Document of

The World Bank

Report No: 19913-BHU

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED CREDIT

IN THE AMOUNT OF SDR 7.9 MILLION

(US$10.8 MILLION EQUIVALENT)

TO THE

KINGDOM OF BHUTAN

FORA

BHUTAN - URBAN DEVELOPMENT PROJECT

November 23, 1999

South Asia Regional Office

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CUR-RENCY EQUIVALENTS

(Exchange Rate Effective )

Currency Unit = NgultrumNu 1= US$ 0.023

US$ 1 = Nu 43.57

FISCAL YEARJuly 1 June 30

ABBREVIATIONS AND ACRONYMS

CAS Country Assistance StrategyDYT Dzongkhag Yargye TshogchungECOP Environmental Code of PracticeEMP Environmental Management PlanFMIS Financial Management Information SystemFC Financial ConsultantFYP Five Year PlanGEF Global Environment FundGYT Gewog Yargye TshogchungMOC Ministry of CommunicationMOF Ministry of FinanceNBACD National Budget and Aid Coordination DivisionNEC National Environment CommissionNFS National Finance ServicesNTTA National Technical Training AuthorityOD Operational DirectiveO&M Operation and maintenancePC Project CellPMR Project Management ReportsRAA Royal Audit AuthorityRCSC Royal Civil Service CommissionRGoB Royal Government of BhutanR&R Resettlement and RehabilitationSA Social AssessmentSEA Sector Environment AssessmentSEP Second Education ProjectSFO Senior Finance OfficerUDHD Urban Development and Housing Division

Vice President: Mieko NishimizuCountry ManageriDirector: John W. Wall

Sector Manager/Director: Frannie A. LeautierTask Team Leader/Task M\anager: Evangeline Kim Cuenco

BHUTANUrban Development Project

CONTENTS

A. Project Development Objective Page

1. Project development objective 22. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 22. Main sector issues and Government strategy 33. Sector issues to be addressed by the project and strategic choices 3

C. Project Description Summary

1. Project components 42. Key policy and institutional reforms supported by the project 53. Benefits and target population 54. Institutional and implementation arrangements 5

D. Project Rationale

1. Project alternatives considered and reasons for rejection 62. Major related projects financed by the Bank and other development agencies 73. Lessons learned and reflected in proposed project design 84. Indications of borrower commitment and ownership 85. Value added of Bank support in this project 9

E. Summary Project Analyses

1. Economic 92. Financial 93. Technical 104. Institutional 105. Social 116. Environmental assessment 127. Participatory approach 12

F. Sustainability and Risks

1. Sustainability 132. Critical risks 133. Possible controversial aspects 14

G. Main Loan conditions

1. Effectiveness conditions 142. Other 14

H. Readiness for Implementation 14

I. Compliance with Bank Policies 14

Annexes

Annex 1: Project Design Summary 15Annex 2: Detailed Project Description 18Annex 3: Estimated Project Costs 22Annex 4: Cost Benefit Analysis Sumrnary, or Cost-Effectiveness Analysis Summary 23Annex 5: Financial Summary 26Annex 6: Procurement and Disbursement Arrangements 30Annex 7: Project Processing Schedule, 39Annex 8: Documents in Project File 40Annex 9: Statement of Loans and Credits 41Annex 10: Country at a Glance 43

MAP(S)IBRD 28474

BHUTAN

Bhutan - Urban Development Project

Project Appraisal Document

South Asia Regional OfficeSASIN

Date: November 3, 1999 Team Leader: Evangeline Kim CuencoCountry Manager/Director: John W. Wall Sector Manager/Director: Frannie A. LeautierProject ID: P057570 Sector(s): UY - Other Urban DevelopmentLending Instrument: Specific Investment Loan (SIL) Theme(s): URBAN

Poverty Targeted Intervention: N

Project Financing DataO Loan 1 Credit El Grant E Guarantee El Other (Specify)

For Loans/CreditslOthers:Amount (US$m) 10.8

Proposed Terms: El To be defined 1 Multicurrency C] Single currencyL Standard Variable 1 Fixed O LIBOR-based

Grace period (years): 10 Years to maturity: 40Commitment fee: 0.5

Govermnent 0.84 0.59 1.43IBRDIDA 1.82 8.98 10.80

Total: 2.66 9.57 12.23

Borrower: ROYAL GOVERNMENT OF BHUTANResponsible agency:MINISTRY OF COMMUNICATIONSOther Agency(ies):Urban Development and Housing Division, Ministry of CommunicationsAddress: Thimphu, BhutanContact Person: Tshering Dorji, Joint Secretary, UDHDTel: 975-23-23416 Fax: 975-23-23441 Email: dorjit@druknet.net.bt

Estimated disbursements (Bank FY/US$M):=2 a

Annual 0.1 2.4 3.3 3.0 1.7 0.3Cumulative 0.1 2.5 5.8 8.8 10.5 10.8

Project implementation period: 5 yearsExpected effectiveness date: 01/31/2000 Expected closing date: 12/31/2005

OCS PAD F-,, Otb.S.9 j

A: Project Development Objective

1. Project development objective: (see Annex 1)

The objective of the Project is to improve the quality of life through enhancement of the level andcoverage of basic urban services in selected secondary towns of Bhutan, and, to that end: (a) to strengthenthe financial and institutional capacity of the responsible authorities to deliver such services; and (b) tofinance high priority investments in suc]h services for which there is broad public support. This objectivereflects the Royal Government of Bhutan's (RGoB) policy of balanced regional development anddecentralization, and its dedication to environmentally sustainable development.

2. Key performance indicators: (see Annex 1)

The ID component will strengthen the capacity of the Urban Development and Housing Division(UDHD) of the Ministry of CommunicaLtions, and the project towns (dzongkhag towns) in: (a) urbanplanning, land use management and malpping; (b) planning and implementation of urban developmentinvestments, focusing on adequate operation and maintenance (O&M); and (c) project management andmonitoring within the UDHD and project towns. Success will be measured in terms of: (a) thedevelopment of well planned and livable district centers, designed with respect for the local culturalcontext; (b) improved O&M of urban development investments, supported by adequately trained staff andequipment; and (c) improvement in the lprocurement and financial management capacity of the UDHD andproject towns.

The Urban Development component will increase access by a larger number of inhabitants to safeand reliable water supply and sanitation. Performance indicators will include: for water supply, percent ofhouseholds with access to safe piped water supply; for solid waste management, percent of waste collectedand disposed appropriately; for sanitation, number of rehabilitated/new community latrines); and for accessroads and stormwater drains (length of access roads and drains built and maintained). Specific indicatorsfor each sub-component are provided in Annex 1.

B: Strategic Context1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: P6016-BHU Date of latest CAS discussion: 07/06/93

The last CAS was prepared in FY94. A CAS Progress Report will be presented alongside thisCredit, reflecting developments in Bhutan and its relationship with the World Bank. This project supportsthe Government objective, reflected in the CAS Progress Report, of carefully planned growth of secondarytowns, with special attention to hygiene and amenity values. It also supports the objective of encouragingbeneficiary and community ownership through decentralization, community participation in urban planningand development, and the selective use of user fees to provide partial cost-recovery.

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2. Main sector issues and Government strategy:

Bhutan's development has been rapid and broadly shared. Up until the 1950s Bhutan was isolatedfrom the rest of the world, and its dispersed rural population was entirely dependent upon subsistenceagriculture. Once it opened up to the outside world in the 1 960s, Bhutan embarked upon a far reachingdevelopment strategy that has been articulated in successive five-year plans, the latest being the Eighth Plancovering the period 1997-2002. On the basis of the development strategy articulated in these five-yearplans, Bhutan has developed a physical infrastructure of roads, power supply, telecommunications, andwater supply that now serves a growing share of the population. At the same time the Government hasdeveloped a social infrastructure of education and health services which have, despite the difficult terrainand scattered population, greatly improved access to education and health services. The Government'sstrategy in every sector is guided by its Vision Statement "Bhutan 2020: A Vision for Peace, Prosperityand Happiness" which seeks a "cautious interpretation of modernization". The Vision Statement putshuman happiness, not economic growth, at the center of the nation's vision and values, and calibrates theambitions of development policy to Bhutan's ability to absorb change without creating alienation andexcessive inequality:

"Our guiding principles for the future development of our nation and for the safeguardingof our sovereignty and security as a nation-state must be complemented by a singleunifying concept of development,...the distinctively Bhutanese concept of Gross NationalHappiness.. .The concept places the individual at the center of all development efforts andit recognizes that the individual has material, spiritual and emotional needs. It asserts thatdevelopment cannot and should not be defined exclusively in material terms. ... Theconcept of Gross National Happiness must be translated into objectives that are able togive direction to the Kingdom's long-term development.. .These objectives are: humandevelopment; culture and heritage; balanced and equitable development; governance; andenvironmental conservation."

The goals of balanced and equitable development are reflected in the urban developmentstrategy, which aims to ensure viable and sustainable urban growth outside the nowrapidly growing commercial centers of Thimphu and Phuntsholing. The Government aimsto ensure that the secondary towns grow in a well-planned manner into livable districtcenters.

3. Sector issues to be addressed by the project and strategic choices:

Through a program of institutional development and support for high priority investments insecondary towns, the project addresses the following sector issues:

* Urgent need for basic services through the implementation of the physical investment program inthe project;

* Weak local government institutions through the provision of technical assistance to improve theinstitutional and financial management capacity of participating municipalities;

* Neglect of operations and maintenance (O&M) aspects of infrastructure services by focusing onrehabilitation, and provision of technical assistance towards maintenance activities; and

* Improved sustainability to service provision through the involvement of the community and otherstakeholders in the planning, implementation, and O&M of these services.

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C: Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

The project covers ten district towns, namely: Wangdue Phodrang, Trongsa, Zhemgang, Tingtibi,Bumthang, Lhuentse, Trashi Yangtse, Duksum, Rangjung and Paro. Of the ten towns, the higher prioritytowns are: Paro, Trongsa, Zhemgang, Lhuentse, Trashi Yangtse, Rangjung, Wangdue Phodrang andBumthang. Although Tingtibi and Duksum have remained in the list of towns, they have been accordedlesser priority due to either the slow pace of development (Tingtibi) or the very small urban population(Duksum).

The project has two major components: (a) institutional development and (b) urban development.

Institutional Development (ID): The ID component will strengthen the capacity of the UDHD, and theproject towns in: (a) urban planning, landl use management and mapping; (b) planning and implementationof urban development investments, focusing on adequate O&M; and (c) project management andmonitoring within the UDHD and project towns. Under the ID component, support will also be provided tothe National Environmental Commission (NEC) for the development of environmental guidelines for theurban sector; and UDHD, for environmental codes of practice (ECOP) for solid waste management.

Urban Development (UD): The second component of the project will consist of the following:

Water Supply and Chlorinatioin Equipment: Water supply investments are confined mainly tothe rehabilitation and augmentation of existing systems and construction of some new schemes.

Solid Waste Collection: All project towns will benefit from the solid waste management programunder project. The program also includes public information campaign and comprehensive programs oftraining for waste management personnel (refer to ID Component, section (a) above)

Sanitation: The program includes construction and rehabilitation of public toilet blocks, andregular emptying of septic tanks. There will be no sewerage installations since all the towns are very small,and many of the developments are yet to be started.

Urban Infrastructure: This will consist of drains, urban roads, and civic facilities.

Institutional Development Institutional 1.60 13.1 1.60 14.8Development

Urban Development Other Urban 10.63 86.9 9.20 85.2Development

Total Project Costs 12.23 100.0 10.80 100.0Total Financing Required 12.23 100.0 10.80 100.0

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2. Key policy and institutional reforms supported by the project:

The RGoB has committed itself to the goals of decentralization, and balanced and equitabledevelopment. An important step in this direction has been the introduction of local government autonomy atthe city level, initially applying only to the Thimphu City Corporation (TCC), and to a lesser extent, to thePhuntsholing City Corporation (PCC). The National Assembly recently approved the Bhutan MunicipalAct which provides a further degree of autonomy, which is planned to be extended to PCC. The Act alsoprovides for the establishment of autonomous corporations in other towns over time. By supportingdevelopment in secondary towns, the project reflects the government's commitment to decentralization andbalanced regional development.

3. Benefits and target population:

Direct Benefits: The main expected benefits of the project are two-fold: improved institutionalcapacity; and improved levels of service to urban populations in participating towns. Improvedinstitutional capacity would be achieved by the development of project management capacity at theUDHD/MOC and improved O&M capacity at the district level. Improved service delivery would beachieved through more efficient delivery of urban services, improved coverage and enhancement ofsustainable development. The project would also assist NEC in developing environmental guidelines for theurban sector, and UDHD, for ECOP in solid waste management.

Economy-wide benefits: These would include : (a) enhanced resource generation, with aconsequent reduced dependency on government transfers through the introduction of user fees withmetering; (b) contributing to improved financial, managerial and institutional capacity and enhancedperformance by municipalities; and (c) incrementally improved environment, health and productivity inurban populations with consequent savings in health care costs. These benefits would result in increasedtax and revenue collection and savings; and demonstrated management practices and institutionalprocesses, which can contribute to overall improvements in governance.

Beneficiaries: The principal direct beneficiaries of the project are: (a) the residents of theparticipating towns who would receive improved infrastructure services; (b) staff at both the UDHD/MOCand district level; and (c) NEC.

4. Institutional and implementation arrangements:

The implementation agency will be the UDHD at the MOC. The linkage between the staff of theUDHD and Dzongkhag will be strengthened during project implementation. Execution of civil works willbe through private contractors according to IDA procurement guidelines.

A Project Cell (PC) under a Project Manager within the UDHD will coordinate urban planning anddevelopment, engineering design and contractor procurement activities, establish the monitoring andevaluation system for the project, supervise the studies, coordinate inter-Dzongkhag coordination activities,and liaise with NEC on the development of the urban environmental guidelines and codes of practice.TheProject Manager will be assisted by deputy project manager, a Chief Technical Expert (CTE), a SeniorFinance Officer and Project Accountant, a Financial Consultant to introduce the financial reporting systemconsistent with IDA requirements, and a Procurement Specialist. In addition, there will be a full-time siteconstruction supervisor in each of the project town. The operation and maintenance unit in the Dzongkhagadministration will be concurrently strengthened to assume greater responsibilities for urban works

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implementation and O&M. The proposed project will support these efforts. Development andimplementation of the institutional development and training component of the project would be closelycoordinated with the Royal Civil Service Commission (RCSC) and the National Technical TrainingAuthority (NTTA).

Financial Management Arrangement: (See Annex SA for details)

The RGoB would pass on the budgeted funds for capital expenditure to the UDHD through theLetter of Credit (LC) system in accordance with the normal formula in which assistance is passed on tovarious ministries and dzongkhags. The PC would route the requisitions for funds through the UDHD inThimphu. Initially, the project will follo w traditional disbursement method and will switch to PMR-baseddisbursement over a period of time. It has been agreed with MOC and Ministry of Finance (MOF)that PMR-based disbursements will be 42dopted not later than July 1, 2001. Books of accounts for theproject would be maintained as per RGoB rules prescribed in the Financial Manual, 1988. A separatecash book and general ledger will be maintained by each project town for project related transactions.From the commencement of the Project, simplified PMR's would be generated from the project accountsand submitted to IDA within 45 days of the end of each quarter for IDA's review. As and when theproject graduates to PMR-based disbursements, the PC would arrange to submit all the PMR's (as performat agreed during the negotiation) and the disbursements will be based on these quarterly PMR's. TheAccounts of the Project will be audited every year by the Royal Audit Authority (RAA) as per RGoBrules. However, the RAA will have the ciption to contract out annual audit to private sector auditors (whoshould be qualified chartered accountants acceptable to IDA). The annual project financial statementsaudited by the RAA/private sector auditors would be submifted to IDA within 6 months of the closeof RGoB 's fiscal year. MOF and MOC would ensure that a Financial Consultant (a professionalaccountant with knowledge of computerized accounting) is recruited by March 31, 2000 to overseeprojectfinancial management. MOF will ensure that the implementing units would have sufficientnumber of finance staff to carry out various routine activities. After reviewing the available products inthe market, MOF and MOC would adoplt a computerized Project Accounting and ManagementSystem software most suited to Bhutan 's needs by June 30, 2000.

D: Project Rationale

1. Project alternatives considered and reasons for rejection:

Several alternatives were considered for the project design. The first would be to invest in Thimphuand Phuntsholing which are experiencing the fastest rate of urbanization. This was rejected given theexisting concentration of development assistance in these two cities, and the clear need to broadenassistance to other district centers to support the Government's policy of more balanced regionaldevelopment.

The second alternative was for a technical assistance project. This would consist of establishingfull institutional and legal framework, including land management, municipal finance, and humansettlements policy; training, in-service and external; and introduction and strengthening of degree programsin existing training institutions. The project could be prepared rapidly and would have the benefit ofreducing manpower shortages in subsequent investments. This was rejected because DANIDA, ADB andUNDP are already providing assistance in these areas.

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The third alternative would be assistance in a specific sector (e.g., water supply) only. Activitieswould include investments in one sector or sub-sector in several district towns and strengthening ofregulatory frameworks, tariff structures and results assessment at the central level. This alternative wasrejected because a sectoral focus does not address broader urban development issues.

The fourth and last alternative would be to strengthen the management of development in selecteddistricts through investment programs directed by the communities. The components would includecreation of a fund for investments--with clear eligibility criteria for sub-projects--for which district canparticipate and compete for. This alternative was rejected because of weak local capacity to preparesub-projects.

Given the above, the strategic choice was made to design a project which combined both TA andinvestment in high priority areas in selected urban centers outside Thimphu and Phuntsholing.

2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).

Latest Supervision

Sector Issue Proiect (PSR) Ratings:______________________________ _____e____i___.____.___ (Banklvnanced projiecs only)

implementation DevelopmentBank-financed Progress (IP) Objective (DO)

This is the Bank's first urbandevelopment project in Bhutan.

Other development agenciesDANIDA Water Supply Consolidation

and Sewerage Project inThimphu and Phuntsholing(completed in March 1997)

DANIDA Urban Sector Program Support(started in January 1999)

ADB Urban InfrastructureImprovement Project: Thimphuand Phuntsholing (negotiated1999)

ADB Urban Centres Water Supplyand Sanitation Project(completed in 1992)

UNDP Urban Development andHousing Technology(completed in 1989)

UNDP Strengthening the SurveyDepartment

UNDP Urban Planning (completed in1989)

UNDP Human Resource Development

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UNDP Human Settlements SectorReview (Reports 1990, 1993and 1996)

UNDP Strengthening Capacity forUrban Management and HumanSettlements Sector Planning inThimphu and Phuntsholing(completed in February 1999)

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in the project design:

This would be the first World Bank-assisted urban development project in Bhutan. However, Bankexperience with project implementation has been excellent, on account of very strong governmentownership and commitment to effective project implementation, and good collaboration with co-financiers,notably the Swiss Development Corporation. The portfolio currently consists of two projects, the thirdForestry Credit, for which implementation remains satisfactory, and the Second Education Project. Therecently closed First Education Project and GEF Environment Trust Fund were also fully satisfactory,although the education project had to be extended by 18 months because of delays in school constructionduring the project's first few years. Both projects met or surpassed their major benchmarks, with theexception of teacher training candidates on account of a shortage of applicants up to 1994. TheEnvironment Trust Fund even met its conservation benchmarks in three years rather than the anticipatedfive.

There are also lessons to be learned from urban projects in countries experiencing a similar lowlevel of urbanization and weak institutional capacity. These are the need to: (a) keep the project simple interms of design, scope and institutional arrangements; (b) emphasize the importance of combining capacitybuilding and investments; and (c) set out modest goals which can be achieved within existing constraints.These have been considered in the design of the project.

The experience from the DANIDA water supply and sanitation project in Thimphu andPhuntsholing demonstrates the feasibility of cost recovery for O&M in water supply. These projectsintroduced meters, a good pricing structure, and most important, separate water accounts so that the littlesubsidy given is not hidden. This sets an important precedent for other urban centers.

4. Indications of borrower commitment and ownership:

The RGoB has identified urban development as a priority area in its long-term developmentstrategy. It is introducing changes in the legislative framework that would support urban planning andmanagement at the national and district levels. The Bhutan Municipal Act was recently passed and RGoBis developing a separate Urban Administration Act. A draft Urban Planning Act has been completed. Oncost recovery, metering has been introduced in Thimphu, Phuntsholing, Paro, Gelephu and SamdrupJongkar, setting an important precedent for other cities. The RGoB recognizes that water tariffs need tocover O&M and capital replacement and meet all debt servicing requirements satisfactorily. There is arecognition that tariffs in Thimphu and Phuntsholing need to be increased to provide sufficient revenues formedium and long-term sustainability. Metering has been introduced in these towns. For the project, RGoBwould like to install meters progressively in all houses and commercial buildings once the water supplydelivery has been demonstrated as satisfactory. Progress in this objective would be monitored in terms ofpercent of household metered and percent of O&M cost recovered over time.

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At the district level, district administrators of all ten project towns have indicated their full supportto introduce appropriate tariffs and charges for the proposed water supply, solid waste and sanitationimprovements. District administrators have assisted fully in the project preparation field surveys as well asin the formulation of urban development plans and investment programs.

RGoB and Dzongkhag administrations have also demonstrated their commitment by participatingin several workshops to launch and discuss the findings of the preparatory studies.

5. Value added of Bank support in this project:

IDA brings to bear a comprehensive view of sector development, a strategic focus, and the lessonsof experience in implementing sector wide projects throughout the world. IDA's role is crucial in achievingthe project objectives of strengthening the institutional structure at the district level thereby supporting theGovernment's decentralization policy and implementation of the newly passed Municipal Act, andaddressing the much needed urban services in district towns.

The Bank's involvement would also reinforce the efforts of bilateral and other multilateral agencies.This is particularly in relation to the importance of building institutional capacity at the district level, and toensuring medium- and long-term sustainability through a realistic cost-recovery policy. This projectrepresents a potential model which could be implemented at a later date in other urban centers in Bhutanfacing similar urban environmental problems and pressures, as experienced in the selected project towns.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (supported by Annex 4):

D Cost benefit NPV=US$ million; ERR = 20.7 %O Cost effectivenessO Other (specify)

The proposed project would support the RGoB's decentralization policy and improve urban serviceprovision in selected municipalities. The investments will result in substantial direct and indirect benefits,including improved urban environment, better health from cleaner water and better sanitation; reducedhousehold cost of fetching water; and higher tourism income through improved municipal conditions andservices.The quantifiable incremental economic benefits are: (a) time savings from not having to fetchwater; (b) health cost savings (drugs and hospital care); and (c) incremental tourism revenues.Willingness-to-pay estimates -- obtained from social surveys in each project town -- were undertaken for:(a) improved water services, (b) improved solid waste (garbage) services, and (c) improved sanitation. Theoverall EIRR is 20.7%. The FIRR for the water supply components is 11.2%, with individual water supplyscheme FIRRs varying from 0.3% (Duksum) to 19.6% (Paro). The major assumptions are: (a) project lifeof 20 years; (b) FIRRs are based on water user charges, but exclude land taxes, urban surcharges etc.; (c)the capital charge is 2.75% of total water supply capital cost, amortized over 15 years; (d) the O&M costsare 3% p.a. of all project costs, less the institutional support component. The after 20 years residual valueis 40% of all capital costs.

2. Financial (see Annex 5): NPV=US$ million; FRR= %

The total project cost is estimated at US$12.23 million equivalent to finance infrastructureinvestments and technical assistance for institutional development. The cost of the project is expected to befinanced from an IDA Credit of $10.8 million, with the remaining amount to be financed by RGoB.

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Fiscal Impact:

The overall burden on government finances as a result of the project would be small. As most ofthe funding would be made as a grant to municipalities, debt service impacts on municipalities would besmall. Implementation of the project would increase urban productvity, introduce fiscal discipline, improvepublic sector resource allocation and strengthen the capacity of local government to prepare, finance, andimplement a program of urban improvements. The net fiscal impact of these improvements is expected tosubstantially outweigh project investments.

Financial Management:

The National Budget and Aid Coordination Division (NBACD) of the Ministry of Finance, whichhandles the foreign currency special account is familiar with World Bank disbursement procedures sincethey have been satisfactorily managing several on-going projects in the country. Therefore, there would beno problem in commencing the project using the traditional mode of disbursements. During appraisal, thefinancial system of the UDHD in MOC was reviewed to identify the type of external support required bythe departmental accounting staff for the phased introduction of disbursements based on ProjectManagement Reports (PMRs). On the basis of the review, a suitable time frame has been agreed withUDHD and MOF to fill in the gaps identified in the proposed review to graduate to PMR-baseddisbursements in a phased manner. It has been agreed with MOC and MOF that PMR-baseddisbursements will be adopted not later than July 1, 2001. Annex 5 details the proposed financialmanagement arrangements and the plan of action, The project will provide a TA component to meet thecosts of consultant(s) salaries, accounting software, computers, training, etc., to build up UDHD's financialmanagement capacity.

3. Technical:

Special effort will also be taken to ensure that urban design considerations in the urbandevelopment plans give due attention to the unique cultural features of the built environment.

The design of the proposed civil works must be appropriate to the conditions in the individual tentowns and to the existing capacity for O&M which will be enhanced under the project. To suit the localsituation, the project will support simple systems which are easy to operate and maintain and require littlemechanical and electrical equipment and chemicals.

4. Institutional:

a. Executing agencies:The MOC is in charge of urban affairs. The UDHD in the MOC is responsible for urban development andmanagement as regards infrastructure provision and operation, planning aspects, and coordination withsector ministries as regards social and economic development. The Ministries of Finance and Home Affairsare other important ministries involved in urban development.

The local government structure comprises 20 districts (Dzongkhags) and 202 blocks (Gewog)being the lowest level of administration. The district administrations are headed by an appointed districtadministrator (Dzongdhag). The latter is assisted by a deputy district administrator and by sectoralrepresentatives of the central ministries. The larger districts are divided into subdivisions (Drungkhag)headed by a Dungpa. The Dzongdhag is also the head of the district town. The responsibilities of the

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Dzongkhag and DYT include the preparation of 5-year plans, annual plans, and execution of the same, andthe monitoring and review of programs in the Dzongkhag level. Within this framework, the proposedproject execution arrangements for the project will be the UIDHD under the MOC with district levelimplementation of works.

b. Project management:For the planning, coordination, monitoring, and supervision of all project components, UDHD hasdesignated the Executive Engineer as the Project Manager of the Project Cell/UDHD in Thimphu. He willcoordinate engineering design and contractor procurement activities, oversee project disbursement andaccounts, manage the development and implementation of training programs in coordination with existingtraining institutions, establish monitoring and evaluation system for the project, supervise studies, andcoordinate the inter-district activities. The Project Manager will be assisted by a full-time deputy projectmanager, a Chief Technical Expert, a Senior Finance Officer, project accountant, and Financial Consultantin introducing the financial reporting system consistent with IDA requirements, a procurement specialist,and construction site engineers in the project towns.

5. Social:

The proposed investments in basic infrastructure services will have direct and positive benefits onthe social and physical environment, in a sustainable manner for the ten urban centers of Bhutan. Theproposed high priority investments will provide improvements to the safe drinking water, sanitationfacilities, solid waste management and road and transport system. These improvements in basic urbanservices will translate into wider social and environmental benefits over the life of the project.

As part of the project preparation study, a social assessment (SA) was carried out to find out thepotential beneficiaries: (a) preferences and priorities for basic services; (b) willingness and affordability topay for the improved services; and, (c) undertake land requirement assessment to determine the likelyadverse impacts. Household surveys were carried out among the 600 families of domestic and commercialusers. In addition, consultations were held with the representatives of bulk users of the services such asschools, hospitals, monk bodies, army, hotel, police, etc. to assess the needs and priorities as well as theirwillingness and affordability to pay for the improved services. The SA indicated a positive response fromthe potential beneficiaries and other stakeholders towards the proposed project. The outcome of SArevealed that the: (a) first priority for urban environment upgrading was the provision of improvements towater services followed by solid waste disposal services; (b) generally high willingness to pay for privatewater supply connections, solid waste collection services, and improved sanitation system; and, (c) the needfor greater public health education, and awareness program for promoting cleanliness, personal hygiene andhealth conditions. The project has been designed to reflect the needs and views expressed by the potentialbeneficiaries as expressed in the social assessment.

Social Safeguard Policies

Keeping the Bank's social safeguard policies in view, a land requirement assessment was carriedout to assess the likely requirement of land for various proposed physical investments and its associatedadverse impacts. The assessment indicate that the total land required for all physical components is onlyabout 7.5 acres and most of the sites for the proposed activities have been identified within the governmentowned lands free from any encumbrances. Only a small portion of land will be acquired from 11 privateland owners who will loose only part of their total land holding. Thus the adverse social impacts are veryminimal. In order to compensate the losses suffered by the land owners and assist the adversely affectedpersons, RGOB had prepared a "Policy Framework for Land Acquisition and Resettlement" consistent withthe Bank's OD 4.30 on Involuntary Resettlement. The Policy Framework has been reviewed by the Bank

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and found to be satisfactory. The Framework has been adopted by the MOC. RGoB will undertake thebaseline socio-economic survey among the adversely affected families to record the baselinesocio-economic characteristics including the details of assets owned and lost to the project. Based on thesurvey results, an action plan will be prepared outlining the details of compensation payment and assistanceto be extended to affected families in accordance with the provisions outlined in the policy framework. Thepolicy framework ensures the payment of compensation and assistance to all adversely affected personsprior to the start of civil works. This will be ensured by a mechanism, wherein the concerned Dzongkhagand UDHD/MOC has to certify prior to the award of each contract package that "the payment ofcompensation and R&R assistance to all affected persons has been completed".

The Land requirement assessment did not reveal any risk of damage or destruction to any form ofcultural properties (Cultural Property - OPN 11.03). Further, the potential beneficiaries or affected personsof the proposed land acquisition are not a separate indigenous group in the sense that they do not have anyseparate social and cultural identity distinct from the dominant society (OD 4.30 On Indigenous Peoples).Therefore, it is concluded that preparation of separate Indigenous Peoples Development Plans (IPDPs) andseparate measures for protecting cultural properties may not be required.

6. Environmental assessment: Environment Category: B

The project would have an overall positive impact on the environment. It is placed in category B.

Bhutan is a country seriously committed to protecting and preserving its environment, and has anadequate legal and institutional framework for sound environmental management. The NEC has adequateand increasing capacity to manage and mnonitor, and the environmental assessment process -- which meetsIDA requirements -- has been approved and made effective by NEC in February 1999. The overallphilosophy of RGoB towards sustainable development and environment, is detailed by NEC in the"National Environmental Strategy, December 1998". In this strategy, the Government has stated in thestrongest possible terms that protecting the natural environment and ensuring that development activitiesundertaken in the Kingdom must be done: in a suitable and environmentally sensitive manner.

Currently, there are no guidelines for the urban sector and NEC is in the process of developingthese; the project will assist NEC in this endeavor. It will also assist the UDHD to formulateenvironmental codes of practices in solid waste management. These ECOPs will recognize that themajority of environmental impacts occur during the operation and maintenance stage. These ECOPs will beconsistent with the relevant rules/acts such as the recently approved municipal act, water and sanitationrules (the Municipal Corporation of Thirnphu is currently developing performance indicators), land use act,etc.

A Sector Environment Assessmernt (SEA), carried out during project preparation by the UTDHD withassistance from NEC, clearly indicates that the improvements in urban infrastructure have positive effectsin environmental conditions in the project towns, particularly as they relate to water supply and sanitation.The Environmental Management Plan (EMP) for all project activities, which forms part of the SEA,ensures that any minor negative impacts during implementation or operation will be adequately mitigated.Responsibilities and indicators for mitigation and monitoring are also set out in the EMP.

7. Participatory Approach (key stakeholders, how involved, and what they have influenced or mayinfluence; if participatory approach not used, describe why not applicable):

a. Primary beneficiaries and other affected groups:

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The proposed project reflects RGoB's thrust to involve communities in planning, implementationand management of all development projects. The Social and Environmental assessments served usefully toinform the communities about the project, identify investment priorities, and elicit their views onwillingness-to-pay for improved services.

F: Sustainability and Risks

1. Sustainability:

The project's sustainability relates to continued commitment to decentralization, use of appropriatetechnologies in the provision/rehabilitation of urban infrastructure, and enhanced institutional capacitydeveloped under the project. By focusing on O&M under the institutional development component, theproject will assist the project towns to execute planned maintenance in accordance with district plans and tobetter use limited resources. Appropriate technology and community participation promoted under theproject will help facilitate local participation by project beneficiaries in project implementation, promotecost recovery and proper O&M.

2. Critical Risks (reflecting assumptions in the fourth column of Annex 1):

Risk Risk Rating -Risk Mlnimization MeasureFrom Outputs to ObjectiveContinuing commitment from RGoB N Continuing dialogue with RGoB on(MOC, MOF and Ministry of Home policy issues relating to urbanAffairs) and District Administrations to developmentpolicy of balanced regional developmentAdequacy of trained personel at the M Designation of project manager andUDHD and district engineering cells agreement with RGoB to deploy staff

for project implementation and hiringconsultants as needed; training of staff

Community groups are properly M Informed community consultations;motivated to contribute to cost-sharing agreement with Government on costarrangement to cover O&M recovery guidelines

From Components to OutputsContinued government commitment to N Continuing policy dialogue withpolicy of decentralization Government and selected towns

Overall Risk Rating M

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

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3. Possible Controversial Aspects:

None

G: Main Loan Conditions

1. Effectiveness Condition

None

2. Other [classify according to covenant types used in the Legal Agreements.]

The Borrower shall ensure that any land required for the Project will be acquired, and any persons affectedby the acquisition of such land will be compensated, resettled and/or rehabilitated, all in accordance withthe provisions of the Policy Framework for Land Acquisition and Resettlement.

Dated Covenants:

The Borrower will appoint a Chief Technical Expert (not later that March 31, 2000); a FinancialConsultant (a professional accountant with knowledge of computerized accounting) (not later than March31, 2000) to introduce a financial reporting system for UDHD consistent with IDA requirements; aProcurement Specialist (not later than March 31, 2000); and (f) a full-time construction supervisor in eachProject town (not later than June 30, 2000).

The Borrower shall adopt PMR-based disbursement procedures not later than July 1, 2001.

H. Readiness for Implementation

1 1. a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

2 1. b) Not applicable.

I2 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

1 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

O] 4. The following items are lacking ancl are discussed under loan conditions (Section G):

1. Compliance with Bank Policiies

Z 1. This project complies with all applicable Bank policies.El 2. The following exceptions to Bank policies are reconmended for approval. The project complies with

all other applicable Bank policies.

v/.X>, A

Evangeline Kim Cuenco /AiFrannie A. Leautier John W. WallTeam Leader Sector Manager/Director Country ManagerlDirector

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Annex 1: Project Design SummaryBHUTAN: Bhutan - Urban Development Project

Key PeEormaic-;'iterarch r&bjectives indkalorO M & a on. i- t

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)To improve access to basic Full government support to 5-year Development Plan Infrastructure constraintsinfrastructure where the Development Plan removed to support povertyeconomically justified, and Economic and sector reports alleviation in the projectstrengthen institutional districtscapacity in theUDHD andDzongkhags Complementary investments

take place to supportinfrastructure developments

Project Development Outcome / Impact Project reports: (from Objective to Goal)Objective: Indicators:

The objective of the Project is Extent of satisfaction with UDHD progress reports Continuation of Government'sto improve the quality of life urban service delivery emphasis on urbanthrough enhancement of the expressed by citizen Supervision mission reports developmentlevel and coverage of basic respondents to representativeurban services in selected survey or social assessment Evaluation mission reports Continuation of thesecondary towns of Bhutan, (mid-term and final) Government's decentralizationand, to that end: (a) to Public health - morbidity rates initiativestrengthen the financial and of water borne diseases Consultant studies and reportsinstitutional capacity of the Ability to plan and executeresponsible authorities to Improved capacity of project sub-projects to improve urbandeliver such services; and (b) towns in fulfiling essential service deliveryto finance high priority urban service responsibilitiesinvestments in such servicesfor which there is broad publicsupport.

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H@obj= ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~,q1

Output from each Output Indicators: Project reports: (from Outputs to Objective)component:Enhanced UDHD/municipal Percent of municipal and UDHD progress reports, Continuing commitment fromcapacity in project towns to UDHD staff trained in mid-term review evaluation, RGoB and Districtplan, implement and operate financial management, ICR, OED end of project Administrations to policy ofand maintain basic services budgeting and accounting evaluation decentralization and balanced

systems, and procurement regional developmentprocedures

Other projects in BhutanPercent of municiipal staff contributing to the same

trained in the following development objectives withtechnical areas (land use similar outputsplanning/management,O&M) Community groups are

properly motivated toPercent of O&M cost contribute to cost-sharing

recovered from metering arrangement to cover O&M

Improved urban services in Percent of households withproject towns access to safe piped water

supply

Percent of domestic wastewater disposed properly

Percent of solid wastecollected and disposedproperly

No. of community toiletsbuilt and rehabilitated; andregular emptying of individualseptic tanks

Length of urban roads built orrehabilitated

Percent of civil workscompleted (e.g., length offootpaths, streetlighting,market sheds and parkingimproved, community parksconstructed/improved, busterminalsconstructed/rehabilitated,erosion control works inselected towns)

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Key Perormnco,Hierarch of Objctives ncilcators Moniitprln & vkain Crt2 ~ Ii

Project Components I Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)a. Institutional $1.6 million Same as above Timely counterpart funds

Development available as planned;procurement actions arestreamlined and timely;adequate staff continuitywithin UDHD

b. Urban $10.6 millioninfrastructureinvestments andservices

(See Annex 2 for detailedproject description).

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Annex 2: Project DescriptionBHUTAN: Bhuitan - Urban Development Project

The project will be implemented in ten district towns namely: Wangdue Phodrang, Trongsa,Zhemgang, Tingtibi, Bumthang, Lhuentse, Trashi Yangtse, Duksum, Rangjung and Paro. Of the 10 towns,the higher priority towns are: Paro, Trongsa, Zhemgang, Lhuentse, Trashi Yangtse, Rangjung, WangduePhodrang and Bumthang. Although Tingtibi and Duksum have remained in the list of towns, they havebeen accorded lesser priority due to either the slow pace of development (Tingtibi) or very small urbanpopulation (Duksum) both at present and the future.

The Project consists of two components: (a) Institutional Development and (b) UrbanDevelopment.

By Component:

Project Component I - US$1.60 million

Institutional Development: The ID component will strengthen the capacity of the UDHD, and the projecttowns in: (a) urban planning, land use management and mapping; (b) planning and implementation of urbandevelopment investments, focusing on adequate O&M; and (c) project management and monitoring withinthe UJDHD and project towns. Under the ID component, support will also be provided to the NationalEnvironmental Commission (NEC) for the development of environmental guidelines for the urban sector,and to UDHD for ECOP in solid waste management.

Project management support to the Project Cell and project towns will be in the form of consultantsand equipment. The consultants recruited shiall be both international and regional/local experts to supportrequired specific areas where existing capacities are limited. They will assist the Project Manager and eachof the ten project towns to supervise construction works. In particular, the Project Manager will be assistedby a Chief Technical Officer, a Financial Consultant, and a Procurement Specialist in the management ofthe project. In addition other specialized specific short international inputs will be made available duringthe project implementation. The inputs are for: (i) erosion control measures; (ii) development ofbilling,collection and accounting systems;(iii) training; (iv) urban design, planning, mapping, etc.

Chief Technical Expert

The main tasks will be to provide assistance in the overall management of the project and to ensurethat technical standards with regard to design, tender documentation and physical work implementation areadequately achieved. In addition, the consultant will:

monitor the performance of construction site supervisors and the construction qualitycheck quality of tender documentation and assist in the evaluation of tenders and award of

contractsprovide advice to Project Manager in the development of suitable computer software applications

for project monitoring, technically and financiallyassist in the preparation of proper O&M work plans for the facilities constructedassist and advise on training programs for UDHD and district O&M staffparticipate in field trips for construction supervision and quality monitoringassist in data collection for monitoring construction progress and for monthly reporting.

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assist in the preparation of monthly and quarterly reports to World Bank and Government and theproject completion report.

Financial Consultant

The consultant will be a professional accountant knowledgeable in computerized accounting..He/she would be responsible for: (a) all aspects of project financial management; (b) guiding andassisting the project accounting staff in consolidation of project accounts at the national level; (c)coordinating preparation of PMRs for the World Bank and other stakeholders; and (d) fmancial planningand management of the project including financial forecasting. The FC would be located in the PC andwould also work closely with the Project ManagerDirector and the project accounting staff. Apart fromproviding support on financial accounting, and reporting aspects of the project, the FC would alsointeract with various field offices, RAA and/or the private sector auditors, as necessary.

Procurement Management Specialist

The Consultant will have an engineering background and not less than ten years of experience inprocurement. He/she will assist in monitoring and providing guidance on procurement to UDHD and theproject towns.

Construction Site Engineers

Construction site engineers will be recruited for each of the ten project towns to superviseconstruction works. These engineers should have at least 5 years' experience in the design andimplementation of water and urban works. The main task of the site engineers is to make sure that worksconstructed are in accordance with the tender drawings and specifications. In detail, he would:

* participate and record all results for pipeline and concrete testing* check all materials used in the construction for compliance with the specifications

check that constructions and steel reinforcement are in accordance with drawingsmonitor construction progressparticipate in measuring completed works for program paymentsmake on-site decisions for urgently required changes in construction

* check the contractors' bills for progress paymentsprepare monthly progress reportsprepare as-built drawings of works completed

* liaise with district authorities

To ensure adequate O&M, in addition to trained staff, the project also provides in the physical contingencyallowance for adequate supply of spares and replacement to be brought in with the original equipment,stored in a central area for safe keeping. This also applies to the common set of O&M equipment to beshared by project towns. Said equipment should be stored safely, with its use and maintenance being theresponsibility of the district engineer assigned for urban civil works in the designated storage location.

Urban Planning:

For all the ten towns, the rapid assessment of existing and projected urban land uses anddemographic trend has been completed. Based on this information schematic land use plans were prepared

- 19 -

sufficient to guide the implementation of the high priority infrastructure investments. The schematic landuse plans have identified the optimal future land use patterns and primary networks with sufficient certaintyto design the water supply, drainage, solid waste management, and other infrastructure activities.

During the implementation of the project, more detailed and comprehensive urban developmentplans would be prepared as necessary. This will include the specification of geographical scope, daterequirements, planning information systems, required plan components, cartographic and other essentialoutputs of the urban planning process. Further detailed planning under the loan project will be based onschematic land use plans from the project preparation study completed by the consultants.

Assistance to the NEC

The NEC is presently developing environmental guidelines for the urban sector. The Project's IDcomponent will support this endeavor through the provision of consultancy support.

Project Component 2 - US$10.63 million

Urban Development: This component will consist of the following subcomponents:

(a) Water Supply and Chlorination: 'Water supply investments are confined mainly to therehabilitation and augmentation of existing systems and construction of some new schemes. The watersupply program will apply to all the project towns.

(b) Solid Waste Collection: All project towns would benefit from the solid waste managementprogram under the project. The provision of communal refuse storage bins, tractors and trailers willimprove storage facilities and collection services. Paro town will, in lieu of tractors and trailers, receive3-ton tipper trucks because of the long haul distance. Funds have been allocated for purchase ofequipment (two small excavators) and development of sites with roads, fence, drains, and site office. Theprogram also includes public information campaign and comprehensive programs of training for wastemanagement personnel.

(c) Sanitation: The program includes the construction of 5 new public toilet blocks and rehabilitationof 3 toilets. The construction of new toilets will be started only if the local authority agrees to operate on apay-and-use basis. Each block will provide latrine facilities for both men and women. There will be nosewerage installations since all the towns are very small, and many of the developments are yet to bestarted. Therefore, to cope with the sanitary service facilities, a desludging vacuum pump mounted on atruck will be provided to each of the towns fbr emptying of septic tanks and for disposal at the controlledlandfill site.

(d) Urban Infrastructure:

(i) Urban Drainage: Drainage improvements will aim to alleviate the inundation in theChamgkhar town at Bhumthang. Eight towns will receive investments in drainage. For the majority oftowns in the program, the drain overflows is due to inadequacies of the existing system. Drainageimprovements include new masonry drains, r econstruction and covering of existing drains. As part oferosion control of streams and rivers flowing beside the towns, about 3 km erosion protection of riverembankmnent is included in the project. The erosion control works in Paro and Bhumthang will only bestarted after a hydraulic expert has visited the sites and completed the detailed design.

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(ii) Urban Roads: Investments will focus on the upgrading of existing roads operated by themunicipal corporations, and also some new road development. Upgrading will consist of convertingearthen, gravel surfaced roads to bitumen surfaced. The priority program includes improvements of about6.2 km of roads. The new road development is about 3 km.

(iii) Civic Facilities: Two project towns will benefit from new or refurbished bus terminals andexpanded parking areas. Four town residents and the school children will benefit from new footpaths,which will be provided inside the town, or as walking access to nearby schools. Three project towns willbenefit from investments to improve their central kitchen market places. Three towns will be provided withrecreational parks. The parks will focus on the need for children's playground facilities.

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Annex 3: Estimated Project CostsBHUTAN: URBAN DEVELOPMENT

Institutional Development 0.90 0.60 1.50Urban Development 1.34 7.10 8.44

Total Baseline Cost 2.24 7.70 9.94Physical Contingencies 0.24 1.28 1.52Price Contingencies 0.18 0.59 0.77

Total Project Costs 2.66 9.57 12.23Total Financing Required 2.66 9.57 12.23

Technical Assistance 0.96 0.64 1.60Civil Works 1.69 7.79 9.48Goods and Equipment 0.01 1.14 1.15

0.00 0.00 0.00

Total Project Costs 2.66 9.57 12.23Total Financing Required 2.66 9.57 12.23

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Annex 4: Cost Benefit Analysis Summary

BHUTAN: Bhutan - Urban Development Project

The project will benefit an estimated 55,000 people in ten secondary towns over twenty years.Benefits were calculated using estimated values for value of time, cost of medical treatment, value oftourist days. Willingness-to-pay data -- used to assess the lowest monetary value of changes inenvironmental quality and health1 -- was obtained from social assessment surveys in each project town.

The quantifiable incremental economic benefits are: (a) time savings from not having to fetchwater; (b) health cost savings (drugs and hospital care); and (c) incremental tourism revenues.Willingness-to-pay estimnates -- obtained from social surveys in each project town -- were undertaken for:(a) improved water services, (b) improved solid waste (garbage) services, and (c) improved sanitation.

The overall EIRR is 20.7%. The FIRR for the water supply components is 11.2%, with individualwater supply scheme FIRRs varying from 0.3% (Duksum) to 19.6% (Paro).

1. Better health from cleaner water and better sanitation

A major benefit from the project would be improved health for urban residents. At present there isa serious level of water and hygiene-related sicknesses and diseases in all project towns (as identified by thesocial assessment, discussions with hospitals and BHU personnel in each of the project towns, from healthdata provided by the district administrators and hospital management personnel, and from publishedMinistry of Health and Education data). This has led to high and recurrent levels of public expenditure ondrugs and hospital/health institution patient care, which will become an increasing fiscal drain as theGovernment moves closer to its aim of health-for-all, while continuing largely free provision of healthservices. Improved urban sanitation can contribute to reducing health costs -- both for the community andthe Government -- through improved sanitation, especially the removal/reduction of fecal and othercontamination from water sources.

Reliable delivery of potable drinking water to domestic consumers and bulk users in the ten townswill ameliorate many environment-related health problems. In 1997/98 the twelve most prevalentconditions were: ARI/pneumonia; intestinal infections/viral hepatitis; skin diseases; peptic ulcer syndrome;musculoskeletal diseases; jaundice/headaches; eye diseases; teeth and gum diseases; injuries; worms;hepatitis/unknown fevers; ear diseases. Of these twelve conditions, almost 50 per cent can be attributeddirectly or indirectly to contaminated water, or related contamination/bacterial infection from a lack ofwater for personal hygiene. Diarrhea sickness/disease and dysentery represent a major water-related healthproblem which is significantly under-reported in all hospitals and health stations. It remains the third mostcommon sickness at Basic Health Units, and there has been little change over the last five years in thenumber of cases reported of diarrhea and dysentery linked to contaminated drinking water.

With the introduction of potable water all-year-round, the number of water and hygiene-relatedsicknesses and diseases will be reduced. Savings can be expected in all urban centers from: (a) drug costsassociated with the treatment of patients, both as day visits, and from drugs administered after hospitaladmission; and (b) costs associated with hospital treatment (as out-patients or as admissions). Bulk waterusers such as Monk Bodies, army, police and school boarders are also expected to derive health benefits.

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2. Reduced Household Costs of Fetching Water

Willingness-to-pay surveys indicated a high-willingness to pay for private (in-dwelling) watersupply in all towns except Tingtibi, where stringent requirements for new house construction and limitedgovernment investment to date has resulted in resistance to payment for new services. In all towns exceptWangdue-Phodrang (where supply is currently very intermittent), there was a low willingness to pay forimproved stand-pipe service.

Time-saving analysis for residential users suggests that the project will have substantial benefitsfor the popula-tions of all ten towns. At present the average distance to a tap stand varies from 7 meters(Ranjung) to 82 meters (Paro), with a weighted average of 36 meters. While in the wet season some wateris available on site from rainwater, no such provision is effectively possible in the dry season.

Total time savings in opportunity cost terms vary from Nu. 31,000 a year (Ranjung) to Nu.770,000 a year (Paro). The average is Nu. 207,000 a year. The estimates use a market wage (opportunitycost of labor) of Nu. 80 a day for an average 8 hour day, and assume 9 trips per day with a 20 litre bucket;if bulk users were included benefits would be significantly higher.

3. Higher Tourism Income through Improved Municipal Services/Conditions

A third quantifiable benefit of the project is increase tourist income. Tourism has been growingsteadily, expanding four-fold since 1990. This tourism has been high-value, with the Government setting aminimum $200 fee per day. The Government continues to see higher value-lower volume tourism aseconomically, culturally and environmentally desirable. Future sustainable tourism development will beundertaken through the private sector, while continuing to be prudently regulated.

As a sign of the potential for future growth an additional 25 tourist licenses were granted in 1998over and above the existing 33. But a range of possible determinants to further rapid growth have beenidentified. These include:

The relatively poor development of urban town centers outside Thimphu, particularly access topotable water in hotels, the standard of sanitation in hotels, and the near-absence of adequate public toilets.

A degraded urban environment, with open dumping of garbage in almost all towns.

Poor standard of many hotels, particularly in relation to access to clean water for bathing, kitchenhygiene, shortages of electricity, and overloading of septic tanks.

The proposed project will foster urban upgrading of benefit to tourism in the following areas: urbanwater supply (quality and quantity); garbage collection and disposal/burial; upgrading of public toilets;desludging of septic tanks; provision of urban amenities/street paving, street lighting, drainage, parks/playlots.

Major Assumptions:

Project life of 20 years.FIR:Rs based on water user charges, but exclude land taxes, urban surcharges etc.Capital charge of 2.75% of total water supply capital cost, amortized over 15 years.O&M costs 3% p.a. of all project costs, less the institutional support component.After 20 years residual value is 40% of all capital costs.

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Sensitivity Analysis:

Sensitivity analysis indicated no major or unexpected down-side risks. For the economic analysisthe impacts of increase in capital costs, decreases in estimated benefits, and delays in completion are:

10% increase in capital costs : 16.46%10% decrease in benefits . 16.92%Delay in completion by one year : 18.98%

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Annex 5: Financial Summary

BHUTAN: Bhutan - Urban Development Project

Years EndingJune 30

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7Total Financing RequiredProject CostsInvestment Costs 0.1 2.5 3.8 3.5 2.0 0.3 0.0Recurrent Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Costs 0.1 2.5 3.8 3.5 2.0 0.3 0.0Total Financing 0.1 2.5 3.8 3.5 2.0 0.3 0.0

FinancingIBRDIIDA 0.1 2.4 3.3 3.0 1.7 0.3 0.0Govemment 0.0 0.1 0.5 0.5 0.3 0.0 0.0

Central 0.0 0.0 0.0 0.0 0.0 0.0Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0User Fees/Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Financing 0.1 2.5 3.8 3.5 2.0 0.3 0.0

Year I Year 2 Year 3 Year 4 Year 5 Year 6 Year 7Total Financing RequiredProject Costs

Investment Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0Recurrent Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0Financing

IBRD/IDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0Government 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0User FeeslBeneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Main assumptions:

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Attachment 1

Financial Management Arrangements

Flow of Funds

The RGoB would pass on the budgeted funds for capital expenditure to eachImplementing Unit (IU) through the Letter of Credit (LC) system in accordance with the normalformula in which assistance is passed on to various ministries. A specially designated Bank LCaccount will be maintained by the Ministry of Communications (MOC) for routing projecttransactions. The Administration and Finance Division (AFD) of MOC will prepare their projectexpenditure budget for each fiscal year based on the proposed project activities in consultation withthe lUs. The actual disbursement of funds for capital expenditures from the Ministry of Finance(MOF) would take place, on a case by case basis, upon requisition submitted by MOC supported byrelevant documentation. The recurrent expenses will be transferred quarterly. In order to ensureproject coordination and accounts consolidation, all project related transactions will be routedthrough the Project Cell (PC) and AFD of MOC in Thimphu. MOC will initially advance theamounts to the lUs based on agreed work program and the IUs will submit supporting documentationfor their expenditure. The PC and AFD will consolidate the same submission to MOF. Initially, theproject will follow traditional disbursement method and will switch to PMR-based disbursement overa period of time. It has been agreed with MOC and MOF that PMR-based disbursements will beadopted not later than July 1, 2001.

Accounting and Internal Controls

Books of accounts for the project would be maintained as per RGoB rules prescribed inthe Financial Manual, 1988. A separate cash book and general ledger will be maintained for projectrelated transactions which will be routed through a unique Bank Account LC number. Accounting ofproject expenditures will be capable of capturing data by RGoB budget heads, project components,sub-components, expenditure categories (summary and detailed), and disbursement categories (as perLegal Agreements). This would match closely with the classification of expenditures and sources offunds indicated in the project documents (Project Implementation Plan and Project Cost Tables in theProject Appraisal Document). From commencement of the Project, simplif ed PMR's (Forms 1-Aand 3 as per format agreed with IDA during project negotiations) would be generatedfrom theproject accounts and subnmtted to IDA within 45 days of the end of each quarter for IDA'sreview. As and when the project graduates to PMR-based disbursements, AFD and PC wouldarrange to submit all the PMR's (as per format agreed during negotiation) and the disbursements willbe based on these quarterly PMRs. Consolidation of project accounts would be done by AFD andPC. The Chart of Accounts would ensure that data is captured in a manner as to facilitate financialreporting for the project to various stakeholders.

Financial Reporting

The IUs would submit their consolidated monthly statement of accounts to AFD, PC andMOF in the format prescribed in the RGoB Financial Manual. Apart from this, the AFD and PCsupported by the recruited Financial Consultant (FC) and the project accounting staff would beresponsible for consolidating the project accounts and preparing quarterly PMRs as per format

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agreed with the World Bank.

Auditing Arrangements

The Accounts of the Project will be audited every year by the Royal Audit Authority(RAA) as per RGoB rules. However, the RAA will have the option to contract out annual audit toprivate sector auditors (who should be qualified chartered accountants acceptable to IDA). When theaudit is contracted out to private sector aiuditors, the audit fees for the same shall be eligible forreimbursement from IDA Credit. The AFD and PC would ensure that the accounts are finalizedand the project financial statements are submitted to auditors within 3 months of the close ofRGoB 's fiscal year. The annual project financial statements audited by the RAA/private sectorauditors would be submitted to IDA wiithin 6 months of the close ofRGoB 'sfiscal year (asrequired under World Bank's operationalpolicies). Any accounting firm(s), or any of itsassociates providing accounting or other consultancy services for this project would not be eligible tobe the auditor for the project, to avoid conflict of interest.

Staffing for Financial Management

Key Professional Staff: The most important requirement for effective financial management ofthe project is appointment of qualified and appropriate staff at key levels. The MOF and MOCwould ensure thiat a Finance Consultant (Professional Accountant with knowledge ofcomputerized accounting) is recruited by March 31, 2000 to oversee the project financialmanagement. The FC would be responsible for: (a) all aspects of project financial management; (b)guiding and assisting the project accounting staff in consolidation of project accounts at the nationallevel; (c) coordinating preparation of PMRs for the World Bank and other stakeholders; and (d)financial planning and management of the project including financial forecasting. The FC would belocated in the PC and would also work closely with the Project Manager and the project accountingstaff. Apart from providing support on financial accounting, and reporting aspects of the project, theFC would also interact with various field offices, RAA and/or the private sector auditors, asnecessary.

SupportingStaff: MOF will ensure that there is a dedicated Finance Officer and ChiefAccountant to handle project transcations. The designated accounting staff for the project wouldbe given appropriate training in World Bank disbursement procedures.

Computerized AccountinLe and Manaaement Information System

MOF will review the Financial Management Information System (FMIS) beingdeveloped for the Second Education Project (SEP) in Bhutan and other software products available inthe market to find out whether the system meets the reporting requirements of RGoB and the WorldBank for PMR-based disbursements. The World Bank has provided information on other vendorswho have developed simnilar software for other Bank projects. After reviewing the available products,MOF would adopt a software most suited to Bhutan's needs by June 30, 2000.

FMS Development Action Plan

i) MOF and MOC would recruit a Financial Consultant (Professional Accountant withknowledge of computerized accounting) by March 31, 2000 to oversee the proposed newproject with responsibilities as described above.

-28 -

(ii) MOF and MOC would review the FMIS developed for the SEP as well as otherproducts available/emerging in the market and arrange to adopt a suitable software forthe project by June 30, 2000.

(iii) MOF and MOC would make all arrangements to switch over to PMR-baseddisbursement by July 1, 2001.

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Annex 6: Procurement and Disbursement ArrangementsBHUTAN: Bhutan - Urban Development Project

Procurement

A. General Rules

1. The proceeds of the Loan will be used to finance the procurement of civil works (water supplyincluding filtration plants, footpaths, drains, civic works, river erosion control measures, street lighting,etc.), goods (domestic water meters, chlorination equipment, vehicles, waste collection bins, computers,etc.) and services (consulting services, training, etc.).

2. Procurement of works, goods and related services under the Project would be carried out inaccordance with the provisions of the Bank 'Guidelines: Procurement under IBRD Loans and IDA Credits'of January 1985 and revised in January/August 1996, September 1997 and January 1999.

3. Procurement of consultants would be done in accordance with the provisions of 'Guidelines:Selection and Employment of Consultants' by World Bank Borrowers of January 1997 and revised inSeptember 1997 and January 1999.

4. Invitation for bids will be published in the press: (i) UNDB and local/Indian press for all ICBcases; (ii) local and Indian press for all NCB cases; and (iii) local press only for all cases valued at lessthan US $50,000 (works/goods locally procured).

5. Minimum post qualification criteria mwill be fixed and indicated in the documents in all cases toensure selection of bidders with appropriate financial and technical capability.

6. No special preference will be accorded to any bidder, either for terrns and conditions, or for price,except to the extent agreed to for ICB, in accordance with Appendix 2 of the Procurement Guidelines.

All bidders/contractors shall provide bid/performance security as indicated in the bidding/contractdocuments

A bidder's Bid Security shall apply only to a specific bid, and a contractor's perforrnance securityshall apply only to the specific contract under which it was furnished

7. Post-bidding negotiations shall not be, allowed with the lowest evaluated or any other bidders.

8. Extension of bid validity shall not be allowed without the prior concurrence of the Bank (i) for thefirst request for extension if it is longer than eight weeks; and (ii) for all subsequent requests for extension,irrespective of the period.

9. Re-bidding shall not be carried out without the Association's prior concurrence. Bids shall not berejected merely on the basis of a comparison with an official estimate without the prior concurrence of theAssociation. Contracts shall be awarded to the lowest evaluated bidders.

10. Detailed design and engineering, including soil investigation and land acquisition should becompleted before bids are invited.

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11. Schedule of rates (based on which estimates are prepared) should be updated regularly, taking intoaccount realistic data based on construction methodology to be used, current market prices for materialsand labor and reasonable contractor's profit.

12. BOQ should have separate schedule for those general items which are not covered in the analysisof rates based on which the estimates are prepared.

13. Contractors should be made responsible for providing all materials, including cement/steel/pipes,etc.

14. There will be no restriction in the sale of bidding documents. Bid documents shall be madeavailable, by mail or in person, to all who are willing to pay the required fee. Foreign bidders shall not beprecluded from bidding and no preference of any kind shall be given to national bidders in the biddingprocess. There shall not be any restrictions on the means of delivery of the bids.

Bids shall be opened in public in one location, immediately after the deadline for submission ofbids.

15. Bids shall not be invited on the basis of percentage premium or discount over the estimated cost.Evaluation of bids shall be made in strict adherence to the criteria disclosed in the bidding documents, in aformat and specified period agreed by the Association.

16. Bid packages should be formulated optimally to attract competitive bids from qualified bidders toensure satisfactory completion in desired time frame.

17. ICB procedures will be used for all cases needing import of equipment.

18. The Project Cell will develop an acceptable Procurement Management Reporting system to flrnishperiodical reports on progress of procurement.

Procurement methods (Table A)

1. Civil Works

Civil works include:

(a) water supply works, including filtration plants(b) roads, footpaths, drains, civic works, river erosion control measures(c) street lighting

These works are small and scattered over ten towns. These will be packaged into separatepackages for each town, valued approximately $0.1-0.5 million. Foreign frms would not fnd the contractsattractive in view of the very nature of the works and their geographical distribution. They will thereforebe procured following the National Competitive Bidding (NCB) procedures ($8.71 million). Nonetheless,bids from foreign contractors would not be precluded. Strict post-qualification criteria will be incorporatedin the bidding document for each work to ensure selection of qualified contractors for execution.

2. Procurement of Small Civil Works

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Small civil works of value individually costing less than $50,000 per contract ($770,000 inaggregate) would be awarded: (a) on the basis of comparison of price quotations obtained from at leastthree qualified contractors eligible under the guidelines; (b) on the basis of unit/piece rate system toqualified contractors; or (c) by Force Account as a last resort in a manner satisfactory to the Association inaccordance with Paragraph 3.8 of the Guidelines.

3. Bidding Documents

Standard NCB documents as finalized by the RGoB were reviewed and comments offered duringappraisal. RGoB will amend the documents keeping the Bank's Standard Bidding Documents (SBD) asbase and incorporate all suggestions. The modified documents will be submitted to the Bank for reviewand comments, before final adoption.

FoT procuring small civil works under Shopping, RGoB will prepare a model document for reviewby the Bank before adoption.

4. Goods and Equipment

The project supports the procurement of the following items:

(a) domestic water meters and chlorination equipment(b) vehicles(c) mobile sewage pumps with tankers(d) solid waste collection bins

These will be procured following International Competitive Bidding (ICB) procedures inaccordance with Procurement Guidelines. ICB documents shall be compiled by the RGoB based on theBank SBD's.

International/National Shopping procedures will be adopted for procurement of office equipment,computers, etc., valued at less than $50,000 per contract, not to exceed in aggregate approximately $0.23million, in accordance with Paragraphs 3.5 and 3.6 of the Guidelines.

Books, periodicals, video tapes, cornputer software, etc., costing at less than $50,000 per contract,not to exceed in aggregate approximately $0.05 million, will be procured following Direct Contractingprocedures in accordance with Paragraph 3.7 of the Guidelines.

5. Technical Assistance, Studies and Training

Technical assistance and consultancy services would be contracted following procedures inaccordance with Bank Guidelines for Selection and Employment of Consultants by World Bank Borrowers,January 1997 [revised January 1999]. The Standard Request for Proposals [RFP] and Conditions ofContract would be used for all contracts. Mainly Quality and Cost Based Selection [QCBS] method willbe followed. For some cases, selection of inidividuals based on qualifications could be used in accordancewith Section V of the Guidelines.

Training services in established institutions would be procured directly subject to clearance withthe Bank on course content, number and details of personnel to be deputed and course fee. Other training

- 32 -

services would be procured following QCBS procedures.

Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

1. Works 0.00 8.71 0.77 0.00 9.48(0.00) (7.40) (0.65) (0.00) (8.05)

2. Goods 1.15 0.00 0.28 0.00 1.43(1.15) (0.00) (0.28) (0.00) (1.43)

3. Services 0.00 0.00 1.32 0.00 1.32Technical Assistance (0.00) (0.00) (1.32) (0.00) (1.32),

0.00 0.00 0.00 0.00 0.00___________________________ (0.00) (0.00) (0.00) (0.00) (0.00'

Total 1.15 8.71 2.37 0.00 12.23(1.15) (7.40) (2.25) (0.00) (10.80)

Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies

a Includes civil works and goods to be procured through national shopping, consulting services, services ofcontracted staff of the project management office, traiing, technical assistance services, and incrementaloperating costs related to (i) managing the project, and (ii) re-lending project funds to local governmentunits.

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Table Al: Consultant Selection Arrangements (optional)(US$ million equivalent)

s ~~~~~~~~~~~~~{ ~~~~~~~~~~~~

A. Firms 1.08 0.00 0.00 0.00 0.00 0.00 0.00 1.08(1.08) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (1.08)

B. Individuals 0.00 0.00 0.00 0.00 0.10 0.14 0.00 0.24(0.00) (0.00) (0.00) (0.00) (0.10) (0.14) (0.00) (0.24)

Total 1.08 0.00 0.00 0.00 0.10 0.14 0.00 1.32(1.08) (0.00) (0.00) (0.00) (0.10) (0.14) (0.00) (1.32)

1\ Including contingencies

Note: QCBS = Quality- and Cost-Based SelectionQBS = Quality-based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsOther = Selection of individual consultants (per Section V of Consultants Guidelines),Commercial Practices, etc.

N.B.F. = Not Bank-financedFigures in parenthesis are the amounts to be financed by the Bank loan.

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Prior review thresholds (Table B)

1. Procurement Planning

Prior to the issuance of any invitations to bid for contracts, the proposed procurement plan for theproject shall be furnished to the Bank for it's review and approval, in accordance with the provisions ofParagraph 1 of Appendix I to the Guidelines. Procurement of all goods and works shall be undertaken inaccordance with procurement plan as shall have been approved by the Bank and with the provisions of thesaid Paragraph 1.

2. Prior Review

Civil Works

All packages for civil works exceeding the equivalent of $100,000 or more will be subject to priorreview by the Bank as per procedures set forth in Paragraphs 2 and 3 of Appendix 1 to the BankGuidelines.

Goods and Equipment

All ICB packages irrespective of value would be subject to prior review by the Bank.

Technical Assistance, Studies and Training

The following would be subject to prior review by the Bank:

(a) Terms of Reference for all consultancies;(b) Contracts for the employment of consulting firms estimated to cost more than $50,000;(c) Contracts for employment of individuals estimated to cost more than $10,000

3. Post Review

Works and Goods

The contracts below the prior review threshold for Works and Goods shall be subject to postreview as per procedures set forth in Paragraph 4 of Appendix I of the Bank Guidelines.

Technical Assistance. Studies and Training

Contracts for the employment of consulting firms estimated to cost less than $50,000 and contractsfor employment of individuals estimated to cost less than $10,000 shall be subject to post review providedthat the TORs have been cleared with the Bank.

4. Procurement Information

Procurement information will be collected and recorded as follows:

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(a) Prompt reporting of contract award information by the Project Cell/MOC of the RGoB;

(b) Comprehensive semi-annual reports by Project Cell/MOC of the RGoB indicating:

(i) revised cost estimated for individual contracts and total cost;(ii) revised timings of procurement actions including advertising, bidding, contract

award and completion time for individual contracts; and(iii) compliance with aggregate limits of on the specified methods of procurement

(c) Completion by the Borrcwer within three months of the Credit closing date.

5. Assessment of Procurement Management System

The Bank reviewed the Procurement/Project Management system of Project Cell/MOC todetermine whether the systems are in conformity with the Bank's guidelines for procurement in theinvestment projects. The following action is agreed:

(a) The Project Cell would have a Procurement Management Specialist (with engineeringbackground and not less than 10 years experience in procurement) to assist in monitoring and providingguidance on procurement to the various urban local bodies.

(b) The Project Cell would identify and select a panel of engineering consultants who could bedeputed to inspect the works and conduct technical audits of contracts as and when required, underimplementation to ensure quality and provide recommendations to the Cell for following up and correctiveaction necessary.

(c) The Project Cell would also engage a consultant to develop and implement a ProcurementMonitoring System (PMS) to ensure generation of all PMR reports in the Bank approved formats.

Table B: Thresholds for Procurement Methods and Prior Review'

1. Works More than US$50,000 NCB Works costing more thanUS$100,000

Up to US$50,000 NS/FA/Unit/Piece Rate NoneSystem

2. Goods- goods More than US$50,000 ICB All

- computer and office Up to US$50,000 International/National Noneequipment Shopping

- books, periodicals,videotapes, computer Up to US$50,000 Direct Contracting Nonesoftware, etc .

- 36 -

3. Services- Technical More than US$200,000 QCBS AllTraining

More than US$100,000 upto US$200,000 QCBS (shortlist could All

comprise entirely of nationalconsultants)

Up to US$100,000Single Source Individual consultants

costing the equivalent ofUS$10,000 or more and

firms costing the equivalentof US$50,000 or more.

4. Miscellaneous

Total value of contracts subject to prior review: $8 million

Overall Procurement Risk Assessment

Average

Frequency of procurement supervision missions proposed: One every 6 months (includes specialprocurement supervision for post-review/audits)

1Thresholds generally differ by country and project. Consult OD 11.04 "Review of ProcurementDocumentation" and contact the Regional Procurement Adviser for guidance.

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Disbursement

Allocation of loan proceeds (Table C)

The allocation of Loan proceeds is given in Table C. Disbursements against civil works contracts willcover about 85% of certified expenditures, with the balance to be fnanced from counterpart funds.

Table C: Allocation of Loan Proceeds

Civil Works 7.28 85%Goods and Equipment 1.20 100% of foreign and local expenditures

(ex-factory cost) and 90% of localexpenditures for other items procured

locallyInstitutional Development Training and 1.24 100%Management SupportUnallocated 1.08

Total Project Costs 10.80

Total 10.80

Use of statements of expenditures (SOEs):

Applications for withdrawals will be sent by the Borrower to IDA based upon the anticipated paymentsschedule (based upon corresponding procurement plan). Full documentation for all contracts requiringBank's prior review will be sent to IDA in support of withdrawal applications. Expenditures for individualcontracts of goods and services, for which prior review by IDA is not required, will be disbursed againstStatement of Expenditures (SOEs); all records evidencing such information must be retained by UDHDuntil at least one year after IDA has received the audit report for the fiscal year in which the lastwithdrawal from the Credit is made. All withdrawal applications in respect of civil works will beaccompanied by certificates from the Supervision Consultants attesting that the works and materials meetthe design standards and specifications agreed by IDA, and that the payments are in accordance with thecompleted works. Royal Audit Authority will conduct or contract out to a private sector firm the financialaudit; certified copies of the audited accounts and financial statements for each fiscal year, together withthe auditor's report and the auditor's opinion on the statement of expenditure (SOE) would be madeavailable to IDA no later than 6 months after the end of the fiscal year.

Special account:A Special Account of US$1.0 million will be established at the Royal Bank of Bhutan to meet anticipatedexpenditures of about four months. Eligible payments greater than one third of the Special Account amountmay be paid by the Bank directly to suppliers at a specific request of RGoB. The Special Account will bereplenished on the basis of reimbursed clairms for eligible expenditures received by IDA.

- 38 -

Annex 7: Project Processing ScheduleBHUTAN: Bhutan - Urban Development Project

Time taken to prepare the project (months) 23First Bank mission (identification) 02/08/98 02/08/98Appraisal mission departure 06/12/99 06/12/99Negotiations 10/14/99Planned Date of Effectiveness 01/31/2000

Prepared by:

Preparation assistance:

Bank staff who worked on the project included:

Name SpecilityEvangeline Kim Cuenco Task Leader/Urban DevelopmentPaul Blanchet EngineeringKarl Kleiner EngineeringPeter Nicholas EconomicsJonathan Kamkwalala Municipal FinanceP.K. Subramanian Financial ManagementI.U.B. Reddy Social DevelopmentR.R. Mohan Social DevelopmentDan Hoornweg EnvironmentPanneer Selvam EnvironmentAkhtar Hamid Legal CounselIvonna Teresa Kratynski DisbursementCarmen Severino-Jones Project Finance/budgetCliff Ellis Land Management/Urban DesignOrville Grimes EconomicsN. Raman ProcurementHeinz Unger Environment

- 39 -

Annex 8: Documents in the Project File*

BHUTAN: Bhutan - Urban Development Project

A. Project Implementation Plan

1. Borrower's Project Implementation Plan - September 19992. Sectoral Environmental Assessment - July 19993. Policy Framework for Resettlement and Rehabilitaton of Project Affected Persons - September

1999

B. Bank Staff Assessments

None

C. Other

1. Bhutan Eighth Five-Year Plan (1997-2002), Ministry of Planning, September 19962. Environmental Act of Bhutan (draft), National Environment Commission, August 19973. Bhutan Human Settlements Review Report, November 19934. National Report to HABITAT II, "City Summit", Royal Government of Bhutan, March 1996

*Including electronic files

-40 -

Annex 9: Statement of Loans and Credits

BHUTAN: Bhutan - Urban Development Project

Difference between expectedand actual

Original Amount in US$ Millions disbursementsProject ID FY Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd

Number of Closed Projects: 5BT-PE-9582 1994 ROYAL GOVT OF BHUTAN FORESTRY III 0.00 5.40 0.00 3.41 3.03 0.89BT-PE-9574 1998 ROYAL GOVT OF BHUTAN EDUCATION 11 0.00 13.69 0.00 12.81 2.43 0.00

Total: 0.00 19.09 0.00 16.22 5.46 0.89

Active ClosedProjects Projects Total

Total Disbursed (IBRD and IDA): 2.64 21.00 23.64of which has been repaid: 0.00 0.91 0.91

Total now held by IBRD and IDA: 19.09 16.37 35.46Amount sold: 0.00 0.00 0.00

of which repaid: 0.00 0.00 0.00Total Undisbursed: 16.22 0.00 16.22

Actual disbursements to date minus intended disbursements to date as projected at appraisal.

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BHUTANSTATEMENT OF IFC's

Held and Disbursed Portfolio

In Millions US Dollars

Committed DisbursedIFC IFC

FY_Approval____ Company Loan Equity_ Quasi Partic Loan Equity_ Quasi Partic

Total Portfolio:

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

Total Pending Commitmient: 0.00 0.00 0.00 0.00

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Annex 10: Country at a Glance

BHUTAN: Bhutan - Urban Development Project

11/17/99

POVERTY and SOCIAL South Low- -

Bhutan Asia Income Development dlamond^1998Population, mid-year (millions) 0.76 1.305 3,515 Life expectancyGNP per capita (Atlas method, IJS8I 480 430 520GNP (Atlas method, U5$ bitlions) 0 36 555 1,844

Average annual growth, 199248

PoPulation (%) 2.9 1.8 1.7Labor force (%1 2.3 2.3 i's GNP V Gross

per primaryMost tecent estimate (latest vear available, 1992-98) capita enrollment

Poverty (% of population below national Povertv line)Uirban population (%of totalpooulation) 15 27 31Life expecancy at birth (years) 66 62 63Infant mortality (per 1,000 hve births) 71 77 69Child malnutrition (% of children under 5t 38 53 Access to safe waterAccess to safe water (% of population) 64 81 74Illiteracy (% of population age 15+) 46 49 32Gross primary enrollment (% of school-age population) 72 100 108 Shutan

Male .. 109 113 Low-income groupFemale 90 103

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1977 1987 1997 1998Economic ratios'

GOP (USS billions) 0.28 0.40 0.43Gross domestic investment/GOP . 30.5 48.1 47.3Exports of goods and services/GOP .. 21.4 33.0 33.2 TradeGross domestic savings/GOP . 17,2 38.8 37.9Gross national savings/GDP . 10.1 35.8 36.5

Current account balarince/GDP -34.0 -14,1 -10.8 Domestic Interest payments/GDP 0.2 0.6 0.5 Savings InvestmentTotal debt/GDP .. 14.4 30.3 27.8Total debt servicelexports .. 1.0 6.0 6.3Present value of debtUGDP ..

Present value of debtlexports ..Indebtedness

1977-87 1988-98 1997 1998 1999-03(average annual growth)GDP 7.9 6.1 7 8 7.1 7.1 -BhutanGNP per capita 7 2 2.0 Z.6 2.4 3.1 - Low-income groupExports of goods and services .. .

STRUCTURE of the ECONOMY1977 1987 1997 1998 Growth rates of output and Investment (%)

I5% of GOP at factor cost)Agriculture .. 46.0 37.8 38.2Industry .. 27.4 36.5 36.5 o

Manufacturing .. 5.8 11.4 11.6 .Services ,, 26.6 25.8 25.4 2 0_ ,- _ =_i__

Private consumption .. 65.2 35.8 38.2 .20 P4 95 9r 7 P8

General government consumption .. 17.6 25.5 25.8 -0GDI a GDPImports of goods and services .. 34.6 42.3 42.6

(average annual growth) 1977-87 1988-98 1997 1998 Growth rates of exports and Imports (%)

Agriculture 6.2 3.1 3.1 3.4 2-

Industry 14.8 9.0 3.8 7.3Manufacturing 11.6 12.2 3.6 13.0

Services 6.7 7.0 16.1 7.2 IPrivate consumption.. . .. .General government consumption .. ,Gross domestic investment 4.7 9.9 0.3 7.5 95 9C 97 98Imports of goods and services .. .. . .. - Exports 0 ImportsGross national product 9.4 5.0 5.7 5.5

Note: 1998 data are preliminary estimates.

'The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete.

-43 -

Bhutan

PRICES and GOVERNMENT FINANCE1977 1987 1997 1998

Domestic prices nan %(% change) 20

Consumer prices 4.8 7.4 9Implicit GDP deflator 8.6 14.7

Government finance s(% of GDP, includes current grants) oCurrent revenue .. .. 18.5 19.9 93 94 as se S7 9tCurrent budget balance 0.6 3.3Overall surplus/deficit -2.3 3.2 GDP deflator CPt

TRADE

(USS millions) 1977 1987 1997 1998 Export and Import levels (US$ millions)Total exports (fob) .. 29 99 111 ie2

Electricity .. .. 21 37Agric. Prods. .. .. 12Manufactures ..

Total imports (cif) . 101 131 136FoodFuel and energyCapital goods .. .. .. ..

Export price index (1995=100) .. 2 93 94 9S 9t 97 9Import price index (1995=100) . Exports IlmportsTerms of trade (1995=100) ..

BALANCE of PAYMENTS

(US$ millions) 1977 1987 1997 1o98 Current account balance to GDP ratio (%)

Exports of goods and services . 50 121 146 a tImports of goods and servires . 144 183 203 .s 92T 93 54 as ss 97 95Resource baldnce .. -95 -62 -57 -o __ L

Net income .. 0 0 0 .15

Net current transfers . 0 6 11 -20

Current account balance .. -95 -56 -47 -2s

Financing items (net) .. 79 78 92 -30

Changes in net reserves .. 16 -22 -45 -3s

Memo:Reserves including gold (USS millions) .. .. 176 218Conversion rate (DEC, locaMUSS) 8.7 13.0 36.3 41.3

EXTERNAL DEBT and RESOURCE FLOWS1977 1987 1997 1998

(USS millions) Composition of total debt, 1998 (USS millions)Total debt outstanding and disbursed 0 40 121 120

IBRD 0 0 0 0IDA 0 9 23 24 B: 24

Total debt service 0 1 7 9 E: 38IBRD 0 0 0 0

IDA 0 0 0 0

Composition of net resource flowsOfficial grants .. .. 74 85Official creditors 0 16 14 2Private creditors 0 0 -2 -2Foreign direct investment .. 0 0 0Portfolio equity .. 0 0 ° D: 5

World Bank programCommitments 0 0 0 14 A -IBRD E -BilateralDisbursements 0 5 1 1 B - IDA D - Other multilateral F - PrivatePrincipal repayments 0 0 0 0 C - IMF G - Short-term|Net flows 0 5 1 1Interest payments 0 0 0 0Net transfers 0 5 1 0

Data on National Accounts and Debt is in calendar year, all other data is in fiscal year. 11/17/99Development Economics

-44 -

MAP SECTION

IBRD 28474

-40' AD,

-28'30'

BHUTAN 28J30'-

Thimpky_ BHUTA

UNPAVED ROADS, ROADS RIVERS .; .T.5000

) ~~~~~~~~~~~~~~~~~~~ ~~~~~UNDER CONSTRUCTION _,_DISTRICT BOUNDARIES I 3000

5 A52WG ~~~~~ . #F NATIONALCAPITAL -S-- INTERNATIONALEOUNDARIES \ . .S. 1000~~~~~~~NAIONL CAITALloo

20

IDiXf o 2 . DISTRICT CAPITALS ITRAINLBUDRE

/ ) \ t Z - \ ; O~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ OTHER TOWNS

-28 00 8£0, ,

W, xJ ET\N /A_

28 00'-

0 ID 20 30 AO 50 ' iG ti ' 7 ->| p|-*

J 7

hlLOMETER~S v t t '..,j7

f T d

L~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Ff,JN

\au~~~~~~~~~~~~~~~~~~~~~~~~~~~~AUR HA99