-NEP: Melamchi Water Supply Project (Subproject-2) supported by Loan 2058/59 NEP: Kathmandu Valley Water Services Sector Development Program.

6. Given the Government‟s commitment to water sector reforms, enhancement of systemic and management capacities both at the Government and local level, a better understanding of ADB‟s safeguards and procurement issues there is a need to build-on the on-going water sector improvement investments.

7. The prime purpose of this PPTA was to define the next 5 year‟s funding of investments based on priorities identified by the CIAMP (2010-2025) and determine the project contours for another ADB loan.

1.2 Project Goal and Purpose 8. Goal: To contribute towards social-economic development, improved health and well-being of all the urban population of Kathmandu Valley, in particular, the poor.

9. Purpose: To provide capital works that assist KUKL to meet its licence conditions and to provide appropriate water and wastewater service levels by providing infrastructure which:

Optimises water supply from existing and new in-valley sources

Provides effective and equitable water distribution from the water supplied under the Melamchi Water Supply Project, Subproject 1, and from the in-valley water sources

Improve the collection and conveyance of the off-site sewerage system and wastewater treatment, and

Improves treatment services for on-site sanitation services.

10. To ensure that the proposed infrastructure investments are sustainable, on-going SDP Project Loan 2059-NEP will provide capacity building and institutional strengthening to improve financial and asset management capacity.

11. A Design and Monitoring Framework (Draft) is provided as Appendix 1.

1.3 Scope of the Report 12. This Final Report highlights the need and rationale for the project and provides an overall view of: a) Government level policy; b) socio-economics and water sector management covering technical and financial details; and (c) social and environmental safeguard assessments for identified water supply and wastewater system investments.



2. Urban Water Sector in Nepal 2.1 Socio-Economic Context 2.1.1 Population and Urbanisation 13. In Nepal, urban2 growth occurred due to the emergence of new towns, expansion of existing urban areas and migration, both internal and external. In 2001, Nepal had a relatively low urbanization level, with an urban population of 14%, with 58 municipalities. In the last 2 decades, Nepal‟s population has increased from about 15 million to 23 million. During the same period the urban population grew from 1 million to more than 3 million. According to ESCAP report (quoted in CBS 2001), over 65% of urban growth in Nepal was due to migration. During the last decade, the rate of migration increased rapidly due to political un-rest and insurgence in the country. The rate of urban growth is about 6.6% per year. Table 2-1 provides population growth since 1981 with estimated projections to 2021 indicating that this growth rate will increase further in coming years. Estimates suggest that the urban population will reach 24% by 20173, and 32% by 20274.

Table 2-1: Nepal Population Growth

Year Rural population growth (%)

Urban population growth (%)

Total population (million)

1981 14.0 1.0 15.0 1991 16.8 1.7 18.5 2001 19.5 3.2 22.7 2004* 20.8 3.9 24.7 2021* 24.8 9.2 34.0 Annual growth 1.7% 6.6% 2.3% Source: CBS, 2003 Note: *Estimated projection based on Census 2001 by the Central Bureau of Statistics

14. Table 2-2 shows that the average population density in urban areas in Nepal was 985 persons per km2 compared to 136 persons per km2 for rural areas. However, the urban densities in Kathmandu valley are more than 10 times the density of other urban areas.

Table 2-2: Regional Population Densities in 2001

S.N. Regions Population Percentage Area (km2) Density (per km2) 1 Hill/Mountains 576,024 2.5% 1047 550 2 Terai 1,263, 781 5.6% 1,158 1,092 3 Kathmandu Valley 995,966 4.4% 97 10,265 Urban Total 3,227,879 14.2% 3,276 985 Rural Total 19,509,055 85.8% 143,905 136 Source: CBS, 2003 2.1.2 Economic Development 15. Nepal is characterized by income poverty where large irregularities exist in social indicators if compared to the various geographic regions and socio-economic groups. In terms of socio-economic indicators, such as access to essential services like health, education, and safe drinking water, electricity, cooking fuel etc, the rural regions tend to be

2 The Local Self Government Act (1999) considers settlements of population greater than 20,000. The National

Urban Policy (2007) re-defines urban to include settlements with a minimum population of 5,000. 3 Government of Nepal. 2007. Three Year Interim Plan. Kathmandu.

4 New Era. 2006, Nepal Population Perspective Plan 2002-2027. Kathmandu.



significantly behind, with disadvantaged groups still having less access. Nepal has been making rapid progress in drinking water supply and it is estimated that 81% of the total population will have access to improved water sources (MDG, Progress Report, 2006). The gap between the urban and rural areas has narrowed in terms of access to water and sanitation coverage. Water supply in the rural areas has been showing steady progress reaching the target as per MDG. However, in urban areas it stagnated due to inability of the systems to keep up with the rising population and demand. In urban areas, 59% of households are estimated to not having access to a piped water supply (CBS, 2005). Access to improved sanitation (as defined by the Joint Monitoring Program) in 2006 was 46% for urban areas and 24% for rural areas.

16. Agriculture is a major sector in Nepalese economy from the production, employment, and livelihood aspects. This sector occupied 32.4% of GDP in fiscal year 2008/09 while its contribution especially to rural employment continues to be very high. The strong role agriculture plays in the national economy is evident from the fact that more than 80% of the country's population live in rural areas with agriculture as the major source of income.

17. Wholesale trade and Transport communication contributed to the national economy with 13.7% and 10.5% respectively in the fiscal year 2008/09 while industry (manufacturing and mining) is the fourth major sector contributing about 6.8% to the national economy.

18. Table 2-3 indicates that the economy of the country is stagnant. Real GDP growth was 3.39% in the year 2007/08; which is reasonably higher than the previous year, but the preliminary estimate growth of real GDP for 2008/09 is projected to be only 2.26%. The growth is just sufficient to maintain the population growth. It is stated that the slow growth is due to unfavourable weather conditions for agriculture and a contraction in non-agricultural growth such as the industrial sector and other sectors due to load shedding and lack of political stability in the country. Other economic indicators such as Gross Domestic Saving, Gross National Saving, Exports of goods, Imports of goods; and Gross Fixed Capital Formation in terms of percentage of GDP have changed little during the past 5 years.

Table 2-3: Key Macro-economic Indicators for Nepal

Particulars 2004/05 2005/06 2006/07 2007/08 R 2008/09 P

Annual Change in nominal per-capita GDP (%) 7.41 8.54 8.89 9.93 14.73 Annual change in real per-capita GDP (%) 1.47 1.46 1.43 3.39 2.26 Percapita GDP (USD) 328 350 391 468 473 Percapita GNI (USD) 329 352 395 473 484 Gross domestic saving as % of GDP 11.56 8.98 9.87 11.21 8 Gross national saving as % of GDP 28.41 29.03 28.61 31.53 32.31 Exports of Goods and services as % of GDP 14.58 13.45 13.04 12.08 15.7 Imports of goods and services as % of GDP 29.48 31.32 31.3 32.66 37.42 Gross Fixed Capital Formation as % of GDP 19.94 20.72 20.38 21.11 21.25 Source: Economic Survey, 2009;

P = Preliminary, R = Revised

19. There are signs that the recent global economic crisis might be receding. Even so, the world economy is still expected to have a negative growth of 1.3% in 2009 despite the growth of 5.2% in 2007. Nepal cannot be excluded from the global economic crisis. However, emerging and developing economies are expected to grow at 1.6% whereas advanced economies might be negative in the coming years. Thus, the economic growth of



Nepal is projected to be 2.3% in the fiscal year 2008/9 compared to 3.4% in fiscal year 2007/8. The two neighbouring countries to Nepal; China and India achieved 9.0% and 7.3% growth respectively in the year 2008 but such growth is expected to reduce respectively to 6.5% and 4.5% in the year 2009.

20. The main industries in Nepal include food and beverage, textiles, carpets, tourism, tobacco and cigarettes, chemical and chemical products, cement and brick factories. The textile, carpet, garment and spinning industries are the largest industrial employers, followed by sugar and jute processing. The total value of industrial output of Nepal was NRs.156.3 billion ($2,000 million) in the fiscal year 2006/07 which provided employment opportunities to about 169.800 people directly; and the number people engaged in the national industry is about 177.600 indirectly.

2.1.3 Social Profile in Nepal 21. Nepal is one of the least developed, landlocked countries in the world. The general characteristics of the country are low levels of infrastructure development and inadequate social services (health care, drinking water and education). About 19% of the population live in the cities and towns (ADB, 2008). The life expectancy at birth is 63 (2006) and the literacy rate is 56.5 (2007).

22. According to the 2001 census, there are 105 caste/ethnic groups in Nepal. Brahmin, Chettry and Newar are the major groups in urban areas, which account for over 51% of the total population whereas the same group constitute only 31% in the rural areas. Other castes, which constitute more than 2% of the urban population, are Magar, Muslim, Tamang, Gurung, Tharu, Rai and Kami.

23. The 2001 census indicates that the literacy rate for population above 6 years of age was 54% of the total population. Of this the urban literacy has reached to 72% while in rural areas is just over 50%. The gap between male and female is around 20% of the total with the female literacy rate in urban areas at 62% compared to only 40% the rural areas.

2.1.4 Poverty 24. The poverty line is defined as the income required to provide adequate calories (2250 kilocalorie) for an average Nepali to be active5. Nepal Living Standard Survey conducted by CBS in 1995/96 and 2003/04 revealed that between the two surveys there had been substantial decrease in the poverty in Nepal. The survey shows that poverty had decreased faster in the urban areas, by 56%, than in rural area where the decrease was only 20%. Table 2-4 shows the changes in the poverty status between the two surveys.

Table 2-4: Change in Poverty between 1995/96 and 2003/04 Poverty Population below the

poverty line (1995/96) Population below the poverty line (2003/04)

Poverty Decrease %

Nepal (overall) 41.8% 30.9% 26% Rural 43.3% 34.6% 20% Urban 21.6% 9.6% 56%

5 This has been calculated as NRs.10,000 per month per family (Emergency Flood Damage

Rehabilitation Project, 2009). However, there are other indicators like probability of not surviving to age 40 (Human Development Report 2009), adult literacy rate (age 15 and above), people not using an improved water source and children underweight for age 5 or less are also used.



25. The Nepal Government made poverty alleviation one of the major objectives of the Eighth Plan (1992-1997). The Ninth Plan (1997-2002) also gave continuity of the previous plan in reducing poverty. The Tenth Plan (2002-2007) and the Three Year Interim Plan (2007-2010) also gave continuity to the previous plans in reducing poverty and reducing the increasing gap between rich and poor through a number of micro level programs.

26. However, the extent of poverty continues to be much more in rural than in urban areas where the income level is estimated to be 4.6 times higher. As a result, increasing numbers of rural poor migrate to urban areas in the hope of getting employment and a better livelihood.

2.1.5 Socio-Economic Outlook 27. The 2001 census determined that the total population of Nepal was 23.15 million with 4.2 million households and a population growth rate of 2.4%. The average population density for the whole country was 164 persons per km2 but in Kathmandu Valley it was over 10,000 persons per km2. The 2027 population projection for the country is 36 million, assuming an annual growth rate of 2.1%. Nepal has more than 100 different caste and ethnic group of which, 43 groups have been categorized as indigenous people.

28. Nepal‟s economy is still heavily dependent on agriculture, which accounts for about 40% of the Gross Domestic Products (GDP). More than 73% of economically active population are dependent on agriculture. The annual per capita GDP at current price is $470 (2007/08). The growth in productivity is not matching with the population growth. Almost one-third of the population are living below the poverty line (2004). Life expectancy at birth is 63 years (2006), infant mortality rate is 46 per 1000 live births (2006), and the illiteracy rate among the population of 15 years of age and above is 56% (2007). The Human Development Index (HDI), which is considered as one of the indicators for overall country development, has ranked Nepal at only 145 out of 179 countries of the world (UNDP 2009).

29. Nepal was the lowest among all other South Asian Countries except Afghanistan. Sri Lanka was ranked top (99) followed by Maldives (100), India (128), Bhutan (133), Pakistan (136) and Bangladesh (140).

30. Nepal has more than 6,000 rivers flowing from north to south. These rivers make Nepal one of the richest nations in terms of potential water resources. However, only 71% of the total population have access to safe drinking water, 41% of land has to be irrigated throughout the year and due to inadequate power generation, only 34% of the population has access an electricity supply, who also suffer from frequent load shedding.

2.2 Water Sector Management 2.2.1 Policies, Targets and Programmes 31. The Government of Nepal has revised and promulgated a number of policies, acts, strategies after the restoration of democracy in 1990. The overall goal of different policies has been to contribute towards improvement of living conditions of Nepali people through reducing poverty, unemployment and under employment in a sustainable manner. These policies and laws include a number of social development principles, such as, access to adequate safe drinking water and sanitation; ensuring health security; gender balance; assistance to disadvantaged / vulnerable groups; encouraging participation or taking ownership in development; increasing agricultural production to ensure food security;



equitable balance between rural and urban areas; avoidance of or minimization of resettlement with adequate and timely compensation and rehabilitation for the social and economic losses due to projects.

32. Broad-based economic reforms during the 1990s and the economic liberalization during the 2000s, has changed the overall economic policies and encouraged openness. The domestic market has become more competitive, trade has been liberalized, the industrial licensing system has been relaxed and financial sector reforms and privatization programmers have been launched. After the revision in the Local Self-Governance Regulations (2007), the development activities with PPP model increased. In the fiscal year 2008/09, the government planned to introduce, through Public Private Partnership, foreign investment as an essential input for country‟s economic growth and new industrial and foreign investment policy to achieve the economic growth rate. Programs like urban sanitation, solid waste management, transport management, supply and distribution of drinking water, renewable energy etc. were carried out in FY2007/08 under the concept of Public Private Partnership.

33. The prime task of the present Government is to raise the living standard of the Nepalese people in a sustainable manner through economic development. Although measures were prepared to address poverty and deprivation in the 9th and 10th plans; and in the three-year interim plan, the result has not yielded the desired effects in terms of poverty reduction due to the lack of a focused approach and a clear strategy. The situation has been further damaged by political instability, insurgency and regressive tendencies in some aspects of governance. Table 2-5 provides a summary of targets and achievements from successive Plans.

Table 2-5: Targets and achievement of drinking water supply and sanitation programs

Plan Period Target Achievement 6th plan Provide 4.1 million additional population

with basic drinking water services 3.4 million population benefited

7th plan Provide drinking water services to 9.3 million additional population.

(i) additional 2.7 mill population benefited. (ii) additional 32,000 people provided with latrine facilities - 4,000 latrines built under the Low-cost Latrine Program.

8th plan (i) Provide basic drinking water services to additional 7.2 million population. (ii) 1.6 million population benefited from sanitation.

(i) additional 5.5 million population benefited. (ii) 0.3 million population benefited.

9th plan (i) provide basic drinking water services to additional 9.7 million population. (ii) 5.3 million population will be benefited from sanitation.

(i) additional 2.9 million population benefited. (ii) 1.5 population benefited from sanitation.

10th plan (i) provide basic drinking water services to additional 4.6 million people. (ii) sanitation facility to 7.4 million people.

(i) 77% of the total population has access to drinking water. (ii) 46% of the total population is using proper latrines.

Interim Plan (2007-2010)

(i) provide drinking water to 85% of the total population. (ii) proper latrines to 60% of total population.

Source: Different GoN five year plans and 3 years interim plan (2007-10)



2.2.2 Legal Framework 34. Government of Nepal remains fully committed to the provision of safe drinking water and sanitation services for all of its citizens as a fundamental human need and a basic human right and on providing improved water supply and sanitation services of medium and higher levels that are commensurate to affordability of the townships. In the 1990s, political liberalisation and a focus on decentralisation saw important new sector actors emerge, namely community groups, local government and the private sector – including non-governmental organisations. However, the ever-growing urban population and increasing water demand has placed a strain on existing urban water supply and sanitation services. There have been a number of efforts to streamline planning and investment in the sector. Some of the major efforts are examined below.

35. National Drinking Water Quality Standards (2006) provide details of the water quality standards to be applied to all new urban systems and complements the Environment Protection Act (1997) which requires Environmental Impact Assessments (EIA) or Initial Environmental Examination (IEE) of all new projects and pollution control for all water resources.

36. National Urban Policy (2007) highlights the historical imbalances and haphazard nature of urban development in Nepal. It views urban centres as catalysts for economic development linked to north-south and east-west access corridors and flags poor sanitation, environmental degradation and lack of access to basic services by the urban poor as requiring urgent attention. The Urban Policy proposes building the capacity of Municipalities to plan and manage integrated local development activities including the preparation of urban master plans to be moderated by central and regional authorities. Private sector involvement and investment in infrastructure development is specifically sought.

37. National Urban Water Supply and Sanitation Sector Policy 2009 was recently formulated to provide overall policy support and guidance towards achieving equity in service delivery by ensuring that the financially marginalized households within the system areas are mainstreamed as valid customers of service through design and implementation of financial incentives where so required. The policy stresses for demand side management of water supply and promotion of effective and appropriate institutions at local level for implementation, operation and management of water supply and wastewater systems. The policy discourages central subsidies at the operational level and encourages private sector participation and involvement of users in the decision making process. The policy on cost recovery in water is to achieve full cost recovery of operation and maintenance cost and a portion of the capital cost.

38. GoN‟s Local Self Governance Act (1999) provides the legal basis for the devolution of responsibilities and authorities for social, economic, institutional, and physical infrastructure development, including water and sanitation systems, to local government. While periodic district plans have been formulated in 52 districts, a decade long political conflict, including the absence of locally elected officials for most of this period, have frustrated implementation of plans.

39. Government‟s 3 Year Interim Plan (2007- 2010) provides the most recent guidance on urban sector priorities highlighting, in particular, the need to address the effects of rapid urbanisation on service levels, water quality and scheme maintenance. It proposes the full



integration of sewerage, on-site sanitation and solid waste management in all urban schemes and specifically endorses cost recovery from consumers.

40. Local authorities (Municipalities, VDCs and DDCs) are responsible for developing and overseeing project implementation at local level. However, some private organisations have initiated project implementation for business purposes and their role is increasing. Business oriented private organisations are also collecting municipal solid waste at many locations. As a result, the role of many municipalities has reduced to only transporting and managing landfill sites. Due to KUKL‟s inability to supply adequate water and limitations in regulation enforcement which prohibits unmanaged ground water extraction some private parties are extracting ground water and supplying to local consumers in Kathmandu. This business is quite profitable. Some user committees, as private sector organisations have made financial contributions for the construction of locality roads and drains and are supervising construction to ensure quality of works.

41. The Nepal Water Supply Corporation Act (2nd Amendment) (2007), provided the legal base for transfer of ownership of water supply and wastewater service system of any urban centre operated by NWSC to any other appropriate organization as decided by the Government. It also opened the door for NWSC to engage companies to operate and manage its system under management contracts.

42. Water Supply Management Board Act (2006). This Act places emphasis on the involvement of local bodies and institutions in the water supply and wastewater sector development in the urban areas. It allows for the establishment of autonomous and independent water supply management boards for a municipality or a group of municipalities at local level for providing water supply and wastewater services. It also allows for involvement of the private sector in the management and operation and maintenance of the systems. In case of Kathmandu Valley, the act has made it mandatory for Kathmandu Valley Water Supply Management Board (KVWSMB) to issue license to a service provider for operation and management of its water supply and wastewater system.

43. Water Supply Tariff Fixation Commission Act (2006) provided the authority to the Water Supply Tariff Fixation Commission (WSTFC) for economic regulation of water supply and wastewater services and in resolution of consumer complaints. This autonomous corporate body is empowered to fix the tariff for water supply and wastewater services independently at a reasonable price based on level of service and the cost involved in providing the service. WSTFC shall ultimately be responsible for regulation of water supply and wastewater services throughout the country though it has initially started its activities from Kathmandu Valley.

2.2.3 Institutional Structure and Roles 44. In the early 1990s, the institutional framework for urban development was created with the establishment of the Ministry of Housing and Physical Planning (now the Ministry of Physical Planning and Works - MPPW), Nepal Water Supply Corporation (NWSC), Urban Development Training Centre, and town development committees in each municipality. The Town Development Fund was established in the mid-1990s as a source of urban finance, and amendments to the Town Development Act empowered local bodies to conduct guided land development and/or land pooling projects. More recently, the Local Self-Governance Act and the Nepal Water Supply Regulation were approved. ADB's ongoing Urban and Environmental Improvement Project, which is the first decentralized urban development



project executed by Department of Urban Development and Building Construction (DUDBC), reflects an attempt to put integrated municipal development into practice.

45. Several Government Ministries, departments and other agencies are involved in the management of the water supply and sanitation (WSS) sector and related activities. The MPPW is responsible for formulating national level policies and programs and guiding sector activities to meet objectives and targets outlined in National Development Plans. The Department of Water Supply and Sewerage (DWSS) is the lead agency in the sector and is responsible for water supply services in rural areas and small urban centres. MPPW oversees the activities of the NWSC, a semi-autonomous corporation responsible for water supply and sewerage in major urban centres outside of Kathmandu Valley, and the KVWSMB, an autonomous body established under WSMB Act (2006) and responsible for water supply and sewerage services in Kathmandu Valley. MPPW also oversees RWSSFDB, an autonomous unit established to support small rural WSS projects.

46. Table 2-6 provides a summary of the institutions, responsibilities and coverage. The list is not exhaustive from the project‟s perspective as more institutions could be added depending on their relevance to total water demand and wastewater production due to urban growth. For example, other institutions with a secondary involvement include regulators and providers such as the Ministry of Environment, Science and Technology (MoEST) and Nepal Electricity Authority.

Table 2-6: Role of Institutions in Water Sector Management and Development

Agency Responsibilities Coverage

Ministry of Physical Planning and Works (MPPW)

Policy, Planning and Administration of all water sector and Urban Departments, Corporations and Development Authorities. Overall responsibility for the water and sanitation, transportation and urban development sectors.

Country wide

Ministry of Local Development (MLD)

Lead government body for promoting local development and decentralization. The ministry achieves this through supporting capacity building in local bodies i.e. District Development Committees, (DDC), Municipalities and Village Development Committees (VDC).

Country wide

Ministry of Water Resources (MoWR)

Responsible for the implementation of water resource policies including allocation of water resources for various uses. Although MoWR does not have direct involvement in water supply and sanitation, it has the lead role in the District Water Resources Committee for licensing and registering of Water User Associations.

Country wide

Department of Water Supply and Sewerage(DWSS)

It is designated as the lead agency for the drinking water and sanitation sector with the objective to achieve sustained improvement in health status and productivity for Nepalese people as a whole with particular emphasis on low income groups through the provision of adequate, locally sustainable water supply and sanitation facilities in association with improved personal, household and community hygiene behaviour to all by the year 2017.

Country wide

Department of Urban Development & Building Constn. (DUDBC)

It is the lead sectoral agency responsible for urban planning and development through provision of urban infrastructure facilities including water supply, drainage, roads, etc.

Country wide



Agency Responsibilities Coverage

Department of Local Infrastructure Development and Agriculture Roads (DoLIDAR)

Under MLD, the Department of Local Infrastructure Development and Agriculture Roads (DoLIDAR) is responsible for small village schemes through the District Technical Offices and VDCs. As part of decentralization process, DoLIDAR builds the technical capacity of DDCs to implement rural infrastructure development projects including water supply and sanitation.

Country wide

Rural Water Supply & Sanitation Fund Development Board (RWSSFDB)

The Fund Board has a national programme addressing the needs of many small and medium sized rural areas. It implements projects through a system of technical support agencies (consultants) and support organisations (NGOs).

Country wide

Water Supply Tariff Fixation Commission (WSTFC)

Independent regulatory commission established in 2007 under WSTFC Act (2006) for regulating water and sewerage tariff in the country. It is also responsible for ensuring quality standards in service delivery, resolving disputes between Service Provider and the Consumer. Although initially responsible for Kathmandu Valley only, it is likely to extend its authority to other parts of the country.

Country wide

Nepal Water Supply Corporation (NWSC)

NWSC and its predecessors have been responsible for provision of drinking water and sewerage in designated municipalities since 1973. After the formation of KVWSMB and KUKL its role is limited to only about 20 municipalities and large urban centres outside the Kathmandu valley.

Selected Municipal Areas

Kathmandu Valley Water Supply Management Board (KVWSMB)

Autonomous and independent board established under WSMB Act (2006), which is the asset owner of all the water supply and sewerage facilities of the Kathmandu Valley and responsible for developing and overseeing service policies

Kathmandu Valley

Kathmandu Upatyaka Khaepani Limited (KUKL)

Public limited water company established under the Companies Act (2006) in PPP model with the Government, local municipalities and the private entities holding major share. Awarded with license to operate and manage water supply and sewerage services in Kathmandu Valley by using the assets of KVWSMB under a 30-year lease.

Kathmandu Valley

Metropolitan, Sub-metropolitan areas and Municipalities

The main role played by local governments is promoting the development of water and sanitation facilities by developing local plans, programmes and projects and also providing the materials and financial support to match the projects‟ cost and technical support. They provide political consensus among the different political parties and stakeholders to facilitate the drinking water and sanitation.

Local Area

High Powered Committee for Integrated Development of Bagmati Civilization

Initially established for cleaning of Bagmati river around Pashupati temple area. Government has given HPCIDBC the mandate to clean Bagmati through integrated development including development of interceptor sewers and wastewater treatment plants

Bagmati River Area



3. Kathmandu Valley Socio-Economic Context 3.1 Population and Urbanization 3.1.1 Overview 47. The most important initial issues for an investment program is the determination of the size of the problem, or more specifically in this case - the population to be served and the service standard demand. Urban centre development is considered to be the engine of growth as the planned urban development can result in overall economic development of the nation. Kathmandu Valley has five municipalities out of a total of 58 in Nepal and is home to about 30% of the country‟s urban population.

48. The Kathmandu Valley is the most densely populated region in Nepal. Its population has also been increasing rapidly. This population is largely in Kathmandu, which is the centre of administration, industrial, commercial, social and economic activities. During the last three decades, the growth in population has been significantly driven by in-migration. The in-migration is largely due to better employment and business opportunities, better educational and medical facilities, but also insurgency and security concerns of recent years.

49. The population in the Kathmandu Valley increased from the 0.41 million in 1952/54 to 1.6 million in 2001, the year of the last census. The growth rate between 1991 and 2001 was 3.84%. This was comprised of 5.1% urban growth and 2.3% growth in rural areas. Accordingly, the average population density in the valley was 2,507 persons per km2, which is very high compared to 156 persons per km2 for the country as a whole. Kathmandu district has the highest density at 2,550 persons per km2 followed by Bhaktapur at 2,167 persons per km2 and Lalitpur, 997 persons per km2. In many areas of Kathmandu, the average density exceeds 40,000 to 45,000 persons per km2 and at the core of Kathmandu the density exceeds 80,000 per km2. Although Kathmandu Valley only covers 0.43% of the total area of Nepal, it has about 7% of the total population.

50. The rapid unplanned urbanization of the Kathmandu Valley has brought negative impact to its overall development. Water became scarce as demand exceeded supply. Lack of operational wastewater system facilities converted the holy Bagmati River into a highly polluted river. Congested and crowded roads brought hardship to travellers and road junctions became garbage dumping sites. Despite these negative impacts, the urbanization of the valley has still continued at a similar rate to the past 10 years. According to urban planners, from urban basic service management and disaster relief management aspects, the Kathmandu Valley only has a carrying capacity of 5 million population.

3.1.2 Urban Growth Patterns 51. Two urban growth trends are significant. Firstly, people owning property and living in core parts of the greater urban areas (e.g. Kathmandu and Patan) tend to leave their inner city properties and migrate into newly developed areas adjacent to the Ring Road or main highways. The other common trend is the selling of residential properties located at the city centres for commercial purposes. Negative growth rates were recorded in some of the wards of Kathmandu, Lalitpur and Kirtipur during the last census period (1991 to 2001) as a result. It is also expected that those wards in Kathmandu, Lalitpur and Kirtipur, where there were negative growth rates in the past will be filled up by tenants to the previous level thus nullifying the growth rates.



52. This last trend is still continuing but at a reduced rate. For example, some of the VDCs located near the Ring Road and having growth rates of over 20% during the last census have had reduced growth rates of around 15% in the last 8 years (verified through the number of buildings built in the same area in the same duration). It is thus expected that as the areas become more developed in the next 5 to 15 years the growth rate will decrease as the population density becomes higher and ultimately saturated. In the coming years, people are expected to move even further out towards the foothills of the valley.

3.1.3 Population Growth Projections 53. The only available information on population and its growth rate is from the Population Censuses carried out at an interval of every 10 years by the Central Bureau of Statistics (CBS) of the Government of Nepal. For ward populations, other publications6 have been referred to, including district and municipal profiles.

54. In 1999, the Ministry of Population and Environment (MOPE) estimated that the population in 1998 was 1.5 million, assuming an urban growth rate of 6.3% and 2.32% for the rural sector. This is consistent with the 2001 Census of 1.67 million. Using separate growth rates for the urban and rural population, the population of the valley was estimated to reach 3.5 million by 2016 under a "do-nothing scenario" according to MOPE (1999), as shown in Table 3-1.

Table 3-1: Population Projection for Kathmandu Valley under "Do-nothing Scenario"

Year Total Urban 1 Rural 2 1991 1,105,379 598,528 506,851 1996 1,369,403 800,965 568,438 2001 1,709,380 1,071,872 637,508 2006 2,149,378 1,434,407 714,971 2011 2,721,406 1,919,560 801,846 2016 3,468,082 2,568,805 899,277

Note: 1. Growth rate at 6% per annum, 2. Growth rate at 2.32% per annum Urban population includes municipal population and population of 34 rapidly urbanizing VDCs. Source: MOPE, 1999

55. Table 3-2 compares the population predictions for the KUKL water supply area, adopted for the original BDS design (Lahmeyer International/Mott MacDonald, 1998) with the SAPI studies (2004).

Table 3-2: Comparative Projected Population of KUKL Water Supply Area (000’s)

Study Year 2001 2006 2011 2016 2021 BDS Design 1999 1,291.6 1,459.2 1,649.0 1,862.9 2,104.7

SAPI Phase II 2004 1,248.3 1,541.2 1,843.6 2,128.5 2,432.1

56. Taking the urban growth patterns into consideration, population growth rates have been analysed and population projections to 2025 have been developed for each ward of the KUKL service area. Table 3-3 summarizes the permanent population projections of the Kathmandu Valley and KUKL water supply service area.

6 Profile of Nepal published by Intensive Study and Research in 2008, Integrated Action Planning of Madhyapur Thimi

Municipality, published by DUDBC in 1999, Municipal Profile of Kirtipur Municipality prepared by the municipality in 2008



Table 3-3: Projected Population for Kathmandu Valley and KUKL Service Area

Year 2001 (census) 2010 2015 2020 2025

Kathmandu Valley 1,579,737 2,712,000 3,486,000 4,481,000 5,761,000 KUKL Service Area 1,285,737 2,135,000 2,713,000 3,242,000 3,963,000

57. Figure 3-1 shows the present KUKL water supply and wastewater service areas within the Kathmandu Valley. The wastewater service area is presently restricted to the 5 municipal areas.

Figure 3-1: Kathmandu Valley and KUKL Water Supply and Wastewater Service Areas.

58. Figure 3-2 compares the KUKL service area permanent population projections adopted for the Capital Investment and Asset Management Program (CIAMP) with those with those provided by SAPI (2004) and the Bagmati Action Plan (BAP)(2009). The BAP projection is higher because the area taken is for the whole of the Kathmandu Valley and includes areas outside the KUKL service area.

59. Kathmandu Valley also has a large number of temporary residents who are not included in the permanent population census, but for whom water sector services have to be provided. These people come from different parts of the country for economic activities, studies and work. Additionally, there is internally displaced population (IDP) and a floating population. Predicting the exact number of temporary population in the valley is a challenging task, as there is no reliable data. The PPTA undertook a sample survey to count temporary population. The sample surveys were focussed on three categories of the temporary population viz street vendors; students, service holders and labours seeking job in



the valley; and house servants/keepers. The survey indicated that temporary population amounted to approximately 30% of the permanent population. The proportion of temporary population varies between municipal and VDC wards and has been taken into account in the local population projections and service demands.

Figure 3-2: Comparison of Population Projections

3.2 Socio-Economic Context 3.2.1 Social and Household Profile 60. Social Classification. According to Census 2001, majority of the people living in the Valley are Hindus (76%) followed by Buddhist (21%). The percentage of other religions living in the valley is minimal. The households are divided into different ethnic groups such as Newar, Brahmin, Chettri, Tamang, Magar. Newar are the prominent inhabitants followed by Brahmin, Chettri, Tamang, and Magar. These ethnic groups are not at the same level of socio-economic development. In Kathmandu valley, Newar are termed as an advanced indigenous people group. This group comprise about 41% of the valley population. Besides Newar, Brahmin (18%), and Chhetri (15%) are the major ethnic groups. Similarly, Tamang constitute about 6% and Magar hold 3% of the total population of the valley.

61. Age. The age group between 15 to 44 years (economically active) constitute about 56% of the project districts population. The other main age group is 5 to 14 years. Only about 5% of the population are 60 years and above. There are no significant differences in the percentage of age wise distribution in KUKL service areas.

62. Health. The number of health facilities owned by the government or provided by NGOs/INGOs and private sector is relatively better in Kathmandu than in other districts. More health institutions are available in Kathmandu than in Lalitpur and Bhaktapur district. However, the population served by the number of health institutions in Kathmandu is less (1:9,574) than in Bhaktapur (1:5,637) or Lalitpur (1:4,119). It shows that the number of health institutions is low in comparison to the size of population in Kathmandu.



63. Education. Kathmandu Valley has long been considered the centre for higher education in Nepal. In 2007, there were 6,106 high school level and 474 higher secondary, college or university level education institutions. The number of students enrolled during the period at high school level and higher education level was 573,779 and 156,828 respectively.

64. Table 3-4 summarizes the distribution of gender and households and the literacy rate of the five main districts in the Valley.

Table 3-4: Household Profile in Kathmandu Valley

Metro/Sub-metro/ Municipality & VDCs covered

Population Total HHs

Average size of HHs

Literacy rate Male Female Total

Kathmandu Metro & VDCs

470,433 416,301 836,734 197,280 4.5 82.6

Kirtipur Municipality &VDCs

34,158 31,359 65,517 14,646 4.5 73.7

Bhaktapur Municipality & VDCs

59,312 58,012 117,324 20,703 5.7 69.2

Madhyapur Thimi Municipality

24,747 23,004 47,751 9,551 5.0 72.7

Lalitpur Sub- Metro & VDCs

116,829 111,003 227,832 47,823 4.8 80.9

Source: Compiled from Census 2001, CBS

3.2.2 Employment 65. The economy of the Kathmandu Valley is based on trade, commerce and manufacturing industries like carpets, garments. Other economic sectors are agriculture, education, transport and hotels and restaurants. Tourism is also a key component of the valley‟s economy. However, in the rural areas, the economy is still based on agriculture.

66. Kathmandu Valley is a centre of trade links with India and China (Tibet). According to Economic Survey 2008/09, in the fiscal year 2007/08, Nepal exported 65% of its goods to India and 35% to countries like USA, U.K, Italy, Germany, Canada and Japan. The main export commodities are readymade garments, woollen carpet, woollen and pashmina goods, handicrafts of which most of them are manufactured in Kathmandu Valley. The majority of goods imported from third countries are also handled through Kathmandu Valley. Kathmandu Valley is the entry point for the majority of tourists. In 2008/09, a total of 409,100 tourists (excluding Indians) arrived in Nepal, of which, more than 90% entered through Kathmandu international airport.

67. Kathmandu Valley has a number of traditional cottage industries like textile (handlooms), brick & tiles, pottery, handicrafts, wooden furniture & carving, bamboo crafts, leather crafts, herbal medicines, traditional art and paintings. The major carpet industries are concentrated in Kathmandu, whereas handicrafts especially metal crafts are established in Lalitpur district.

68. About 53% of the total population aged 10 years and above in the valley are economically active (Census 2001). 36% are engaged in agriculture and forestry. The other major industries are manufacturing (17%), commerce (16%), construction (4%), and transportation / communication (3%).



69. Table 3-5 summarizes the economic activities in the urban areas of Kathmandu Valley. About 34% of households are engaged in small-scale non–farm activities. Lalitpur Municipality has the highest percentage (50%), whereas Kirtipur Municipality has the lowest (13%) of small-scale non-farm activities. Among the households engaged in non-farm activities, nearly 45% of the households are engaged in trade and business followed by services (32%) and manufacturing (9%). Nearly 50% of the households of Kirtipur and Kathmandu are engaged in trade and business.

Table 3-5: Household in Non-Farm Economic Activities in Kathmandu Valley

Municipalities % of HHs engaged in non-farm activities

Type of activities Manufacturing Trade/

Business Transport Services Others

Lalitpur 50.18 13.25 33.22 4.29 42.37 6.86 Bhaktapur 40.83 13.24 38.55 4.26 26.54 17.40 Madhyapur Thimi

35.02 11.39 41.88 4.48 23.26 18.98

Kathmandu 31.57 6.86 49.49 3.49 30.26 9.90 Kirtipur 13.34 9.72 51.42 2.84 22.83 13.19 Total 34.43 9.02 44.66 3.76 32.41 10.14

Source: Population census 2001 (selected urban tables), CBS 2003

70. In the rural areas of the Valley, rice paddy is the main crop of Kathmandu and Bhaktapur district, whereas maize is the prominent cereal crops of Lalitpur District. The other cereal crops in the project districts are millet, wheat and barley. Other agricultural produce such as lentil, soya bean, pea, black gram are the main pulses grown, as well as pulses, potato and oil seed.

71. Livestock rearing is the second most important activity after cropping. Most of the households in the rural areas have some connection with animal husbandry for income, food or draft power. Goat represents the highest number in Kathmandu valley followed by cattle and buffaloes; the produce of which has a ready market in the local city area.

72. According to the 2001 census and Nepal Human Development Report 2004, poverty status of the Kathmandu valley is lower than the national level. Table 3-6 indicates that the human development index (HDI) in the Kathmandu Valley is better than the national level.

Table 3-6: Kathmandu Valley Development Indicators

Districts Human Development Index (HDI)

Human Poverty Index (HPI)

Gender-related Development Index

(GDI) All Nepal 0.471 39.6 0.452 Kathmandu 0.652 25.8 0.635 Lalitpur 0.588 25.0 0.569 Bhakltapur 0.595 29.9 0.578

Source: Census 2001, Nepal Human Development report by UNDP 2004

73. The HDI it is based on three different categories of deprivation in relation to the quality of life. The first deprivation relates to lack of opportunities to survive with its indicator “probability of not surviving to age 40” followed by lack of access to knowledge with its indicator “adult literacy rate” and lack of opportunities for decent living standard with



indications on hunger and malnutrition (underweight) and finally, access to health and safe drinking water. The calculated figure is weighted mean of these three categories of deprivation.

3.2.3 Slums and Squatter Settlements 74. The rapid population growth has created a number of slums and squatters settlements within the KUKL service area. Table 3-7 summarizes the findings of a survey conducted by LICSU, KUKL during 2008. There were 39 squatter settlements and 137 slums in the Kathmandu Valley on which 40,237 population live in 8,846 households. Of these, 22% had no access to piped water supply and none had adequate sanitation, all.

Table 3-7: Slums and Squatter Settlements in Kathmandu Valley

Type of Residence No. of Households

(HHs)

Total Population

Average Household

size

% of HHs without piped water supply

Slums Bhaktapur Municipality 754 3274 4.34 32 Madhyapur Thimi Municipality

382 1981 5.19 85

Lalitpur Sub - Metropolitan 391 1,866 4.77 62 Kathmandu Metropolitan 3,784 16,575 4.38 58 Kirtipur Municipality 1,674 7,767 4.64 64 Squatters Kathmandu Metropolitan 1,861 8,774 4.71 95 Total 8,846 40,237 4.5 21.98

Source: Mapping of Slums, Squatters and Stand Posts in Kathmandu valley updated by LICSU, KUKL, June 2008, AVIYAAN Consulting (P) Ltd.

75. Due to constraints in supply, KUKL is unable to supply the required quantity water to these un-regulated settlements. To help manage the water supply and sanitation problem in these areas, the government established the Low Income Consumer Support Unit (LICSU) in KUKL in 2008. The basic objective of LICSU is to serve the drinking water to the urban poor. In this role, LICSU has constructed water tanks, stand posts and rehabilitated broken stand posts. In 2008, a survey showed that 395 (38%) public stand posts were not working in the valley. However, KUKL manages to distribute drinking water to these settlements through its own water tankers. The project considers these areas as priority for providing improved water supply services.

76. Because, KUKL is unable to provide adequate drinking water and sanitation services to the increasing slum and squatter settlements the participation of NGOs and the private sector has been encouraged for operation and management. The government has adopted a policy of handing over completed schemes to the user groups for operation and management. For this, user groups are required to share at least 20% of the total cost of the scheme. As a result, there is a significant number of Water Users Groups in Kathmandu valley who are involved in operation and management of drinking water system and sanitation in different places but not necessarily in the KUKL service area.

77. There are also various NGOs/INGOs working in water and sanitation sector in the Valley. These organizations have focused mostly in slums and squatter settlements and rural areas of Kathmandu valley. They typically construct 5m3 water tanks and a number of



latrines / toilets with drains in these communities. The major NGOs/INGOs working in the water and sanitation sectors are:

Lumanti Support Group for Shelter NGO Forum for Urban Water and Sanitation Centre for Integrated Urban Development Environment and Public Health Organization (ENPHO) Nepal Water for Health (NEWAH) Action Aid, Water Aid, Plan International UDLE Red Cross

3.3 Economic Development and Prospects for Growth 3.3.1 Economic Potential 78. In comparison to the rest of Nepal, the Kathmandu Valley possesses basic facilities like water supply, sanitation, electricity, bottled gas, telecommunications, roads, education, security, and transportation. The Valley is also the centre for several major industries such as textile, food & beverage, non-metallic mineral products, publishing and printing. Such facilities and opportunities are a huge attraction to the rural poor resulting in high migration rates into the Valley. This is postulated as the main reason for the rapid population growth and demand for urban services, especially water supply, within the valley.

79. The Kathmandu Valley‟s annual industrial output is estimated to be NRs.14.6 billion ($190 million), which is nearly 9.4% of the total national industrial output. The industrial sector employment is about 37,500 in Kathmandu valley, which is 22.1% of the national employment figure in the industrial sector. Similarly, indirect employment in the industrial sector is about 38,900, which is about 21.9% of the national figure.

80. Being a capital city and commercial centre for the country, Kathmandu and its surrounding valley is developing and urbanizing fast in comparison to the rest of Nepal. The Kathmandu Valley is the most important urbanized area in Nepal. New products and services are first introduced in the valley, giving the inhabitants access to modern equipment and technology. An indication of confidence in economic growth is the high demand for new housing real estate and the number of new vehicles on the roads, which is rising rapidly. In addition, there are plans for major transportation improvements such as the Kathmandu outer ring road and new link road to India via the Terai.

3.3.2 Constraints to Economic Development 81. The economic development of Kathmandu Valley will continue, but only if adequate services and infrastructure can be provided. Of these, water supply and power will be the two main constraints. Similarly conflicting land uses, unplanned and haphazard construction, inadequate road network, and inefficient transport management are creating severe traffic congestion and pollution in the city. Un-controlled development is already straining the environmental capacity of the Valley, resulting in the depletion of forest cover, contributing to erosion and flooding, depletion of ground water and pollution of watercourses due to urban and industrialization with related health risks.



82. Without the institutional support to infrastructure development and proper asset management the problems of shortage of water supply and inadequate wastewater system cannot solved. To ensure socially and environmentally sustainable development, strong and effective control on land use planning and management must also be practiced.



4. Project Rationale – Need and Demand 4.1 The Project Drivers 4.1.1 Introduction 83. This proposed project is strongly related to other existing ADB projects for Kathmandu‟s water and wastewater system under the umbrella of the Melamchi Water Supply project (MWSP). It will provide critical outcomes of ADB‟s entire investment program for the MSWP. The goal of the MWSP cannot be realized without the investment proposed in this new project.

84. The project will focus on infrastructure provision that :

maximises the efficiency and effectiveness of infrastructure and services previously provided or planned;

is implemented in a sustainable manner leading to improvements in water sector management; and

is targeted at under-served areas.

85. While this proposed project focuses on infrastructure provision, its outcomes and impacts are heavily depending on the success of other projects, especially institutional strengthening of the water sector in the valley and relevant hygiene awareness and education programs.

86. The following paragraphs highlight some key drivers for the project under the headings of:

Economic, health and social drivers; The Melamchi Water Supply Project Links (i.e. sub-projects 1 and 2) Consistency with ADB‟s Country Partnership Strategy; Urban Investment Priority; and Consistency with National Urban Water Supply and Sanitation Sector Policy.

4.1.2 Economic, Health and Social Drivers 87. The Kathmandu Valley, accounts for about 30% of the country's gross domestic product. Its population is approximately 50% of total urban population and 7% of the total population. It has five large municipalities and is the centre of governance for Nepal.

88. A key rationale behind the MWSP is that Kathmandu Valley is the country‟s single largest urban economy and that this economy is critical to the Nepal‟s economic growth. This contribution is threatened by its rapid population growth and haphazard physical development – especially its grossly inadequate urban water supply and wastewater services. Hence, although the proposed project is primarily an urban water sector loan, the impact of investment will be of immense importance to the country as a whole.

89. The institutional development support taken in conjunction with this loan (e.g. Loans 2058/59), and resultant outcomes, will be a beneficial example to other sectors and agencies in the urban area (e.g. municipalities as they deal with stormwater drainage and transport).

90. Water is central to the well-being of the population and the key to its productive capacities. Current water sector services are grossly inadequate and unreliable with most



people having to resort to a number of coping strategies (e.g. private tankers, shallow wells, deep wells, vendors, traditional supplies and bottled water).

91. The wide extent of on-site sanitation septic tank systems and poor disposal of septage pollutes shallow groundwater. Water quality delivered to customers is unsatisfactory – partly due to inadequate water treatment at sources and deterioration of water quality in the distribution system. Intermittent operation of the water distribution, as a result of constrained supply, also contributes to the poor water quality. Water quality of the alternative water sources from vendors, tankers and bottled water is also questionable. Poor water quality and inadequate water quantity impacts sharply on health. Although the entire urban population suffers from these problems, the effects are greatest on the poor – both from health perspectives and economic perspectives. When poor quality water is distributed, the richer people can afford to boil and filter it before drinking, while poor use it as supplied. Rich people have access to different water sources including bottled water, while access to water to poor people is limited (public stand post, dug well and stone spouts) which often has to be carried considerable distances – usually by women and children.

92. The surface waters and streams in the valley are grossly polluted. Surface water quality deteriorates significantly in the urban reaches of the Bagmati River and its tributaries. While there are several sources of pollution to these streams (e.g. sewage, solid wastes, industrial wastes and stormwater), untreated or inadequately treated domestic sewage is a major factor. Although these surface waters are not generally used directly for domestic water use, they are used indirectly (e.g. vegetable washing and infiltration galleries for informal water supplies). Not only is the water pollution an environmental and social problem for the residents, tourists and pilgrims, but it also has negative health impacts. Again, it is the urban poor who suffer the most as they are most vulnerable and have less resources to cope with illness. Most poor people living in the valley use polluted river water. Some by selling vegetables on roads; others use the riverbank for defecating and then washing in the polluted water.

93. This situation is compounded due to the rapid growth in population. For example, the population in the water service area is predicted to increase from its current 2.8 million to 5.1 million by 2025.

94. Time taken in water collection will also drastically reduce once the distribution system is able to supply more water more often. The convenience factor will also be significantly increased as many water supplies in water poor areas currently occur at night or early morning hours. Long queues are common at standpipes. The new project will especially help alleviate the burden on the poor. As women are the primary carriers of water, this will increase their productive times.

95. Deeper groundwater is being over-extracted and extraction is unsustainable. It is estimated that there are over 10,000 hand dug well which are used to supplement the KUKL water supply. More reliable water supplies will reduce the need for groundwater pumping, thus allowing more sustainable use of this valuable water resource.

4.1.3 Melamchi Water Supply Project Links 96. The main driver for this new loan is to ensure that benefits from existing and committed investments to the MWSP can be realized. The MWSP is a comprehensive water supply project that aims to improve the health and well-being of the people in Kathmandu Valley. It will achieve this impact by diverting water from the Melamchi River to the



Kathmandu Valley and thus deliver its overall outcome of alleviating the chronic shortage of potable water.

97. MWSP is implemented under two subprojects. Subproject-1 delivers bulk potable water to the head of the Kathmandu Valley. Its major civil components are the 26 km tunnel and the new water treatment plant at Sundarijal. MWSP subproject-2‟s major civil components are water distribution system and wastewater system improvements in the valley. Three outcomes of subproject-2 are:

Water distribution and wastewater system improved by provision of capital works;

Institutional reforms achieved and efficiently operated; and Social and environmental support provided in Kathmandu Valley.

98. Loans 2058/59 are specifically designed to address the institutional reforms. These institutional reforms are required to deliver quality water services efficiently and responsively and to manage and sustain the water service system. The provision of efficient and affordable water services in Kathmandu Valley will, in turn, support the area‟s economic growth and contribute to the country‟s overall poverty reduction.

99. Loan 1820 MWSP revised cost estimate is $299.39 million7 (excluding financial charges). Subproject-1 cost estimate is $235.31 million and subproject-2 cost estimate is 64.08 million. For MWSP subproject-2, only $34.4 million is allocated to physical water supply and wastewater system improvements. To meet the projected service demands for 2025, the capital investment base cost estimate for water supply is nearly $250 million and for wastewater $170 million8. Subproject-2 will bring the first phase of water delivered by MWSP subproject-1 to Kathmandu, but it will not distribute it to the population.

100. Clearly additional investment is required to maximize the project benefits. It is crucial to have the water supply bulk distribution system and distribution network improvements completed as much as possible by the time potable water is available from the Melamchi diversion tunnel. It is also crucial to begin improvements on the wastewater system to minimise environmental impacts and related public health risks from the expected additional wastewater in the valley.

4.1.4 Consistency with ADB’s Country Partnership Strategy 101. In the water services sector, ADB‟s country partnership strategy (CPS9) notes that it will continue to focus on (i) increasing access to and improving service level of water supply and sanitation; (ii) improving environment and public health; and (iii) strengthening management capacity of responsible organizations.

102. In support of this, ADB notes that providing improved water supply and sanitation services has a direct impact on the inclusive social development pillar of CPS. These services will directly benefit the health of the population with a reduction in the occurrence of waterborne diseases, resulting in less expenditure on health services. Time-saving for water

7 Nepal: Melamchi Water Supply Project and Kathmandu Valley Water Services Sector, Development

Program, Major Change in Scope and Implementation Arrangements, ADB Manila, January 2008. 8 TA 4893-NEP: Kathmandu Valley Water Supply & Wastewater System Improvement. CIAMP Final

Report, February 2010. 9 ADB Country Partnership Strategy – Nepal 2010-12. October 2009



collection will provide more time, particularly to women and children, for social interaction and other social or economically productive activities. Specific interventions will be provided to ensure affordable access to improved water supply for the urban poor, such as, improved public stand posts with adequate water or yard taps with subsidized water tariff as per the policy of KUKL to provide services to low income groups.

103. In regards to the water supply and wastewater facilities in Kathmandu Valley, the CPS notes that ADB will continue to support the recently established institutional framework and operational setting as well as the provision of efficient and affordable water supply and wastewater services. ADB will continue to support the Government in (i) improving urban water supply and wastewater system infrastructure; (ii) improving access to and service level of water supply and sanitation; and (iii) institutional strengthening and capacity building to strengthen operation and management skills of the WUO (KUKL) in accordance with the Government's policy.

104. It proposes that ADB assistance will, inter alia, increase health and hygiene education through awareness campaigns, in accordance with the National Urban Water Supply and Sanitation Sector Policy (UWSSSP). This will complement the needs identified above in terms of the impacts on the urban poor.

105. In conclusion, the proposed project is consistent with the ADB CPS.

4.1.5 Urban Investment Priority 106. Nepal‟s MDG target for the proportion of the population with sustainable access to improved water sources in urban areas is 95% (ADB Country Priority Strategy 2010-2012). The latest figures show that coverage of this target is 94.5%. However, it is noted that the target may not be met if functionality and water quality issues are taken into account. In terms of house connections, the figures are substantially lower at 49% in urban areas. The proposed project will directly address this issue in Kathmandu urban areas - in relation to the largest urban area of Nepal.

107. While the rural coverage of improved sanitation is well behind the MDG targets (currently 41% compared with the target of 52%), the urban coverage is currently ahead of the MDG target (85.4% compared with target of 67%). The Joint Monitoring Program‟s (JMP‟s) definition of improved sanitation facilities include a flush/pour-flush toilet or latrine that flushes to a sewer, septic tank or pit. It can be argued that this is a simplistic definition as it does not classify facilities according the quality of the service. It does not address, for example, the question as to whether a community is improved when the management of excreta downstream of the toilet is not.

108. The proposed project‟s focus on access in low income areas will also address the lack of access to and poor quality of both water supply and sanitation services in growing urban slums to help maintain the coverage rates. Improved water supply pressure and availability will allow more house connections and yard taps to be provided to reduce the need to wait and carry water to homes, usually done by women. The proposed wastewater investment is designed to maintain the current coverage rate of 70% of connection to off-site systems, which is essential to maintain the coverage rates of urban areas.

109. The Government‟s 3 year Interim Plan also emphasizes the need to maintain regional balance in urban development by considering it as a promoter of rural development and as market centres as a means to expand rural-urban linkages.



4.1.6 National Urban Water Supply and Sanitation Sector Policy (2009) 110. The National Urban Water Supply and Sanitation Sector Policy (UWSSSP) was prepared to provide policy support and guidance for achieving equity in service delivery.

111. The goal of the UWSSSP is to ensure socio-economic development, improved health status and quality of life to urban populations, including the poor and marginalised, through the provision of sustainable water supply and sanitation services and protection of the environment.

112. The Objectives of the policy are:-

i. To ensure the availability of basic safe, accessible and adequate water supply and sanitation services to all urban populations for improved quality of life.

ii. To improve the level of water supply services with at least one-third of the population having access to high or medium levels by 2017.

iii. To ensure the participation of the users, especially women and the vulnerable groups, in articulation of their concerns and in decision making at all levels.

iv. To enhance institutional and operational capacity at local levels for effective operation and maintenance of water supply and sanitation services.

v. To recover capital investment, generate funds for operation and maintenance, and protect and optimize investment on a sustainable basis.

vi. To protect, harness, develop and manage surface and ground water sources serving urban centres in an efficient manner.

vii. To promote public private partnership in water supply and sanitation services delivery.

113. The Government‟s 3 Year Interim Plan (2007-2010) aims to increase the percentage of population with access to drinking water from 77% to 85% and those with proper latrines from 46% to 60% which support the above policy objectives. The proposed project is consistent with the UWSSSP.

4.2 Problem Analysis of Water Sector Services 4.2.1 Overview of Water Sector Services 114. The ADB‟s Poverty Reduction Strategy identifies poverty as “a deprivation of essential assets to which every human is entitled”. The Strategy includes access to water, sanitation and other basic services, as well as income, employment and wages, as measures of poverty. The assessment of the prevailing situation in Nepal, and in particular the Kathmandu Valley, has identified a massive deficiency in the provision of basic services, particularly to the poor and the unacceptable quality of the urban living environment.

115. A review of the management and institutional situation also demonstrates gaps in the organizational arrangements that are necessary for the efficient delivery of urban services. Minimum standards for improvements to the physical environment are not possible without considerable investment in organizational and institutional change. Lessons learnt from previous ADB projects and development projects demonstrate that it is the ability to finance, plan and effectively manage such services that are critical to Project success and long-term sustainability.

116. The Project takes guidance from the National Urban Water Supply and Sanitation Sector Policy (2009), but no national guidelines are published regarding minimum standards



for levels of service within the Nepal urban context. All urban areas of Kathmandu Valley lack basic water sector infrastructure and municipal services to some extent. Provision of basic urban infrastructure and services fall below normal acceptable levels. The problems relate to physical deficiencies in respect to supply, demand and deficient operation and maintenance. Water supply and wastewater system improvements are high priorities. The status of the two infrastructure services is summarized below.

4.2.2 Water Supply 117. The present permanent population of the valley water supply service area is estimated at over 2.1 million with a water demand of 195 MLD. The total water production in wet and dry seasons is about 140 MLD and 100 MLD respectively. The ground water is depleting due to over extraction and surface water catchments are becoming degraded.

118. In addition to the deficit in water resources, there are many problems in the distribution system. These include aging pipes, high rates of leakage and wastage, illegal and multiple service connections; badly laid pipelines, supply contamination, etc. The resultant water supply is constrained and intermittent. People in most of the areas get hardly one hour supply in every fourth day. Table 4-1 summarizes the main problems and causes. Appendix 2 further analyses the problems and constraints.

Table 4-1: Water Supply – Problems and Causes

Problems Causes i. Inadequate supply pressure and quantity delivered to customers

In sufficient water re-sources in the Kathmandu Valley to meet demand Under capacity of the system and ageing of existing critical elements. High percentage of leakage from distribution network. Long individual house service pipes causes high pressure losses. Multiple individual service connections to network increases leakage.

ii. Poor condition of infrastructure

Lack of planned capital investment Inadequate quality of design and construction of capital works Poor workmanship and supervision of pipe-laying and service connections Operational shortcomings (see below)

iii. Inadequate operation and maintenance of existing assets

Inadequate operational budget available to operate the system Poor operational practices without asset management planning, preventive

maintenance, efficiency or energy audits, records of operational data Inadequate staff capacity to operate the system.

iv. Inadequate performance monitoring and management

No institutionalized systems to regularly benchmark performance of water supply service delivery

Lack of implementation of performance improvement measures

v. Lack of institutional framework

Unstable government during past 10-15 years Absence of sector strategy and implementation plan Lack of policy objectives

vi. Poor compliance with legal / regulatory framework

Lack of urban development control and land management Multiple un-registered consumer connections. Poor water supply pressure forces customers to connect pumps to draw

water from network resulting in contamination of supply. vii. Poor customer relations and public awareness

Insufficient stakeholders' involvement and participation in water supply services

Absence of public awareness activities in water conservation activities

119. More elaboration of the reasons for the poor condition and operation of the water supply services are summarized below.



Lack of Water Resources

120. Surface Water Sources. At present, there are 30 surface sources being tapped for water supply in the valley. There is considerable seasonal fluctuation in water discharge. Most water sources have a reduced flow in the dry season by 30 to 40% with some by as much as 70%. Almost all the sources have some potential additional yield in the wet season. The total wet season supply of 137 MLD reduces in the dry season to 70 MLD.

121. Groundwater Sources. Deep tube wells are the main means of extracting groundwater for use in the water supply system. Out of 73 existing deep tube-wells only 54 are currently in operation. Most of the tube wells electro-mechanical parts are in a poor condition with most flow meters missing or broken. Tube wells used to be operated only in the dry season in order to supplement reducing surface water sources, but, due to demand exceeding supply, they are now also used in the wet season. Total dry season rated production is 40.6 MLD with a reduced wet season production of 2.2 MLD.

Poor Quality of Supply

122. Water Treatment Plants. At present, there are 21 water treatment plants (WTPs) in the system with a total treatment capacity of about 85 MLD treating surface water and groundwater due to high iron content. The largest is at Mahankal Chaur with a treatment capacity of 9,900,000m3 per annum and the smallest is at Kuleswor with a treatment capacity of 40,000m3 per annum. Most of the WTPs are in poor condition and none has operational flow meters or properly operating chlorination equipment.

Inadequate Storage and Delivery

123. Service Reservoirs. There is a total of 43 service reservoirs in the water supply system with capacities ranging from 4,500m3 down to 50m3. Most of the reservoirs are in reasonable condition but two are leaking. The total storage capacity is 40,910m3.

124. Pumping Stations. There are 31 water supply pumping stations in the system that are used to draw water from sump wells to treatment plants or service reservoirs, and to fill up reservoirs located on higher ground or overhead tanks. Of these only 11 are in satisfactory condition. Few have operational flow meters or pressure gauges.

125. Transmission Mains and Distribution Lines. At present, the total length of pipelines including transmission mains, pumping mains and distribution lines is about 1,250kms with pipe diameter varying from 50mm to 800mm. The pipe materials used include Galvanized Iron (GI), Cast Iron (CI), Steel (SI), Ductile Iron (DI), High Density Polythene Pipe (HDPE) and Polyvinyl Chloride (PVC). The majority type of pipe used is 50mm diameter GI. The system has approximately 1260 valves of different diameters. There are many problems in the distribution system. These problems include: ad hoc laying of pipes and valves, involvement of users‟ group and their intervention in the operation of valves, multiple service pipeline connections, direct pumping from distribution lines, illegal connections, high percentage of leakage and wastage, and direct distribution from transmission mains. The majority of consumer lines are leaking at the connection to the distribution mains and few customers have properly operating consumer meters.

Poor Institutional, O&M, Financial Management

126. Inadequately trained staff. There is no system of „right person at the right job‟. Untrained guards (at many water sources) have responsibilities to supervise and monitor



surface water sources and structures. Tubewells are operated by unskilled labourers and water treatment plants are being operated by inadequately trained personnel.

127. Asset management program. There is no operational management information system with active records. A computerized database developed in 2004 has not been maintained. The lack of an asset management program to efficiently organize maintenance is a key contributor to these poor asset conditions.

128. Lack of service monitoring. There are few pressure gauges and flow meters at tubewells and water treatment plants, which are required for operation monitoring.

129. Poor maintenance of assets. Most of the facilities (except newly built) like intake structures, deep tube wells, water treatment plants, service reservoirs, pumping stations are in poor condition. Leaking valves and damaged panel boards and pumps without form base are common with leaking walls, cracked structures and corroded bar racks.

130. Inadequate funding. There is inadequate budget for operation and maintenance of assets. But, it is socially difficult to increase service tariffs without first improving the service.

4.2.3 Wastewater System Problems 131. The Conceptual Wastewater Master Plan, February 2010, has identified the key problems and their causes of the wastewater system. They are complicated and interrelated. Many reasons for the poor condition of wastewater services are summarized in Table 4-2. Appendix 2 further analyses the problems and constraints.

Table 4-2: Wastewater System – Problems and Causes

Problems Causes i. Poor or unknown condition and extent of sewerage infrastructure

Lack of knowledge of network assets or condition Operational shortcomings (see below)

ii. Infrastructure capacity lagging growth

High urban population growth and uncontrolled urban planning Lack of follow-through on previous recommendations and reports –

strongly linked to unstable political context and ambiguous agency responsibilities (see below)

Wastewater system planning inadequacies Lack of appropriate sized or located assets Inadequate funding

iii. Inadequate operation and maintenance of existing assets

Inadequate staffing levels and funding of operational department Inadequate sewer cleaning equipment Ambiguous agency responsibilities (see below) Poor solid waste collection – this is exacerbated by the combined

sewer / drainage system Inadequate flushing for self cleansing of sewers Suboptimal construction standards Inadequate asset maintenance and record keeping

iv. Ambiguous agency responsibilities

Multiple actors with inadequate inter-agency co-operation and co-ordination

Absence of overall wastewater network planning



Problems Causes v. Disposal of

untreated or inadequately treated sewage to water courses

Inadequate treatment plant capacity – for example - the capacity of the existing treatment plants, if operated as originally intended would be of the order of 170,000 people. This compares with the connected population of about 1.8 million.

Inadequate operation and maintenance of existing wastewater treatment plants

High frequency of long power outages Inadequate disposal of septic tank septage Lack of viable alternative on-site systems Poor enforcement of industrial discharge regulations and absence of

discharge standards for domestic wastewaters

132. More elaboration of the reasons for the poor condition and operation of the wastewater services are summarized below.

133. Limited water for self cleansing: A key contributing reason for blocked sewers is inadequate flushing water to maintain self cleansing in the sewers. This is partly related to insufficient quantities of water available to customers. – i.e. water scarcity. This issue is inter-related to the poor solid waste systems which increases debris in the sewers. It is also related to hydraulic design assumptions inherent in the original sewer designs.

134. Planning inadequacies and lack of commitment to meet plans: A number of Master Plans have been prepared but none of them have been implemented because of low prioritization. Additionally, there are no plans of the actual constructed sewerage networks.

135. Combined System: As was common practice, sewerage was initially designed as a combined system to cater for both domestic wastewater and stormwater. While there has been considerably more separate sewerage systems installed, connections of liquid wastes occurs in an ad-hoc manner to any drainage conduit – regardless of whether it is for foul sewage or surface water. Combined systems result in large variations in dry and wet weather flows and sewers need to be appropriately designed and managed for this large variation in flow. This is exacerbated by the poor solid waste collection in the valley and numerous un-made roads from which sand and gravel is washed into the sewers.

136. Budget Allocation: 50% of KUKL water bills are intended as a wastewater service charge but only 20% of this intended amount is spent on sewerage network operation. It is widely recognized that wastewater collection and treatment, typically costs up to 50% more than a water supply system. With such a low budget allocation for wastewater, management of the system continues to deteriorate.

137. Treatment: About 95% of the wastewater collected from the urban areas in sewers is discharged un-treated into the valley watercourses. There is no treatment of septage (septic tank sludge). Although five WWTPs have been established in the valley none of them are operating adequately. The capacity of the existing treatment plants, if the plants were rehabilitated to their originally intended process would be of the order of 170,000 people. This compares with the connected population of about 1.8 million. Thus if the existing treatment plants were rehabilitated, only 9% of the sewage collected could be treated. This percentage will decrease as the connected population increases.

138. Industrial wastewater pollution: Existing standards for industrial wastewater discharge are not being monitored or maintained.



139. Lack of coordination: Apart from KUKL‟s Sewerage Operation Department, various other agencies, such as municipalities and the HPCIDBC, are working in the sewerage sector in the valley. The Conceptual Wastewater Master Plan includes an institutional analysis. It demonstrates significant fragmentation of responsibilities within the sector.

4.3 External Assistance and Lessons Learned 4.3.1 Overview 140. ADB is the leading urban development donor. The World Bank focuses on rural development and few other donors are involved in the urban sector. UNDP has a program on public–private partnership for the urban environment, while UNICEF is working closely with the Government on water quality, sanitation improvement and rehabilitation of water schemes. GTZ (with KfW funds) is supporting the Town Development Fund, and DANIDA is supporting decentralization and urban self-governance. The World Bank, the Government of Finland, and DFID have been supporting community-based rural water supply. Under the Melamchi Water Supply Project, ADB is coordinating with four co-financiers: Japan Bank for International Cooperation, Nordic Development Fund, OPEC Fund for International Development, and JICA. Appendix 2 provides a summary of external assistance to Nepal in the Water Sector.

4.3.2 ADB in the Nepal Water Sector 141. ADB assistance for water supply and sanitation sector has usually been part of the urban sector. Expenditure to the end of 2007 on its completed urban projects from 1984 amounted to $147.6 million. All the projects so far completed were rated for impacts and sustainability as partly successful. In particular, Loan 1165: Third Rural Water Supply and Sanitation provided small scale water supply systems to over 387 communities, largely in the Terai region, but no subsequent benefits or results have been reported. On the other hand, relatively small investments (totalling $27.6 million) focusing on tourism infrastructure (Loan 1156: Tourism Infrastructure Development and Loan 1451: Second Tourism Development) seem to have had tangible economic impacts as Pokhara has become the gateway to Himalayan tourism and Nepal‟s second city.

4.3.3 Lessons Learned Water Sector Development in Nepal

142. The Urban Water Supply and Sanitation Rehabilitation Project (UWSSRP) was designed with assistance from the World Bank to strengthen the technical, managerial, financial and operations / maintenance capability of WSSC and to increase utilization of existing water supply and sanitation systems through rehabilitation and extension. The Project failed to achieve several of its original objectives and was rated “unsatisfactory”. Some delay in project implementation took place because of changes made by the donors in identifying suitable implementation agency and partners for undertaking project related capacity building programs. Other factors which contributed to the poor performance of the Project included ineffective institutional autonomy in the formation act of Nepal Water Supply Corporation (NWSC); frequent turnover of staff especially in managerial positions; tariffs not being raised in a timely manner; dues to NWSC not paid by the Government; and, lack of commitment towards strengthening NWSC‟s financial operations. Because NWSC management was slow in making key decisions, it was concluded that NWSC failed to exercise autonomy power granted under the act and the procurement process incurred substantial delays. The major lessons learnt from the UWSSRP revolved around



institutional weaknesses in implementing and managing a project of this size and nature plus sequencing of Technical Assistance programs tied to the Project and procurement processes.

143. A major intervention in the urban water supply and sanitation sector outside Kathmandu has been the ADB supported Small Towns Water Supply and Sanitation Sector Project. The project design took a community-based demand responsive approach. This approach required the Water User and Sanitation Committee (WUSC) to be fully involved and jointly responsible for all major project decisions. Mobilization of local resources has been a major achievement and a significant feature considering the urban nature of the settlements and communities included in the Project. While this has had significant impact on ownership of the built infrastructure, there have been concerns of affordability and its affect on the urban poor, technical weaknesses and financial sustainability. Technical weaknesses that were emerged ranged from poor pipe joining to ineffective functioning of water treatment plants and households water meters. There have been some contractual and procurement issues such as difficult synchronization between the main contractor's work and the community work resulting in delay and poor quality. The STWSSSP adopted a single package procurement approach wherein all civil works and materials were lumped into one package. Supply and installation was a fairly new experience for the civil works contractors and their associates. This resulted in below par performance of some equipment installed leading to delay in project completion and difficulty in remedying problems during the defects liability period.

144. Based on lessons learnt, the new Project (Second Small Town Water Supply and Sanitation Sector Project) has proposed combining construction and First-Year Operation in the new contracts. This will include technical operation of facilities in the first year in the main civil works contract, in particular incorporating operational performance in payment conditions. During the first year of operation, management staff to be engaged by WUSCs for operating the system will receive full on-the-job training from the contractors to ensure the seamless transition after the first year of operation.

145. Similarly, financial contributions from the communities have often been difficult for some sections of the community – particularly the urban poor. The new Project has introduced output-based-aid (OBA) in line with the Urban Water Supply and Sanitation Policy 2009 to alleviate this problem. Local tariffs to meet part of the capital cost and total O&M costs were introduced in the Project, but WUSCs, because of local peer pressure, have failed to introduce desired optimum tariff levels. Prevailing tariff rates still are generally low compared to the recommended rates, which may affect the financial sustainability in the long run of such projects, with inadequate funds for proper maintenance.

Water Sector Development in Kathmandu Valley

146. Piped drinking water system in the Kathmandu Valley were initiated more than a century ago, however, planned efforts in terms of projects with specific objectives and outputs were initiated only from the early 1960‟s. Major investments began with the World Bank supporting the development of urban water supply and wastewater systems in Kathmandu starting from 1974. Since then the systems have been expanded with support from ADB, JICA and other donors. Lessons learnt from the planning and implementation of various previous projects has assisted in formulating, designing and implementing new projects more effectively. Problems encountered by previous projects have ranged from institutional, social to technical and procurement related issues.



147. Implementation of the three IDA Projects in the 1970‟s and 1980‟s highlighted institutional weaknesses resulting in poor management and financial sustainability of large utility agencies. Apart from institutional factors, technical issues especially in demand projection and packaging of contract packages were also encountered during implementation. Hiring of excessive non-productive staff – mostly non-technical – under political pressure has been a feature of Government owned corporations like WSSC and NWSC that has continued to today. Lack of autonomy in management and operations of Government owned water utilities led stakeholders, especially international donors, to advocate for the engagement of a private operator through private sector participation (PSP). Several attempts were made to introduce lease contract (Private Sector Participation, 1999), performance based management contracts. Unfortunately, these attempts failed in Nepal's fluid political environment which may have been considered to have too high a cost risk by competent international players.

148. ADB has been instrumental in reviving and carrying forward the Melamchi Water Supply project (MWSP). MWSP was introduced to address the chronic water shortages in the Kathmandu Valley and improve the economy and the health and wellbeing of the Valley inhabitants. The MWSP cost estimate was $464 million at 2000 prices. However, because of the fluid socio-political environment in the country and existing institutional weaknesses, the Project faced continued delays in implementation. Major donors like the World Bank, NORAD and SIDA withdrew from the Project because of the perpetual delay in project implementation. Institutional factors included the inefficiency of the implementing agency‟s organizational structure and weaknesses in its administrative, accounting, and reporting systems which contributed to substantial delays. To overcome these impediments MWSP was divided into two sub-projects, namely Melamchi River Diversion Subproject (Subproject 1) and Kathmandu Valley Water Supply and Sanitation Subproject (Subproject 2). It was concluded imperative to establish an effective project management structure in both the subprojects under Loan 1820–NEP.

149. In accordance with MWSP restructuring, a PMU for Subproject 2 under Loan 1820-NEP was established to implement activities to improve water supply and wastewater facilities within the service area of KUKL in the Kathmandu Valley – both immediately and in the long term. However, various ADB review missions experienced that the project implementation activities under the KUKL PMU, including procurement and disbursement, was extremely slow and ineffective. This was largely attributed to the overwhelming operational work load of KUKL and its inexperience in handling a large externally funded project, such as Loan 1820-NEP MWSP Subproject-2 which had a total budget much larger than the annual operating budget of KUKL. To address this issue, all concerned stakeholders agreed to establish a Project Implementation Directorate (PID) under the KUKL Board of Directors separate from KUKL‟s day-to-day management with its own independent financial mechanism. Appendix 2 provides additional details on lessons learned including a chronological list of water sector developments.



5. Selection of Physical Components 5.1 Methodology and Approach 150. A Capital Investment and Asset Management Program (CIAMP) for the period 2010 to 2025 was prepared as part of the PPTA. The purpose of the report was to outline the infrastructure investment requirements for water supply and wastewater for next 15 years for the Kathmandu Valley.

151. The identified investments were split up into three parts. The first investment was for the on-going Loan 1820-NEP: MWSP Subproject-2. The second investment was for this project loan presently in the ADB pipeline for 2011. The proposed project is to be implemented in the 5-year period 2012-2016. This project takes into consideration preparation activities for receiving and distributing water to be delivered by the Melamchi Water Supply Project and collecting and treating the resultant wastewater.

152. The remainder of the identified capital investment was for the following 10 year period 2016-2025 to be implemented in two 5-year phases corresponding to increasing population service demands and further phases of the Melamchi Water Supply Project.

153. Sections 3 and 4 of the CIAMP present the main factors considered when identifying and selecting components of the capital investment plan.

154. The central strategic development objective of water sector capital investment programs is to provide water sector services and adequate environmental and institutional conditions that will permit and encourage sustainable economic growth and targeted development. This objective thereby contributes to the reduction of urban, specifically, and national poverty generally, thus assisting in meeting MDGs.

5.2 Underlying Principles 155. Bearing in mind the present state of development in the Kathmandu Valley with the available government agency and/or municipal finances, the CIAMP recommends that the focus should be on providing a quality rather than quantity service that is equitable, reliable and efficient. In all cases, this provision requires a combination of civil works – to put things in place – and a sequence of procedural and organizational requirements to finance, plan, manage and sustain such services.

156. In outline, minimum targets are:

A reliable water supply of adequate quantity and acceptable quality, ideally for 24 hours per day, through maximizing house connections and minimizing the need for public standposts; and

For densely populated urban core areas where there is adequate water supply: a networked system to collect and transport wastewater, with treatment of the collected sewage; and on-site sanitation of acceptable quality in lower population density areas.

157. Gaps in the operations and maintenance staffing structure were also identified in relation to the existing and proposed assets. Staff enhancement and capacity building activities could start in the pre-investment period before project implementation commences through Loan 2059-NEP: Capacity Building and Partnership consultant contract.



5.3 Component Selection Criteria

The total investment depends on the level of current basic needs, the affordability, and the assessed implementation capacity of KUKL or other development agencies. Overall, project component selection is influenced by need, affordability and implementation capacity, rather than total estimated cost.

158. In the interests of integrated development, a consideration in component selection has been to ensure inter-sector linkages and optimization. For instance, water supply and wastewater systems are seen as a composite sector and not in isolation from each other.

Social and Poverty Considerations 159. The social and poverty indicators as applicable in the urban context were key criteria in the selection of the investment. A conscious effort has been made to reach out to target communities, which are socio-economically deprived. The key criteria for selection was the aspect of human poverty focussing on limited or no access to basic water services, which include:

Population coverage/served by the proposed water distribution scheme; Prevalence of poverty/low income group; Extent of KUKL pipeline connections; Existence of other source(s) of water; and Extent of necessary land acquisition and resettlement.

Financial Considerations 160. The financial considerations for investments will be through a financial operating plan that will forecast:

Yearly revenue under various budget heads and alternative assumptions; Expenditure for existing levels of services; Estimated capital for providing infrastructure at different service levels; Additional O&M cost due to the new schemes under various O&M options such

as departmental and management contract (See section on institutional criteria); and

Estimation of annual debt servicing burden under alternative scenarios of loan / grant mix.

Economic Considerations 161. For economic viability the investment should:

Demonstrate significant improvement over the “without project” situation; Demonstrate demand and supply management as an integral part of design; Be the most cost effective solution where viable options exist; and Demonstrate low risk from technical, social, environmental, financial and

institutional perspectives.



162. For economic development the capital investment plan should have potential to:

Maximise the removal of constraints on economic activity - sectors ranked as negatively affecting business performance will be preferred;

Maximise economic growth - components ranked as contributing to improving business performance and prospects will be preferred;

Act as a catalyst to economic growth - components which will affect industrial sectors identified as having growth potential will be preferred; and

Act as a catalyst for pro-poor economic growth - which have high local employment and income generating effects, will be preferred (e.g. tourism).

Environmental Screening Considerations 163. The overall environmental goal is that the project components should maximise improvements to the urban environment and living conditions for urban population while, at the same time, minimising the environmental impact of their implementation.

164. For maximising environmental benefits project components should:

Improve access to reliable safe water supply, in particular poor beneficiaries; Reduce direct exposure by population to the risks of polluted wastewater; Reduce property damage due to flooding and dirty storm water; and Reduce flooding of neighbourhoods.

165. For minimising environmental negative impacts:

Developments should avoid or minimise damage to valuable ecology and natural heritage areas;

Developments should avoid or minimise disturbance to the extent, depth, or hydrological balance of groundwater and wetlands;

Developments should avoid disruption and dislocation to communities: No resettlement or relocation should be required; and Avoid destruction / disturbance to historical / cultural items or values.

166. Investments should avoid causing or exacerbating environmental hazards. In particular:

Components should not result in new or intensified drainage problems in other areas;

Development on flood-prone land or floodplain of any river should be avoided. Flood mitigation / drainage improvement works need to take account of downstream effects.

167. Developments should be undertaken in an environmentally sound fashion to:

Ensure full environmental benefits will be achieved through adequate maintenance and operation of the components;

Ensure developments on alluvial soils do not produce effluent / leachate that enters groundwater or aquifer; and

Ensure any effluent produced or diverted by component investments do not increase pollutant loading on rivers.



Institutional Considerations 168. The institutional considerations for the capital investment will be linked to the financial and operating plan. Each investment component should have in place a system of allocation of resources for operation and maintenance or should have adequate staffing to oversee the component. Alternatively, there should be in place an extended O&M contract as part of the construction contract or have a private O&M operator in place.

5.4 Least Cost Solutions 169. In formulating project components, the preferred option will be developed based on Least Cost Options. This will take into account service delivery targets and whole-life costs, including achievable operation and maintenance arrangements, and available resources in terms of skills and facilities. Table 5-1 summarizes the main considerations.

Table 5-1: Least Cost Solutions

Water Sanitation / Sewerage Source Source close to supply area to reduce

transmission costs Perennial surface water fed by gravity rather

than pumped ground water

Sanitation Choice Low population density. Space on-plot for

twin-pit latrine or septic tank with soak away or other acceptable alternative on-plot system.

High population density, high water table no space for on-plot – development of sewerage.

Treatment Rapid sand filtration preferred to slow sand

filtration: higher energy but lower land needs

Transportation / Sewer network Gravity systems to avoid pumping Pipe materials selected on construction

quality, durability and cost Transmission and distribution Pipe material selected on cost, durability

and pressure resistance Metered house connections to facilitate

water demand management

Treatment Compromise between land requirements,

power needs and O&M: usually leads to choice of waste stabilization ponds, UASB, activated sludge systems, tower bio-filters or other technologies.

5.5 Evaluation and Selection of Components 5.5.1 Basis of Component Selection 170. Based on the considerations and screening referred to in the preceding section, priority components were selected for the Project. Each component was scrutinized and their financial, social and environmental impacts assessed in order to verify acceptability and ensure that they can be justified for funding under the ADB loan.

5.5.2 Water Supply Component Selection 171. With the intention to streamline the water supply operations and maintenance, the present KUKL water supply service area has been divided into eight smaller zones. The supply zones are based on existing and potential water supply sources so that existing assets are utilized efficiently and services are improved in all areas, including the high growth Kathmandu Metro area, in an equitable manner.

172. Selection of the water supply components focussed on three main physical considerations. These were: a) areas of poor service; b), areas of poor income groups; and



c), the m ost e ffective and eff icient use o f w ater t o be de livered by t he f irst ph ase of t he Melamchi Water Supply Project.

Areas of Poor Water Supply Service 173. The present KUKL service area can be divided into three major blocks viz: extremely poor supply area, poor supply area and good supply area. The extremely poor supply areas are categorized as the areas with virtually no supply for long durations. These include parts of Kathmandu, Lalitpur and Bhaktapur core areas like Asan, Nhykha, Kilagal, Nyakhachowk, Bangemudha, Pyaphal, Nagbahal, Kwlakhu, Jhatapole, Ekhachhen, Chochhen, Taumadhi, Golmadhi, Datatriya, etc, where the supply has been irregular for the last 15-20 years. A ll remaining se rvice areas of K UKL except t hose located al ong t he transmission m ains and adjacent or near to the reservoir si tes fall into the second category. The areas under this category get one to two hours supply on every alternative day in wet seasons and one hour supply on every fourth day in dry seasons. However, in the last category consumers get 6 to 24 hours supply daily depending upon the locality.

174. Figure 5-1 provides a map of the frequency of water supply in different areas.

Figure 5-1: Map of Frequency of Water Supply Service

Extension of Water Distribution to Low Income Groups 175. Figure 5-2 indicates the m ain areas of poor income com munities. Other th an numerous t emporary economic migrant settlements on en croached public l and an d along river banks the low-income groups are generally located in the older inner city / core areas.



Figure 5-2: Area Inhabited by Low Income Groups

Utilizing MWSP Phase 1 Delivered Water 176. The investment required to provide the most effective and efficient use of the water to be de livered by t he f irst ph ase M elamchi Water Supply P roject (MWSP) was closely analysed. The Bulk Distribution System (BDS) deals with transferring and storing the bulk supply f rom MWSP and distributing it, together with other local sources, to the Kathmandu Metro area water sup ply sub -zones. The prim ary f ocus of t he D istribution N etwork Improvement (DNI) is to enhance the distribution of water from rehabilitated and new water treatment plants plus the new WTP being undertaken under Loan 1820-NEP:MWSP.

177. Since it is not physically or financially possible to complete all required infrastructure within a short 5 year l oan period, op tions for p riority i nvestment w ere asse ssed. C riteria were de veloped t o select the be st al ternative for i mmediate investment. T he criteria included technical, soci al, eco nomical an d financial pa rameters. The t echnical c riteria included the use of existing facilities, areas covered for service improvements, population to be benefitted, change in the unaccounted for water (UFW). Social criteria include population coverage o f poor or low income groups, r esettlement i ssues an d requirement o f l and acquisition. The economic criteria include the utilization of assets in 2015-2016 compared to 2025 an d increment i n the r evenues, esp ecially i f w ater from t he MWSP S ubproject-1 is delayed. I n the f inancial analysis, t he cost per capita and need f or additional operational costs (for example power for booster pumps) to maintain the system were considered.

178. A summary of the assessment of 5 alternatives for BDS and DNI investments for the project is prov ided as Appendix 3, Annex 1 . The selected water supply components are listed in Table 5-2 and indicated in Figure 5-3.



Figure 5-3: Proposed Water Supply Investments



5.5.3 Wastewater Component Selection 179. A Conceptual Wastewater Master Plan for the wastewater services for the Kathmandu Valley with a planning horizon of 2025 was developed as part of the CIAMP under TA 4893-NEP. The major improvement and development works for wastewater under the CIAMP is for piped sewers and centralized and decentralized treatment facilities.

180. Due to the present lack of KUKL institutional capacity and on-going schemes under the Bagmati Action Plan (BAP) for constructing interceptor sewers, Wastewater System Improvements (WSI) investments under Loan 1820-NEP Subproject-2 is limited to location and condition surveys of the existing sewerage network including sewer cleaning and some rehabilitation. This will allow the preparation of a sewerage network development plan.

181. The major wastewater system capital investment will be for this project which includes further rehabilitation and development of the existing collector sewers to feed into BAP interceptor sewers and initial upgrading of WWTPs. Locations of the key wastewater system improvement investments are listed in Table 5-2 and indicated in Figure 5-4.

5.5.4 Project Selected Components 182. The proposed components for the project are provided in Table 5-2. Additional description of the components, with estimated base costs, are provided in Appendix 3. The appendix also includes details of capital investments of the on-going Loan 1820-NEP MWSP Subproject-2 and subsequent proposed investments from 2016 to 2025.

Table 5-2: Water Supply and Wastewater Infrastructure Project Components

Component Description Beneficiaries and Outcomes Water Supply A Bulk Distribution

System (BDS) 35 km pipeline from 600 to 1500 mm dia.

Non-DNI areas 840,000 beneficiaries In DNI Areas an additional 490,000 Low income – 37,000 persons total Improved service from 45 to 135 lcpd Accessibility: Tap flow from <1 hr per every 4 days at ~ zero head to > 2 hours supply at minimum 4m. head to 90% of customers NRW - From >40% to 20%

B Service Reservoirs 5 No. with total 68,000m3 capacity C Distribution

Network Improvement (DNI)

427 km of mains from 80 to 600 mm dia. with 100,000 No. service connections

D Equipment, Vehicles and Materials

Trench excavator, maintenance vehicles, spare pipes and fittings.

Wastewater System A Sewerage Network

Rehabilitation 360 km sewers cleaned, 76 km sewers rehabilitated, 60 Combined Sewer overflow (CSO) /filters installed, and 10.500 new (back-log) HH connections

900,000 population benefit from rehabilitated sewerage system 200,000 population benefit from new sewer connection Low income – 45,000 persons indirectly. Incidents of sewer blockage and flooding reduced by 50%. Volume of treated wastewater increases from 1 MLD to 22 MLD. Effluent from WWTPs meets agreed standards

B Sewerage Network Development

28 km new sewers constructed and 43,000 new HH connections

C Wastewater Treatment Plant Upgrading

1 No. WWTP (0.5 MLD) rehabilitated and 3 No. WWTPs (total 21.5 MLD) upgraded including 3 No. Septage treatment facilities with approx 84m3/day capacity.

D Equipment, Vehicles and Materials

4 No. Sewer cleaning equipment sets and maintenance vehicles



Figure 5-4: Proposed Wastewater System Improvements



6. Water Sector Management in Kathmandu Valley 6.1 Institutions and Capacity 6.1.1 Policy and Legal Context 183. The water supply and wastewater services of Kathmandu Valley have remained poor despite various attempts through many projects during last three decades. It was realized that the poor state of water services in Kathmandu valley was a compounded result of deficiencies in water resources, weaknesses in system capacity and inadequacies in management efficiency.

184. To overcome these deficiencies, the Government of Nepal formulated a policy strategy in 2001 for the water sector in Kathmandu Valley. The new strategy focused on; a) sector planning and infrastructure improvements; b) service delivery standards; c) institutional framework reorganization; d) legal framework; e) cost recovery and tariff structure; f) access to service for the financially disadvantaged; and g) transparency and consultation with consumers. .

185. Institutionally, the policy strategy recommended reviewing the existing institutional framework in order to clarify and separate the policy formulation, planning, service provision, and regulatory functions in the sector with the aim of improving coordination and organizational efficiency. The policy proposed a framework with more involvement of local bodies and full organizational autonomy with responsibilities of each organization clearly delineated to avoid duplication and conflict in work spheres. The policy encouraged involvement of the private sector in the management of services and creation of an enabling environment to allow the management of services through a private-operator.

186. On 18 December 2003, ADB approved two loans, one program and one project loan, to the Government of Nepal to assist in the implementation of institutional reform of Kathmandu Valley water supply and wastewater sector. The reform included restructuring the existing NWSC and establishing three separate entities, each for the role of asset ownership and policy setting (Kathmandu Valley Water Supply Management Board (KVWSMB), operation and management of services (Kathmandu Upatyaka Khanepani Limited (KUKL) and economic regulation of the services (Water Supply Tariff Fixation Commission (WSTFC). The Program loan supported the finance of initial operation costs of three new entities and costs for right sizing the staff transferred to KUKL from NWSC by utilizing a voluntary retirement scheme (VRS). The project loan was also linked to institutional reform with the aim to improve Kathmandu Valley water supply and wastewater services by introducing the private sector participation (PSP) modality for the management of KUKL via a performance-based management contract (PBMC).

187. Relevant laws were amended and new laws were enacted to allow the implementation of these institutional reforms. The Water Supply Management Board Act (2006) was enacted which enabled establishment of Kathmandu Valley Water Supply Management Board to take over responsibility of water supply and wastewater services in Kathmandu Valley and to operate and manage the services through a private sector service provider. The Nepal Water Supply Corporation Act (1990) was amended to allow its assets to be transferred to Kathmandu Valley Water Supply Management Board. Water Supply Tariff Fixation Commission Act (2006) enabled the government to establish independent Water Supply Tariff Fixation Commission for economic regulation of water supply and wastewater services and resolution of consumer complaints. These new and amended laws



were designed to establish the legal basis for developing an institutional structure with the goal to; a) establishing a mechanism for representation of municipalities and the public at a policy level; b) protecting the operating company from political interference in management and operational decisions; c) implementing an efficient set of tariffs based on the principle of cost recovery; d) running the operating company in a professional and commercial manner and e) introducing PSP modality to manage service delivery of operating company.

188. The result was the establishment of the 3 new key entities. (i) The Kathmandu Valley Water Supply Management Board (KVWSMB), responsible for water supply and wastewater services in the Valley, as asset owner and developer of service policies and governed by an executive committee which has majority of members from local agencies (municipalities and VDCs); (ii) the Kathmandu Upatyaka Khanepani Limited (KUKL), a public utility company, responsible for operating and managing the assets under license and asset lease agreement with KVWSMB for providing services to the consumers; and (iii) The Water Supply Tariff Fixation Commission (WSTFC), responsible for the economic regulation of the sector, throughout the country. The new institutional framework ensures a professional and commercially-driven operational environment for KUKL.

189. KVWSMB issued an operating license to KUKL for 30 years on 12 February 2008 and also signed asset lease agreement for 30 years. Under the license KUKL is required to operate the services in a professional manner and achieve the following goals: (i) regularity and continuity of water supply; (ii) protection of public health and security; (iii) efficiency in operations; (iv) equity and universality of supply and service and (v) responsiveness to customers‟ needs. KUKL is also required to meet the service standard as specified in the license. Under the Asset Lease Agreement, KUKL has exclusive use of leased assets for the purpose of providing water services over 30 years and is responsible for maintaining the leased assets in good working condition, preparing capital investment and asset management programs to meet the service standards specified in the license and implementing such investment plan as approved by KVWSMB. As provider of the license, KVWSMB is also responsible for monitoring whether KUKL complies with the provisions of the operating license and asset lease agreement.

6.1.2 Operator License Performance Standards 190. Table 6-1 describes the KUKL operating license service standards set by KVWSMB which KUKL is required to meet within the specified timeframe. These performance standards provide a timetable of service improvement objectives which are related to providing adequate access to safe drinking water and sanitation linked to drinking water quality and wastewater management.

191. The KUKL license standards only refer to water supply to KUKL connections rather than potential customers within its license area. Thus, there is no requirement to increase the number of connections, although there will always be a community and civic demand to extend the system, often beyond supply capacity. Neither does the license provide a minimum standard for daily per-capita water supply for different types of service. Nor does it specify effluent standards for discharges from wastewater treatment plants.



Table 6-1: KUKL Licence Service Performance Standards

Ref Description of Service

Performance Standard

1 Ensure the availability of water supply

By the beginning of the fourth year after the Start Date, no less than 1 hour per day of water supplied at minimum 4 meter head for at least 90% of all connections

2 By the beginning of the sixth year after the Start Date, no less than 2 hours per day of water supplied at minimum 4 meter head for at least 90% of all connections

3 By the beginning of the second year after the commissioning of Melamchi Project, no less than 8 hours per day of water to be supplied at minimum 10 m head for at least 75% of all connections

4 By the beginning of the fourth year after the commissioning of Melamchi Project, no less than 8 hours per day of water to be supplied at minimum 10 m head for at least 95 % of all connections

5 Ensure water quality in the distribution system

By the beginning of the fifth year after the Start Date, no less than 80% of water samples tested in a Calculation Period shall comply with the Water Quality Standards

6 By the beginning of the second year after the commissioning of Melamchi Project, no less than 95% of water samples tested shall comply with the Water Quality Standards

7 Ensure water quality at each water treatment facility

From the beginning of 2nd year after the Start Date, compliance with the provisions of Attachment 1 to the Service Standards Appendix concerning the quality of treated water introduced into the treated water distribution network

8 Operation of wastewater treatment plants

By the beginning of the sixth year after the Start Date, all existing Wastewater Treatment Plants to be functional and wastewater to be diverted to Wastewater Treatment Plants to run each plant at least 90% of its hydraulic capacity

9 Wastewater Services By the beginning of the fifth year after the commissioning of Melamchi Project, wastewater services in the form of sewer or on site sanitation should be made accessible to 90% of the population in the service area

6.2 Improving Water Sector Management 6.2.1 Existing Situation 192. KUKL took over operation and management of water supply and wastewater services from Nepal Water Supply Corporation (NWSC) from 13 February 2008. All the operational staff of NWSC involved in Kathmandu Valley operations were deputed to KUKL. There is an urgent need to improve capacities of the water utility operator (KUKL) in managing sector reforms and service delivery.

193. Rapidly growing urban population is not only straining existing water supply and wastewater services, but also placing huge demands for water supply – which will in turn result in significant additional wastewater. In this context of rapidly growing demand and constrained resources, existing services are deteriorating as well as being stretched.

194. As outlined earlier, problems in the water distribution system include ad-hoc laying of pipes, involvement of user groups and their involvement in valve operation, spaghetti pipeline connections, direct pumping from distribution lines, illegal connections, high leakage and wastage, direct distribution from transmission mains, etc. The majority of consumer lines are leaking at the connection to the distribution mains and few have operating



consumer meters. Similarly, other water supply assets including surface water intakes, tube wells, water treatment plants, service reservoirs, etc. are in need of repair or rehabilitation.

195. The key problems and their causes of the wastewater system are complicated and interrelated. Problems range from duplication or lack of clarity of institutional roles and responsibilities to purely technical matters. Problems like limited water for flushing of self-cleansing, inadequate and often ad-hoc planning of sewer network, poorly maintained wastewater treatment plants, discharge of industrial wastewater into sewer lines and rivers, etc. have compounded the worsening wastewater problem in the valley. Another major issue is lack of coordination among agencies. Apart from KUKL/Sewerage Operation Department, various other agencies, such as municipalities and the BCIDC, are working on sewerage sector in the valley. Clear demarcation in their respective roles and responsibilities is required to ease present problems. Low operational funding is also a major constraint to wastewater service sustainability.

196. The main issue for operation and maintenance continues to be financial constraint and the lack of adequately trained and motivated technical manpower to look after all the facilities. There is no system of ”right man at the right job‟. There is no proper job description issued to the staff. Untrained guards have responsibilities to supervise and monitor surface water sources and structures and with some tubewells operated by unskilled labourers. Similarly, water treatment plants are being operated by inadequately trained personnel. CIAMP10 Annex B provides a summary of KUKL staff and equipment for O&M.

197. Operational shortcomings include the lack of an asset management program (AMP) with proper records and management information system. A computerized database was developed in 2004 but this has not been maintained. Most of the facilities like intake structures, deep tube wells, water treatment plants, service reservoirs, pumping stations are in poor condition. The lack of an AMP to efficiently organize maintenance is a key contributor to these poor asset conditions. In the water supply system electrical wiring is unsatisfactory at all tube well sites and there are few flow meters and pressure gauges – which are required for operation monitoring. Leaking valves and damaged panel boards and pumps without a firm base are common with leaking walls, cracked structures and corroded bar racks. In the wastewater system no pumping stations are operational, wastewater treatment is virtually non-existent and most interceptor sewers are choked.

198. A more holistic and long term approach needs to be adopted for planning purposes, while ad-hocism needs to be totally removed from day-to-day work. Zonal approach in water distribution with increased reliability needs to be applied for all future development and expansion. Procedural guidelines for house connection, operations and maintenance, asset inventory and management, human resource development, financial administration, etc. need to be developed and adopted to reflect modern utility management concept.

10 CIAMP – Capital Investment and Asset Management Program prepared under TA 4893-NEP, March 2010.



6.2.2 Water Utility Operator (KUKL) Responsibilities 199. Kathmandu Upatyaka Khanepani Limited (KUKL) is required to provide water and wastewater services to customers in the Kathmandu Valley to defined “Service Standards”. KUKL is required to use the “Service Assets” to provide those services.

200. The assets that are currently being used to deliver water and wastewater services have been assessed and their present condition and performance have been documented. The Asset Assessment Field Findings are included in a Supplementary Report to the CIAMP. The current services being delivered – in the context of the following service goals – have been reported in earlier sections.

Regularity and continuity of water supply.

Protection of public health and security. Efficiency in the operation of the assets. Efficiency in the management of billing and the collection of revenues. Equity and universality of supply and service. Responsiveness to the needs of consumers and the general public.

201. It is clear that KUKL infrastructure assets for providing public water sector services have not been properly operated, maintained or managed. This has resulted in a failure to meet the minimum service standards set by the water utility operator licence.

202. The prime objective of asset management is to best enable the provision of services to the required standards. An effective asset management program sustains the integrity of infrastructure to ensure continuous, sustainable delivery of services. An efficient asset management program keeps capital, operations and maintenance costs as low as possible. In developing an asset management program for the water supply and wastewater services in the Kathmandu Valley the tariff rate structure for those services may be kept optimally low. Further information on asset management programs is provided below.

Legal Status

203. The various legal instruments established to develop a hierarchy of arrangements in the water sector in the Kathmandu Valley define asset ownership and the responsibilities associated with ownership; and, the requirement to invest in water supply and wastewater infrastructure assets in order to sustain the delivery of services.

204. As the owner of water supply and wastewater systems in the Kathmandu Valley, the Kathmandu Valley Water Supply Management Board (KVWSMB) is accountable to its stakeholders / customers for the use of those systems to provide water supply and wastewater services within the Kathmandu Valley to agreed levels of service or service standards.

205. KVWSMB relies upon KUKL to deliver water supply and wastewater services using the Board‟s infrastructure assets. The legislative arrangements allow the Board to enforce the delivery of services. The legislation also places an onus on KUKL to maintain appropriate investment in the assets so as to ensure the delivery of water supply and wastewater services to agreed standards of service reliability.

206. The Water Supply Tariff Fixation Commission (WSTFC), in their governance role of “protecting the interest of the consumers”, oversee what the KVWSMB and KUKL estimate



their need to invest in the water supply and wastewater systems to operate the assets to sustain service delivery. The investment plans (incorporating expenses and profit) will be examined by the Commission in fixing the tariff rates. It is in the interest of the KVWSMB and KUKL, and the Commission, to ensure the true cost of delivering services is identified and used as much as possible in setting the tariff rates for water supply and wastewater services. Developing a program to facilitate answering the six questions below is therefore crucial to the long term sustainability of the arrangements created by the new legislation in the water sector in Nepal.

6.2.3 Asset-centric Management Approach 207. Infrastructure assets are constructed to enable the delivery of infrastructure-based services – e.g. water supply and wastewater services. Collectively the KVWSMB and KUKL provide management oversight of the delivery of water supply and wastewater services, and therefore are collectively responsible for answering the following questions:

Does the KVWSMB know what assets they own, what condition they are in and whether they are performing efficiently and effectively?

Is the KVWSMB actively managing risk in order to prioritize and optimize investments in its infrastructure; and, to identify the relative criticality of its assets?

Does the KVWSMB have documented capital investment plans that reflect what it knows about its assets?

Does the KVWSMB have long term funding and asset management improvement strategies to enable and sustain service delivery?

Does KUKL know what levels of service it is aiming to deliver, and how each asset they operate and maintain is performing within that context?

Does KUKL have documented operations and maintenance investment plans?

208. The six questions above are adapted from the United States Environment Protection Agency‟s asset management training program. Figure 6-1 frames the ten steps to developing an asset management plan within five core governance questions.

Figure 6-1: Steps for Developing an Asset Management Program

Develop

Asset

Registry

Assess

Performance,

Failure Modes

Determine

Residual

Life

Determine

Life Cycle &

Replacement

Costs

Set Target

Levels of

Service

Determine

Business Risk

Optimize

O&M

Investment

Optimize

Capital

Investment

Determine

Funding

Strategy

Prepare Asset

Management

Program

2. What is my required

level of service?

3. Which assets

are critical

to sustained

performance?

4. What are my best O&M and CIP

investment strategies?

5. What is my best long-term

funding strategy?

1. What is the current state of my assets?



209. In the context of regular approaches to asset management planning, distinction between a “Capital Investment Plan” and an “Asset Management Program” is required:

Capital Investment Plan: a series of capital works projects to develop infrastructure assets. The objectives of the Capital Investment Plan are to: o Increase hours of water supply until 24 hour per day water supplies are

provided to all customers; o Facilitate the distribution of water from the Melamchi Water Treatment

Works to be constructed under the Melamchi Water Supply Project; and,

o Promote appropriate wastewater services, including septic tanks and other forms of on-site sanitation, as appropriate in the circumstances, for all Customers including the provision of sewerage services where it is economic to do so.

Asset Management Program: a business model for the management of infrastructure assets.

210. Elements in the objective‟s major activities enable the development of the Capital Investment Plan. However, the information about the current infrastructure, and the development of specific asset investment projects, are managed under an Asset Management Program.

211. It would be sensible, therefore, under the implementation phase of the project for two related but parallel initiatives to take place. Firstly, management of the capital works plan to ensure the infrastructure required to improve the delivery of water and wastewater services is developed in a timely manner. Secondly, instituting the development and implementation of an asset management program so that both the KVWSMB and KUKL are able to undertake their legislative obligations to the greatest extent possible.

212. KUKL have a significant role in applying asset management techniques to the water supply and wastewater systems in the Kathmandu Valley. As indicated in the six questions above they have direct responsibility for significant parts of the asset management program, while supporting the KVWSMB‟s needs for the remaining parts. Therefore, the main benefits to KUKL in adopting asset management as a business model and applying best appropriate asset management practice are as follows:

Creating the institutional framework to assure appropriate governance and accountability (externally and internally).

Establishing business practices that enable the provision of services to the required standards.

Identifying risks that have the potential to prevent KUKL from delivering services to the required standards.

Ensuring that, in providing water supply and wastewater services, KUKL keeps the cost of doing so to a minimum.

KUKL is able to sustain all of the above for the 30 year lease term of its agreement with the KVWSMB.



6.3 KUKL Financial Management Assessment 6.3.1 Introduction and Objective 213. The Financial Management Assessment (FMA) was performed with the objective of identifying key constraints, and proposes recommendations for the improvement in financial management of KUKL. The assessment presents the background and existing situation and identifies underlying constraints in the financial management procedure within the KUKL. The assessment also shows the salient features of resource management including the overall budget framework, revenue mobilization, expenditure plan framework and debt management, which are summarized below. Appendix 4 provides more details of the FMA.

214. Financial management systems include the policies and practices regarding financial planning, accounting, reporting, auditing, funding, organization, and personnel of KUKL, as an implementing agency. The specific objective is to assess the ADB fund flow arrangement of PID and in particular:

To review KUKL financial performance and whether it can maintain financial management systems that can provide timely and reliable information suitable for monitoring projects.

To seek if KUKL is reliable and complete on effective control environment, internal control systems and proper recording and safeguarding of assets and resources.

To examine and identify shortfalls and strength of the organizational and possible actions to be taken for strengthening.

215. This study seeks to review recent efforts to improve financial management in KUKL and evaluate progress achieved so far during the handover of authority from NWSC to KUKL and make practical recommendations for improving fiscal management under the ADB guidelines of financial management.

6.3.2 Accounting Policies and Procedures 216. The assessment found that KUKL has prepared, designed, developed, and operated within the framework of the financial policies, strategies, and systems prescribed by government institutions and National Standard.

217. The financial statements have been prepared under the historical cost convention on accrual concept unless otherwise stated and are in accordance with National Accounting Standard as applicable under the prevalent laws of Nepal. KUKL applies the accounting policies consistently.

218. The financial transactions have been recorded properly including expenditure, disbursement categories and the project will be using entity accounting system. Normally all transactions are correctly made and adequately explained in preparation and approval of transactions. The chart of accounts reports the disbursement of the project activities in adequate detail.

219. It is observed that the general ledger and subsidiary ledger are reconciled and balanced. The financial information and supporting documents are retained on a permanent basis for authorized personnel to access easily for financial management purposes. All the information relating with the accounting system of various transactions is separated for easy access.



6.3.3 Auditing 220. Auditing is one of the critical areas identified in the KUKL Financial Accountability Assessment (FAA) for transparent accountability. The present review aimed to seek transparency in auditing standards, and timely disclosure of audit reports and follow up actions. Similarly, the objective of the diagnostic study was to review the institutional capacity, and revenue and expenditure account management.

Internal Auditing System

221. KUKL has an Audit Committee with three members above the General Manager; that is aligned to the Board of Directors. The internal audit section has three accounting staff under the Deputy General Manager. Every six months an internal audit of all the transactions and revenues and balance sheet of KUKL is carried out. The internal auditing report is submitted to the General Manager. The inclusion of audit program for the project in the KUKL work program is yet to be established. It is observed that the internal control mechanisms are satisfactory.

External Auditing

222. The financial statement of KUKL is audited by a government license holder external independent Auditor once in a year. The Annual General Meeting of the shareholders of KUKL nominates the External Auditor. A financial statement of the current fiscal year has not been completed and, as such, the auditor‟s report is delayed. Auditing was conducted based on National Standard. There are no major accountability issues and there are no suggestions or recommendations prior to the audit report. There is no provision for auditing by a supreme audit institution or independent government entity.

6.3.4 KUKL FMA Strengths and Constraints 223. The overall strengths and constraints of the financial and procurement activities in KUKL, the implementing agency, can be summarized as follows:

Major Strengths:

Highly qualified and experienced financial and accounting staff in the financial accounting section. The staff are adequately capable to handle the financial accounting system.

Efficient and timely completion of accounts and reporting. All the transaction documents and financial accounts including up-to-date cash book, and recording receipts and payment are kept in proper and secure manner so as to incorporate work smoothly.

The accounting system is on an accrual basis rather than cash basis.

There is an internal auditing and control section to audit and check the accounting and procurement procedures.

The accounting system is as per the National Accounting Standard that is consistent with the ADB‟s guidelines.

The written policies and documents covering financial management and related administrative activities are as per rules and regulations of GoN.



Major Constraints:

Accounting and financial staff are not trained in the use of automated accounting computer programs. No accounting and procurement training is presently proposed on automated computer program according to ADB procedures

The financial accounting, reporting and record keeping management system are not fully computerized. No automated computerized system is used to safeguard the financial accounting and other related data and information.

Most of the accounting staff have no computer facility and insufficient logistic facilities, such as, photocopier, internet, networking, printers etc.

The administration system structure is a traditional one that was based on the previous organisation of Nepal Water Supply Corporation (NWSC).

A computerized billing system is yet to be implemented. The billing systems in all branches is done manually.

Lack of banking system facilities for consumers to pay bill.

6.3.5 KUKL FMA Recommendations 224. The financial management assessment of KUKL observed that there is scope for improvements in KUKL financial performance.

a. The revenue collection can be increased by introducing a computerised billing system and providing banking payment system facility for customers.

b. For the improvement of financial activities it is required to provide cashier and revenue ledger keeping training plus consumer water meter reader training.

c. The leakage of water and loss of water due to unmetered consumers can be reduced by providing a meter system to all consumers. There should be a stock taking of available spare meters and the quantity increased if necessary.

225. Most staff had a computer but all of them were using simple spreadsheets (excel) to prepare financial statements manually. An appropriate financial automated package program (financial model software) should be introduced. All staff should be provided training so that reports can be produced efficiently and effectively, as and when required.

226. The computer network system is very poor with only a few computers have internet facility. A full network system is to be provided as soon as possible within the accounting, financial and procurement division with internet facility. The introduction of computerized billing system, the computerized accounting system and networking system will automatically improve the accounting practices and administration account.

227. The financial management assessment of KUKL determined that all personnel were qualified as per requirement but none had relevant training in computer financial management software programs. Appropriate training should be provided to key financial personnel.

228. Present staff numbers are inadequate to implement and manage the project. The organization structure also needs to be re-organized. An increase in the number of financial and accounting staff is required. Training on finance and accounting system as per ADB procedure must be provided.



229. A restructuring of accounting staff is necessary to improve efficiency with the provision of promotion and incentives to improve work performance. The restructuring should also review the daily wages staff and contract staff and employ as permanent.

6.4 KUKL Finances 6.4.1 Background 230. Kathmandu Upatyaka Khanipani Limited (KUKL) was established under the Company‟s Act of Nepal on 24 December 2006 (09 Poush 2063) as a Public Private Partnership (PPP) model. The current shareholders of KUKL are the Government of Nepal (GON), Municipalities within the Kathmandu Valley (Kathmandu Metropolis and Lalitpur Sub-metropolis), Federation of Nepalese Chamber of Commerce and Industries (FNCCI)/Nepal Chamber of Commerce (NCC) and the Employees Trust. The Company is licensed and monitored by Kathmandu Valley Water Supply Management Board (KVWSMB) and commenced its operation on 13 February 2008. KUKL has completed only two years of operation. The agreement signed between KUKL and KVWSMB grants KUKL responsible for operating and providing water supply and sanitation services within the Kathmandu Valley for a period of thirty years.

6.4.2 Capital Account 231. KVWSMB handed over all properties and current assets as well as fund and liability from Nepal Water Supply Corporation (NWSC) to KUKL as per the decision of the council of ministers on September 30, 2007. Table 6-2 indicates the fixed assets and current assets are the equivalent to NRs.3898.24 million; and fund and liability equivalent to NRs.4547.83 million. The “Memorandum of Association” states that the capital structure of the company has an authorized capital equal to NRs 450 million and issue capital equal to NRs.440 million. Among the issues capital of 4.0 million shares each valued at NRs.100 is allotted as preference shares. The paid up capital amount will be NRs.25.5 million in terms of equity shares. Out of the 4.0 million shares, 3.0 million shares are to be owned by the company itself authorized as per the handover of assets. The rest are to be issued as per requirement under the Company‟s Act.

Table 6-2: KUKL Balance Sheet at Hand Over from NWSC (February 2008)

S. No. Particular Amount in Million NRs A Fixed Asset and Current Assets

a. Fixed Assets Fixed Assets 2,173,224,201.00 Capital WIP 344,554,890.52 Total Fixed Assets 2,517,779,091.52

b. Current Assets Inventory 150,664,146.46 Receivable 898,028,274.21 Advances and Deposits 36,769,750.03

Life Insurance fund Account 16,019,708.72 Cash and Bank Balance 278,976,691.93 Total Current Assets 1,380,458,571.35 Total Fixed and Current Assets (a+b) 3,898,237,662.87



S. No. Particular Amount in Million NRs B Less Obligation

c Long Term Debt 1,101,852,063.97 d Current Liabilities, Sundry Creditors and Provisions 1,319,702,803.04

Obligation Debt and Other Liabilities (c+d) 2,421,554,867.01 C Net Worth Value (A + B) 6,319,792,529.88 D Represented By Fund and Liabilities Corporation's Fund 1,710,556,538.27 Less Profit and Loss Accounts (649,596,825.10) Net Corporations Fund 1,060,959,713.17 Capital Reserve Fund 415,723,082.69 Total Share Grant and Capital Fund 1,476,682,795.86 E Fund and Liabilities without PL Balance Corporation's Fund 1,710,556,538.27 Capital Reserve Funds 415,723,082.69 Obligation Debt and Other Liabilities 2,421,554,867.01 4,547,834,487.97

6.4.3 Revenue and Expenditure 232. Present financial status of KUKL is encouraging in terms of revenue and expenditure with the gross profit margin of 87.4 million rupees and operating profit of NRs.48.3 million. However, Table 6-3 is an extract from the balance sheet of profit and loss account including the depreciation, doubtful debt, differed tax assets, and income tax shows that the net loss of company is NRs.26.4 million. The company‟s loss is due to vast amount of doubtful debt equivalent to NRs.60.5 million transferred to profit-loss account. The annual operating profit of NRs.48.3 million is the indication of future prosperity of KUKL. Presently the revenue from water supply is about one third of the actual potential due to suppressed water supply.

Table 6-3: KUKL Profit & Loss Account (July 2008)

Particulars Detail from Schedule 2008 Water & Sewerage Billing 11 191,602,502 Less Cost of Sales 12 104,365,932 Gross Profit 87,236,570 Other Income 13 19,549,085 Selling Expenses 14 12,444,530 Administrative Expenses 15 46,018,068

Total 58,462,598 Operating Profit 48,323,057 Transferred to Balance Sheet Depreciation

1,600,758

Provision for Doubtful Debt

60,510,683 Deferred Tax – Assets

(957,949)

Pre operating Expenses

325,000 Income Tax Provision

13,253,234

Total 74,731,725 Profit (Loss) Account (26,408,669)



6.4.4 Tariff Structure 233. The tariff structure had continued since 2004 until December 2009. This was despite the Water Supply Tariff Fixation Commission‟s (WSTFC) proposed new tariff structure which was to be executed from January 2009. Water tariff has been increased to allow the government to award the tunnel construction contract for the Melamchi Water Supply Project, as tariff rise was a precondition for funding of the project by Asian Development Bank. KUKL has prepared a future proposal for tariff revision based on inflation.

234. Table 6-4 illustrates the different metered and non-metered tariff rates for volumetric and non volumetric charges, respectively. However, the same tariff rates are set for households, commercial and industrial sector irrespective of metered or non metered and volumetric or non volumetric at different consumption limits. It would be reasonable that the tariff rate for the commercial and industrial sector should be higher than that for the domestic connection. However, water is considered as an economic good but the tariff should be set at its full cost that includes O&M costs, repayment of loan, capital investment, cross subsidy.

Table 6-4: KUKL Existing & Proposed Tariff Structure (effective December 2009)

Metered Consumers Non-Metered Consumers Minimum Tariff Volume NRs/m3

Connection Size

(inches)

Minimum Volume charged (Litres)

Previous NRs

Applied NRs

Additional per m3

Previous NRs

Additional per m3

Applied NRs

Previous NRs

Applied NRs

½ “ 10,000 50 55 15 17.50 360 432 ¾ ” 27,000 810 1,053 30 39.00 1,944 2,535 1” 56,000 1,680 2,184 30 39.00 4,032 5,265

1 ½ “ 155,000 4,650 6,045 30 39.00 11,160 14,508 2” 320,000 9,600 12,480 30 39.00 23,040 29,952 3” 881,000 26,430 34,359 30 39.00 63,432 82,485 4” 1,810,000 54,300 70,590 30 39.00 130,320 169,416

235. The cost of production and distribution of water is increasing annually. Although leakage has reduced in recent years to curb the financial burden, the loss is still estimated to be over 40%. The percentage leakage of water supply remains one of the main losses of revenue. Although, revenue is greater than expenditure in term of operating expenses, for sustaining KUKL in the long run; it has to raise the unpaid bill amount from consumers.

236. The major obstacle to poor households getting a water supply connection is the connection charge, which currently ranges from NRs.10,000 - NRs.18,000 depending on the distance from the main pipeline. The connection charge is often much higher than the household income and has to be paid in advance.

237. The problem of poor income cannot be solved by increasing the tariff because in the present context there is insufficient supply of water to satisfy demand. Households are forced to conserve water so the consumption of water reduces although most service connections are either un-metered or with broken meters the householder has to pay even if no water is received.

238. A sewerage tariff is charged as a 50% surcharge to the water bill wherever the sewerage system is available. However, rough estimate of sewerage system coverage is



only about 70% of the water supply system within the 5 municipal areas. The proportionate operating expenditure of sewerage and water supply was approximately 1:14 in the year 2008. Similarly, proportionate income of sewerage and water bill is approximately 1:5. However, in the budget for the fiscal year July 2009, sewerage expenditure is proposed to be increased by 500%; the actual financial statement of which is yet to be finalized and disclosed by KUKL.

6.5 Planned Water Sector Management Development Activities 239. Under the Kathmandu Valley Water Services Sector Development Program (SDP) (Loan 2059-NEP), KUKL was to contract out the utility operations management to a management contractor through an international competitive bidding procedure. However, the recruitment of a management contractor based on a performance based management contract was abandoned at the final stage due to political pressure. Following a major change in scope of the project, the modality of management support was changed to a capacity building and public–private partnership support team (CBP). This change was based on the assessment of the volatile political environment, and lessons learned from the failures of the originally proposed PSP modality.

240. The CBP team will focus on long-term capacity building and strengthening of the operational and management skills of KUKL. It will assist with initial management and capacity building of KUKL so that it can efficiently operate the Kathmandu Valley water supply and wastewater services. The CBP team will be engaged for 4 years, after which the team will be reviewed and, if satisfactory, extended upon mutual agreement between KUKL and the CBP team. The scheduled recruitment of the CBP team is mid 2010.

241. The CBP team will assist KUKL to:

i. Operate the water and wastewater facilities within the service area of KUKL for the initial start-up period, as listed in the lease agreement between KUKL and the Kathmandu Valley Water Supply Management Board (KVWSMB).

ii. Set up procedures and corporate structures within KUKL to enable KUKL to manage and maintain water supply and wastewater services within the Kathmandu Valley on a long-term, sustainable basis.

iii. Identify needs for KUKL's human resource development and design and manage programs to build the capacity and advance the skills of the KUKL staff.

iv. Develop a computerized customer database, geographic information system, and management information system for KUKL.

v. Implement the capital investment plan and design the asset management program.

vi. Identify and reduce technical and financial losses from the water network system;

vii. Optimize water supply sources within the Kathmandu Valley and improve the quantity and quality of water supplied.

viii. Extend water services to cover lower-income households and slums.

ix. Maintain water and wastewater facilities, carry out maintenance programs for the facilities, and rehabilitate and repair the facilities.



x. Carry out all other obligations of KUKL under KUKL‟s license and lease to provide water and wastewater services in the service area during 4 year start-up period.

242. With the scheduled CBP consultant assistance under Loan 2059-NEP, KUKL would be in a strong position to absorb and manage further improvement and development investments in the water supply and wastewater systems. Therefore, based on the present legal responsibilities of KUKL no further resources for improving water sector management in the Kathmandu Valley are required from this proposed project.



7. Outline Implementation Arrangements 243. The existing implementation and reporting framework developed for Loan 1820-NEP: Melamchi Water Supply Project, Subproject-2, as indicated in Figure 7-1, will continue for this proposed loan. The following section provides a description of the arrangements.

7.1 Project Management and Administration 7.1.1 Executing Agency 244. Although the Kathmandu Valley Water Supply Management Board (KVWSMB) is the asset owner of water and wastewater systems, the Ministry of Physical Planning and Works (MPPW) would be the Executing Agency (EA) of the Project and will be responsible for overall strategic guidance, management and implementation of the project, and ensuring compliance with the loan covenants.

7.1.2 Implementing Agency 245. KUKL undertook implementation of Melamchi Water Supply Project, Subproject 2 for rehabilitation and improvement of the water supply system for Kathmandu Valley from its inception. KUKL, as the infrastructure operator and service provider, will be the Implementing Agency (IA) for both water supply and wastewater improvements. A Project Implementation Directorate (PID) has been established under KUKL Board to manage and implement ADB assisted projects. The PID is empowered to make prompt decisions in procurement and implementation, completely separate from KUKL‟s day-to-day management and run by the Project budget, having its own accounting and auditing mechanism and separate financial and personnel regulations.

246. The Project Director, a government officer of Joint Secretary level, is supported by 4 seconded senior government officers, KUKL staff and consultants. The PID will (i) coordinate all activities under the Project; (ii) be responsible for overall project implementation, technical monitoring, and supervision; and (iii) report to the KUKL Board of Directors, the MPPW and ADB.

7.1.3 Project Steering Committee 247. At Government level, a Project Steering Committee (PSC) will be established chaired by Secretary MPPW to oversee project implementation and to ensure cooperation of concerned agencies, and accomplishment of policy frameworks and reform measures. The PSC will include representation from Ministry of Finance, KUKL Board chairman, KUKL General Manger, and KVWSMB Executive Director. The Project Director, PID will be the Member Secretary. The KUKL Technical/Operations Manager will be a permanent invitee.

7.2 Project Implementation Directorate (PID) 7.2.1 Staffing Structure 248. The present organization structure is technically focused with sections on project management, engineering, design, procurement plus general and financial administration sections. A safeguard monitoring unit has also been included to address social and environmental issues. There are 35 personnel in the proposed organizational structure, which includes 14 officer level and 21 assistant level staff. Of the total PID staff, 18 are technical, while the remaining 17 are non-technical staff. Personnel with administrative, account and other sundry background (drivers, messengers, etc.) are termed as non-technical staff.



KUKL Board of Directors

(BoD)

GM / MD

Vice GM (CBP) DGM (Internal)

CBP Consultants Ln 2059

Technical Manager

Financial Manager

Other Corporate Structure

Other Experts

Branch Branch Branch Branch

Other Experts

Project Director

DSC

DPO Engg

DPO Mgmt

Procurement Contracts

Finance

Safeguard

QA / QC

Design Constn

Branch SU

Branch SU

Branch SU

Liaison

Structured Monthly Reports from PID Submitted to KVWSMB, KUKL BoD, KUKL GM

PID (Ln 1820 Subproject-2)

Project Steering Committee

Members MoPPW Secretary MOF J. Sec KUKL Chairman KVWSMB ED KUKL GM Project Director Mem. Sec. TM KUKL Permanent Invitee

Figure 7-1: Project Reporting Framework



249. Of the total 35 personnel, only the Project Director, Deputy Project Director, Senior Procurement Officer, and Senior Accountant have been deputed, so far, by the Government. A legal officer is to be deputed after clearance from the Ministry of Law and Justice. Similarly, another Deputy project Director, Deputy Manager, Procurement Officer, Engineers (3), Account and Administrative, etc. have been deputed by KUKL. The remaining positions are expected to be filled within the first quarter of 2010.

250. It is considered that a section on customer awareness and relations would be required to act as an interface between the customers and the various implementation firms (contractors, suppliers, etc.) during the various works to be carried out for system improvement and rehabilitation. Another critical aspect is utility coordination, which has to be explicitly addressed by the PID during the planning and implementation phases. A number of utilities like electricity, communication, roads, etc. are directly related with the proposed works. Therefore, a utility coordination unit for effective and unhindered implementation of works is very essential.

251. The PID is presently housed in a rented accommodation at Anamnagar near Singh Durbar. The total rented space is about 750m2 spread over three different buildings in the same compound. The rented space accommodates the PID, PPTA consultants and also the Interim Project Management Consultants. It is envisaged that the Detailed Engineering Design and Supervision Consultants (DSC) shall also be accommodated within the same premises. Although the available working space is presently adequate, it may prove insufficient when the PID is fully operational and the entire DSC team and other consultants are mobilized.

252. The Project Implementation Directorate (PID) will have full project implementation autonomy, including financial and administration, and will have its own Bid Evaluation Committee.

253. The Project Implementation Directorate (PID) would be responsible for:

a) appointing project support consultants for project management, detailed design and construction supervision, public relations and community awareness, NGOs, and benefit monitoring and evaluation (BME);

b) approving the design of the investment components prepared for the project; c) pre-qualifying contractors (where appropriate); d) reviewing public relations and community awareness programs; e) preparing standard bid documents to comply with ADB guidelines; f) monitoring the tendering process and guiding the project consultants in bid

evaluation and preparing bid evaluation reports for approval by ADB; g) procuring equipment and services; h) ensuring project compliance with loan covenants; i) coordinating with ADB on matters related to disbursements; j) coordinating the KUKL training and capacity building programs under Loan 2059-

NEP; k) providing support under the institutional development assistance; and



l) maintaining project accounts and submitting timely reports (including monthly project performance reports, quarterly progress reports, BME reports) to ADB and GoN.

254. PID staffing arrangements will remain as at presently agreed for Loan 1820-NEP.

7.3 PID Financial Management Assessment 7.3.1 FMA Introduction and Objective 255. Financial management systems include the policies and practices regarding financial planning, programming, accounting, reporting, auditing, funding, organization, and personnel of a project or of an IA. The outcome of the financial management assessment (FMA) performed in PID may be termed as satisfactory. The assessment was conducted with the objective of identifying key constraints and strengths and recommending any improvements in financial management of PID deemed necessary. The assessment presents the background and existing situation and review underlying constraints in financial management procedure within the PID, which are summarized below. Appendix 4 provides more details of the PID FMA.

256. The assessment emphasize the policies and practices regarding financial plan, accounting, reporting, auditing, funding, organization, and personnel of PID as an executing agency and to assess the fund flow arrangement of PID funded by ADB and in particular:

To determine whether institutional capacity, in terms of financial management, justifies loan approval and review whether it can maintain financial management systems that can provide timely and reliable information suitable for monitoring projects.

To identify the PID‟s financial management development needs - both project related and long term – for developing a reliable and effective control environment, internal control systems and proper recording and safeguarding of assets and resources.

To confirm that the financial management system is sustainable. To examine and identify shortfalls and strength of the organizational and

possible actions to be taken for strengthening.

257. The study reviews recent efforts to improve financial management in PID and evaluate progress achieved so far since the transfer of PMU to PID and make recommendations for improving fiscal management based on ADB guidelines.

7.3.2 Accounting Information Systems 258. The financial management in PID has not been fully computerized. However, all the financial staff have computer facilities and are using Microsoft Word and Excel (Spreadsheet) for preparing the necessary financial statements. Only a senior financial officer has basic skills and knowledge in financial accounting package programs or automated accounting programs based on National Accounting Standard of GoN.

259. The financial personnel keep the data and information of all the accounting systems safe and confidential. PID has no internal controls section to check the accounting system. However, the accounting information is efficiently managed as per management needs.



Auditing

260. PID is producing a monthly financial statement including the budgeting, financial planning data, record keeping and cost accounting. Auditing is one of the critical areas identified in the PID Financial Accountability Assessment (FAA) for transparent accountability. The present review verified the transparency in auditing standards, and timely disclosure of audit reports and follow up actions. Similarly, the diagnostic study reviewed the institutional capacity, and revenue and expenditure account management as satisfactory.

261. It was assessed that accounting and auditing arrangements, standards and practices were found acceptable as per the requirement by ADB loan and project agreements including relevant financial management and audit system.

262. There is no internal auditing section in PID and no formal auditing is conducted internally. The financial statement of PID is audited by Auditor General of GoN annually based on the National Accounting Standard.

Reporting and Monitoring

263. The financial and procurement reports of PID are prepared according to the accounting standard of GoN. The reporting of the financial statement is on a monthly basis. The report provides information on the financial statement as well as physical progress.

7.3.3 PID FMA Strengths and Constraints 264. The overall strengths and constraints of the financial and procurement activities in the PID can be summarized as follows:

Major Strengths:

Highly qualified and experienced financial and procurement staff in the financial accounting section and procurement section who are adequate to handle the financial accounting system. All trained in ADB procedures.

All the transaction documents and financial accounts including up to date cash book, and recording receipts and payment are kept in a proper and secure manner so as to incorporate work smoothly.

The accounting system is as per the national standard of GoN. The written policies and documents covering financial management and related

administrative activities exist as per rules and regulations of GoN.

Major Constraints:

Procurement and financial staff are not trained with automated accounting and procurement computers programs in accordance with ADB procedures and no training has yet been proposed.

The accounting system is on the basis of cash rather than accrual basis. There is no internal auditing and control section to audit and check the

accounting and procurement procedures. The financial management and procurement system are not fully computerized.

No automated computerized system is used to safeguard the financial and procurement data and information.



Financial staff need to prepare financial statement information in two different formats as per the rule and regulation of GoN and for ADB format separately.

Fund flow mechanism is lengthy. Instead of transferring directly from MoF to PID it is transferred from MoF to to PID via KVWSMB.

E-bidding system is yet to be implement

265. Efficient and timely completion of procurement of goods and works from bidding to contract award is still to be assessed.

7.4 Project Implementation Support Services 266. Consulting services will be required for project management, engineering design, construction supervision, procurement of goods and services, public relations and awareness, and BME.

267. For a project of this value, separate packages for project management and design / supervision are often included. However, the PID is already established for implementing Loan 1820-NEP Subproject-2, which includes international design and supervision consultants who will also provide project management support. By 2012, when the proposed project is due to commence, the PID will have an operational project management and monitoring system and will be well conversed in ADB procedures and reporting. Consequently, a separate project management consultant package has not been included.

268. Selection and engagement of consultants will be in accordance with ADB‟s Guidelines on the Use of Consultants. Scope of work for the following consultant packages is provided in Appendix 5.

Design and Supervision Consultant (DSC). The main objectives of the DSC is to assist the PID to update maps and plans, undertake surveys, investigations and prepare detailed designs of various project components, prepare technical specifications and contract documents, assist in construction supervision and quality control, and undertake works measurement. The DSC, depending on need and specialization, will assist the PID in project management activities including reviewing engineering designs, procurement, and implementation. The DSC would also assist the PID in project formulations, management, monitoring and evaluation, financial and environmental management aspects plus public relations and awareness during implementation of physical works.

Community Awareness and Participation Consultant (CAPC). A national Community Awareness and Participation Consultant firm appointed by the PID will facilitate community awareness and participation programs (CAPP) on project related issues and provide transparency in the setting and ensuring distribution of compensation payments to affected persons for temporary business disruption or other agreed project related damages or grievances.

Benefit Monitoring & Evaluation Consultants (BMEC). A national Benefit Monitoring & Evaluation (BME) consulting firm recruited by the PID would identify and evaluate broad macroeconomic, socio-economic and environmental impact of the Project and ensure that project facilities are managed efficiently and the benefits of the project reach the target groups.



7.5 Procurement and Disbursement Procedure 7.5.1 Procurement of Goods and Works 269. The PID in accordance with ADB‟s Guidelines will procure goods, works, and services financed by ADB for Procurement.

270. Goods: Equipment and selected materials will be acquired using international competitive bidding (ICB) and national competitive bidding (NCB) procedures as appropriate. Goods costing less than $500,000 (equivalent) per contract will be procured through NCB procedures. Off-the-shelf items and standardized products costing $100,000 or less will be procured following direct procurement procedures acceptable to ADB.

271. Civil Works: Given the Project‟s geographic location and the nature of works, civil works contracts valued at less than $1 million will be carried out using NCB procedures acceptable to ADB. Most civil works will be „Item Rate‟ contracts. However, wastewater treatment plants (WWTP) will be implemented on a turnkey basis. Turnkey contracts for WWTPs will include construction detail design and construction with operation and maintenance of the plant for one-year, during the defect liability period (DLP). WWTP Turnkey bidding documents will also include options for extended operation and maintenance periods for evaluation purposes. Equipment, materials or civil works costing $30,000 or less including for use by community organizations or NGOs for public awareness activities will be procured using the Government‟s applicable procurement procedures acceptable to ADB.

272. Services: All other contracts, other than for Goods & Works, as outlined above, will fall under this category, for example, appointment of consultants. The procedures for appointment of such services will be in accordance with ADB‟s Guidelines on the Use of

Consultants or other arrangements satisfactory to ADB for selecting and engaging domestic consultants.

7.5.2 Disbursement Procedures 273. The loan will be disbursed in accordance with ADB‟s Loan Disbursement Handbook and Interim Guidelines for Disbursement Operations, LIBOR-Based Loan Products. An imprest account will be established at the Nepal Rastra Bank (Reserve Bank) to expedite implementation of the Project through the timely release of loan proceeds. It is proposed that a second-generation imprest account (SGIA) will be opened in compliance with prescribed procedures as agreed by Government of Nepal (the Borrower) and ADB. Under the SGIA, the Ministry of Finance (MoF) will pass on the Nepal Rupee equivalent of ADB‟s imprest advance to the implementing agency (IA), PID, through the budgetary mechanism. The IA will maintain the advance in a separate commercial bank account and withdraw from it only the eligible portion of expenditure. The SGIA would be managed, replenished, and liquidated in accordance with the Loan Disbursement Handbook and detailed arrangements agreed to by the Borrower and ADB. The initial amount to be deposited in the imprest account will not exceed the lesser of the equivalent of six months expenditures or 10% of loan amount. The initial and subsequent amounts to be deposited in the SGIA will be determined by ADB in consultation with the Borrower. The PID will be responsible for consolidating the accounts, and submitting applications to ADB for reimbursement.



7.6 Fund Flow 274. The following procedure will be followed for all disbursements under the Project:

The Executing Agency (MPPW) will authorize the Project Director, PID, to release payments due under the Project. Based on the Annual Work Plans and budgets prepared for works under each component, the PID will indicate fund requirements. The PID will maintain a separate Project Account, which will be operated by the Project Director. Care shall be taken to ensure that funds available in the Project Account are not used for purposes other than that required under the specific Project.

Based on joint measurements of works by the DSC and the Contractor, and on confirmation by the DSC that works conform to the prescribed quality and are in accordance with the required physical completion, invoices will be prepared by the Contractor for release of fund by the PID.

Part works not meeting the prescribed standards will not be billed. Only approved works will be billed and forwarded to the PID; works not conforming to the prescribed quality standards should be rectified before the next scheduled date of measurement.

The PID, on receipt of the invoice, will record the physical progress and release funds to the Contractor or Supplier.

The PID will consolidate and prepare all physical and financial progress reports and forward to MPPW, GoN and ADB.

7.7 Procurement Packages and Implementation 7.7.1 Implementation Schedule 275. The proposed project includes phased components from KUKL‟s Capital Investment and Asset Management Program (CIAMP). Scheduled negotiation of the Loan is late 2011 with effectiveness in early 2012. Implementation of the Project will be over five years and therefore includes CIAMP components identified for implementation between 2012 and 2016. On-going Loan 1820-NEP MWSP Subproject-2 will provide finance for other identified investments during the period 2010 to 2013. Scheduled completion of Loan 1820-NEP MWSP Subproject-2 is December 2013. Figure 7-2 and Figure 7-3 summarize the proposed KUKL water supply and wastewater capital investment plans for the period 2010 to 2025. The capital investments are shown in relation to other integral sector infrastructure needs.

276. Prior to Loan effectiveness, PID with the assistance of Loan 1820-NEP: MWSP Subproject-2 design and supervision consultants, will carry out advance actions including completion of detail design and bidding documents for selected first year of contracts. This action avoids delays that would occur if such tasks were done after the loan effectiveness. Figure 7-4 summaries the implementation schedule for the Project Loan components including design and construction phasing; with 6 months minimum for procurement.

277. Within the first two months after loan effectiveness, the Project Design & Supervision Consultants (DSC) will be mobilized in the PID and the initial batch of subprojects will be awarded for construction. The Project DSC will undertake detailed design for the remaining infrastructure investments and commence supervision of the first year batch of subprojects.

278. The KUKL capacity building program for infrastructure asset management and operations under the Loan 2059-NEP will be conducted between mid-2010 and 2013.



2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 NRs. (mill) US $ (mill)

M1 Diversion Tunnels & Access Roads 12,000 160.00M2 Water Treatment Plants 20,777 277.02

32,777 437.02

A1 Rehabilitation and Development 284 3.91

B1 Rehabilitation and Development 301 4.18

C1 Rehabilitation and Development 229 3.11

D1 Transmission mains 1,343 17.90

D2 Ring main 1,237 16.49

D3 Transversal mains 1,326 17.68

Total for BDS 3,905 52.07

E1 Repair and New Construction 1,588 21.17

F1Distribution Network Improvement in Kathmandu Metro Zone 11,505 153.56

F2 Distribution Network Improvement in Outside Zones

193 2.57

Total for DNI 11,698 156.13

G1Transmission main from Gokarna to Bansbari plus WTP & SR sites 458 6.10

18,463 246.66

Note: Above base cost estimates do not include insti tutional development, consultant implementation support, incremental adminis tration costs or phys ica l

and price contingencies , taxes , duties and interest during construction.

Melamchi Water Supply Development Phase 1 Phase 2

Kathmandu Valley Water Supply

A – Surface Water Sources

B – Ground Water Sources (Tube Wells) & Pumping Stations

C – Water Treatment Plants and Quality Improvements

D - Bulk Distribution System (BDS)

E – Water Supply Service Reservoirs

F - Distribution Network Improvement (DNI)

Melamchi Water Supply Development - Total Capital Investment

Kathmandu Valley Water Supply - Total Capital Investment

G – Land Acquisition

S.No. ProjectInvestment Year Indicative Base Cost

Figure 7-2: Water Supply - Capital Investment Plan (2010-2025)



2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 NRs. (mill) US $ (mill)

A1 Asset Condition Surveys 50 0.67A2 Cleaning of existing sewers 92 1.23A3 Network Repair and Rehabilitation 766 10.21A4 Sewer connection back-log work 84 1.12A5 Expansion of collection system 871 11.61A6 Development of collector sewers 290 3.87

Total of A 2,153 28.71

B1 Repair and rehabilitation of WWTP 1 0.01B2. Upgrading of existing WWTP sites 1,817 24.23B3 Development of new WWTPs 1,513 20.17

Total of B 3,331 44.41

5,484 73.12

A1 Expansion of collection system 391 5.21A2 Development of trunk sewers 1,760 23.47A3 Septage collection vehicles 113 1.50

Total of A 2,264 30.18

B1 Rehab & Upgrading of existing WWTPsite

380 5.06B2. Smaller Treatment Plants (< 5,000 popn.) 140 1.87B4 DEWATS (< 500 popn.) 260 3.47

Total of B 780 10.39

C1Land acquisition for trunk sewer to Khokana & WWTP Development 4,110 54.80

7,153 95.38Note: Above base cost estimates do not include maintenance equipment, insti tutional development, consultant implementation support, incremental

adminis tration costs or phys ica l and price contingencies , taxes , duties and interest during construction.

A – Sewerage Network

B – Wastewater Treatment Plants (WWTP)

Total Wastwater Investment 2010 to 2025 under BAP & others

2. High Powered Committee for Integrated Development of Bagmati Civilization (HPCIDBC) and Others

1. Kathmandu Upatyaka Khanepani Ltd. (KUKL)

C – Land Acquisition

A – Sewerage Network

B – Wastewater Treatment Plants (WWTP)

Total Wastwater Investment 2010 to 2025 by KUKL

S.No. Project Investment Year Indicative Base Cost

Figure 7-3: Wastewater - Capital Investment Plan (2010-2025)



Figure 7-4: Proposed Project Loan Implementation Schedule

Loan 1820-NEP MWSP-2 DSC supportLoan NegotiationsLoan EffectivenessProject Preliminary Tasks

a Engagement of additional PID Staff b Selection & Engagement of Project DSC

Water Sector Infrastructure Investments

A Bulk Distribution System (3 packages)

B Service Reservoirs (2 packages)

C Distribution Network Improvement (6 packs)

D Sewerage Network Rehabilitation D1 Bhaktapur Wastewater ImprovementsD2 Rehabilitation of existing sewerageD3 Kodku WWTP UpgradingD4 Sewerage Network DevelopmentD5 Dhobighat Sewerage & WWTP Upgrading

E Equipments, Vehicles and MaterialsPart C : Project Implementation and Assistance

Project DSC Mobilized Selection of Contractors / Equipment SuppliersDesign, Supervision & Quality ControlCommunity Relations & Awareness ProgramBenefit Monitoring & Evaluation

421 2Ref Activity

2011 2012 2013 2014 2015 2016

3 31 2 3 4 1 3 4 212 3 4 1 2 3 44 1

Design phase

Construction phaseProcurement period



7.7.2 Procurement Packages 279. The investments selected from the CIAMP described previously in Table 5-2 and Appendix 3 with supporting consultant services have been developed into a series of contract packages. These are presented in the Procurement Plan provided in Appendix 6. Each of the civil work contract packages would include clauses regarding payment retention to cover the likely cost of correcting or repairing any faults or failures that become apparent after the construction phase, during the 12 months deflects liability period (DLP).

7.8 Reports, Accounting and Audit Requirements 7.8.1 Reporting Requirement 280. The Government of Nepal, MPPW, will provide ADB with quarterly progress reports on project implementation. The PID will be responsible for obtaining and consolidating all relevant information. The progress reports will describe physical progress, details of any modification required to the project implementation schedule, problems encountered and an outline of the work for the next quarter. The report will also provide summary financial accounts of the Project: expenditure during the quarter, year-to-date expenditure during the quarter, year-to-date expenditure, and expenditure to date.

281. The progress report will include sufficient information in summary form to be useful to ADB as a financing agency. The purpose of the report is to enable the borrower, EA and ADB to monitor the latest progress, become aware of current problems, and assess whether the Project‟s immediate objectives will be met. Consultants or contractors for the EA‟s management may prepare more detailed reports. These reports will be held at the PID and made available for ADB reviews, midterm review, and project completion review missions. The progress report will be an executive summary of the detailed reports; with format and content permitting ADB staff to readily capture key information for inputting into the project performance report (PPR). The PPR is expected to be the main implementation performance monitoring tool to be used by ADB. Simple charts such as a bar or milestone charts to illustrate implementation progress, a chart showing actual versus planned expenditures, and the relationship between physical and financial performance should constitute a part of the PPR.

282. Within 3 months of the physical completion of the Project, the PID will also submit to ADB a project completion report. This will provide details of implementation, costs, monitoring and evaluation activities, and other information requested by ADB.

7.8.2 Accounting 283. The MPPW, through the PID, will be fully responsible of deployment and management of the accounting system. The PID will establish and maintain separate accounts and records using a computerized Project Financial Management Information System (FMIS) adequate to identify the incomes and expenditures related to the Project. The PID will have an adequate number of suitably qualified accounting staff including an accounts officer.

284. The project accounts will be kept on a cash basis. The accounting process will include detail financial report in accounting format, budget expenditure and flow of fund. The system will meet all statutory requirements and comply with ADB reporting requirements. The statement will provide accounts to enable data to be captured and classified by budget heads, project components, expenditure categories and disbursement categories.



285. Internal control of the project will include the following mechanisms that will be conducted by the monitoring and evaluation unit of the MPPW:

The establishment of appropriate budgeting systems and regular monitoring of actual financial performance with budget and targets;

Adoption of simple, clear and transparent financial and accounting system which will govern financial management and accounting for the project. The system and procedures will include identification procedures for transfer of funds and accounting of expenditures.

Maintenance of standard controls over funds transaction, appropriate documentation, level of authorization, periodic reconciliation, physical verification procedure and system will ensures for sub project at transaction level.

7.8.3 Auditing 286. Detailed consolidated annual project accounts, as maintained by the PID, will be audited by independent auditors acceptable to ADB and will be submitted to ADB within 9 months of the close of the fiscal year. The annual audit report will include the audit of the imprest account, SGIA, and SOE procedure, and an audit opinion on the use of the SGIA and SOE procedures.

287. Auditors will be required to comment on (i) whether the loan proceeds have been utilized only for the Project in accordance with the Loan Agreement; (ii) the financial information complies with relevant regulations and statutory requirements; (iii) financial information contains data specifically agreed upon; and (iv) financial covenant compliance.

288. MPPW and PID should be aware of ADB‟s policy on delayed submission, and the requirements for satisfactory and acceptable quality of the audited accounts.

7.9 Project Review 289. Project performance will be reviewed in a three-tier system. In the first tier review, the PID will review progress and the performance on each contract package. The review will take place in the first 10 days of the month for the previous month‟s performance. Monthly performance reports will be prepared for each contract by the DSC and submitted to the PID. Based on the reviews, the PID will suggest changes in the project design and implementation, or refer the issues to the EA. The review report will be sent to ADB, the EA, and the project steering committee for necessary action.

290. The Steering Committee will conduct the second tier review at quarterly meetings. The monthly project performance reviews and major policy issues will be reviewed and actions to be taken recorded. The review results will be circulated to ADB, EA, and PID.

291. The third tier review will be conducted by ADB every 6 months. This will coincide with the ADB Review Mission visiting the project, to discuss major issues with MPPW, PID and the project steering committee. This review will provide ADB‟s opinion for action at the Government level.

292. The project review will be supplemented by a formal comprehensive midterm review, with the participation of senior Government officials as well as ADB staff when detailed design is completed and major contracts have been awarded and started. The review will be held about 24 months after the loan effectiveness date. It will critically evaluate actual project progress, implementation procedures, procurement methods, public relations and



community awareness, BME activities, and the performance of the design and supervision consultants. Following the review, corrective measures, as appropriate, will be introduced to remedy any identified weaknesses.

7.10 Project Performance Monitoring System 293. The Project Performance Monitoring System (PPMS) forms an essential part of Project Implementation and is a systematic set of procedures aimed at monitoring Project progress. The Project performance is measured through a set of defined indicators, which assist in evaluating the Project‟s achievement in terms of the goals, purpose and outputs established in the Design and Monitoring Framework (as indicated in Appendix 1 and to be finalized between ADB and the Executing Agency).

294. The PID is responsible to ensure that the project performance monitoring system (PPMS) is established and undertaken. The PPMS has numerous categories of monitoring, corresponding to development activities and representing the direct and indirect outcomes expected from the Project. The PPMS also defines the responsibility for monitoring, recording, and reporting. Certain tasks will be outsourced to external contractors; others form part of the routine reporting from the PID.

295. Indicators broadly cover (i) physical progress of infrastructure works; (ii) institutional development and capacity building; and (iii) impact assessment. Key indicators include:

Preparatory activities, comprising pre-loan agreements including loan conditions, key appointments, legislative changes, establishment of departments, etc.;

Physical works for infrastructure, comprising project development and detailed design, tendering and infrastructure construction; the system would also include standard construction management procedures;

Financial monitoring, comprising fund draw down and expenditures made; and Institutional development, comprising targets on, streamlining systems and

procedures, improved asset management and efficiencies in operational processes.

296. The PID would conduct initial baseline physical and socio-economic surveys and submit a detailed implementation plan for monitoring performance and for preparing benchmarking information for ADB‟s review and concurrence within 3 months of loan effectiveness. Thereafter, the PID will submit annual monitoring and evaluation reports to ADB throughout project implementation.

7.11 Long-Term Sustainability 297. Asset creation through the Project requires an institutional mechanism for long-term sustainability. In addition, the institutional mechanism established for asset creation should undertake asset management and maintenance in the long-term besides undertaking future water sector infrastructure planning with a holistic perspective. Currently, KUKL does not have an effective management information system (MIS) that can be used for developing an asset management program as described in Section 6.2.3. The asset management program will be prepared through the capacity building program under Loan 2059-NEP, described in Section 6.5.



8. Financial and Economic Analysis 8.1 Project Cost Estimate 299. The total cost of the Water Supply and Sewerage System Improvement Project is estimated at $129.33 million comprising a foreign exchange component of $53.57 million (41.4%) and a local currency component of $75.76 million (58.6%), including interest; physical and price contingencies. Table 8-1 provides a summary of the costs. Further details on the financial and economic analysis are provided in Appendix 7.

Table 8-1: Project Cost Estimate by Components

$ million % Foreign % of Components Local Foreign Total Exchange Base Cost Civil Works Water Supply 36.11 30.76 66.87 45.5% 70.8% Wastewater 9.32 7.94 17.26 12.5% 18.3% 45.43 38.7 84.13 Equipment & Material - 2.57 2.57 4.1% 2.7% Consulting Services 2.74 3.28 6.02 9.5% 6.4% Project Administration 0.92 - 0.92 1.0% Re-settlement Cost 0.82 - 0.82 0.9% Total Base Cost 49.91 44.55 94.46 73.0% 100.0% Price contingencies 9.24 3.22 12.46 9.6% Interest 16.61 5.8 22.41 17.3% Total Cost 75.76 53.57 129.33 100.00

Total base cost includes 13% of VAT

8.1.1 Investment Plan 300. The total project cost will be incurred over a 5 years period. The cost estimate is calculated based on the following project investments and implementation plan. In the first year of the project, approximately 8.2% of the total estimated cost will be incurred; 22.3% in the 2nd year, 34.4% in the 3rd year, 25.0% in the 4th year and 10.1% in the 5th year of the project investment period. Table 8-2 provides a summary of the expenditure, which is based on detailed estimates of the roll out of each project component.

Table 8-2: Summary of Investment Cost ($ million)

Components Year 1 Year 2 Year 3 Year 4 Year 5 TOTAL % Civil Works Water Supply 2.43 14.43 25.82 18.13 6.02 66.86 70.4% Wastewater 1.76 4.46 5.20 4.21 2.17 17.79 18.7% Equipment & Tools 1.92 0.65 2.57 2.7% Consulting Services 1.20 1.21 1.20 1.20 1.21 6.02 6.3% Project Management 0.18 0.18 0.18 0.18 0.18 0.90 0.9% Social & Environment 0.33 0.25 0.25 0.83 0.9% Total (Base Cost) 7.82 21.17 32.65 23.75 9.56 94.96 100.0% % of Total 8.2% 22.3% 34.4% 25.0% 10.1% 100.0%



8.1.2 Financing Plan 301. Table 8-3 indicates the financing contributions to the project. Using present loan agreements, government finance is expected to contribute 28.0% of the total project cost including all taxes and duties, interest and contingencies, while the ADB will contribute 72.0% of the total. The contributions are equivalent to amount of $36.21 million by government $93.12 million by ADB.

Table 8-3: Financing Plan ($ million)

Local Foreign Total Percent Government of Nepal 36.21 36.21 28.0% Asian Development Bank 93.12 93.12 72.0% Total Financing 36.21 93.12 129.33 100.0%

8.2 Economic Analysis 302. Economic analysis of Kathmandu Valley Water Supply and Sewerage System Improvement Project represents the cost and benefit to the society in terms of opportunity cost. All cost streams and benefit streams are changed to represent economic values. The basic assumptions of conversion factors such as foreign currency, standard conversion factor, opportunity cost of capital and traded or non-traded components at border price etc. are considered as normal practices. Adjusting the estimated cost of all components to reflect the economic value, the economic analysis was performed. The economic evaluation is performed to seek the feasibility of the project in the national perspective.

303. Economic analysis for project components has been carried out to examine the economic viability of the Project undertaken in accordance with the principles and procedures set out in the ADB Guidelines for the Economic Analysis of Projects (1997). The costs and benefits of the Project physical components have been quantified using resource cost and „willingness to pay‟ measures incremental to a „base case‟, defined as the situation without the project and with project situation. The economic net benefit measures the net real economic worth of a project to the national economy.

304. The physical components of the Project have been categorised into two groups for economic analysis, because of the different approaches to measuring benefits:

water supply

wastewater system (sewerage and sanitation)

combined Water Supply and Wastewater System

capital costs of improvement

annual operating and maintenance (O&M) costs of the improved infrastructure

forecasts of demand for/usage of infrastructure services

supply characteristics of infrastructure networks and service delivery

existing water demand

forecast of water demand

existing revenue



8.3 Economic Rationale

305. The economic rationale of the Project is two-fold. One rationale is provided in Section 2.1.2, where it was pointed out that urban areas in Nepal are net contributors to GDP. Relevant points mentioned in that section are:

The estimates of the contribution of urban areas to GDP are in the order of 77.8% whereas rural areas it is only 22.2% in the industrial sector.

The overall contribution to GDP by urban areas from economic activities including industries and agriculture is estimated about 60% and that of rural agricultural and primary industries was 40% in 2008 [CIA World Data Book, 2008].

306. Economic growth in Nepal is thus dependant on the fortunes of urban areas and their ability to attract investment, increase productivity and continue to provide the focus of service sector activity. This ability, in turn, depends on the ability of cities to deliver services and provide an adequate urban environment, amenity and quality of life.

307. The tourism sector is one of the major income sources of foreign convertible exchange that was equivalent to $286.88 million in fiscal year 2008/09, which was equivalent to 20.8% of the foreign exchange earned from total exports of goods and services; and contributed about 2.3% of GDP. The recreation tourists occupy about 41.4% of the total visits in Nepal; and mainly attracted to the traditional monuments of Kathmandu Valley. The tourism sector has declined due to long period of political conflict and a deteriorating urban environment. The present study is not intended to evaluate the impact of the project in the tourism sector and its contribution to national economy. However, it is certain that the water supply and sewerage improvement project will gain positive impact on tourism sector and enhance the economic development of the Kathmandu Valley.

308. The second economic rationale of the Project is to provide water sector services to improve environmental and living conditions to acceptable levels, not only for social development but also to enable access to economic opportunities (i.e. income and employment generation), particularly by the poor. Without the project situation, the environmental condition is very poor with increasing public health risks. Due to the poor water supply, the drainage system has become clogged with sediments causing overflowing drains and flooding of properties. With the project situation, water supply will be sufficient and such problems will be reduced with a resultant improved environment and a reduction in public health risks and associated medical costs. However, this study is not intended to quantify the benefits from environmental improvement.

309. The process of selecting the project components is described in Chapter 5. The process included concepts of particular importance to the economic evaluation of the proposed improvements:

The least cost or most cost effective way of meeting effective demand, in terms of scale, location, technology and timing, and;

Economic benefits are likely to exceed economic costs.

310. Economic analysis is the most cost effective way of demonstrating the Project‟s objectives and resources are being allocated efficiently, i.e. that the Project‟s economic internal rate of return benefits exceed the economic opportunity cost of capital.



8.4 With and Without Project Situations

8.4.1 ‘Without-Project’ Situations 311. Tariffs are very low in the valley and there is little scope for increasing the tariff until the water supply is regular, sufficient and safe for drinking. As the tariff is low and the availability of supply is low the metered revenue is very low.

312. Consumers have to bear high costs to purify the water consumed since alternative water sources for domestic use are often polluted. Consumers also bear high costs for ground water pumping, installation of ground and roof storage tanks, and rely on tankers due to little or no supply of piped water.

313. The inequity of supply affects the poor severely who need to spend considerable time fetching and carrying water, using shallow tube wells, polluted streams or relying on public stand posts.

314. Kathmandu Valley has a deteriorating situation in terms of social life, health hazards, income poverty and environmental consequences. If all the negative consequences are evaluated in term of economic value it will be of huge economic loss to the nation.

315. The consumer has to spend substantial amounts to collect and purify the water due to inadequate water supply, poor sewerage and sanitation system. The consumer has also to bear extra amounts for cleaning septic tanks and improving wastewater systems.

316. Piped water is supplied once in four day in some areas and then only for about one to two hours. The overall per capita water consumption of utility supplied water is estimated to be on average 35 litres per capita per day (lpcd); ranging from 30 to 50 lpcd. The per capita supply of water will reduce over time as population numbers and demand for water increase.

8.4.2 ‘With-Project’ Situations 317. The economic cost and benefits „with-project‟ situation are estimated by comparing the „without-project‟ situation and with-project situation based on acceptable assumptions using socio-economic survey results from the DNI pilot area. The expected benefits are adjusted in the economic analysis. For the financial analysis only revenue is considered as benefit.

318. The DNI pilot area household survey interviewed about 5.5% of the pilot area population. Although the percentage might be considered low the reliability of the available data is generally acceptable as a basis for the economic analysis.

319. In the „with-project‟ situation the water supply will be hygienic, clean and safe. The water supply will be sufficient and continue daily for at least for 2 hours. Hence, in the „with-project‟ situation the expenditure of the consumer on health and sanitation will be reduced. Such intangible benefits based on the DNI pilot area survey report are considered for economic analysis for seeking viability of the project.

320. The water supply will be increased to the level of at least an overall average of 70 lpcd from the year 2015 onwards with the project situation in comparison to the „without-project‟ situation average of 35 lpcd.

321. In the „with-project‟ situation, the economic benefits associated with the resource costs saving in terms of time saving to collect water, incremental benefit in terms of



increased water demand as additional consumption, unaccounted-for-water in terms of utility of non-revenue water. These benefits are considered as economic benefits for the analysis of economic viability of the project.

322. The benefits of improved sewerage or sanitation will be better environmental and living conditions and a reduction in public health risks in the Project area. This will be achieved through the more effective removal of wastewater from and around living areas and prevention of wastewater from entering drains and rivers and, in some areas, broken water supply pipelines. Improved disposal of wastewater will result also in more pleasant surroundings through a reduction in street or property flooding and odours and an improvement in the aesthetic quality of drains, rivers and low-lying areas.

323. However, quantifying environmental benefits is difficult because of the need for data to establish the magnitude of the impacts of the improvements and to separate out the effects of an improved sewerage or drainage system from other factors such as personal hygiene habits, housing standards, water quality, etc.

8.5 Methodology 324. The financial and economic analysis was performed in two basic lending conditions. Scenario (i): the loan condition of ADB lending to GON at a subsidized interest rate, which is based on an interest rate of 1% for the grace period of 8 years and interest rate at 1.5% for annuity payment by 24 years. Three different analyses for Water Supply, Wastewater and combined Water Supply and Wastewater were performed. Scenario (ii): the On-Lend loan condition of GoN/KVWSMB to KUKL, which is based on 50% of the investment as grant and 50% as loan at an interest rate of 9.0% for the grace period of 5 years and for the annuity payment by 25 years. Only the combined Water Supply and Wastewater analysis was conducted to seek out the tentative performance based on the existing information without segregating Water supply and Wastewater. This analysis is to provide a rough assessment of the feasibility of the investment to indicate whether present tariffs would need to be increased in future years beyond the rate of annual inflation. This analysis did not taken into account overall financial liabilities of KUKL, such as, licence fees, cost of water from MWSDB or financial costs of future investments required to meet 2025 service demands, which are yet to be ascertained and are beyond the scope of present study. In addition, financial information such as terms of lending other than above mentioned interest rate and terms of condition, share of private investors, share of KUKL and consumer contribution are also yet to be ascertained.

325. Each investment component is compared to the „without-project‟ situation, using the discounted cash flow technique for water supply and wastewater improvements. The evaluation period allows for 30 years from the first full year of operation after the construction period of 5 years. The analysis was conducted at domestic prices, the discount year was taken as 2012 and all values expressed in 2009 prices.

326. The investment costs and annual costs are divided into two components, foreign cost and local cost, to derive at the economic cost. The financial costs of local components, which generally include local labor and local material, are adjusted to reflect the economic value by standard conversion factors. Similarly, Standard Conversion Factor (SCF) adjusts other local components and locally produced items to reflect economic costs.

327. The internal rate of return (IRR) is the major tool to measure the viability of the project. IRR is the rate of benefit incurred during the project period. Economic internal rate



of return (EIRR) is determined based on all costs and benefits streams at economic price. For a project to be acceptable the EIRR should be greater than the economic opportunity cost of capital.

328. The following assumptions have been used for the economic analysis of the project components.

All resource costs and revenues are expressed in 2009 price. The construction period of the project is 5 years for the period 2012 to 2016. Economic analysis is evaluated on a cash flow stream for 35 years. The economic opportunity cost of capital is considered at 12%. The economic opportunity cost of raw water provided to the project is assumed

zero. The opportunity cost of water “benefit foregone” use of water in agriculture is not considered. It is assumed that raw water is not diverted from any other commercial use, including irrigation.

An exchange rate of NRs.75.0 per $1.0 has been employed when converting foreign costs to local currency equivalent based on 2009 exchange rate.

The shadow exchange rate or standard conversion factor (SCF) of 0.90 has been applied to non-tradable inputs to convert them into economic cost.

It is assumed that the wage rate of skilled labour is non-distort. The shadow wage rate (SWR) of 0.70 has been determined to change local unskilled labour to opportunity cost of labour.

The foreign component includes transfer payments of 1%; hence, the conversion factor to change from financial cost to economic cost is 99%.

8.5.1 Water Demand 329. Water demand was derived from the current population within the planned service area, population growth, current and future domestic water consumption level assumptions, and a provision for non-domestic water consumption. The permanent population is forecast to rise from present population of 2.1 million in 2010, 2.7 million in 2015 and 3.2 million in 2020 and 3.9 million in 2025. Out of the total population forecast 77%, 87% and 96% of the population will be served, as a result of the project and future investments, in 2015, 2020 and 2025 respectively. The water demand is based on the population forecast; percentage of population served and assumed lpcd of water. The per capita supply will increase from an average 35 lpcd at present to 70 lpcd average supply because of the project, in 2016. However, demand is also a function of price, household income availability and accessibility of water supply, but accurate estimates of the impact of these factors require extensive analysis of historical data, which is not the objective this study. The average per capita supply and water demand forecast is derived as the sum of the 8 different sample locations of Kathmandu Valley. The household size is estimated at 6.7 as the weighted average. The water demand is estimated at 192.4 million liters per day in the year 2010 to 686.8 million liters per day in the year 2025. (Appendix 7, Attachment Table A1-1 )

8.5.2 Economic Costs 330. The economic costs of capital works and annual operation and maintenance will be calculated from the financial cost estimates on the following basis:



Price contingencies and physical contingencies are excluded because they represent real consumption of resources;

The existence of unemployment and under-employment for unskilled workers within the Nepal economy means that the opportunity cost of unskilled labour can be considered to be lower than its wage rate and transfer by SWR.

The market wage rate for skilled labour is considered non-distortive to opportunity cost that is converted by SCF.

All costs, in particular imported tradable inputs are exclusive of duties and taxes for economic analysis because they represent transfer payments.

8.5.3 Valuing Economic Benefits 331. Three main quantifiable economic benefits of the project are considered for the analysis. These are; resource cost saving in terms of time saving; incremental and non-incremental benefit accruing to water users, and, valuation of non-revenue water that is consumed by the people.

332. The benefits of the project can be termed as time saving in fetching and carrying, energy and cost saving in pumping, saving in water purchase from tankers, saving in household water purification expenses and saving in medical expenses.

333. The water supply in the Kathmandu Valley via KUKL‟s piped network at present is an average 35 litres per capita per day. The incremental consumption of water demand with the project situation is valued at the willingness to pay and considered as economic benefit.

334. The project estimated that the loss of water due leaks and wastage is about 40% of the total water supplied but a certain percentage of water losses is expected to be consumed by people without payment, such utility is considered as economic benefit to the society indirectly. It is assumed that people will utilize at least 25% of the lost of water.

335. The avoided costs of coping with the poor quality supply in the absence of the project include; time spent in collecting water, expenditure on facilities such as additional storage and rainwater harvesting systems.

8.5.4 Avoided Economic Costs 336. The household survey was conducted in the DNI pilot area designed under TA 4893-NEP which is located in the ward No.7 and some part of ward No.8 of Kathmandu Metropolitan City. The sample survey interviewed 219 households, equivalent to 5.5% of the area total households (Refer Appendix 8, Section B, Annex 3). The survey results indicate the high cost of drinking water purification done at the household level. It is estimated that the per household expenditure for treatment of water is NRs 1191 per month for boiling, use of filter, use of Euro Guards and chlorination etc. It is assumed that at least 25% of the household expenditure will be reduced with improved water supply and wastewater systems, which can be considered as, avoided economic costs. However, this avoided cost is not considered for the present economic analysis of Water supply component.

337. The DNI pilot area survey determined that the cost incurred by households for septic tank cleaning is about NRs 1023 per year per household. It is assumed that at least 25% of the total households reduce expenditure by 50% as avoided cost, which is considered for the economic analysis of the wastewater system improvement. This assumption is relatively low in comparison to the report on Improved Water Quality, Sanitation and Service Delivery In



Emerging Towns Sector Development Program, Nepal 2008, ADB which estimated an overall cost reduction in household sanitation costs of 35% due to project intervention.

338. Household health expenses due to unhygienic water supply and poor sewerage and sanitation system were at NRs.1651 per household per year based on the DNI pilot area survey. It is assumed that at least 50% of the expenditure of households will be reduced with the implementation of water supply and wastewater projects that can be considered as avoided cost due to the improvement of sewerage and sanitation system. This is termed as economic cost and is considered for the economic analysis of the wastewater system improvement. Chlorination of water for treatment yields a 37% reduction in diarrhoeal incidence. (Journal of Water and Health, WHO, 2007, pp – 484). The above assumption may be justified because chlorination water reduces diarrheal incidence only by 37% but improvement of sewerage and sanitation and clean, hygiene water supply will reduce the number of other health risks including diarrheal incidence.

339. The water supply and wastewater components of the Project were split and combined for the economic analysis because of the different types of benefits. The analysis was also performed for the combined Water Supply and Wastewater system with the on-lend condition from KVWSMB to KUKL (50% grant and 50% sub-loan) at an interest rate of 9% with the grace period of five years, which is capitalized to capital amount and annuity payment over 25 years, a total of 30 years.

8.5.5 Exclusions 340. Any institutional strengthening and capacity building components related to the Project have not been subjected to economic appraisal due to the difficulties of measuring their economic benefits.

341. The economic analysis has been based on information from the DNI pilot area survey, on the engineering, environmental, social, financial and other studies of the PPTA and on economic evaluation parameter values relevant to the Project.

342. The following benefits of reduced pollution, a cleaner city and improved river environment have not been quantified:

environmental degradation cost due to poor water/sanitation;

private and public costs of mosquito control due to poor sewerage and sanitation

effects on businesses and industries, such as aquaculture and fisheries, agriculture and washing;

effects on tourism and tourist-related businesses.

8.6 Analysis Results

343. The analysis results shows that the all subproject and combined projects are economically viable since the EIRR is greater than EOCC and economic net present value of net benefits is positive. The economic NPV of net benefit is found at NRs.9309, 2509, 8083 and 8412 millions for Water Supply, wastewater, combined and on-lend condition respectively. The positive and higher economic net present value of net benefit indicative of acceptable as national perspective. Details of the analysis are provided in Appendix 7, Attachment Tables A-2 to 9.



Table 8-4: Economic Analysis Summary Results

Outcome Results Water Supply Wastewater Combined On-lend Situation EIRR 36.9% 30.8% 26.1% 26.9% AIEC 4.44 1.41 6.28 8.83 ENPV of Net Benefit 9309 2509 8057 9553

8.7 Financial Analysis 344. The financial analysis is the basic of economic analyses. The financial analysis is conducted based on the consideration of market prices. The financial analysis is performed to seek the feasibility of the project in terms of investor's perspective. Financial net benefit provides a measure the rate of return in terms of financial price or commercial viability of the project on the project-operating entity. For a project to be economically viable, it must be financially sustainable, as well as economically efficient. If a project is not financially sustainable, economic benefits will not be realized. Financial analysis and economic analysis are therefore complementary.

8.7.1 Summary of Financial Management Assessment (FMA) 345. The major key finding with respect to the FMA are summarized as follows:

a) The present revenue collection is not efficient because only 70% of the revenue is raised. The remaining 30% may be considered as bad debt.

b) Nearly 40% of the water supply is leakage, which reduces revenue.

c) The tariff structure is very low but tariffs cannot be increased, for social reasons, until improvements are made due to limited water availability, unhygienic water, intermittent supply etc.

346. For the improvement of revenue generation, the following activities must be initiated:

a) Household survey to determine the number of operational consumer water meters and the actual water delivered.

b) Provision of training for meter readers, cashiers and revenue ledger keepers.

c) Provision of a stock of replacement consumer water meters, and

d) Introduction of a customer banking billing system.

8.7.2 Financial Performance of KUKL 347. Present financial status of KUKL is encouraging in terms of revenue and expenditure with the gross profit margin of 87.4 million rupees and operating profit of NRs.48.3 million. However, the balance sheet of profit and loss account including the depreciation, doubtful debt, differed tax assets, and income tax shows that the net loss of company is NRs.26.4 million. The company‟s loss is due to vast amount of doubtful debt equivalent to NRs.60.5 million transferred to profit-loss account from the previous year. The annual operating profit of NRs.48.3 million is the indication of future prosperity of KUKL. Presently the revenue from water supply is about one third of the actual potential due to suppressed water supply. At present the revenue is received from the water bill is about 70% of the water supply due to numerous reasons, such as, illegal connections, faulty meters, unpaid water bills, etc.



8.8 Methodology and Assumptions 348. The internal rate of return (IRR) is the major tool to measure the viability of the project. IRR is the rate of benefit incurred during the project period. FIRR is benefit incurred on a project where all costs and benefit schemes are measured in financial price. The FIRR represents the financial benefit during the project period. FIRR is expected to be greater than the Weighted Average Cost of Capital (WACC) for the viability of project

349. The following assumptions and considerations have been applied for the financial analysis of the project components.

All resource costs and revenues are expressed at 2009 market prices.

The construction period of the project is 5 years from 2012 to 2016.

Financial analysis is evaluated on a cash flow stream of 35 years.

Designed outputs of Loan 1820-NEP: MWSP are delivered on schedule.

350. The following assumptions have been made with regards to costs

All tradable goods include excise tax and duties

VAT is included in costs which is currently payable at 13% on all purchases. However, VAT is not considered on water sales.

Capital costs include physical contingencies and price contingencies. The international inflation rate is considered at 2.3% based on the IMF estimates the inflation rate of major countries Australia New Zealand, UK and EU. (Economy Watch 2009).

The domestic inflation rate is considered at 5.5% based on the consumer price index of non-food and services in Kathmandu Valley at a five years average (Economic Survey, Ministry of Finance, GoN, 2009). (The contingency calculations are provided in Appendix 7, Attachment Table A-14-16).

An exchange rate of NRs.75.0 per $1.0 has been employed when converting foreign costs to local currency equivalent based on 2009 exchange rate.

ADB loan Interest rate is considered at 1.0% for 8 years grace period and is considered at 1.5% annuity repayment for 24 years, a total of 32 years.

On-lend condition from KVWSMB to KUKL (50% sub-loan and 50% grant) with an interest rate of 9% with the grace period of five years, which is capitalized to capital amount and annuity payment over 25 years, a total of 30 years.

Incremental revenue is used for the analysis with deducting existing revenue.

8.8.1 Tariff Structure 351. The most effective and acceptable tariffs are volumetric tariff using metered charges per cubic meter. These provide consumers control over water bills and assists water suppliers to manage water supply and demand more effectively.

352. Thus, the tariff structure is based on the volumetric consumption assuming that all water consumers in the Kathmandu Valley will have metered connections. Tariff is also a demand management tool; an increase in tariff can cause a decrease in water demand and vice versa. An incremental volumetric block tariff system is used to increase the revenue as



well as to discourage the wastage of water. The incremental block tariff system is also justified on socio economic prospect to provide cross-subsidy to lower income group or poor communities who use less water per capita. Tariffs are fixed by the Water Supply Tariff Fixation Commission (WSTFC), which considers socio-economic, financial and economic viability of investments and the cost of operations and management of the utility.

353. Melamchi Water Supply Project (KVWSDP, ADB, 2008) financial forecast assumed that the tariff would be increased by 15% in FY2007 and FY2008. After these two consecutive revisions, tariffs would increase in line with the rate of inflation, estimated at 4%. The Water Tariff Policy allows the tariff to be increased to ensure the project is sustainable in covering operation and maintenance, plus 30% of the project capital investment.

354. The existing wastewater tariff pricing will be retained as equivalent to 50% of the household water supply bill. The wastewater system at present covers only about 55% of households in the service area but is designed through the project to be increased to 70%. With the present lower coverage of the wastewater system compared to water supply distribution network the actual revenue from sewerage equates to only about 27.5% of the total revenue received from water utility billing.

355. Error! Reference source not found. shows the existing water supply and wastewater tariff structure.

Table 8-5: Existing Tariff Structure

Water Supply (NRs) Wastewater (NRs) Combined (NRs) Minimum Consumption 10 m3 55.0 27.5 82.50 Additional Consumption per m3 17.5 8.75 26.00 Stand posts per tap 1188.00 - 1188.00

8.8.2 Proposed Tariff Structure 356. With the need for KUKL to cover their operational costs and pay back the project on-lending investment costs to GoN / KVWSMB it will be necessary to increase the present tariffs. The tariff rate is required to be increased by at least 15% in 2015 and every five years at 15% up to year 2025, which is equivalent to an approximate incremental tariff increase of 3.0% per annum. However, to assist poor communities using public stand posts it is proposed that the stand posts tariff be subsidized and reduced by 50% from NRs.1188 to NRs.594 and to remain as a flat rate.

357. An indication of a likely future tariff structure for water supply is provided in Table 8-6. It is assumed that a supplementary tariff for wastewater service would be charged where connected to the wastewater system equivalent to 50% of the prevailing water supply tariff.

Table 8-6: Proposed Tariff Structure

(NRs) 2010 (NRs) 2015 (NRs) 2020 (NRs) 2025 Minimum Consumption 10 m3 55.00 63.25 72.74 83.65 Additional Consumption per m3 17.50 20.00 23.00 26.50 Stand posts per tap 594.00 594.00 594.00 594.00

358. Detailed determination of future tariffs would be part of KUKL‟s 5-year business plan to be developed with assistance from the CBP consultants engaged under Loan 2059-NEP and would take into account further investments to meet service demands up to 2025.



8.8.3 Cost Recovery Analysis 359. The cost recovery analysis is performed for the on lend situation only. However, the tax structure is yet to be ascertained for KUKL but for the cost recovery analysis overall tax rate is assumed at 30% on gross income from the water sale plus wastewater charge. With the proposed tariffs the annual cash flow is found positive up to the year 2016 before the annuity payment; the level of retained profits will be in surplus after the year 2019 showing positive cumulative cash flow after deducting tax at 30% on gross income and repayment of debt service including interest. (Appendix 7, Attachment Table A-13)

360. With the proposed tariff rate the total capital cost recovery will be retained in the 16th year after deducting tax, which is 14 years ahead of tenure of the annuity payment of loan including interest rate.

8.8.4 Analysis Results 361. Table 8-7 shows the results of the financial analysis, which estimates the FIRR at 13.6%, 20.3%, 13.3% and 13.9% in the case of Water supply, Wastewater, Combined and on-lend condition respectively, which are quite higher than the estimated weighted average cost of capital (WACC).

362. The financial net present value (NPV) of net benefit is estimated at NRs.8,465, 7,585, 18,554 and 28,034 million respectively for Water supply, Wastewater, Combined and On-lend condition. The positive NPV in all cases indicate them to be financially acceptable.

Table 8-7: Financial Analysis Summary Results

Outcome Results Water Supply

Wastewater Combined On-Lend Situation

FIRR 13.6% 20.3% 13.3% 13.9% AIFC 3.13 0.95 3.08 5.00 FNPV of Net Benefit 8465 7585 18554 28034 PIR 0.07 0.28 0.08 0.10 Sensitivity Analysis 10% increase in Costs 12.8% 20.1% 11.7% 127% 10% decrease in Benefits 12.7% 18.7% 11.2% 12.6% 10% increase in costs & 10% decrease in Benefits

11.5% 18.5% 9.4% 11.5%

8.8.5 Changes in Property Values 363. The improvement in the environment, together with some perception of health benefits, may be reflected in the amount people are willing to pay for property, either in terms of rent or in the purchase price of the property. For example, improved wastewater disposal may be part of a range of characteristics associated with a particular property option; individuals who value a new or upgraded wastewater system may be willing to pay more for property with “good” disposal than for a property with “bad” disposal. Following the same reasoning, people may be willing to pay more for housing in areas where they are “less exposed” to environmental degradation and unpleasant surroundings caused by sewage odour and stagnant water, etc.



364. Quantification of the benefits associated with environmental improvements can be done by comparing property values in areas, which are “less exposed” to environmental degradation and unpleasant surroundings with property values in those areas which are “more exposed” to environmental degradation and unpleasant surroundings.

365. It has not been possible to undertake a detailed comparative study of property values in the Project area, so a conservative assumption of 5% will be made of the increase in property values likely to take place as a result of improvements compared to not having the Project:11

366. Data sources for property values are the Socio-Economic Household Survey and values of financial parameters such as real rate of return from income on rental properties and capital growth in residential properties.

8.8.6 Affordability 367. The affordability of the household is evaluated based on DNI pilot area survey and on secondary information of the income status of the Kathmandu Valley population. The determination of affordability tariff is based on the assessment of the affordable range condition under the ADB‟s guidelines for water resource projects.

368. The tariff structure is based on household, incomes and consumer‟s ability and willingness to pay. The method of determining tariffs considers the affordability within the range of 3 to 5% of household incomes.

369. The Financial Analysis result is explicit that even poor people can afford the existing tariff structure, which is calculated at 1.1% of the monthly income per household in the on-lending combined Water Supply and wastewater condition.

370. The affordability condition in the case of on-lend situation analysis also shows a level reasonably below the affordable range; even for poor people it lies in an affordable condition, which is calculated at 1.65% in the year 2010 and 2.5% in the year 2025 respectively of the lower monthly income of the households.

8.8.7 Willingness to Pay (WTP) 371. The willingness to pay for water is based on the reliability, quality and continuity supply of water. The study of household expenditure on water purifying and collecting water other than supply tap water is equivalent to more than NRs.500 per household per month. Hence, consumers are likely to be willing to pay up to Rs 500 per household per month (Kathmandu Valley Water Supply – Development Program, December 2000).

372. Almost 70% of the households that are connected to the KUKL system are willing to pay a monthly bill of NRs.600, and almost 50% of the households that are not connected to the KUKL system are willing to pay a monthly bill of NRs.500. These figures may be compared with a standard monthly charge for an unmetered KUKL connection of NRs.70 at the time the survey was carried out. For the households that are connected to the KUKL system, the median WTP is NRs.900 per month for improved services, i.e. at least 50% of the sample is willing to pay more than NRs.900 from their monthly income to obtain the improved services. The average WTP is NRs.1,030 per month among connected

11 The assumed increases in property value may also include some perception of health costs and flooding costs but it is felt that the degree of double counting would be minor.



households. For poor households connected to the KUKL system, the mean WTP is NRs.800 (ADB, KVWSSDP, November 2003).

373. Among unconnected households, the mean WTP for improved service from a private connection is NRs.840 per month. The mean WTP for an improved water supply from a shared connection, which is similar in all respects except that it will provide about 250 litres of water a day, is NRs.230 per month. The mean monthly WTP of poor households not connected to the KUKL system was NRs.630 for a private connection and NRs.240 for a shared connection (ADB, KVWSSDP, November 2003).

374. Commonly, households spend nearly 5% of household income on domestic water consumption for fetching, purifying, medication due to unhygienic conditions in the Kathmandu Valley, but they are not presently willing to pay 5% of the income on water tariff because they cannot rely on the safe, sufficient and regular water supply from KUKL. Consumers are willing to pay less because there is a diminishing marginal utility for domestic water resulting in a willingness to pay less per unit of water, and less proportion of income, as availability of water.

375. Empirical evidence shows that households mostly pay 1.0% or less of the household income on the water bill. The proposed tariff rate in the case of on-lend situation is assumed to be increased by 15% in every five years for the project analysis based on viability of project. In the household socio economic survey undertaken by the PPTA (Kalo Pool DNI pilot area, November 2009), the willingness to pay for water supply and sanitation evaluation indicated that 52% of the household are willing to pay up to NRs.150; 30% of households are willing to pay between NRs.150 to 450 and 18% of the households are willing to pay more than NRs.450. The proposed tariff structure is within the range of willingness to pay.

376. The present study is focused on the proposed tariff structure for the case of the on-lend situation, the result of which shows that there is scope of increasing the tariff with increases in the future within the affordability range to ensure sustainability. The proposed tariff structure for on-lend condition is within the affordable range based on the DNI pilot area socio economic survey results and for the sustainability of the project.

8.8.8 Financial Subsidy 377. The average incremental financial cost (AIFC) is often taken to indicate the level of tariff required. The average incremental economic cost AIEC can be used to calculate the level of economic subsidy applied to achieve the benefits. It is justified by the economic welfare benefit (if consumer surplus exists) that the AIEC is the optimum tariff rate.

378. The financial subsidy can be facilitated to the core poor people maintaining sustainability of the project for lifeline consumers or core poor households with the community tap stands with a “lifeline tariff”. The existing tariff structure can also be considered as a financial subsidy since the lifeline consumer needs to pay only NRs 82.50 per month per household which is equivalent to 1.65% of the income of poor households in the Kathmandu Valley and the tariff rate is within the affordability range.

8.8.9 Cross Subsidy 379. The incremental block tariff (IBT) system is also applicable for cross subsidy from high income group to low income group indirectly. The IBT system is applied in a tariff structure so as to make it more beneficial to the poor community. The IBT system can be



applied in various locations and communities such as urban and semi urban areas also if it is crucial for cross subsidy.

380. The cross subsidy can also be applied with high tariff rate for non-domestic sector to indirectly benefit the domestic sector with comparatively lower tariff rates. It would be justified if tariffs for non-domestic water sales were more than 30% higher than the tariff for domestic water sales, since the commercial or industrial sector use water is usually for profit making. However, the present water supply system is based on the domestic household consumption irrespective of the sector. Hence, the tariff is considered same for domestic and non domestic sectors. For the present analysis the tariff structure is such that the lifeline rate is up to the consumption of 10,000 litres per household per month before any additional water is charged for at a flat rate irrespective of the consumption.

381. The tariff structure and other financing mechanisms will cross-subsidize services like community taps for the urban poor. Criteria for the identification of target groups will be made so that the poor and disadvantaged groups will be benefit from the water supply and wastewater system improvements. For the present analysis the stand post monthly flat tariff has been reduced by 50% so that it will be more beneficial to the urban poor.

382. To ensure equitable water supply and sanitation service provision, government subsidies, cross subsidies, revolving loan funds and other financing mechanisms could be applied so that only a “lifeline tariff” is charged to users from poor and marginalized groups. Lifeline block for such a tariff range shall be generally fixed between of 5,000 to 10,000 litres per household per month depending upon water availability and socio-economic characteristics of the community [MPPW]. For the present study lifeline block is considered fixed at 10,000 litres per household per month assuming availability water supply.

8.8.10 Poverty Situation 383. The government defines the national poverty line as income below NRs. 10,000. The survey result of the DNI pilot area survey shows that 1.83% of the household lies below monthly income of Rs. 5,000 and 4.11% of the household lies below the income of NRs. 10,000. The average poverty of the DNI pilot area survey was estimated at 3.9%.

8.8.11 Poverty Impact Assessment 384. The consumer surplus, which represents the economic welfare benefit, accrued by the poor consumer have been evaluated with the survey results of the willingness to pay survey. The economic subsidy which is directed to achieving the economic welfare benefit must have an impact on the poor.

385. Other distributional benefits that can be taken into account include gains to the government and gains to labour. It is expected that the additional distributional of benefits from these will be small relative to the net benefits accruing to the consumers.

386. In general, poverty impact assessment is evaluated in connection to the economic benefit to the poor associated with consumer‟s utility and labour supply, which is assumed to be 60% of the unskilled labour and is compared with the economic benefit of the project as a whole. The gain and losses are determined by the difference between economic benefit and financial cost. The overall gain and loss is evaluated to clarify the Poverty Impact Assessment as a positive ENPV. The poverty impact ratio (PIR) is calculated based on the proportion of net economic benefits accruing to the real poor with economic benefit of the project as a whole. The poverty impact ratio is calculated, which is considered the economic



benefit at present value gains by the poor community. The results of the analysis show that the poverty impact ratios are 0.7, 0.9, 0.8 and 1.1 for the Water supply, Wastewater, Combined and On-lend condition. These are equivalent to 7%, 9%, 8% and 11% which are higher than the existing poor population in the service area that indicates that more poor people will beneficial than the existing poor population. The poverty analysis is provided in Appendix 7, Attachment Table A-17 to 20.

8.8.12 AIFC & AIEC 387. The average incremental financial cost (AIFC) and average incremental economic cost (AIEC) for the project provides a measure for the cost of water per m3 and determines the basis of the tariff needed to meet full cost recovery and to meet O & M costs. The AIFC can be compared with the level of tariff for sustainability. AIFC is calculated at NRs.3.13, 0.95, 3.08 and 5.00 respectively for water supply and wastewater components, which are quite below the tariff rate hence the project is viable in terms of sustainability. Similarly, the AIEC is estimated at NRs.4.44, 1.41, 6.28 and 8.83 for Water Supply, and Wastewater, Combined and On-lend condition respectively. The AIEC figure is higher than AIFC due to the discounted rate of economic opportunity cost of capital at 12%.

8.9 Sensitivity Analysis

388. The financial and economic analysis of water supply projects is based on forecasts of quantifiable variables such as demand, costs, water availability and benefits. The values of these variables are estimated based on the most probable forecasts, which cover a long period. Sensitivity analyses are particularly concerned with factors, and combinations of factors, that may lead to unfavourable consequences. Hence, analysis has been undertaken considering three unfavourable conditions with three different options to make decision by the influence of the changes in costs and benefits streams in the project whether viability of the project is altered or not. The three conditions are:

a) increasing all costs by 10%

b) decreasing all benefits by 10%

c) increasing overall cost by 10% as well as decreasing benefits by 10% respectively

389. Referring to the Table 10-5, the results of FIRR‟s the results are found to be quite higher than the WACC in all options of the sensitivity analysis for all sub-projects components.

8.10 Financial Sustainability

390. Sustainability of the project is the most important factor. The economic and financial considerations must be determined considering the operation and maintenance cost for long-term sustainability. The project may be considered as sustainable when the project runs for a long term maintaining the cost of operations, maintenance and rehabilitation costs. That is, at least the expected revenue per year from the project component should cover the operation, maintenance and rehabilitation costs. Sustainability of the project also depends on numerous other factors such as management of the project, availability of spare parts for maintenance, distance from project site to major markets.

391. The financial and economic analysis results are sensitive to tariff rates. Efficiency is maximised when the marginal benefit and marginal costs are equal and the project is



considered to be sustainable for the long term. It is essential that financial costs involved in implementing and operating water supply and wastewater improvement systems are recovered at an appropriate level to ensure long-term sustainability. The cash flow analysis shows that the project is sustainable with operation and maintenance and capital cost recovery after the completion of the project analysis period. The overall analysis results clearly indicate that the Water Supply and Wastewater components are financially as well as economically viable. The project is beneficial after the loan repayment.

392. From the project perspective, economic analysis of the loan is mandatory. The economic analysis broadly follows the outline in ERD Technical Note 14. The draft design and monitoring framework outlines the major outcomes of the project as well as outputs. As outlined in the earlier sections, the project will foster economic growth in the region and the investments are critical for growth. However, weaknesses in the delivery regime are major issues and the project‟s focus is to strengthen the delivery systems. From this perspective, the investment decisions will be based on the CIAMP supported by the institutional strengthening and capacity building and related legislative changes to be implemented with support from SDP Loan 2059-NEP to enable better management and resource recovery.



9. Social Impacts and Safeguards 9.1 Resettlement and Rehabilitation 9.1.1 Review of Resettlement Policies and Legal Framework 393. There is no national resettlement policy in Nepal. Resettlement policies have been prepared for specific projects funded by donors and guided by the donor‟s Involuntary resettlement guidelines. These include ADB‟s Involuntary Resettlement guidelines, and safeguard policy statement, etc.

394. Resettlement measures in ADB-funded projects are built around a development strategy and form an integral part of project design from an earliest stage of the project cycle. The ADB‟s resettlement checklist has been applied to identify resettlement issues and to ascertain the nature and degree of the impacts on potential affected households and people that may arise from the various investments identified during the Project scoping exercise.

9.1.2 The Asian Development Bank Policy 395. According to the ADB new safeguard policy statement (SPS, June 2009) the basic objectives of the safeguards requirements are to avoid involuntary resettlement wherever possible. The aim should be to minimize involuntary resettlement by exploring project and design alternatives; to enhance, or at least restore, the livelihoods of all displaced persons in real terms relative to pre-project levels; and to improve the standards of living of the displaced poor and other vulnerable groups.

396. The ADB policy requires –

Involuntary Resettlement (IR) should be avoided wherever possible. Where IR is unavoidable, minimize involuntary resettlement by exploring project

and design alternatives. Enhance or at least restore the livelihoods of all displaced persons in real terms

relative to pre-project levels. Improve the standards of living of the displaced poor and other vulnerable groups; Gender analysis is required to identify related resettlement impacts and risks. A Resettlement Plan (RP) should be prepared in full consultation with affected

persons (AP), host communities, and concerned nongovernmental organizations including disclosure of the RP and project related information.

Preference given to land-based resettlement for displaced persons whose livelihoods are land-based. However, if the land is not the preferred option or the land is not available at a reasonable price, the APs will be provided opportunities for employment or self-employment in addition to the reasonable cash compensation for land and other assets lost.

Cash compensation for the loss of structures, other assets and incomes should be based on full replacement cost.

Absence of formal legal title to land or non recognized or recognizable claims to such land by the affected persons should not be a bar to compensation.

The rate of compensation for land, structures and other assets should be calculated at full replacement cost on the basis of fair market value; transaction



cost; interest accrued; transitional and restoration cost, and other applicable payments, if any.

All asset compensation payments and related activities must be completed prior to the commencement of the civil work.

Special attention to be paid to the needs of vulnerable groups especially those below the poverty line, the landless, the elderly, women and children, indigenous people and those without legal title to land.

9.1.3 Government of Nepal Legislation and Guidelines 397. The Interim Constitution of Nepal (2007), Article 19 (I) guarantees the fundamental right of a citizen to acquire, own, sell and dispose of property. Article 19 (II) prescribes that the State cannot acquire the property of any person except in case of public interest. Article 19 (III) states that compensation shall be provided for any loss of individual property when acquired for public interest.

398. The Land Acquisition Act (1977) specifies the procedures for land acquisition and compensation. The Act empowers the government to acquire any land for public interest or for the execution of any development work. There is a provision for a Compensation Determination Committee (CDC) under the chairmanship of Chief District officer which will fix the rate of compensation for the affected property. The other members in the committee are the Chief of Land Revenue Officer, representative from District Development Committee (DDC), concerned Project Director/Manager. The CDC can also invite representatives from the affected persons and from the affected VDC/Municipality.

399. The basic function of the CDC is to review the verification of lands to be acquired, review and determine the compensation to be paid, identify the proper owners, distribution of compensation and address the issues related to land acquisition and compensation distribution. The District Administrative Office (DAO) is also responsible for notifying the public regarding the details of the land area, structures and other assts affected by the project in the concerned VDC/Municipality.

400. The Land Reform Act (1964) is relevant in the compensation distribution modality. This specifies the compensation entitlements for the registered tenant. Where the tenancy right is legally established, the owner and tenant each will be entitled to 50% of the total compensation amount. Section 42 of the Land Reform Act states that Guthi (religious/trust) land acquired for the development work must be replaced with other land.

401. In most cases the legal framework of the Government of Nepal is compatible with ADB policy such as to avoid involuntary resettlement as far as possible and where displacement is unavoidable; the living status of the affected people shall be improved at pre-project condition at no cost to themselves.

9.1.4 Nepal and ADB Resettlement Policy Differences 402. In Nepal, there is no legal provision for providing compensation to a non-legal titleholder (i.e. a person who does not possess the land ownership certificate). Whereas ADB policy indicates there should be compensation to affected persons, irrespective of legal ownership.

403. ADB Policy requires compensation for all affected structures including those of encroachers or squatters. Under Nepal legislation, squatters and encroachers are not entitled to compensation for the loss of structures built illegally on government land.



404. In Nepal, the compensation for all affected assets will be determined by the Compensation Determination Committee (CDC) under the chairmanship of Chief District Officer (CDO). ADB policy requires that compensation shall be made for all lost assets as per market price / replacement cost.

9.2 Social Objectives in Project Formulation 9.2.1 Project Scoping Issues 405. Development of major water supply and wastewater infrastructure schemes can have impacts on communities including cultural, archaeological, demographic, development and economic. This means that people are affected if they lose their private property or displaced from their homes or properties. These losses, in turn, would have negative impacts on the livelihoods of affected persons. So, the main social objective in project formulation is to avoid or minimize the adverse social impacts. Where the negative impact is unavoidable, it should establish measures to mitigate adverse social impacts through compensation or any other means so that their living standard can be restored in the pre-project condition at no cost to themselves or if possible improve their standard of living to better than before.

406. The key social objectives in formulation of the Project address the three core issues of – Access, Quality and Affordability of services. The objective of access relates to easy and timely availability of the water supply and wastewater improvements to the beneficiaries. Quality of the water sector services have been voiced as a critical factor by the community. Quality of services will determine the ownership and willingness to pay by the community thereby ensuring sustainability of the project investment thereby making it a vital factor in improving quality of urban life. Last but not the least, affordability of the services by the community has to be considered as one of the key factors during Project formulation to make the components viable and easily acceptable by the community.

407. The key issues identified during project scoping are summarized below.

Water Supply Improvement

408. The Project will include laying large diameter bulk distribution mains though built up urban areas and the rehabilitation water supply distribution networks in selected city areas. In addition, there will be the construction of water supply service tanks. The water mains will be constructed within existing public road corridors and public rights of way. The water service reservoirs will be constructed on land previously acquired under Loan 1820-NEP. No additional land or property acquisition is required for water supply improvements under the Project. However, there is likely to be temporary disruption to commercial outlets / businesses and street vendors / hawkers during construction in narrow streets when road closures might be required.

Wastewater System Improvement

409. The Project includes the rehabilitation and expansion of the wastewater system network and upgrading of wastewater treatment facilities. The wastewater network rehabilitation and expansion will be undertaken only within existing public road corridors and rights of way. Upgrading of wastewater treatment plants will be on existing secure sites. No additional land or property acquisition is required for wastewater improvements under the project. As with the water supply improvements there could be temporary disruption to



commercial outlets / businesses and street vendors / hawkers during construction in narrow streets when road closures might be required.

410. Implementation of the Project will have a range of positive and negative socio-economic impacts. Positive impacts include the access to a better drinking water service and improved wastewater management. It will also improve the quality of life for the poor and many women due to safer drinking water and time saved by the removal of the need to collect water; time which can be used in productive activities. Negative social impacts are related to the temporary loss of income to businesses and hawkers as well as disruption to the residents in the immediate vicinity of the construction works due to road closures and traffic diversions. The project will provide a net positive socio-economic impact through distributing safe drinking water and improving wastewater facilities to the urban poor as well as to other groups of society. Further, it will provide employment opportunities during construction to the urban poor.

411. There will be no acquisition of land or private assets as result of the Project. There will be no displacement of people, other than temporary relocation of hawkers and mobile vendors during construction. The Project therefore falls under Category C, as approved by ADB, and no resettlement plan (RP) is required for the Project.

412. Table 9-1 shows the potential social effects due to the Project.

Table 9-1: Losses and Potential Social Effects Associated with the Project

Loss of income Business and other income earning activities

Business shops / complex, street vendors, hawkers in the project construction area

Road closures and traffic diversion

Temporary inconvenience Immediate vicinity / residents

Dust, noise, waste disposal

Temporary inconvenience due to construction

Residents and pedestrian

Potential social effects

Changes to income-generating capacity especially to the street vendors and hawkers

Others

9.2.2 Mitigation Actions 413. To cover temporary income losses due to pipe laying and construction activities compensation will be provided for businesses due to road closures in the busy urban streets. In order to identify the extent and nature of likely temporary impacts of the project on household businesses and hawkers, a sample survey of was conducted in the DNI pilot area chosen for detail design under TA 4893-NEP.

414. Persons or businesses temporarily affected due to the construction activities should be compensated for the proportional loss of business revenue. Street vendors / hawkers if doing permanent business and need to be relocated to another location should also be provided a one-time displacement allowance.

415. In order to address these issues a Local Consultative Forum (LCF) or Local Issues Resolution Committee (LIRC) will be formed in each affected community / ward level to address the local resettlement issues and grievances. The entitlement matrix prepared under the Management Plan Temporary Business Impacts during Pipeline Construction included in Appendix 8 – Section B recommends the rehabilitation package and compensation for people adversely affected by the project.



9.3 Indigenous Persons 416. By definition, Indigenous People refers to a population with social, cultural, economic, and political traditions and institutions distinct from the mainstream or dominant society.

417. ADB policy on indigenous peoples (1998) covers ethnic minorities, indigenous peoples and other disadvantaged groups. The policy ensures that these people should not be deprived from the project benefits as they have had limited access to benefit previously though they were located in resource-base areas. Because of their unique culture and social characteristics they should have equal opportunity to participate and gain from the project activities.

418. ADB policy emphasises the following important aspects:

Participation of ethnic minorities in planning consultations; Appropriate mitigation of impacts, including capacity building and institutional

strengthening; Consideration of social and cultural context of ethnic minorities; Development of a long term sustainable development strategy.

419. According to the Government of Nepal official definition stated by the National Foundation for Development of Indigenous Nationalities Act 2002, “indigenous people/nationalities are those ethnic groups or communities who have their own mother tongue and traditional customs, distinct cultural identity, distinct social structure and written or of their own.” The following are the characteristics of the Indigenous peoples:

those who have their own ethnic languages other than Nepali; those who have their own distinct traditional customs other than those of the ruling

high castes; those who espouse a culture distinct from that of the Aryan/Hindu culture of

dominant groups; those who have distinct social structures that do not fall under the hierarchical

varna or caste system; those who have a written or oral history that traces their line of descent back to the

occupants of the territories before their annexation into the present frontiers of Nepal; and

those who are listed in the schedule of indigenous people/nationalities published by Government of Nepal.

420. The Government of Nepal has identified 59 ethnic groups as indigenous people or nationality in Nepal though 2001 Census specified only 43 indigenous people in Nepal. Nepal Federation of Indigenous Nationalities has classified these indigenous people / nationalities into five major categories: They are:

i. Endangered groups; ii. Highly marginalized groups; iii. Marginalized groups; iv. Disadvantaged groups and v. Advanced groups



421. In the Kathmandu Valley, Newar is the advanced group identified as indigenous people. This group still comprise 41%; a large segment of the valley population. Besides Newar, other indigenous people like Sherpa, Magar, Gurung, Rai, Limbu are classified as disadvantaged groups and constitute about 10% of the valley population. Tharu and Tamang as marginalized groups hold 6%. Similarly, ethnic minority groups like Damai, Kami, Sarki (Dalit people) are 2% of the population of the five Municipalities in the valley.

422. The Project aims to improve the drinking water supply and wastewater management in the urban areas of Kathmandu Valley. This improvement should bring substantial health and livelihood benefits to all people living in the Kathmandu valley, including Indigenous People. Adverse impacts to IPs are highly unlikely. IPs living in the urban areas of Kathmandu Valley are assimilated socially, politically, and economically into their localities. They maintain no distinctive customs or practices and share similar characteristics as other social groups. There is no loss of housing, strip of land, crops, trees, or other fixed assets owned or controlled by individual IP households envisioned under the Project. As a result, no Indigenous Peoples Development Plan/Indigenous Peoples Development Framework or specific action is required for the Project.

9.4 Gender 423. In many parts of the developing countries, women are the main collectors, transporters, users and managers of the domestic water consumption. However, they often lack access to education, health care, safe drinking water, family planning services, decision making in the household and community, employment, ownership of property, income generating opportunities etc. Further, they are often ignored in the project design, construction, operation and maintenance, training as well as in monitoring and evaluation. This disparity between men and women gives an indication of the status of women in society.

424. ADB policy on Gender and Development (GAD) ensures women‟s equal participation in, and share of benefits from, the socio-economic development process. The key elements of ADB‟s policy include the following (ADB: Gender and Development 1998):

Gender sensitivity: to observe how ADB operations affect women and men, and to take into account women‟s needs and perspectives in planning its operations.

Gender analysis: to assess systematically the impact of a project on men and women, and on the economic and social relationship between them.

Gender planning: to formulate specific strategies that aim to bring about equal opportunities for men and women.

Mainstreaming: to consider gender issues in all aspects of ADB operations, accompanied by efforts to encourage women‟s participation in the decision-making process in development activities.

Agenda setting: to assist DMC governments in formulating strategies to reduce gender disparities and in developing plans and targets for women‟s and girls‟ education, health, legal rights, employment, and income-earning opportunities.

425. A Gender Action Plan has been prepared on the basis of a gender analysis and government strategy and included in Appendix 8 - Section D.



10. Environmental Assessment 10.1 Purpose of Environmental Examination 426. The purpose of the Initial Environmental Examination (IEE) is to examine the proposed project infrastructure to ensure that they will not damage the environment and to provide guidance for their planning, construction and operation. In the environmental examination, potential environmental impacts are identified, their significance assessed, and strategies devised to avoid these impacts or reduce them to an acceptable level.

427. Government of Nepal legislation and ADB policy require that the environmental impacts of development projects are identified and assessed as part of the planning and design processes, and that action is taken to reduce those impacts to acceptable levels. This is done through the environmental assessment process, which has become an integral part of lending operations and project development and implementation worldwide.

10.2 ADB Environmental Safeguard Policy 428. ADB‟s Environment Policy is to consider environmental issues in all aspects of the Bank‟s operations. ADB requires environmental assessment of all project loans, program loans, sector loans, sector development program loans, financial intermediation loans and private sector investment operations.

429. The nature of the assessment required for a project depends on the significance of its environmental impacts related to the type and location of the project, the sensitivity, scale, nature and magnitude of its potential impacts, and the availability of cost-effective mitigation measures. Projects are screened for their expected environmental impacts and are assigned to one of the following categories:

Category A: Projects that could have significant environmental impacts. An Environmental Impact Assessment (EIA) is required.

Category B: Projects that could have some adverse environmental impacts, but of less significance than those for Category A. An Initial Environmental Examination (IEE) is required to determine whether significant impacts warranting an EIA are likely. If an EIA is not needed, the IEE is regarded as the final environmental assessment report. Category B project may be classified as B-sensitive if it involves environmentally sensitive activities. Such projects require IEEs, but have the same requirements for disclosure and Environmental Management Plans as Category A.

Category C: Projects that are unlikely to have adverse environmental impacts. No EIA or IEE is required, although environmental implications are reviewed.

Category FI: Projects that involve investments of ADB funds to or through FI financial intermediaries).

430. The project comprises water supply and wastewater infrastructure improvements. An initial Rapid Environmental Assessments (REAs) was undertaken and the project classified by ADB as environmental assessment Category B. Studies were conducted according to ADB‟s Safeguard Policy Statement 2009 and GON‟s Environmental Protection Rules (1997) (amendment August 2007). The impacts of providing the proposed infrastructure were assessed and the Initial Environmental Examination (IEE) Report with Environmental Monitoring Plan (EMP) produced. The IEE report is in Appendix 9.



10.3 Government of Nepal Environmental Safeguards 431. Nepal Government (according to EPR 1997) requires that all water supply projects supplying drinking water to a population of more than 100,000, and the connection of new sources; and waste management activities to be undertaken with the objective of providing services to a population of more than 10,000 require an EIA..

432. The proposed project (Kathmandu Valley Water Supply and Wastewater System Improvement) is de-facto a part of the Melamchi Water Supply Project (MWSP). It includes sections of the Bulk Distribution System (BDS), Distribution Network Improvement (DNI) and wastewater system improvement (WSI) works included in the original MWSP. The MWSP was subjected to an EIA in 2000 and was approved by the then Ministry of Environment and Population, Government of Nepal and ADB. The proposed investments do not include any new infrastructure that requires a separate environmental examination. The environmental assessment, mitigation prescriptions and monitoring plan given in the EIA Report of 2000 are still valid. It is therefore not necessary to undertake a new EIA for this project.

10.4 Environmental Background to the Project 433. The Kathmandu Valley Water Supply and Wastewater System Improvement is a Project to improve water supply and wastewater infrastructure, which are urgently required. The Kathmandu Valley is currently suffering from chronic water shortages and inefficient service delivery and lacking a properly functioning sewerage system. This Project has been designed to raise the quality of the infrastructure and services of selected areas of the Kathmandu Valley, thereby increasing the Quality of Life of the people.

434. Kathmandu Valley has gone through a phase of rapid and unplanned urbanization and industrialization without adequate infra-structural development. To improve the present conditions of water supply and wastewater services in Kathmandu Valley, GON, with the assistance of ADB, has embarked on a two-pronged improvement strategy that includes capital investments for infrastructure development (i.e. supply augmentation and system improvement) and institutional reforms.

435. The Kathmandu Valley is the most densely populated region in Nepal where the population has been increasing rapidly. This is mostly in the Kathmandu Metropolitan area, which is the centre of administration, commercial, social and economic activities. During the last three decades, the rapid population growth has mostly been due to in-migration. The in-migration is largely due to better employment and business opportunities, better educational and medical facilities, but also countrywide insurgency and security concerns of recent years.

436. The rapid un-planned urbanization of the Kathmandu Valley has brought negative impacts to its overall development. Water became scarce as demand exceeded supply. Lack of operational wastewater system facilities converted the holy Bagmati River into a highly polluted watercourse. Congested and crowded roads brought hardship to travellers and road junctions became garbage dumping sites. Despite these negative impacts, the urbanization of the Valley continued at a similar rate for the past 10 years. According to urban planners, from urban basic service management and disaster relief management aspects, the Kathmandu Valley only has a carrying capacity of about 5 million people.

437. The improved water supply system proposed under the project in 2016 will serve an estimated population of nearly 720,000 (470,000 directly and 250,000 indirectly) in an area of nearly 1,800 ha with a minimum supply of 2 hrs per day.



438. The project will improve and expand the sewerage network and rehabilitate and upgrade the existing wastewater treatment plants. Domestic septic tank sludge (septage) will be removed and treated at the upgraded wastewater treatment plants.

439. Detailed design will begin in January 2011 with construction scheduled to commence in February 2012 to be completed in 5 years by end 2016.

10.5 Environmental Impacts and Mitigation 440. The environmental impacts due to the laying of pipes for the distribution of drinking water and the sewerage system are similar. Environmental impacts on the physical, biological, and socio-economic and cultural environments during the pre-construction, construction and operation and maintenance phases have been considered in detail with the mitigating measures.

441. Potential environmental measures that shall be taken by KUKL/PID before the project commences are:

Training and awareness programs in health and sanitation, occupational health and safety measures (OHS), community health and safety and usage of water and its importance (water cost, savings, reuse, recycle, water pollution etc.) to the general public; and

Technical training of supervision staff on plumbing, chlorination, water testing, pump maintenance and repair, treatment plant operation and electrical works for water supply and sewerage projects.

442. The ADB safeguard policy statement (SPS), covering both environmental and social safeguards, requires stakeholder consultations. In addition, Rule 7 of EPR 1997 (Nepal) states: “Provided that, whilst preparing the report of EIA, the proponent shall organize a public hearing about the proposal at the area of VDC or Municipality where the proposal is to be implemented and collect opinions and suggestions”. During the project feasibility study several meetings, workshops, and focus group discussions were held with stakeholders, mainly technical persons, and to obtain opinions and guidance for the project design. The details of the consultations are given in a Supplementary Report: TA Consultations.

443. A Safeguard Unit within the Project Implementation Directorate (PID) should be established and be headed by a Senior Environmental Engineer with adequate support staff. When the project reports are approved, the PID will make copies, including the IEE, available in the Nepali language.

444. The Grievance Redress Mechanism as proposed in the Resettlement Plan is also relevant for environmental issues. The Safeguard Unit of PID will be responsible to address the issues and problems raised by the local communities regarding the loss of assets, water and sanitation etc. during the implementation of the project. The PID Safeguard Unit shall ask the Resettlement / Social Development and Environment Specialist of the Design and Supervision Consultant (DSC) to assist in the handling grievances. In addition, community level stakeholders should be encouraged to help in the handling of grievances at the project sites.

445. EMP Consultants as proposed in the Environmental Management Plan of the Kathmandu Valley Water Supply and Sanitation (Subproject-2) by PMU/KUKL (April 2009) to assist KVWSMB/KUKL for effectively carrying out the Environmental Management Plan during the construction of the Project would not be necessary. It is suggested that the Loan



1820-NEP Subproject-2 Design and Supervision Consultant (DSC) employ a full time environmental engineer/specialist to carry out the EMP.

446. Anticipated environmental impacts and mitigation measures have been proposed with a detailed self-explanatory environmental monitoring program. The program lists the environmental impact, its mitigating measures; the parameters to be monitored (including location, measurement and frequency) and the cost. The program will evaluate: (i) the extent and severity of the adverse environmental impacts as compared to what was predicted, (ii) how effective the mitigating measures were and compliance with the regulations and the (iii) overall effectiveness of the EMP.

447. Details of construction mitigation measures will be included in the tender and contract documents. Cost for construction environmental mitigation measures will be borne by the contractor.

448. KUKL/PID/DSC will develop detailed plans for implementing mitigation measures and monitoring plans. These plans will be incorporated into the project contracts. During project implementation, the budgets will be adjusted, based on actual requirements. Before operation, KUKL/PID will develop detailed work plans for environmental management and monitoring during operation based on the EMP. These work plans will be submitted to the concerned persons to help them supervise implementation.

449. A domestic Community Awareness and Participation Consultant (CAPC) firm will be hired to facilitate community awareness and participation programs on an intermittent basis (60 person months) for 5 years. The costs for the public awareness specialist, support team, and IEC (Information, Education and Communication) materials have been estimated as $150,000.

450. All the costs related to cutting of trees, their transportation to an approved location and works related to environmental mitigation shall be borne by the project itself. It is mandatory to plant 5 saplings for every tree cut and maintain them for 5 years. The estimated cost for cutting and nurturing of 10 identified trees for 5 years is $6,000.

451. The EMP will be implemented over a period of 5 years. Most of the activities have been scheduled on a continuous basis.

452. The KUKL training requirements and costs for the operation phase staff trainings will be determined by the CBP Team (Capacity Building and Private Public Partnership Support Team). Training costs will be borne by the operator, KUKL.

453. Overall, the impacts of the Project will be very positive, befitting the environment and the people. Some negative impacts during implementation are anticipated but in specific areas and for short duration (dust, noise, traffic problems, access to buildings etc.). It is expected that the adverse environmental impacts of the planned water supply and wastewater system for the Kathmandu Valley will in general not be significant. Most impacts can be easily mitigated or prevented through appropriate actions with regular monitoring during the design, construction and operation phases.

454. If the Project is properly implemented and environmental issues are duly considered, there will be a significant improvement in the health of the environment and people due to the water supply and wastewater improvements due to the proposed Project and thereby an increase of the quality of life. The quality of the river waters in the Valley will also improve, when the wastewater is treated.



11. Project Risks, Assumptions and Advance Actions 455. Every project has its risks, and these can be much greater and numerous with projects involving cities with crowded, congested narrow roads with a multitude of stakeholders and responsible authorities. However, early acknowledgement of the potential risks will help in mitigating or even eliminating the problems that they may cause during project planning, implementation and beyond. The potential risks come in a number of different categories and are classified below for better appreciation. It is assumed that the risks identified below, and any others identified during the course of the project implementation, will be recognised well in advance and appropriate actions taken to mitigate these risks.

11.1 Institutional and Governance Risks 456. Table 11-1 shows the risks and mitigation measures associated with institutional issues.

Table 11-1: Institutional and Governance Risks

Risk Mitigation GoN and KUKL fail to ensure that PID is adequately staffed and capable of undertaking duties prior to and during project implementation

Monitor progress regularly and take steps early to remove/modify barriers

Project management does not remain constant, for at least the first 3 years, to maintain effective management during project implementation


Weaknesses in procurement controls threaten transparency or effectiveness. Procurement processes cause delays in project implementation.

Avoid multiple level committees for contract award approvals. PID to closely follow ADB procedures and agreed timetable for evaluation and award of tenders.

Untimely recruitment and/or unsatisfactory performance of Design and Supervision consultants causes delays


Project ownership suffers an absence of effective consultation with stakeholders and commitment of other government agencies

Monitor progress regularly and take steps early to remove/modify barriers. Ensure regular bulletins on project progress.

Public awareness and community participation programs ineffective in obtaining the support of the public for charging for improved water sector services

Proper processes followed using appropriate communication and participation programs. Monitor progress regularly and take steps early to remove/modify barriers

Implementing agencies not amenable to capacity building


Poorly defined or duplicated agency roles / responsibilities, and accountabilities in the wastewater sector create inefficiencies and un-coordinated planning.

Institutional roles to be adjusted as per Appendix Q of Conceptual Wastewater Master Plan

Due to corruption, project materials and equipment are used for private use or funds intended for social safeguards are diverted for other uses.

Ensure clear accounting and transparency in financial matters. Provide regular public bulletins on project expenditures.

Interference by politicians and government officials in project implementation.

Engage with politicians and government officials to maintain support for anti-corruption agenda.



11.2 Policy Risks 457. Table 11-2 shows the risks and mitigation measures associated with policy.

Table 11-2: Policy Risks

Risk Mitigation MPPW does not continue to provide adequate guidance and capacity building to support the independent decision making and financial independence of the water sector service provider


Transfer of water supply and sewerage assets to water sector service provider not matched by re-structuring and adequate staffing

CBP - Loan 2059-NEP

Lack of political acceptance of changes in tariffs, taxes, and rates required to meet financial demand for sustainable operations and maintenance of assets.

Financial plan in place to assist decision making in advance. Advance political dialogue and media publicity of reasons for increasing tariffs.

11.3 Physical Component Risks 458. Table 11-3 shows the risks and mitigation measures associated with physical components.

Table 11-3: Physical Component Risks

Risk Mitigation Other utility construction or maintenance contracts conflict with the project works

Utility management coordination to be established and followed

Contractors do not perform competently, to time and budget

DSC to ensure satisfactory and performance and timing

Contractors try to cut costs by not following the requirements of the technical specifications.

DSC to ensure proper standard of work. Involve the local community in contractor surveillance and checking.

Operating agencies may not have the resources (equipment or financial) or skills to manage the operation of the new facilities (e.g. WWTPs and sewers/interceptors) in an environmentally-sound or sustainable way.

Asset management plans to be included in CBP/Loan 2059-NEP Staff capacity building to be addressed in CBP/loan 2059-NEP Financial plans to include allowance for operational costs

Power supply not regular and reliable for operating water supply and wastewater pumps and treatment plants

Capital plans to include stand-by generators Financial plans include allowance for operational costs Electricity generation potential from sludge digestion to be examined by Loan 1820 DSC



11.4 Social Risks 459. Table 11-4 shows the risks and mitigation measures associated with social issues.

Table 11-4: Social Risks

Risk Mitigation Affected person (AP) compensation not agreed and completed before scheduled construction


Inadequate/inappropriate provision for compensation allocated for temporary relocation of street vendor and hawkers during civil works construction

Budget allowance for compensation Policies followed meticulously Monitor progress regularly and take steps early to remove/modify barriers

Inadequate technical support system to help water sector provider in implementing any resettlement and rehabilitation activities

Monitor progress regularly and take steps early through grievance cell to remove / modify barriers

Poor communities unwilling and/or unable to participate in water management and project planning activities

Monitor progress regularly and take steps early through DSC to remove/modify barriers

Investment provided by the Project not integrated with other programs to target the urban poor more effectively and for maximum benefit

PID / MPPW to monitor progress regularly and take steps early to remove/modify barriers

Improved services does not benefit the urban poor and vulnerable groups

Issues specifically addressing urban poor and vulnerable groups included in the physical design, and financial cost recovery is affordable Urban poor and vulnerable groups are included in decision making

Inadequate funding for social needs Budget has adequate social funding. Project funds must not be diverted from the social programs to pay for loan charges

11.5 Environmental Risks 460. Table 11-5 shows the risks and mitigation measures associated with environmental issues.

Table 11-5: Environmental Risks

Risk Mitigation Environmental forest and heritage clearances not completed before scheduled construction

PID / DSC to ensure compliance and timing is acceptable

Increase in population and water supply provision with the completion of Melamchi Water Supply Project results in greater polluting load on the valley watercourses and potential public health risks

Adequate wastewater treatment is provided and properly maintained by implementation of wastewater sector improvements.

Failure to implement the Melamchi Water Supply Project result is further over-extraction of ground water within the valley

Monitor progress regularly and take steps early to remove/modify barriers in relation to the Melamchi Water Supply Project

Climate change (e.g. reduced rainfall and snow fall) reduces available water resources.

Monitor water supply and assess if additional water sources can be developed.



11.6 Financial Risks 461. Table 11-6 shows the risks and mitigation measures associated with financial issues.

Table 11-6: Financial Risks

Risk Mitigation Financial improvement plans (e.g. enhanced service tariffs) not implemented to scale or schedule as necessary for sustained operation and maintenance

Financial plan in place to assist decision making in advance

Willingness of beneficiaries to pay for proper management, maintenance and operation of infrastructure facilities

Proposed tariff structures are supported by willingness to pay studies and customer focused management approaches

Tariffs for services not set at appropriate levels or collected efficiently

Financial plan in place to assist decision making in advance CBP/Loan 2059-NEP address bill collection services

Untimely provision of counterpart funds causes delay in implementation. Time and cost overruns in project components due to billing approvals and disbursement delays.


KUKL may default on sub-loan from KVWSMB repayments

The Government will bear the credit risk of the on-lending from KVWSMB to KUKL.

Delays in project implementation due to strikes, closures and other politically driven external factors.

Maintain close dialogue with political parties and community groups at work site localities to reduce disruption to project progress.

11.7 Economic Risks 462. Table 11-7 shows the risks and mitigation measures associated with economic issues.

Table 11-7: Economic Risks

Risk Mitigation Overrun of project construction costs due to delays Monitor progress regularly and take steps

early to remove/modify barriers DSC in place and performing

Indirect economic costs are significant, e.g. negative environmental impacts on agricultural production, net loss of income due to shutdown of street vendors

Sound economic modeling

Under-achievement of project outputs, i.e. population coverage of improved services is below target or infrastructure improvements not as effective as planned

Monitor project progress regularly and take steps early to remove/modify barriers. Sound engineering design

Effective demand for the services provided by the improved infrastructure is less than projected due to lack of consumer affordability or willingness to accept change

Proposed tariff structures are supported by willingness to pay studies See above under Financial Risks

Infrastructure and equipment operation and maintenance are not funded and/or carried out at levels insufficient to sustain project benefits

Financial plans include allowance for operational costs.



11.8 Advance Actions 463. The following advance actions and conditions that are required to be fulfilled by the Government prior to loan processing.

i. PID to be fully functional with a Social and Environmental Safeguards Unit. ii. KVWSMB will have completed legal takeover of acquired land from MWSDB and

implemented the resettlement management plan, including completion of outstanding compensation payment to the affected persons and security of acquired land free of encroachment.

iii. Government will have secured lands for construction of future wastewater treatment plants as identified in the Conceptual Wastewater Master Plan;

iv. Government will have provided written confirmation that all components of the proposed project are part of the scope of the Melamchi Water Supply Project environmental impact assessment (EIA) approved in 2000, and as consequence, a new EIA is not required for the project.

v. Clearance from Shivapuri Nagarjun National Park authorities to install water supply feeder and trunk distribution pipes to/from Balaju service reservoir through protected forestland along existing tracks and pipeline corridors.

vi. Clearance from the Department of Archaeology for improving water supply and wastewater infrastructure in UNESCO registered sites such as the Durbar Square Cultural Heritage Zones of Kathmandu and Patan.

vii. Government will provide clarification of the institutional framework for wastewater investment and operation in the Kathmandu Valley.

viii. Assurance that KUKL with assistance from the Capacity Building and Partnership Consultants (CBP) to be engaged under Loan 2059-NEP will have completed an Asset Management Program before July 2011.

ix. Assurance that Loan 1820-NEP MWSP Subprojects 1 and 2 are on-schedule to be completed and operational before mid-2014.

x. Endorsement of the Project‟s resettlement entitlement matrix. xi. Clarification on responsibility for permanent road reinstatement following

completion of pipeline civil works.

Documents

Technical Assistance Consultant’s Report · The guidance provided by the, Mr. Krishna Prasad Acharya TA Coordinator, Joint Secretary, Ministry Physical Planning and Works was essential