Report and Recommendation of the President to the Board of Directors. Proposed Loan and Grant Nepal: Subregional Transport Enhancement Project

Transcription

1 Report and Recommendation of the President to the Board of Directors Project Number: October 2010 Proposed Loan and Grant Nepal: Subregional Transport Enhancement Project

2 CURRENCY EQUIVALENTS (as of 1 September 2010) Currency Unit Nepalese rupee/s (NRe/NRs) NRe1.00 = $ $1.00 = NRs ABBREVIATIONS ADB Asian Development Bank ADF Asian Development Fund DOR Department of Roads EIRR economic internal rate of return EWH East West Highway IEE initial environmental examination km kilometer MPPW Ministry of Physical Planning and Works NCB national competitive bidding PAM project administration manual SAARC South Asian Association for Regional Cooperation SDR special drawing right NOTE (i) (ii) The fiscal year (FY) of the government and its agencies ends on 15 July. FY2009/10 ends on 15 July In this report, "$" refers to US dollars unless otherwise stated. Vice-President X. Zhao, Operations 1 Director General S. H. Rahman, South Asia Department (SARD) Director S. Widowati, Transport and Communications Division, SARD Team leader Team members Peer reviewer H. Yamaguchi, Principal Transport Specialist, SARD N. B. Chand, Procurement Officer, SARD D. K. Lee, Senior Transport Specialist, SARD R. Nagpal, Senior Counsel, Office of the General Counsel A. D. Shrestha, Project Implementation Officer, SARD M. B. Shrestha, Associate Disbursement Analyst, SARD L. M. Tai, Transport Specialist, SARD W. Tawisook, Transport Specialist, SARD S. Mitra, Senior Transport Specialist, Central and West Asia Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

3 CONTENTS PROJECT AT A GLANCE Page I. THE PROPOSAL 1 II. THE PROJECT 1 A. Rationale 1 B. Impact and Outcome 2 C. Outputs 3 D. Investment and Financing Plans 3 E. Implementation Arrangements 4 III. DUE DILIGENCE 5 A. Technical 5 B. Economic and Financial 5 C. Governance 6 D. Poverty and Social 7 E. Safeguards 8 F. Risks and Mitigating Measures 10 IV. ASSURANCES 10 V. RECOMMENDATION 10 APPENDIXES 1. Design and Monitoring Framework List of Linked Documents 13

4 PROJECT AT A GLANCE 1. Project Name: Subregional Transport Enhancement Project 2. Project Number: Country: Nepal 4. Department/Division: South Asia Department Transport and Communications Division 5. Sector Classification: Sectors Primary Subsectors Transport, and information and communication technology Road transport 6. Thematic Classification: Themes Primary Subthemes Regional cooperation and integration Economic growth Trade and investments Cross-border infrastructure Widening access to markets and economic opportunities Promoting economic efficiency and enabling business environment 6a. Climate Change Impact: Adaptation Mitigation 6b. Gender Mainstreaming: Gender equity theme Effective gender mainstreaming Some gender benefits 1 No gender elements 7. Targeting Classification: General Intervention 1 Geographic dimensions of inclusive growth Targeted Intervention Millennium Development Goals Income poverty at household level 8. Location Impact: Rural Urban National Regional Medium Medium Medium Medium 9. Project Risk Categorization: Low 10. Safeguard Categorization: Environment Involuntary resettlement Indigenous peoples B B B 11. ADB Financing: Sovereign/Nonsovereign Modality Source Amount ($ million) Sovereign Project grant Asian Development Fund 24.5 Sovereign Project loan Asian Development Fund 24.5 Total Cofinancing: No Cofinancing available. 13. Counterpart Financing: Source Amount ($ million) Government (including contributions of beneficiaries) and sponsors Aid Effectiveness: Parallel project implementation unit Program-based approach No No

5 I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on (i) a proposed loan, and (ii) a proposed grant, both to Nepal for the Subregional Transport Enhancement Project The proposed loan and grant will upgrade the country's road network of about 195 kilometers (km) to (i) provide a north south link between the northeastern region and the East West Highway (EWH), and (ii) improve major international trade corridors in the country in conjunction with a modernization of customs systems. The project will also strengthen the capacity of the road sector and customs authorities. By expanding connectivity in remote areas, increasing road capacity of major international trade corridors, and enhancing customs clearance capacity, the project will boost the economy of the project areas, and integrate them more effectively with their primary markets in India, and with markets beyond. II. THE PROJECT A. Rationale 3. Nepal s economy relies heavily on foreign trade. The ratio of total trade to gross domestic product is about 50%. While average gross domestic product growth between FY2001/02 and FY2008/09 is about 4% per year, average growth in exports and imports is about 5% per year. Trade taxes are a major source of government revenue, e.g., about 22% of total government revenue in An Asian Development Bank (ADB) study 2 highlights three aspects of subregional trade enhancement in Nepal: (i) focus on products that have comparative advantage, (ii) provide facilities, and (iii) improve connectivity. The eastern region has the potential to step up production of highly exportable herbs and spices, as well as of garments and vegetables. Nepal needs to improve its transport network and transit logistics not only to integrate the remote areas of the country, but to create an enabling environment for its integration into regional and global markets. 4. Poor connectivity is a major development constraint for Nepal. Inadequate feeder roads worsen the isolation of remote rural areas, especially in northern hill regions. These areas have a high incidence of poverty and need to be linked to markets in the country, and eventually to neighboring countries. The north south link could also be a potential transit route connecting India and the People s Republic of China. In addition to the connectivity issue of remote hill areas, there is growing congestion along major international trade corridors, especially on the EWH and road sections around the borders, because of fastincreasing vehicle numbers in Terai areas. The poor condition and low capacity of the roads, and limited capability of customs systems exacerbate the congestion. To address these constraints, the government developed and has been implementing the Priority Investment Plan ( ) and the customs modernization plan. Nepal has major international and subregional trade corridors as identified in SAARC 3 Regional Multimodal Transport Study 4 and the Asian Highways network. 5. The road sector development strategy under Nepal's Three-Year Interim Plan (FY2007/08 FY2009/10) includes (i) improving roads for the development of high-density and border area settlements, and for better access to hitherto unserved remote areas with economic potential, and (ii) developing the EWH as the Asian Highway and the regional 1 The design and monitoring framework is in Appendix 1. 2 ADB Unleashing Economic Growth Region-based Urban Development Strategy for Nepal. Manila. 3 South Asian Association for Regional Cooperation. 4 SAARC Secretariat Regional Multimodal Transport Study. Kathmandu, prepared under ADB Technical Assistance for Promoting South Asian Regional Economic Cooperation. Manila (TA 6187-REG).

6 2 trade route in accordance with the concept of developing road networks for promoting South Asian regional development. The strategy includes adopting a road asset management system for sustainable, reliable, and safe road transport operations, and prioritizing repair, maintenance, rehabilitation, and reconstruction of roads and bridges. 6. Project roads include: (i) the Salleri Okhaldhunga and (ii) Okhaldhunga Harkapur roads (100 km), which provide the remote northeastern hill areas with a north south connection to the EWH, and further south to the Siraha border; (iii) the Khandbari Chainpur road (44 km), which provides one of the unconnected district centers with a motorable road, and will form the planned north south transit route connecting India at the Bitranagar border point and the People s Republic of China at the Kimathanka border; (iv) the Bhairahawa bypass (about 3.5 km), part of SAARC Road Corridor 10, connecting Kathmandu with Lucknow in India, which also complements India's ongoing Integrated Customs Posts Program; and (v) the Belbari Chauharwa road (47 km), which is part of the EWH in border areas and forms part of the SAARC Road Corridor 4, facilitating subregional traffic via its Kakarvitta border post to India and Bangladesh. These roads have been selected based on environment, resettlement, social, and economic impacts; and project readiness. Enhancing cross-border transport capacity by introducing information technology and simplifying customs procedures and documentation will further reduce congestion in border areas. 7. The project will support the government in addressing two development issues: expand connectivity of remote areas and boost the capacity of major international trade corridors. The project is relevant to achieving the goals of ADB s country partnership strategy ( ) 5 of enhancing global local connectivity to enable regionally balanced economic growth; it is also relevant to the regional cooperation strategy and programs ( ) 6 aimed at improving subregional connectivity and promoting intraregional trade in South Asia. The project is included in the country partnership strategy and the regional cooperation operations business plan ( ) 7 as a national project with regional implications. This is an approach to accelerating regional cooperation, supported in the Second High Level Forum on Emerging Vision for Shared Prosperity: South Asia and Beyond, held in Manila in August The project has been designed in coordination with development partners to ensure wide geographic coverage and avoid overlaps, and continues ADB's consistent efforts to improve road connectivity and capacity, and facilitate cross-border traffic, in parallel with capacity development relating to road safety, social aspects, overload control, and road asset management. Project readiness is substantially advanced, e.g., ADB project appraisal for all selected roads is based on a detailed design prepared by consultants engaged by the government. B. Impact and Outcome 9. Impact and outcome. The project will promote economic development of Nepal s border areas and the remote northeastern hills by increasing domestic and regional trades through expansion of the national and subregional transport systems. The project will (i) improve connectivity of remote areas with national and subregional markets; and (ii) expand the capacity of major international trade corridors in conjunction with the modernization of customs systems, thereby enabling efficient and safe transport within the country and with India and, through India, with Bangladesh and Bhutan. 5 ADB Country Partnership Strategy: Nepal, Manila. 6 ADB Regional Cooperation Strategy and Programs, Manila. 7 ADB Regional Cooperation Operations Business Plan, Manila.

7 3 C. Outputs 10. Road improvement component. The project will rehabilitate and reconstruct about 195 km of roads for (i) three road sections to expand connectivity, and (ii) two road sections to enhance the capacity of major international trade corridors. Consulting services for consulting supervision will also be provided, which includes support to address risks of HIV/AIDS and human trafficking. 11. Trade facilitation component. The project will provide equipment and capacity development support to modernize customs clearance systems and facilitate subregional trade. Major equipment includes the upgrade of the automated system for customs data, and computers and network systems. The component aims to transform the current computerized system from a transaction-recording system to a processing tool by providing (i) consulting services for reengineering the business process in customs; and (ii) equipment and implementation support, including training. 12. Capacity development component. The project will provide (i) equipment for the government to strengthen sector capacity, such as control of overloading, and (ii) consulting services to strengthen institutions such as the Department of Roads (DOR) and the Roads Board Nepal in line with Nepal s road sector development strategy. Areas requiring capacity development include project management, road asset management, and road technology expertise. D. Investment and Financing Plans 13. The project is estimated to cost $75.9 million, including taxes and duties, physical and price contingencies, and interest during implementation (Table 1). The detailed cost estimates by expenditure category, and detailed cost estimates by financier, are in the project administration manual (PAM). 8 Table 1: Project Investment Plan ($ million) Item Amount A. Base Cost a 1. Road improvement component b Trade facilitation component Capacity development component Tax and duties c 1.0 Subtotal (A) 59.4 B. Contingencies d 16.2 C. Interest During Construction e 0.3 Total (A+B+C) 75.9 a In mid-2010 prices, based on detailed design including environmental mitigation measures. b Includes taxes and duties of $5.1 million for the civil works to be financed from government resources. c Taxes and duties for works other than civil works to be financed from government resources. d Physical contingencies are computed at 15% for the civil works. Price contingencies computed at 10%, 8%, 6.5% for 2010, 2011, and e Interest during construction is computed at 1%. Sources: Asian Development Bank and Department of Roads. 8 Project Administration Manual (Appendix 2).

8 4 14. The government of Nepal has requested a loan in various currencies equivalent to SDR16,169,000 and a grant 9 not exceeding $24,500,000, both from ADB s Special Funds resources to help finance the project. This includes $22.0 million from the subregional pool of the Asian Development Fund (ADF). The government will finance the remaining local cost of $26.9 million equivalent, or 35.4% of the total cost, including taxes and duties, land acquisition and resettlement, office accommodation, and other miscellaneous costs (Table 2). Table 2: Financing Plan Amount ($ million) Share of Total (%) Source Asian Development Bank ADF grant ADF loan Government Total ADF = Asian Development Fund. Source: Asian Development Bank. 15. The loan from ADB s Special Funds resources will have a term of 32 years, including a grace period of 8 years, an interest rate of 1.0% per annum during the grace period and 1.5% per annum thereafter, and other such terms and conditions as set forth in the draft financing agreement. E. Implementation Arrangements 16. The implementation arrangements are summarized in Table 3 and described in detail in the PAM (footnote 8). Table 3: Implementation Arrangements Aspects Arrangements Implementation period January 2011 December 2014 Estimated completion 31 December 2014 date Management (i) Executing agency MPPW (ii) Implementing DOR agency (iii) Implementation unit Main DOR ADB Directorate in Kathmandu, and 5 DOR project site offices and 1 DOC project office: Number of staff proposed: 28 Procurement International competitive bidding 2 contracts About $11.3 million National competitive bidding 14 contracts About $32.8 million Single source selection with 1 contract About $1.0 million UNCTAD Shopping Tbd Tbd Consulting services PIC with capacity development 59 international About $4.9 million (QCBS) and 881 national person-months External monitoring (individual) 12 national About $0.1 million Customs business process reengineering (individual and QCBS) person-months 6 international and 84 national person-months About 1.0 million 9 A country's eligibility for ADF grants under the revised grant framework is determined by its risk of debt distress. The latest debt sustainability analysis determined that Nepal had a moderate risk of debt distress and was therefore eligible to receive 50% of its ADF allocation as grants.

9 5 Aspects Advance contracting and retroactive financing Disbursement Arrangements Advance contracting for procurement of works and recruitment of consultants, including finalization of request for proposals, preparation of bidding documents for works, and call for tenders. Retroactive financing of eligible expenditures, up to 20% of the aggregate amount of the loan and grant, incurred before effectiveness but not earlier than 12 months before the date of signing of the financing agreement. The loan proceeds will be disbursed in accordance with ADB's Loan Disbursement Handbook (2007, as amended from time to time) and detailed arrangements agreed upon between the government and ADB. ADB = Asian Development Bank, DOR = Department of Roads, DOC = Department of Customs, MPPW = Ministry of Physical Planning and Works, PIC = project implementation consultants, QCBS =: quality- and cost-based selection, Tbd = to be determined, UNCTAD = United Nations Conference on Trade and Development. Sources: Asian Development Bank and the Government of Nepal. 17. To help enhance transparency and fair competition for bidding, e-submission of bids will be adopted for procurement of national competitive bidding (NCB) work packages. DOR has previously carried out e-procurement, up to the stage of e-submission of bids, for projects funded domestically and by other development partners. The associated procedure and mechanism in place have been reviewed as satisfactory. III. DUE DILIGENCE A. Technical 18. The project considered climatic hazards and disaster proneness, and, to the extent possible, applied built-in measures to minimize their adverse impacts. For the roads in the hill areas, bioengineering technique 10 was considered where appropriate to protect and stabilize roadside slopes. For the roads in the Terai areas, conventional civil engineering measures were assessed, including embankment height, design values of storm frequency and runoff, and drainage. A road safety audit was undertaken and incorporated during the design, and will also be undertaken during construction. Overall, the project will (i) develop quality roads that sustainably expand connectivity and boost transport efficiency, (ii) improve travel conditions, and (iii) reduce travel time and vehicle operating costs. 19. Upgrading the customs clearance systems will build on the existing software, taking into account current and future needs. First, a business process reengineering plan will be designed, then the automated system for customs data will be upgraded and the plan implemented, keeping in mind the eventual establishment of a single-window system for trade facilitation in Nepal. B. Economic and Financial 20. Economic viability. The economic assessment was conducted in accordance with ADB s Guidelines for the Economic Analysis of Projects. 11 Each road has been assessed using standard approaches for road projects. The World Bank s highway development and management model was used for the Bhairahawa bypass and the Belbari Chauharwa road, both in the Terai region and suited to the model, while a spreadsheet-based analysis, with consumer surplus approach, was used for the hill roads. 10 Bioengineering combines vegetation grass, shrubs, and trees with minor structures such as dams, walls, and drains to manage water and debris, and to protect and stabilize slopes. It is a combination of indigenous methods and modern engineering structures that minimizes cost and maximizes benefits. DOR's division offices throughout Nepal now use bioengineering in the construction, maintenance, and upgrading of all roads, especially in hilly and mountainous areas. 11 ADB Guidelines for the Economic Analysis of Projects. Manila.

10 6 21. The economic internal rate of return (EIRR) evaluated for the roads varied between 13% and 35%. The results indicate that the proposed improvements of the project roads are economically viable on all subprojects and in most cases significantly higher than 12%, indicating the high economic rate of return. The sensitivity of the EIRR for the project roads was analyzed with respect to changes in the benefit and cost streams. The following sensitivity test cases were examined: (i) construction cost increase by 15%, (ii) benefit decrease by 15%, (iii) excluding producer surplus benefits for hill roads, (iv) construction delay by 1 year, and (v) a combination of (i) and (ii). Two of the roads (Harkapur Okhaldhunga and Okhaldhunga Salleri) have an EIRR below 12% in some of the sensitivity analysis cases. The EIRRs in these cases range from 9.7% to 11.5%, which are marginally below 12%. These two roads are also connected to function as one road, which has a higher EIRR in a combined economic analysis. Both roads serve underdeveloped remote areas and their improvement will have a positive impact on the development of these areas. Considering the positive development impact of these two roads and an EIRR of more than 9% even in the worst-case sensitivity scenario, they are recommended for implementation, along with all other roads included in the analysis Financial sustainability. Incremental recurrent costs associated with the project are estimated at 5% of the current DOR maintenance budget and less than 1% of the overall DOR budget on an annual basis. Maintenance will be required after project completion in 2013 and an adequate budget increase is expected in view of recent trends. It is reasonable to expect that funds will be available to meet these costs. The government has earmarked a budget amount for periodic maintenance, and assures that it will fund 100% of routine and periodic maintenance. C. Governance 23. Institutional. DOR, the implementing agency, was established in 1961 under the Ministry of Physical Planning and Works (MPPW). DOR is responsible for the development and maintenance of the strategic road network, which comprises the national arterial roads, and major feeder roads connecting to local and rural roads. DOR is headed by a director general who reports to the secretary of MPPW. 24. DOR has a good record of implementing ADB-funded projects, and has sufficient capacity, past experience, and institutional strength to implement this project. DOR capacity is further augmented by the World Bank s support 13 and ongoing ADB capacity development technical assistance, including training in carrying out feasibility studies for road transport projects and adopting best practices in contract management and quality assurance. 14 DOR will also get support from the provision of consulting services to assist with the supervision of works. 25. Financial management. Financial management assessment was carried out for the implementing agency. DOR has ample experience in implementing ADB-funded projects, enough capacity to carry out project financial accounting, and knowledge of ADB disbursement procedures. Within the DOR Project Directorate (ADB), the project implementation unit for the road transport component, there will be a dedicated project accounting and finance team with a suitably qualified chief project accountant and two assistant accountants. 12 Details of the economic assessment are in Economic Analysis (Appendix 2). 13 The World Bank has been providing support to the overall institutional strengthening, especially in the areas of management information systems, road safety action plan, safeguard implementation capacity, quality control, and human resources management. 14 ADB Report and Recommendation of the President to the Board of Directors: Proposed Asian Development Fund Grant and Technical Assistance Grant to the Kingdom of Nepal for the Road Connectivity Sector 1 Project. Manila (Grant 0051-NEP for $55.2 million and TA 4825-NEP for $0.3 million, approved on 20 July).

11 7 26. DOR will establish and maintain separate project records and accounts to identify the financing resources received and expenditures made for the project, ensuring an adequate audit trail. The government's Office of Auditor General will annually audit the project accounts and related financial statements in accordance with international auditing standards. To further minimize risks, ADB's direct payment procedure will be used for substantial disbursements for works, goods, and consulting services. 27. Procurement and anticorruption. The government has promulgated the Public Procurement Act (2007) and Public Procurement Regulations (2007), both generally acceptable to ADB and encompassing best international procurement practices. To be in line with the ADB s Procurement Guidelines (2010, as amended from time to time), the NCB annex in the procurement plan will be applied for the national competitive bidding. The Public Procurement Monitoring Office 15 has been assigned as the national procurement oversight body under the Office of the Prime Minister and Council of Ministers. E-submission of bids will be adopted for the NCB to substantially increase transparency and fair competition in bidding, as shown in projects funded domestically and by other development partners. The government will publish information on the project on DOR s website, including business opportunities associated with the project, and information on procurement of goods, works, and consulting services. 28. ADB s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government, the executing agency (MPPW), and the implementing agency (DOR). Specific policy requirements and supplementary measures are described in the PAM (footnote 8). D. Poverty and Social 29. Poverty reduction and social impact. The poverty situation in Nepal is serious. More than 26% of the people earn less than the government poverty line of NRs10,000 ($140) per year. Rural poverty is almost twice as high as urban poverty. According to the Nepal Living Standard Survey 2004, the poverty incidence in the rural districts that will be affected by the project ranges from 29% to 46%, as against 30.8% nationally. Most of these districts are also deemed food-insecure, where food is supplied from outside markets and in most cases from abroad. The majority of households have a food deficit for 3 9 months a year. As transportation proves difficult because roads are in poor condition or lacking altogether, it has been a challenge to supply food in time and at low cost. The lack of roads also limits people s chances to grow and sell agricultural products to the neighboring markets. 30. For the poverty and social assessment, 871 households were selected randomly at corridors of impacts. For census for resettlement assessment, 579 affected households were taken. Most primary stakeholders acknowledged the positive impacts of the project. With improved roads and better connectivity, farmers will be able to sell agricultural products to the neighboring markets, and thus grow larger marketable surpluses. A larger marketable surplus will generate more paid agricultural employment, particularly benefiting the poor, and thus improve the food situation in the project districts. The project will also create employment opportunities for skilled and unskilled labor during project implementation. It will enable reliable access to social services, particularly health-care services, education facilities, and supply of drinking water. The direct (access to services and markets) and indirect benefits (employment) of the project will help reduce poverty and improve the quality of life ADB is providing technical assistance to strengthen the Public Procurement Monitoring Office in order to implement requirements of the newly enacted act and regulations. 16 Summary Poverty Reduction and Social Strategy (Appendix 2).

12 8 31. Gender. The project will have no negative gender impacts. It will provide both men and women with direct employment opportunities during implementation, better delivery of services, and easier access to markets, quality health-care facilities, and higher education. Discussions were held with 39 focus groups, of which 28 had mixed male and female participation, and 11 were women-only groups. The number of participants during each discussion ranged from 13 to 52 in mixed groups and from 9 to 14 in female groups. Focus group discussions with women and communities revealed that women primarily look after domestic and agricultural activities. About 11% of the women work outside their homes, as construction or agriculture laborers. Only 2% are employed in services, in schools or in government offices. Women engaged in the non-agriculture sector, such as services and construction, are also responsible for domestic affairs, such as taking care of children and household chores, or looking after cattle. Most respondents welcomed the project. 32. The project will ensure that civil works contractors comply with all applicable labor laws, including elimination of gender-differentiated wages. Men and women directly affected by the project will be given priority of employment under the project. Contractors must pay equal wages to men and women employed for work of equal value; a specific clause will be included in bidding documents and compliance will be monitored during project implementation by a gender specialist engaged under the project implementation consultants, and by external monitoring. 33. HIV/AIDS. Nepal had 4,861 (3,545 males and 1,316 females) reported HIV (including AIDS) cases as of March At present, there are more than 50 nongovernment organizations working in the area of HIV/AIDS prevention, and 57 nongovernment organizations in anti-trafficking activities, in addition to United Nations agencies and government efforts. The National Center for AIDS and STD Control under the Ministry of Health and Population coordinates the activities of all stakeholders in fulfilling the commitments made in the National AIDS Strategy ( ), which emphasizes prevention as the mainstay for an effective response. Anti-trafficking activities are coordinated by the Ministry of Women, Children and Social Welfare. There already exists a large number of information and education print material on anti-trafficking developed through United States Agency for International Development support, which may be reproduced for use in project areas. Although the social assessment undertaken has not brought forth significant risks of HIV/AIDS and human trafficking in the project districts, these risks may be aggravated once connectivity has increased. To prevent this, a gender specialist engaged as part of the project implementation consultants will develop and implement an HIV/AIDS and anti-trafficking program that includes raising awareness of gender issues and child labor. E. Safeguards 34. Environment. The project is classified "B" in accordance with ADB s Safeguard Policy Statement (2009) and therefore, initial environmental examinations (IEEs) were prepared for the subprojects. DOR has submitted all IEEs for ADB approval, and they are now available to interested stakeholders upon request. 17 Findings of the IEEs indicate that the project is not likely to cause significant adverse environmental impact since no forest areas, wildlife sanctuaries, national parks, biodiversity-critical habitats, or similar ecosensitive areas will be traversed or lie within the corridors of impact as defined in the environmental assessment. Four subprojects will upgrade existing roads with no additional right-of-way requirements, and minor alignment changes will be made in conformance with road safety standards. Only the Bhairahawa bypass will require a new alignment and 17 Initial Environmental Examination: Bhairahawa Bypass Road, Initial Environmental Examination: Chainpur Khandbari Road, Initial Environmental Examination: Harkapur Okhaldunga Road, Initial Environmental Examination: Okhaldunga Salleri Road (Appendix 2). The Belbari Chauharwa Road was classified as C.

13 9 conversion of predominantly agricultural lands, but given its limited length of less than 3.5 km, this subproject is not foreseen to generate significant adverse impacts. 35. Most impacts are likely to occur during construction stage, associated with earth movement, embankment shaping, paving, heavy equipment operation, and unpaved-road travel. These impacts are temporary in nature, and mitigating measures are readily designed and easily implemented. Adequate attention was given to improving drainage and preventing erosion along rugged terrain. Coordinated efforts by the Department of Forest and Wildlife and DOR will be implemented for the Harkapur Okhaldhunga Road subproject, including setting up a monitoring office in the area to prevent illegal logging activities that may increase once access to the nearby unclassified secondary forest is made easier. 36. No irreversible, diverse, or unprecedented environmental impacts are expected to occur and a further environmental impact assessment is not needed. The Geo-Environment and Social Unit of the DOR will be responsible for implementing the environmental management plan, with most activities during construction phase to be implemented by the contractors. This will be in accordance with the subproject-specific monitoring plans. The Geo-Environment and Social Unit will prepare annual environmental audit reports for the MPPW during project operation. 37. Involuntary resettlement. The project is classified "B" in accordance with ADB s Safeguard Policy Statement. It has been developed with a view to minimize land acquisition and involuntary resettlement. Where possible, construction activities will take place within the existing right-of-way. A census was conducted based on the detailed design. Out of five subprojects, three will have minor land acquisition impacts and no resettlement is envisaged. Resettlement plans have been prepared for (i) Harkapur Okhaldhunga road (42 km), (ii) Okhaldhunga Salleri road (58 km), and (iii) Bhairahawa bypass (about 3.5 km), to address land acquisition and livelihood impacts. 38. In all, 902 households will be affected by the project, out of which 10 will suffer partial impact on their structures. Of those 10, none will be physically displaced since these households have enough remaining land to construct new structures adjacent to the affected structures. Only economically displaced households will lose a strip of agricultural land, which is identified to be less than 10% of their total land holdings. The displaced households will be entitled to compensation for the loss of land and/or structure (at replacement cost) and for shifting costs, and to other income-restoring assistance. The total cost for implementing the resettlement plan has been estimated to be NRs487,791,989 ($6.6 million). 39. Indigenous peoples. The project is classified "B" in accordance with ADB s Safeguard Policy Statement. Indigenous people constitute about 37.2% of Nepal s total population. The government has declared 59 groups as indigenous peoples. The parameters of defining them include language, physical structure, and the religious and socioeconomic differences. The most populous indigenous group is Magar, followed by Tharu, Tamang, Newar, Limbu, Rai, and Sherpa. 40. Key indigenous groups in the project areas are Newar, Magar, Sherpa, and Tamang. Meaningful consultations, held in an atmosphere free of coercion, were conducted to ensure a comprehensive perspective on the project and its impacts, and to ascertain community response to the project, their needs and demands from the project, an estimate of losses that they would suffer, and steps to mitigate those losses. Social impact assessments confirmed that indigenous people will not be affected more than the rest of the population and will benefit equally from the socioeconomic opportunities created by the project. A combined indigenous peoples plan and resettlement plan was prepared for three subprojects. Adequate compensation provisions have been made in the combined plan to mitigate the impacts on indigenous peoples.

14 10 F. Risks and Mitigating Measures 41. An assessment of peace building, governance risk, and climate change was undertaken. The peace-building tool developed by the Asian Development Bank s Nepal Resident Mission helped the overall design, with a stronger focus on people s participation in decision making, creating opportunities for local employment, avoiding the use of child labor, raising HIV/AIDS awareness, carrying out skills training and an anti-trafficking campaign, and educating the people in the zone of influence. The governance risk assessment identified potential risks in public financial management, procurement, and corruption, as also mentioned in the due diligence. Because the country falls within the mountain ecosystem, climate change would result in accelerated glacial melting, rockfalls, landslides, and glacial lake outburst floods. Given that the tracks of the roads already exist and that the glaciers and glacial lakes are distant, there is no increased risk from the project. The project considered climatic hazards and disaster proneness, and, to the extent possible, applied built-in measures to minimize their adverse impacts as mentioned in the due diligence. 42. The integrated benefits and impacts are expected to outweigh the costs. Major risks and mitigating measures are summarized in the risk assessment and risk management plan. 18 IV. ASSURANCES 43. The government and MPPW have assured ADB that implementation of the project shall conform to all applicable ADB policies, including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement, as described in detail in the PAM and financing documents. 44. The government and MPPW have agreed with ADB on certain covenants for the project, which are set forth in the financing agreement. V. RECOMMENDATION 45. I am satisfied that the proposed loan and grant would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve: (i) (ii) the loan in various currencies equivalent to SDR16,169,000 to Nepal for the Subregional Transport Enhancement Project from ADB s Special Funds resources with an interest charge at the rate of 1.0% per annum during the grace period and 1.5% per annum thereafter; for a term of 32 years, including a grace period of 8 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft financing agreement presented to the Board; and the grant not exceeding $24,500,000 to Nepal, from ADB s Special Funds resources, for the Subregional Transport Enhancement Project, on terms and conditions that are substantially in accordance with those set forth in the draft financing agreement presented to the Board. Haruhiko Kuroda President 4 October Risk Assessment and Risk Management Plan (Appendix 2).

15 Appendix 2 11 DESIGN AND MONITORING FRAMEWORK Design Summary Impact Promoted economic development of Nepal s border areas and the remote northeastern hills by increasing domestic and regional trades through expansion of the national and subregional transport systems Performance Targets and Indicators with Baselines Traffic volume along the project corridor increased 20% more than the country's average traffic growth rate (13% average in the past 5 years) Volume of cross-border traffic increased by 30% more than the country's average traffic growth rate (i.e., 13% in average past 5 years) Data Sources and Reporting Mechanisms Post-implementation measurement Government socioeconomic statistics Border post statistics Assumptions and Risks Assumptions Various government development activities effectively coordinated with road sector investment Cross-border transport is streamlined, e.g., cross-border transport agreement Economic activities in project-influenced areas increased by 10% more than the country's average economic growth rate (i.e., 4% in FY2009/10) Outcome Improved connectivity of remote areas and expanded the capacity of major international trade corridors in conjunction with the modernization of customs systems, thereby enabling efficient and safe transport within the country and with India and, through India, with Bangladesh and Bhutan. Average travel time along major trade roads covered by the project cut by 40% (from more than 2 hours) Opened access to remote areas for the whole year (from 290 days) Waiting time for customs clearance reduced by 1 2 hours (from 4 hours for documentation clearance) Fatality rate along the project corridors not exceeding the country's average fatality rate (i.e., 25 per 10,000 motorized vehicles) Post-implementation measurement Accident data Assumptions Timely and quality project delivery Transport modes and services available for the project roads The government provides routine and periodic maintenance throughout the project life. Improved women s access to social services, healthcare services, education facilities, supply of drinking water, and employment opportunity Gender impact assessment

16 12 Appendix 1 Design Summary Performance Targets and Indicators with Baselines Improved awareness of gender issues, child labor, HIV/AIDS, and human trafficking Data Sources and Reporting Mechanisms Assumptions and Risks Outputs 1. Road improvement component 1.1 Road improvement 1.2 Gender, child labor, HIV/AIDS, and human trafficking awareness 2. Trade facilitation component 3. Capacity development component 195 km upgraded by 2013 Increased capacity in preventing gender discrimination, child labor, HIV/AIDS and human trafficking Customs clearance systems upgraded Project roads maintained with international roughness index below 5 Progress reports Asian Development Bank s review missions Department of Roads road condition survey Assumptions Qualified civil works contractors and consultants participate Efficient and effective procurement and safeguard implementation Government commitment to institutional strengthening Qualified civil works contractors and consultants participate Activities with Milestones 1. Road improvement component 1.1. Engagement of construction supervision consultants by end of Procurement of civil works completed by January Construction of all civil works completed by end of Implementation of gender, child labor, HIV/AIDS, and anti-trafficking awareness program completed by end of 2012 Inputs ADB: $49.0 million Amount Item ($ million) Road construction 29.0 Project implementation support 4.6 Trade facilitation 2.5 DOR capacity development 0.6 Contingencies 12.0 Interest during construction Trade facilitation component 2.1. Design of reengineering process by June Procurement of equipment and services (ASYCUDA World) by Training for the new software package by Capacity development component 3.1. Procurement of equipment by end of Training to enhance DOR capacity completed by end of 2011 Government $26.9 million Amount Item ($ million) Land acquisition and resettlement 6.6 Road construction 10.0 Tax and duties 6.1 Contingencies 4.2 ADB = Asian Development Bank, ASYCUDA = automatic systems of customs data, DOR = Department of Roads, km = kilometer. Source: Asian Development Bank.

17 Appendix 2 13 LIST OF LINKED DOCUMENTS ( 1. Financing Agreement 2. Sector Assessment (Summary): Transport and Information and Communication Technology 3. Project Administration Manual 4. Contribution to the ADB Results Framework 5. Development Coordination 6. Economic Analysis 7. Country Economic Indicators 8. Summary Poverty Reduction and Social Strategy 9. Risk Assessment and Risk Management Plan 10. Trade Facilitation Nepal 11. Initial Environmental Examination: Bhairahawa Bypass Road 12. Initial Environmental Examination: Chainpur-Khandbari Road 13. Initial Environmental Examination: Harkapur-Okhaldunga Road 14. Initial Environmental Examination: Okhaldunga-Salleri Road 15. Resettlement Plan: Bhairahawa Bypass Road 16. Resettlement Plan: Harkapur-Okhaldunga Road 17. Resettlement Plan: Okhaldunga-Salleri Road