The World Bank Nepal Water Governance and Infrastructure Project (P176589) Project Information Document (PID) Concept Stage | Date Prepared/Updated: 26-Aug-2021 | Report No: PIDC31890 Aug 16, 2021 Page 1 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) BASIC INFORMATION A. Basic Project Data OPS TABLE Country Project ID Parent Project ID (if any) Project Name Nepal P176589 Nepal Water Governance and Infrastructure Project (P176589) Region Estimated Appraisal Date Estimated Board Date Practice Area (Lead) SOUTH ASIA Jan 19, 2022 Mar 11, 2022 Water Financing Instrument Borrower(s) Implementing Agency Investment Project Financing Ministry of Water Supply Provincial Ministry of Physical Infrastructure Development (Karnali Province 6), Department of Water Supply and Sewerage Management, Birendranagar Municipality, Surkhet Proposed Development Objective(s) The Proposed Project Development Objectives (PDO) are to i) strengthen sector institutional capacity for water supply service delivery in selected local governments under the federal systems set forth in Nepal’s 2015 constitution, and ii) increase access to improved and climate resilient water supply and sanitation in participating local governments. PROJECT FINANCING DATA (US$, Millions) SUMMARY-NewFin1 Total Project Cost 100.00 Total Financing 100.00 of which IBRD/IDA 70.00 Financing Gap 0.00 DETAILS -NewFinEnh1 World Bank Group Financing International Development Association (IDA) 70.00 Aug 16, 2021 Page 2 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) IDA Credit 70.00 Non-World Bank Group Financing Counterpart Funding 30.00 Borrower/Recipient 30.00 Environmental and Social Risk Classification Concept Review Decision High Track II-The review did authorize the preparation to continue B. Introduction and Context Country Context 1. Over the past decade, Nepal’s economy has performed reasonably well, though vulnerabilities have increased with COVID-19 and climate change. Real gross domestic product (GDP) growth averaged 4.9 percent (at market prices) over 2010–20. Although declining as a share in the economy, agriculture continues to play a significant role, contributing over 29 percent of GDP in FY2020. The service sector has grown in importance, accounting for 46 percent of GDP in FY2019. Industry and manufacturing have grown more slowly and their relative share in the economy has averaged 14 percent of GDP over the past decade. Similarly, exports continue to struggle, while imports are fueled by remittances. Remittances remained stable between 2010 and 2019, with their share of GDP averaging 24.5 percent, supported by an increased transfer of funds through formal channels in recent years. Inflation has been in single digits for most of the past decade, with the peg of the Nepalese rupee to the Indian rupee providing a nominal anchor. Fiscal balances remained sustainable owing to strong revenue growth and modest spending. However, the federal government is now sharing revenue and transferring grants to provincial and local governments, as part of the recent reforms linked to federalism. The poverty headcount ratio (at the international line of US$1.90/day) is estimated at 8 percent in 2020, down from 15 percent in 2010. At a higher line (US$3.20/day), 39 percent of the population is estimated to be poor in 2020. With the COVID-19 pandemic, the risk of falling into poverty has increased. About 31.2 percent of the population that are estimated to live between US$1.9 and US$3.2 a day face significant risks of falling into extreme poverty in 2021, primarily because of reduced remittances, foregone earnings of potential migrants, job losses in the informal sector, and rising prices for essential commodities as a result of COVID. 2. The recent COVID-19 pandemic is expected to derail the strong growth trajectory established over the past three years. GDP growth averaged 7.3 percent (between 2017 and 2019); and grew by 7 percent in FY2019 supported by an uptick in tourist arrivals, strong agricultural growth from good monsoons, and robust industrial growth due to increased electricity generation. On the demand side, the main growth drivers were private investment and private consumption, the latter supported by remittance inflows. In the first half of FY2020 (mid-July to mid-January), agricultural growth slowed down with delayed monsoons and crop damage, which indicates substantial exposure of the sector to climate variability. In March 2020, stringent measures were imposed to contain the spread of COVID-19, including travel Aug 16, 2021 Page 3 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) restrictions. This stopped tourist arrivals, leading to a significant reduction in hotel occupancy rates.1 With remittance inflows are declining, impacting services growth, lockdowns and social distancing measures have disrupted domestic distribution channels, causing shortages of fertilizer, livestock feed, labor, and transportation, all of which will further reduce agricultural growth in FY2020. The restrictions on trade (limited to only essential goods) have disrupted supply chains in the manufacturing sector. Shortages in imports of building materials and skilled labor have brought construction activity to a halt. Lower domestic demand has translated to lower consumption of electricity, gas, and water, further reinforcing the slump in overall economic activity, with an estimated GDP growth rate of 2.3 percent in FY2020. However, a widespread and protracted COVID-19 outbreak, with the attendant lockdowns and supply disruptions, still has the potential to reduce GDP growth as low as 0.5 percent in FY2020. In FY2022, growth is expected to remain subdued at 2.1 percent. However, a widespread outbreak that extends into the high agriculture harvest and festival seasons could cause GDP to contract by as much as 2.8 percent in FY2022. 3. Inflation averaged 4.5 percent year on year in FY2020, but rose in the first half of FY2021, driven by higher food prices. In FY2020, prices of non-food items grew by 5.8 percent, driven mainly by housing and utilities, while food prices rose only 3.1 percent due to good agricultural production. Inflation averaged 6.4 percent (year-on-year) in the first half of FY2021, driven by higher food prices (particularly vegetables) and increased import duties on certain agricultural and industrial goods. In March 2021, inflation reached 6.7 percent (year-on-year), primarily led by food prices because of disruptions in distribution channels. This widened the inflation gap with India and contributed to a 2.1 percent (real effective) appreciation of the Nepalese rupee, over the first half of FY2021. The Nepalese rupee (NPR) is pegged to the Indian rupee (INR) at the rate of 1.6 NPR to 1 INR. As a result, inflation follows the price movements in India with a lag. 4. Nepal’s economy is highly vulnerable to climate change and risks losing 2.2 percent of annual GDP due to climate impacts by 2050.2 It ranks as the fourth most vulnerable country to climate change impacts (Climate Change Vulnerability Index, 2011). The most recent update of the Global Climate Risk Index ranks Nepal as the ninth most affected country over the period from 1999-2018.3 The number and frequency of landslides, flash floods, and droughts has increased in recent years, and erratic weather patterns projected in climate models may exacerbate the impact of these disasters in the coming years.4 Mean annual temperatures throughout Nepal are projected to increase between 0.5-2.0°C by the 2030s,5 while projections show a three-fold increase in monsoon rainfall and more frequent summer floods.6 The risk of flooding in the river basins of the non-Himalayan region due to higher monsoon precipitation is projected to increase by as much as 14 to 40 percent by the 2030s.7 Projected increase in inter-annual rainfall variability is also likely to increase the number of consecutive dry days in many regions. Nepal ratified the Paris Climate Agreement along with its Second Nationally Determined Contributions (NDC) in 2020, with mitigation components in energy, agriculture, forestry, and wastewater management. 5. Federalism and Devolution: In 2017, Nepal held successful elections for all three tiers (local, province, and federal) of the new state architecture defined by the 2015 constitution, marking a protracted-but-successful conclusion of a political transition to federalism that began with the signing of the Comprehensive Peace Agreement in November 2006.8 Provincial governments largely mirror the coalition at the center. At the subnational level, funds, functions, and 1 As of April 2021, the Hotel Association of Nepal estimated the hotel occupancy rates among its 270 members at below 20 percent. 2 Ahmed, M., & S. Suphachalasai (2014). Assessing the costs of climate change and adaptation in South Asia. Asian Development Bank. URL: https://www.adb.org/sites/default/files/publication/42811/assessing-costs-climate-change-and-adaptation-southasia.pdf 3 German Watch. 2021. “Global Climate Risk Index�. Available Online 4 World Bank. 2011. Climate Risk and Adaptation Country Profile for Nepal – “Vulnerability, Risk Reduction and Adaptation to Climate Change.� 5 “Intended Nationally Determined Contributions (INDC)�. Ministry of Population and Environment. Communicated to UNFCC Secretariat in February 2016. 6 Risk Screening Overview of Nepal. Climate Change Knowledge Portal. World Bank Group. 7 World Bank. 2018. Nepal – Systematic Country Diagnostic: A new approach for a federal Nepal. Washington, DC: World Bank Group. 8 Nepal has recently been facing period of political turbulence. On July 12, 2021, Nepal’s Supreme Court ordered the reinstatement by July 18 of the House of Representatives that had been dissolved by President Bhandari at the request of incumbent Prime Minister KP Oli. The Court also issued an order to appoint the Aug 16, 2021 Page 4 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) functionaries hitherto managed by the central, district, and village authorities are moving to the seven new provinces and 753 local governments (LGs)9 for which new legislation, institutions, and administrative procedures are being formalized as constitutionally prescribed. Meanwhile, the central-level authority is being streamlined with a focus on national policies and oversight. This profound level of state restructuring is expected to result in improved outreach and service delivery in the medium term but is likely to take time before becoming fully operational. 6. Despite successful political transition with most political institutions established, financing capacity of the local governments remains weak due to limited revenue generation capacities. Fiscal transfer from the federal government, which includes revenue sharing, different forms of conditional and non-conditional grants and equalization grants comprise the major share of local government finance. Also, in the FY 2019/20, Provincial and Local Governments (PLGs) accounted for about 34 percent of national expenditure,10 most of which came from the federal fund transfers. The implementation capacity remained weak with less than 61 percent spending realized against the annual allocation in aggregate for PLG’s capital expenditure. Significant gaps still exist between the needs at all levels of government in terms of human resources availability, functioning protocols including local adaptation of laws, regulations and directives and capacity to plan, design and fund transformative programs for provisions of infrastructure for delivery of services, which are regarded as constraints to quality and timeliness of expenditure. 7. Institutional capacity at the local levels, for service delivery, are nascent and evolving. Key staffs at decision levels are mostly deputed from the federal government and it is not uncommon for many of these staff to be transferred at short intervals. Most of the federal agencies are maintaining presence at the provincial levels, who are directly responsible to oversee the implementation of federally supported development programs which may not be conducive for consolidation of federalization efforts. Since the roll-out of federalism, PLGs have not been empowered fully to recruit and manage their own civil servants. The civil service adjustment carried out in 2019 failed to fill all technical positions at PLG levels. The Provincial Public Service Commission (PPSC) has been created in some provinces, but the federal Civil Service Act that will empower PPSCs to recruit civil servants for PLGs has not yet been adopted.11 Without the Federal Civil Service Act, Provinces cannot adopt their Provincial Civil Service Act: therefore, Provinces cannot manage and recruit public servants at the local level. Capacity deficits contribute to weak institutional capacity and ineffective performance of functional assignments by PLGs. A Provincial and Local Government Support Program (PLGSP), of about US$ 130 million financing, is under implementation since August 2019. The program is being funded by assistance from DFID, SDC, Norway, EU, and UN. It is envisaged that the program will strengthen PLGs systems, procedures, and intergovernmental relationships, to maximize benefits in terms of cooperative federalism and enhance the capacity of provincial and LGs to deliver services and effectively manage development processes. Sectoral and Institutional Context 8. WASH plays a critical role in human capital development and resilience to pandemics. Safe water supply, sanitation and hygiene services are an essential part of protecting human health during infectious disease outbreaks, including the current COVID-19 pandemic. WASH services in households and at public institutions like schools and healthcare facilities have been identified as the essential elements of the response to the COVID-19 pandemic. The human capital costs of poor water supply, sanitation, and hygiene (WASH) especially during a pandemic like COVID-19 opposition Nepali Congress (NC) Party President, Sher Bahadur Deuba, as Prime Minister. On July 18, 2021, Prime Minister Sher Bahadur Deuba won a vote of confidence, securing his position for the remainder of the term of the House of Representatives till early 2023 when periodic elections will be held. 9 There are 6 metropolitan cities, 11 sub-metropolitan cities, 276 municipalities, and 460 rural municipalities. Rural municipalities are often referred to as ‘Palikas’. 10 The World Bank Group; PER # 7190087 Final Report – Nepal; November 2019 11 World Bank. 2019. Nepal Federal Capacity Needs Assessment (FCNA) Report. https://www.worldbank.org/en/news/press-release/2019/12/17/new-government- report-takes-stock-of-federalism-in-nepal Aug 16, 2021 Page 5 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) are high, which is manifested in poor maternal and child health with lasting consequences in productivity and earnings of the next generation. In Nepal, 36 percent of children under the age of five are stunted. The poor are the worst affected, stunting among children from the lowest wealth quintile is 49 percent compared to 17 percent among the highest wealth quintile. Evidence shows that poor sanitation is also an important contributor to low hemoglobin and anemia in children under five.12 Despite declines in WASH attributable mortality, inadequate WASH remains an important determinant of disease burden, especially among young children. One estimate shows that approximately 3500 children die of water- borne diseases every year.13 Rising temperature and increased flooding due to climate change can exacerbate this problem by reducing the availability of safe water sources or contaminating them. Based on analysis by the World Bank,14 the western most regions in the country have the highest overlap of the geographical variation in the incidence of high- level food poverty, stunting and diarrhea, and areas of low drinking water or sanitation access. 9. Access to WASH services in Nepal improved over time, but significant challenges remain for the Government to achieve the United Nations’ Sustainable Development Goal (SDG) 6 on clean water and sanitation. According to the Joint Monitoring Program (JMP) database, the country has achieved the Sustainable Development Goal (SDG) target for access to improved sanitation/Open Defecation Free status (Actual 2021 = 100 percent, Target 2030 = 100 percent) but is behind the target of access to safely-managed water supply (Actual 2021 = 21 percent, Target 2030 = 50 percent) .15,16,17 The recent Multiple Indicator Cluster Surveys by the Nepal Planning Commission (MICS, 2019) show that nationally, only 19 percent of households have access to safely managed drinking water, with urban households receiving higher proportions of access (21.9 percent) compared to rural households (13.3 percent). The draft WASH Sector Development Plan (SDP) prepared by Ministry of Water Supply in May 2019 estimates that about 16 million lack adequate sanitation facilities.18 Challenges in the WASH sector contributing to these dire statistics are discussed below. 10. Low functionality of existing infrastructure. One of the most salient problems in water service provision is the low functionality of existing infrastructure, which has affected the adequate and reliable delivery of drinking water. A nationwide functionality study found that out of a sample of 42,039 piped water supply schemes covered, only 28.1 percent of them were described as ‘well-functioning’ and 38.1 percent of them did not have year-round supply.19 33.8 percent needed major repair, rehabilitation, reconstruction or were non-repairable. Reasons for this include: (i) community capacity constraints to raise revenue for O&M; (ii) water source issues, particularly due to increasing climate variability and poor watershed management; and (iii) Water Supply and Sanitation User Groups’ (WSUGs) inability to undertake major repairs. It has been estimated that 20-25 percent of the water sources in rural mid-hill have dried up over the past two decades, with disproportionate impacts on low income households and women on whom the burden of water collection falls more heavily.20 12 Coffey, D., Geruso, M., & Spears, D., 2017. Sanitation, disease externalities and anaemia: evidence from Nepal. The Economic Journal. 13 Aryal KK, Joshi HD, Dhimal M, Singh SP, Dhakal P, Dhimal B, et al. Environmental burden of diarrheal diseases due to unsafe water supply and poor sanitation coverage in Nepal. J Nepal Health Res Counc. 2012;10(21):125–9. 14 World Bank, 2021. Glaciers, Rivers and Springs: A Water Sector Diagnostic of Nepal. Washington D.C. 15 15th Periodic plan of GON (2019/020 to 023/24) pp. 252-258, pp. 586-587, p. 587 16 Ministry of Water Supply. 2019. Business plan of MoWS, Sept 2019. p.1 17 UN JMP Database, 2021. Safely Managed Water Supply refers to drinking water from an improved water source that is accessible on premises, available when needed and free from faecal and priority chemical contamination. The national target is for universal household access to safely managed water and sanitation by 2030 in line with the government’s “One House One Tap� policy. 18 Inadequate FSM remains a major challenge across the country, despite Nepal being declared Open Defecation Free (ODF) according to SDG 6.2. 19 National Management Information Project (NMIP) database 2018. pp. 9, 30,31 20 Gurung, A., Adhikari, S., Chauhan, R., Thakuri, S., Nakarmi, S., Ghale, S., ... & Rijal, D. (2019). Water crises in water-rich country: case studies from rural watersheds of Nepal's mid-hills. Water Policy. Aug 16, 2021 Page 6 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) Figure 1: NRW and Supply hours (Source: MoWS Capacity Assessment and Benchmarking 2014/15) 11. Rapid urbanization. While Nepal is one of the ten least urbanized countries in the world, it is also one of the top ten fastest urbanizing countries (Figure 2).21 Nepal has now seven provinces and seven provincial capitals. These capitals are expected to be administrative and economic growth centers for their respective provinces. Out of seven capitals, two are metropolitan cities (Biratnagar and Pokhara), three are sub-metropolitan cities (Janakpur, Hetauda and Butwal) and remaining two are municipalities (Birendranagar and Godavari). All provincial capitals except Godavari have population more than 100,000 as per the National census 2011. Drinking water supplies in these provincial capitals are generally inadequate in terms of overall coverage, water quantity and quality. For sanitation, urban households are dependent on pits and tanks that are cleaned infrequently, and sewerage coverage is sparse. There is no full-service chain available for sanitation (via sewerage or Fecal Sludge Management). The Urban Water Supply and Sanitation Sector Policy 2009 and the proposed new National Water and Sanitation policy (draft) list several problems facing urban utilities that call for substantive improvements:22 poor supply coverage, low supply pressure, intermittent supply, poor water quality, high non-revenue water (NRW) and low customer satisfaction. An official report on the 26 biggest urban utilities showed that on average supply hours vary from 2 to 12 hours a day with an average of 6.5 hours/day (Figure 1) .23 However, in some of the largest cities, an estimate showed that water is supplied intermittently in the interval of 3 to 6 days for one to four hours only.24 NRW in the systems ranges from about 12-58% with an average of about 39%.25 The intermittent supply impacts both water quality and energy costs borne by the households to pump and treat water. Energy usage of water supply systems are significant and NRW only worsens the energy burden, adding both GHG emission and costs. 26,27 Poor 21 Bakrania, S. (2015). UN DESA 22 The new water and sanitation policy is still in draft form. The Urban water and sanitation policy 2009 is still in operation 23 Water Service Providers Capacity Assessment and Benchmarking 2014-2015, Sector Efficiency Improvement Unit (SEIU), Ministry of Water Supply 2016. 24 Udmale, P., Ishidaira, H., Thapa, B., & Shakya, N. (2016). The status of domestic water demand: supply deficit in the Kathmandu Valley, Nepal. Water, 8(5), 196. 25 Government of Nepal, 2014. National Water Supply and Sanitation Sector Policy 2014 – Final Draft December 31, 2014. Ministry of Urban Development, Nepal. 26 Dilip Limaye and Kristoffer Welsien, Mainstreaming Energy Efficiency Investments in Urban Water and Wastewater Utilities, Guidance Note, June 2019. 27 Although Nepal’s electricity production is mostly a clean source (hydroelectric), which produces negligible amounts of GHG, the country imports almost half of its Aug 16, 2021 Page 7 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) access to safe water and sanitation poses a major threat to health, especially during a pandemic like COVID-19. The National Water Supply Corporation (NWSC) has been providing water supply services in 22 urban areas outside the Kathmandu Valley. As the populations in towns have grown rapidly, NWSC has been confronted with institutional and management capacity constraints to meet the growing water demand. Water service providers across all the provinces are operating on decreasing returns of scale; on average, resources are spent at 63 percent efficiency.28 The recent, yet sharp urbanization process in Nepal offers a timely opportunity to develop and implement a holistic approach in building its cities’ water security (see para.17). Figure 2: Greatest absolute increases in build-up areas in Nepal between 2000-2014 (Source: Pesaresi et al, 2015:) 12. Poor water quality. Despite the country’s achievement of 100 percent Open Defecation Free (ODF) status in 2019, wastewater handling and treatment facilities remain challenges which results in widespread pollution of water resources. The latest MICS survey data reveals that 75.3 percent of the population’s water sources, and 85.1 percent of household water is contaminated with E- coli.29 82 percent of the population had improved sanitation access, of which only 7 percent were connected to a private sewer network. Few urban municipalities have wastewater treatment facilities. Kathmandu has only one functional facility out of four, which can handle less than 5 percent of sewage generated, although an Asian Development Bank (ADB) project to improve capacity to 80 percent is under way.30 In 2014, only 50 percent of the 26 urban utilities had a water quality monitoring system in place, and although all of them had chlorination units, their application and maintenance were irregular. 13. High vulnerability to climate change. While Nepal does have extensive water resources, the dry season run-off is low and at further risk of decline as Himalayan glaciers continue to melt faster than expected and springs begin drying up.31 A 2017 study–which surveyed 41 springs in 3 elevation tiers in mid-western Nepal– found that 73.2 percent of the electricity demand from India, which in-turn relies mostly on fossil-based electricity. 28 World Bank, 2019. Nepal Public Expenditure Review 29 MICS, 2019, pp.27-28. 30 ADB 2013. Proposed Loan and Grant and Administration of Loan and Grant Nepal: Kathmandu Valley Wastewater Management Project. Report and Recommendation of the President to the Board of Directors. Manila. 31 Bolch, T., J. M. Shea, S. Liu, F. M. Azam, Y. Gao, S. Gruber, W. W. Immerzeel, A. Kulkarni, H. Li, A. A. Tahir, G. Zhang, and Y. Zhang. 2019. “Status and Change of the Cryosphere in the Extended Hindu Kush Himalaya Region.� In the Hindu Kush Himalaya Assessment, edited by P. Wester, A. Mishra, A. Mukherji, and A. Shrestha, 209–55. Switzerland: Springer, Cham. Shrestha, A. B., and R. Aryal. 2011. “Climate Change in Nepal and Its Impact on Himalayan Glaciers.� Regional Environmental Change 11 (1): 65–77. Aug 16, 2021 Page 8 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) spring water sources had an observed decreased flow and 12.2 percent of them had dried up within the decade, making hill communities vulnerable to water stress.32 The reduction in supply hours in the dry season in major cities goes to show the vulnerability of the water supply system to climate variability, land use changes and the lack of storage for buffer. Moreover, the absence of guidelines and technical standards for good quality infrastructure decreases urban municipalities’ resilience to climate hazards.33 Energy usage of water supply systems are significant and NRW only worsens the energy burden, adding both GHG emission and costs.34 Although Nepal’s electricity production is mostly a clean source (hydro), this constitutes a small portion of total energy use and about half of domestic electricity demand. In a context of rapid urbanization, building resilience to climate change is crucial for the prosperity of Nepal’s urban areas. 14. Weak institutional and human resource capacity. In the new federal structure, the Local Governance Operation Act 2017 places the responsibility of providing local safe water, sanitation, irrigation, and disaster mitigation services to the local governments (municipalities and palikas35). The proximity of local governments to local communities signals the potential for better responsiveness and accountability. However, for the effectiveness of this new governance model, there is need to place extra focus on building institutional and human resource capacity. In carrying out the water sector specific functions, local governments lack capacity for formulation, implementation, monitoring, evaluation and regulation of policies, laws, standards, and plans. Municipalities rely on external support from the Municipal Association of Nepal and National Association of Rural Municipal Association of Nepal to set standards for clean water.36 A survey carried out by the World Bank found that while rural municipalities fare well with regard to undertaking campaigns for awareness raising on sanitation and hygiene, urban municipalities face constraints due to the lack of social cohesion and manpower37. Few municipalities have water use master plans due to lack of technically skilled people to prepare them and the lack of support from national level institutions. While 83% of LGs have a unit in their organizational structure designated to handle procurement, only 46% have prepared procurement regulations due to weak capacity, and very few have prepared annual procurement plans37. Many palikas have received support from Development Partners for water supply and sanitation provision but are still heavily dependent on federal funds to sustain basic operation and maintenance. Resource constraints remain a significant challenge to long term planning, particularly due to limited internal revenue mobilization. A critical and pervasive challenge in the water sector is limited understanding of how the deconcentrated federal line agencies interact with local governments to deliver services, particularly in urban municipalities. There is weak intergovernmental coordination between the three tiers of government, limited transparency, and accountability at local level. Further clarity is required on the roles of respective tiers of government to eliminate overlaps and inefficiencies. 15. Small-scale, fragmented, and unsustainable local water schemes. Municipalities continue to rely on a legacy of Water Supply and Sanitation User Committees (WSUC)-based planning and implementation models for water service delivery, resulting in small-scale, fragmented, and unsustainable local water schemes. Municipalities are responsible for regulating and providing technical and financial support for the operations of WSUCs. However, currently none of the municipalities have a complete register of the WSUCs within their jurisdiction. There are over 40,000 WSUC-managed water supply systems in the country,38 managed mostly on voluntary basis, many of which are currently under 32 Poudel, D.D. and Duex, T.W., 2017. Vanishing springs in Nepalese mountains: Assessment of water sources, farmers' perceptions, and climate change adaptation. Mountain Research and Development, 37(1), pp.35-46. 33 Glacial lake outburst floods, heat waves, intensive rainfall, and landslides have impacted roads and water supply and sanitation systems. Source: “Climate Proofing Urban Development in Nepal�, Presentation by the GON during Regional Dialogue on Climate Resilient Growth and Development, Thailand. 34 Dilip Limaye and Kristoffer Welsien, Mainstreaming Energy Efficiency Investments in Urban Water and Wastewater Utilities, Guidance Note, June 2019. 35 ‘Palikas’ refers to rural municipalities. 36 World Bank, 2021. Local Public Service Delivery Position Paper, WASH case study. Nepal Water Platform ASA 37 World Bank. 2019. Nepal Federal Capacity Needs Assessment (FCNA) Report. Washington D.C. 38 Department of Water Supply and Sewerage Management estimates Aug 16, 2021 Page 9 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) performing.39 While the WSUC-led service delivery model has several positive aspects, such as an emphasis on community participation, empowerment and ownership, and employment creation, it inevitably generates small-scale, fragmented water schemes without the benefits of economies of scale and low sustainability.40 The small and fragmented size of these systems makes interventions for improvement, for example introducing water treatment systems or controlling of the Non-Revenue Water (NRW) costly and technically challenging. WSUCs receive insufficient support to undertake timely maintenance and repairs and as a result, there is outward migration of trained local maintenance technicians in search of better employment opportunities. 16. Policy framework relating to WASH in Nepal has evolved overtime. The National Urban Water Supply and Sanitation Sector Policy (2009) and the Rural Water Supply and Sanitation National Policy, Strategies and Strategic Action Plan (2004) remain in operation but are due for replacement to reflect the transition to federalism.41 The two policies cover definitions of service levels, cost sharing principles, inclusion of women and disadvantaged groups in decision making, environmental protection, and roles and responsibilities of different GoN ministries and agencies as well as other stakeholders. The Sanitation and Hygiene Master plan has led to improved rural sanitation and includes nine guiding principles which have proved important in galvanizing significant progress in the last two years. Key among these guiding principles is that local bodies should lead the process through joint action coordinated by the Municipality Water Supply, Sanitation and Hygiene Coordination Committee (M-WASH-CC). The Local Governance Operation Act (LGOA, 2017), has been instrumental in the devolution of powers to local levels and defines the duties and powers of provinces and municipalities over local level infrastructure, including water supply and sanitation. 17. The proposed Project is a shift from the Bank’s previous support to the Government’s WASH agenda and is closely coordinated with the support for the transition to federalism and its climate strategies. The Bank has been actively supporting the Government in achieving its WASH coverage through three previous projects.42 Additionally, a recent Bank supported sector study investigated ways to further improve scheme sustainability. The project will draw on this experience to deepen the engagement with Government but pivot towards support for the federal transition by: (i) strengthening institutional support mechanisms in participating local governments (Provinces and Municipalities) to enhance service delivery and sustainability under federalism; (ii) continuing to expand water coverage, with an emphasis on municipality-wide access; and (iii) addressing wastewater management through promotion of “Total Sanitation�43 and City-wide Inclusive Sanitation (CWIS) approaches, aiming at achieving safely-managed sanitation standards. The project will align with the National Adaptation Plan of Action (NAPA) and the Nationally Determined Contributions (NDC) with climate resilient infrastructure, energy efficient systems for WSS services, including wastewater plants, and watershed management for water supply source conservation as well as carbon sink44. The project promotes an integrative water management approach towards developing water security in the urban and rural spaces. The integrated water management approach aims at improving the way resources are managed across the urban-water and rural-water cycles 39 Water Service Providers Data Book, Sector Efficiency Improvement Unit, Ministry of Urban Development, 2015 40 UCs are only authorized to carry out projects of up to approximately US$100,000; the average value ranges from US$5,000 to US$60,000. 41 The recent policy documents currently being drafted include: Water Supply and Sanitation Act (2021, draft), National Water Supply, Sanitation and Hygiene Sector Development Plan (2017-2030, draft), and National Water Supply and Sanitation Policy (Draft). Other relevant policies currently in operation include: National Drinking Water Quality Standard (2005); National Water Resources Policy (2020), National Sanitation and Hygiene Master Plan (2011); and Fifteenth Five Year Plan 2019 (2076-2081). 42 The First Rural Water Supply and Sanitation Project (an IDA Credit equivalent to US$ 18.2 million) closed in December 2003, the Second Rural Water Supply and Sanitation Project (an IDA Credit/Grant equivalent to US$ 52.3 million) closed in August 2012, and the most recent Rural Water Supply and Sanitation Improvement Project (RWSSIP) (an IDA Credit/Grant equivalent to US$ 72 million) which closes in July 2021. The first two IDA funded projects were rated satisfactory on completion, and RWSSIP is currently rated as Moderately Satisfactory for both implementation progress and Project Development Objective (IP/PDO) ratings. 43 “Total Sanitation� is a community-led approach to improve sanitation and hygiene practices in mainly rural communities by triggering behavior change in people, leading to spontaneous and long-term abandonment of open defecation practices. It focuses on spontaneous and long-lasting behavior change of an entire community. Source: Water and Sanitation Program (WSP), 2007. https://www.communityledtotalsanitation.org/institutions/wsp 44 Government of Nepal (2020). Second Nationally Determined Contributions. URL: https://www4.unfccc.int/sites/ndcstaging/ PublishedDocuments/Nepal%20Second/Second%20Nationally%20Determined%20Contribution%20(NDC)%20-%202020.pdf Aug 16, 2021 Page 10 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) by promoting water resources protection and diversification, WSS systems efficiency, resilience and climate mitigation, universal access to good quality WSS services, while taking into account all water users in the wider catchments through broad stakeholder participation. 18. The proposed Project supports municipalities to assume their devolved functional mandate for water supply and wastewater service delivery under the new federalist government structure. It synergizes with and complements the Bank’s ongoing engagements in support of federalism, namely the Nepal Urban Governance and Infrastructure Project (NUGIP, P163418), the Integrated Public Financial Management Reform Project (IPFMRP, P164783), the Federal Engagement Framework (FEF), and the Federal Capacity Needs Assessment (FCNA).45 It also complements the interventions by other Development Partners (DPs) including the Provincial and Local Government Support Program (PLGSP)46, as it centers around building institutional and fiscal capacity of municipalities for WASH service delivery. Relationship to CPF 19. The proposed Project is directly aligned with the World Bank Group’s (WBG’s) FY19 -23 Country Partnership Framework (CPF) for Nepal47, particularly in its overarching goal of supporting Nepal’s transition to a federal state that can deliver higher and sustained growth for poverty reduction, inclusive development, and shared prosperity. The proposed Project would directly contribute to Focus Area 1, Objective 1.2. Strengthened institutions for public sector management and service delivery. Taking guidance from the FCNA report, the project will enhance water governance under federalism by supporting the design and implementation of institutional reforms at the three levels of government to reflect the federalized governance structure and new mandates in the Constitution. Specifically, the project will support capacity building for participating local governments to deliver and sustain water supply services including the establishment of dedicated WASH units in municipalities to manage demands of all water users and user committees inclusively, operate and maintain service structures, build planning capacity, establish environmental and social safeguards, as well as, develop a system of financial procurement and management. 20. The project will also directly contribute to CPF Objective 3.2. Improved access to services and support for the well-being of the vulnerable groups. The COVID-19 pandemic has highlighted the major challenges of safe water supply and sanitation (including wastewater treatment) service delivery in Nepal by exposing low service levels and nonfunctional infrastructure, especially in the major urban centers, which have some of the worst water supply infrastructure despite being the country’s growth engines. 21. The project is consistent with the World Bank’s Green Resilient Inclusive Development (GRID) Framework for Nepal with the pillars of Sustainability, Efficiency, Resilience, and Inclusion. These pillars help capture wider dimensions of development progress and highlight the COVID-19 pandemic-induced debt challenges that countries like Nepal must address holistically. The project will invest in upstream water management to enhance water security and the overall resilience of water sources and water system infrastructure to health shocks, natural disasters and climate change, and provide opportunities to plan to build back better in alignment with the broader urban and rural development agendas. This will include integrated watershed management initiatives such as forest and wetland management, urban watershed management, etc., as a part of an integrated approach to resilience, climate mitigation and risk reduction in line with CPF Objective 3.3. Increased resilience to health shocks, natural disasters, and climate change. These aspects are also directly aligned with the bank’s Climate Change Action Plan (CCAP). The project also complements the Bank’s proposed 45 World Bank. 2019. Nepal Federal Capacity Needs Assessment (FCNA) Report. https://www.worldbank.org/en/news/press-release/2019/12/17/new-government- report-takes-stock-of-federalism-in-nepal 46 PLGSP is a multi-donor-funded program with an objective to make provincial and local levels fully functional, sustainable, inclusive, and accountable to through demand-based financial and technical assistances. The project period is from January 2019 to July 2023, and MoFAGA is the implementing agency. 47 Nepal CPF (FY19-23) is currently undergoing a Performance Learning Review (PLR) due to be presented to the Board by July 2021. Aug 16, 2021 Page 11 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) Nepal GRID DPC series and GRID Programmatic ASA, currently at concept stage, which aim to support sector policy reforms that will enhance the operating environment for the proposed project’s investments. Inclusion will be promoted by increasing access of low-income communities to safely managed drinking water thus improving resilience and improving water quality and decreasing leakages. The Project will help rationalize water tariffs in municipalities and promote financial sustainability. Commercial strengthening, operations equipment, improved procurement, adoption of information technology in the NWASH MIS app will help improve efficiency and sustainability. Project support will also help municipalities to better plan, identify, and execute responses to the prevailing crisis. C. Proposed Development Objective(s) 22. The Proposed Project Development Objectives (PDO) are to i) strengthen sector institutional capacity for water supply service delivery in selected local governments under the federal systems set forth in Nepal’s 2015 constitution, and ii) increase access to improved and climate resilient water supply and sanitation in participating local governments. 23. The progress toward achieving the PDO will be measured by the following key indicators: • Functional Water, Sanitation and Hygiene (WASH) Units in Municipalities formally established under the Local Government. • Number of municipal WASH utilities established and operational. • People provided with access to improved water supply services; of which, female (percentage). • Number of HHs adopting improved sanitation practices • Area of watershed under improved catchment management practices and source protection measures D. Concept Description 24. The proposed project is the culmination of over two years of dialogue between the Bank and Ministry of Water Supply under the Nepal Water Platform48 ASA 1.0 (P168191, 2019) and 2.0 (P171575, 2020), which included analytical support on key sector issues, notably (i) an overall water sector Diagnostic49; (ii) policies, institutions and regulations (PIR) pertaining to provisioning of water supply and sanitation (WSS) facilities50; (iii) Water Quality Management51; and (iv) Urban/Municipality-wide WSS service delivery52. The Platform will continue providing a convening space for cross- sectoral coordination and coordination with other Global Practices53 in the Bank, Development Partners, and sector stakeholders during project preparation and implementation, as well as support for key analytics on federalism and governance reforms in conjunction with the Governance GP and other sectors54. 48 The Nepal Water Platform was a Programmatic ASA which aimed to promote integrated, collaborative, and coordinated management of water resources and water service delivery in Nepal. Since its inception in FY18, the Water Platform has conducted a series of analytical exercises including the Water Sector Diagnostics, Water Public Expenditure Review, mentioned above 49 World Bank, 2021. Glaciers, Rivers and Springs: A Water Sector Diagnostic of Nepal. Washington D.C. 50 World Bank, 2020. Water and Sanitation Provision in Nepal: Considering Policies, Institutions and Regulation (PIR) in the Context of the Federal Disposition. Washington D.C. 51 World Bank, 2020. Water Quality Management Study in Nepal under Federalism. Final Draft Report. Washington D.C. 52 World Bank, 2020. Urban Water Supply Status Assessment, Final Report. Washington D.C. 53 The project team is coordinating/collaborating with Urban, Environment, and DRM GPs on water-related TA and analytics to inform NWGIP. 54 Water GP and Governance GP will undertake a Water Sector Federalism Implementation Assessment to inform the implementation of Component 1 during year 1 of the project. Aug 16, 2021 Page 12 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) 25. The proposed Project will demonstrate the operationalization of federalism at the local level with a specific focus on improving water supply and sanitation service delivery in participating municipalities, together with promoting an integrated urban-water and rural-water management. The aim of the project is to demonstrate how the intergovernmental water sector architecture introduced under federalism can function in practice, by empowering municipalities to deliver WASH services under a municipality-wide/utility model in contrast to the current fragmented WSUC-dominated model. The goal is to shift the current weak practices of the municipalities in planning, financing, and developing and managing water infrastructure, by equipping them to respond to their rapidly increasing infrastructure and service delivery requirements, in a context of climate change. Given the lack of basic institutional capacity, the proposed project aims to help the participating local governments to develop viable WASH institutions, starting with the establishment of municipal-level water management and regulatory bodies (municipality WASH units), with the end goal of establishing publicly owned municipal-wide utilities/service providers which can operate all water supply and sanitation schemes sustainably and efficiently within the municipality jurisdiction, while embedding a wider water security vision that is built upon an integrated, climate resilient and climate mitigating water management. 26. The Project will pilot a municipality-wide water service-delivery model by bringing the current highly fragmented and scattered WSUC-managed water supply and sanitation systems under the operation of a single municipal utility/service provider, overseen by a single municipality WASH unit. The project will provide a learning experience for local governments in the pilot endeavor to develop their institutional capacity, to be replicated and scaled at national level in subsequent engagements. Performance Based Conditions (PBCs) will be incorporated into the project design to incentivize the implementation of institutional reforms and prepare the new institutions to stay ahead of the infrastructure management and overall service delivery responsibilities that will increase as project implementation proceeds. Detailed comparison between the current WSUC-led WASH service delivery model and a municipality-wide utility model to be adopted in this project is provided in Table 1 below. Table 1. Comparison between the current WSUC-led WASH service delivery model and the proposed municipality-wide utility model Aspect WSUC-led WASH service delivery model Municipality-wide Utility model Operating Local community level, anywhere from 3 – 20,000 max Covers all households in a municipality, ~10,000 households scale households, fragmented water supply networks and and above. Integrated and scalable operations within operations. Suited to rural context jurisdiction of service provider. Suited to Urban context Governance Established Committee comprised of non-paid volunteers Professional Board of Governors who are paid for service. elected/seconded by the local community. Variable/low Corporate entity governed by commercial principles. High accountability for service standards. accountability for service standards. Management Non-professional and semi-professional personnel engaged Professional technical personnel including Engineers, Structure and in service provision. Minimal expertise in network planning Accountants, Auditors etc. with capacity for capital and Functions and design, low fiduciary management, limited O&M operational expenditure planning, accounting and finance, capacity, often with only one trained Village Maintenance procurement, operation and maintenance, billing and Worker (VMW) or plumber. collections, auditing, logistics Financial Capital and operational expenditures/infrastructure largely Commercial principles. Capital expenditures on large Arrangements financed by external parties, Development Partners and infrastructure partly funded using internally generated Federal government. Low tariffs leading to minimal cost- resources. Operations mainly financed by internal sources. recovery. Low fiduciary oversight. Tariffs based on cost-recovery. Audited books of accounts. Ownership of Asset are owned communally, with limited Utility is fully accountable for the state of infrastructure Infrastructure responsibility/accountability of the WSUC in case of low assets. Assets functionality Standards and Little or no oversight and regulation by local governments. Governing Board for oversight based on Contractually Regulation Depend on community engagement for accountability. Low specified Key Performance Indicators (KPIs) and commercial capacity to deliver WHO/national service levels and standards. Able to achieve national water service standards standards Aug 16, 2021 Page 13 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) 27. Project funds will be channeled to participating local governments through the recently established intergovernmental conditional grant fiscal transfer system, similar to the approach adopted under the World Bank’s Nepal Urban Governance and Infrastructure Project (NUGIP, P163418), to finance the implementation of comprehensive Municipality WASH Plans to be prepared by the newly established Municipality WASH units. This approach enables Central and Provincial government agencies and development partners to provide coordinated and proactive support to municipalities to plan, develop, monitor, and maintain WSS systems within their jurisdiction, in accordance with their mandates under the LGOA, 2017. 28. At the Federal and Provincial government levels, the project will support institutional reforms to realign funds, functions, and functionaries to provide policy support as well as financial and technical backstopping to municipalities to fulfil their constitutional mandate. Support will be provided to the nation-wide expansion of Operational Guidelines and a National (Urban and Rural) WASH Management Information System (NWASH MIS).55 The NWASH MIS app was developed by the DWSSM with support from the recently closed World Bank funded Rural Water Supply and Sanitation Improvement Project (RWSSIP), to systematically monitor and manage constructed water supply and sanitation systems, and ensure their operational service standards and long term sustainability. 29. Geographic coverage and selection rationale: as a pilot for water governance reforms under federalism, the proposed Project will be implemented in selected local governments in two provinces – Karnali and Sudurpashchim (former Provinces 6 and 7), focusing on provincial capitals, strategic towns and selected rural municipalities (palikas). Analysis based on the most recent census data (2011) shows Karnali and Sudurpashchim provinces were the least developed in terms of Human Development Index (HDI) at only 0.463 and 0.478 respectively.56 DWSSM data also shows that Karnali and Sudurpashchim provinces have the lowest coverage of basic water supply service delivery at about 84 percent.57 The Project will also retroactively finance the construction of rural water schemes left over from RWSSIP Batch X and XI in selected palikas in the two provinces. Participating palikas will be selected based on social-economic and transparent readiness criteria provided in Error! Reference source not found.. The Project will target municipalities based on their levels of access to WASH services, readiness to adopt institutional reforms, prevalence of vulnerable communities and poor people, and the potential to reduce GHG emissions. 30. A key project target location is Birendranagar Municipality, Surkhet, which is the capital city of Karnali Province (Figure 3), proposed to take up about 40 percent of project funds. The other selected urban municipality is Dipayal Silgadhi in Sudurpashchim Province taking about 20 percent of project funds and about five rural municipalities to be selected during preparation taking up 15 percent of project funds.58 The project area in Birendranagar Municipality will cover both the urban core and surrounding rural areas of the municipality, an area of 253.6 sq. km. Birendranagar is growing rapidly but its growth is constrained by severe shortage of water for domestic as well as secondary purposes. A vulnerability assessment in its Municipal Adaptation Plan reports that drought, landslide, floods, and fire are major climate hazards in the municipality.59 The urban area in the municipality has grown from 113 Ha in 2001 to 656 Ha in 2016 (580 percent increase). About 1,200 new houses are being constructed per year now which corresponds to more than 4 percent of existing houses. The total population and households of the municipality in 2011 was 100,458 and 23,710 households. The present population of municipality is estimated to be about 200,000 in 35,000 households. Besides the core urban area in Surkhet Valley, the project activities will include surrounding rural areas in Birendranagar 55 Accessible online: https://nwash.mowss.gov.np 56 Source: Journal of Management and Development Studies Vol. 28: pp. 53-68 Available online http://nasc.org.np ©2018 Nepal Administrative Staff College Provincial Comparison of Development Status in Nepal: An Analysis of Human Development Trend for 1996 to 2026 57 Source: NMIP/DWSSM datasheet, by end of 2019/20 58 See Annex 2 for selection criteria for rural municipalities. 59 Birendranagar Municipality, 2017. Vulnerability Assessment and Municipal Adaptation Plan of Birendranagar Municipality, Surkhet Aug 16, 2021 Page 14 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) municipality where small fragmented water supply schemes will be consolidated under the oversight and coordination of the proposed municipality WASH unit and operated by a proposed municipal utility. Figure 3 shows the location of Birendranagar Municipality. A detailed land-use map and satellite imagery for the municipality is provided in Error! Reference source not found.. Figure 3: Location of Birendranagar Municipality, Surkhet in Karnali Province. Source: DUDBC, 2020 60 31. Birendranagar is urbanizing rapidly but in a largely unplanned manner. Birendranagar is ecologically highly sensitive due to major land use changes in the past few decades. Urban area has expanded seven folds between 1989 and 2016, with a 12 percent decline in cultivated land. The water infrastructure assets in the municipality include five small surface-water-based water treatment plants61 with a total production capacity of 13.2 million liters per day (lpd), along with 68 km of transmission and distribution networks (Figure 4). The installed production capacity meets only about 54 percent of the current total demand estimated at about 24 million lpd. By 2050, water demand is expected to exceed 47 million lpd. On-premises piped water supply is available to about ninety-five thousand people through 23,382 house connections, representing about 80 percent of the population of Birendranagar, however duration of supply ranges from only 1 hour/day during the dry season to 3.5 hours/day in the wet season. Most of the network is 20-30 years of age and 60 Department of Urban Development and Building Construction (DUDBC), 2020. Review of Existing Master Plan and Prepare a New Master Plan incorporating expansion area of Birendranagar Municipality, Surkhet. Ministry of Urban Development, Kathmandu. Nepal. 61 Jhupra Khola (7.43 mlpd), Khar Khola (2.59 mlpd), Itram Khola (2.33 mlpd), Khorke Khola (0.86 mlpd), Bulbule springs (0.34 mlpd) Aug 16, 2021 Page 15 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) has technical NRW at around 40%. The NRW is mainly due to pipe leakages and bursts, most significantly in the rainy season where road conditions are poorest. The city does not have a sewerage system and is entirely dependent on on- site pits and tanks and informal de-sludging. With the increased density, plot size decreases and it will be difficult to manage the wastewater onsite. In such circumstances, people start to connect and discharge sewage into the storm water drainage network. The same is happening in Birendranagar. If not addressed with a coherent policy and enforced properly, all storm water drainage will eventually get converted into combined sewer network. The municipality has only one functional Fecal Sludge Treatment Plant (FSTP) recently completed in July 2021, with a capacity to treat 15 m3/day which is about 80 percent of the current sludge generation of 18.79 m3/day. Sludge generation is expected to reach over 22.92 m3/day by 2031.62 Hence, apart from coverage, challenges remain in providing sustainable and resilient water services in Birendranagar under an integrated water management approach. The integrated approach supported by project will help developing comprehensive urban-rural water security, including addressing inequities and quality deficiencies in water supply services and water resources management; low tariff recovery for water supply services challenging the financial sustainability of the WSUC; huge infrastructure gap in achieving safe sanitation; and low capacity to address climate hazard risks and implement climate-sensitive solutions. Figure 4: Water supply network in Surkhet valley. Source: DUDBC, 2020 32. Surkhet Valley Water Users Committee (SVWUC) manages and operates the water and sanitation services in the urban core of Birendranagar. SVWUC was established more than 20 years ago based on a merger of several local Users Committees to form an integrated water supply and sanitation service within the 13 wards of Surkhet Valley in Birendranagar Municipality. SVWUC is a consumer-controlled non-profit organization, formerly Jhupra Water User Committee, and was formed under the legal framework of Water Resources Act 1992 and water supply regulation 1994. All consumers, without exemption, are levied volume-based water tariffs according to a metered consumption. Meter 62 CWIS Technical Assistance Hub, South Asia. 2021. Report on TA Support to World Bank Funded Design and Implementation of Sanitation Component for Nepal Water Governance & Infrastructure Support Project (NWGIP). Bill and Melinda Gates Foundation. Aug 16, 2021 Page 16 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) reading is at a monthly basis followed by billing and collection. SVWUC is operating the web-based water administration systems of Meter Mark and Water Mark to support the billing and collection process. Payments are done through bank transfers or by cash at payment centers. The billing and collection rate is overall at above 97%. Tariffs are revised when needed for improved cost recovery of operations. SVWUC management proposes tariff revisions approvals through the board of directors at the annual general assembly. The current level of water tariff has been effective since the last couple of years. Details of tariff and SVWUC financials are provided in Table 2a & 2b below. Table 2a: Water Tariffs and Financial position of SVWUC Table 2b: Financial position of SVWUC Financial Revenue Expenditures year USD USD 2017 283,725 162,850 2018 304,444 171,887 2019 384,583 188,306 33. Beneficiaries: The beneficiaries of the institutional transformation promoted by the project will be the Provincial and Local Government entities responsible for WASH service delivery and the Department of Water Supply and Sewerage Management (DWSSM) at the Federal level, who will benefit from streamlining of their functions (reduced duplication and increased efficiency of financial and manpower resources) and the training and capacity building activities on financial management, procurement, WASH planning, O&M, M&E, climate resilience and climate mitigation and integrated water management. The municipal utilities to be established in the participating municipalities, local community water supply and sanitation user committees (WSUCs), WASH service providers and local WASH technicians will also benefit from capacity building trainings on sustainable WASH service delivery book keeping/financial management, network planning, watershed management, regular O&M amongst others. The construction and rehabilitation of water and sanitation infrastructure is expected to directly benefit over 400,000 people provisioned with improved water supply and sanitation services in participating municipalities, including over 200,000 people in Birendranagar Municipality. The project will also finance rural water supply schemes in rural areas the two Provinces to be determined based on social-economic and readiness criteria provided in Error! Reference source not found.. These schemes are expected to directly benefit an estimated 200,000 people with improved water supply and sanitation, and an additional 100,000 people with only improved sanitation, giving a total of 700,000 project beneficiaries. Women and children will benefit significantly from project interventions, as they currently bear the burden of securing the daily drinking water needs of the family and disproportionately suffer the consequences of illnesses associated with poor access to water and sanitation. Beneficiaries will be predominantly from districts which currently have low access to water and sanitation services, higher poverty incidence and climate vulnerability, thus bringing greater social equity and resilience in the sector and improving shared prosperity. Description of activities To achieve its development objectives, the Project will be supported through Investment Project Financing (IPF) on IDA terms, investing US$100 million (of which US$70 million IDA and US$30 million Government of Nepal (GoN) Counterpart funding) across four components. Proposed project scope comprises four interconnected components: 34. Component 1: Improving Sector Governance and Institutional Capacity, Project Management (US$20 million, of which US$10 million IDA, US$10 million GoN): Aug 16, 2021 Page 17 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) 35. This component will provide support to improve sector governance and build institutional capacity of water supply and sanitation related agencies of all the three levels of the government at Federal, Provincial and Local Municipality level, including establishing dedicated municipality WASH units and municipal utilities. This will include technical support to the Ministry of Water Supply (MoWS) and Department of Water Supply and Sewerage Management (DWSSM) at the federal level, Provincial Ministries of Physical Infrastructure Development, and the participating municipalities at the local level for project implementation, coordination, monitoring and reporting. A menu of potential capacity building and technical assistance activities will be prepared from which Federal and participating Provincial and Local Municipality entities will select customized packages suited to their needs. Institutional reforms will be implemented using a stepped approach starting with the establishment and capacity building of functional Municipality WASH (MWASH) units in the first year to carry out WASH regulation, planning, and M&E functions, followed subsequently by the consolidation of WSUCs and formation of new professionally-managed WASH operator utilities to deliver enhanced WASH services (please see Error! Reference source not found. for detailed roadmap). The project will also provide support to strengthen the enabling environment and participation of private sector in water and sanitation services and encourage mobilization of private sector financing and investments in the WASH sector. The project will provide support to build the capacities of private operators responsible for front-end delivery of water and sanitation services as necessary. Additional support will be provided to explore private and public financing options for design and development of water supply schemes, and develop models that can be replicated across other muncipalities. A phased project management plan will be developed to guide the transition of project implementation functions from the federal government to the local governments. This component will also fund the preparatory activities for the follow-on lending engagements that may be proposed as a series of operations. 36. Performance-Based Conditions (PBCs) will be incorporated into the project design to incentivize the implementation of institutional reforms. Proposed actions for consideration for PBCs include: i) establishment and capacity building of functional Municipality WASH units ii) drafting of proposed WASH utility operator/entity charter and governance systems; and iii) development of KPIs and target service standards in year 1. For year 2: i) development of asset management plan which include new investments and rehabilitation of current systems; ii) development of utility staffing plan, iii) and preparation of tariff schedule for future application, iv) any refinement necessary for legal or administrative frame work; and v) climate resilience, mitigation and integrated water management instruments. In year 3 or 4, WSUCs will be consolidated and the new WASH operator entity/utility should be established and commissioned for operation. During preparation, the Bank team and the client will select the most strategic set of PBCs and link it to relevant project expenditures as disbursement conditions. The option of developing a performance-based grant system within the government system will also be explored.63 37. Details of activities to be supported in this component are as follows: Federal Level a. Strengthening water governance institutions, accountability, and participation: A participatory Water Sector Federalism Implementation Assessment will be conducted in the first year, to determine institutional and capacity gaps to deliver the required services. The outcome will inform policy dialogue, multi-stakeholder engagement, and reforms that will support improved governance, accountability, and institutional capacity in the sector in the second and third years of the project. 63 Lesson on performance-based grants will be taken from other Bank projects including Mozambique Urban Sanitation Project, Malawi Watershed Services Improvement Project, Kenya Water and Sanitation Development Project, Lusaka Sanitation Project, Nepal: Municipal Solid Waste Management Project, and Pakistan: Competitive and Livable City of Karachi Project Aug 16, 2021 Page 18 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) b. Expansion of the successfully piloted NWASH MIS including development of climate resilience, watershed management and water quality modules as well as benchmarking and monitoring protocols and processes for urban water utilities. Technical assistance for establishing more stringent energy or resource-use efficiency standards or more stringent enforcement of efficiency standards will be explored. c. Support for the establishment and regular functions of a fully functional Project Management Unit (PMU) at the federal level, and an intergovernmental Project Steering Committee (PSC) at federal level. Provincial Level a. Support for the establishment of a intergovernmental Project Steering Committees (PSCs) at the provincial level with representation from federal, provincial and all participating local governments. The PSC would include not only water-related stakeholders but also those from other sectors that are relevant to an integrated water management approach. b. Capacity building and technical support to the Provincial Ministries of Physical Infrastructure Development for project coordination, monitoring and reporting. This will emphasize the facilitation of coordination across local governments who share the same watershed or river basin such that a more comprehensive water management and the adoption of climate resilience measures could be done at a higher administrative scale. Local Municipality Level a. Support the establishment and capacity building of fully functional local WASH units as Project Implementation Units (PIU) in participating municipalities and for technical support to prepare Municipal WASH plans, Detailed Project Reports (DPRs), and bidding documents, as well as build capacity to carry out design and construction supervision and address Environmental and Social Safeguards.64 This will include support for formal registration of all WSUCs in within the municipality and establishing performance agreements between the WASH units and WSUCs with Key Performance Indicators (KPI) for enhanced monitoring and formalized accountability. The support will be extended to considering climate risk assessments and responding to climate emergencies like droughts in the WASH plans, in alignment with Local Adaptation Plans for Action (LAPA) on climate change, which are guided by the National Adaptation Programme of Action (NAPA). b. Technical and commercial capacity building of newly established municipal utilities and service delivery operators as applicable. This includes support to rationalize water tariffs, promote financial sustainability and commercial strengthening, purchace operations equipment, carry out O&M, and improve procurement etc. Capacity building will be geared towards helping improve the operational efficiency, including energy efficiency water-use efficiency (and other climate mitigation activities as appropriate) and also towards developing of a water security vision through the development and implementation of integrated urban-water and rural-water management approaches. c. Support to strengthen the enabling envrionment and participation of private sector in the water and sanitation service delivery. The project will support following activities: (i) assessment to understand the technical and financial gap in engagement of private sector; (ii) identification of necessary reforms of policy & regulatory framework to facilitate private-public partnership in WASH, especially participation of small-scale private sector operators; (iii) skills development of entrepreneurs to improve water and sanitation services with special focus on fecal sludge management; (iv) incentivize the engagement of energy efficient services. 38. Lessons learned during project implementation will be conveyed to other municipalities in the country through periodic learning events to be organized by the mayors’ association, local and international exchange visits and tours, media outreach, and donor-sponsored global experts’ peer group support. The learning events will also feature the 64 The project will work with the design and supervision consultants to support the MWASH units to build their own capacity. Aug 16, 2021 Page 19 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) climate change vulnerabilities facing the municipalities, along with awareness on mitigation and adaptation strategies, and integrated water management. 39. Component 2: Access to Improved and Safe Water Supply and Sanitation (US$70 million, of which US$50 million IDA, US$20 million GoN). The activities under the component are divided into three further subcomponents: a. Urban and peri-urban water supply and City-wide Inclusive Sanitation (CWIS): i) Construction and rehabilitation of water supply schemes in participating urban municipalities to improve water and sanitation service delivery levels. This would include rehabilitation and improvement of existing systems, interventions to reduce non- revenue water (NRW), expansion of systems to new areas, development of new water sources, transmission conveyance, water supply treatment facilities, distribution lines, connection arrangements. Water treatment facilities will be constructed in the water supply schemes to ensure safe water quality as necessary. ii) Construction of fecal sludge and wastewater treatment facilities including both sewer systems, Fecal Sludge Treatment Plants (FSTPs) and on-site sanitation. Sanitation facility options are presented in Table 3 below. Support will also be provided for CWIS capacity building, household engagement and outreach, and sanitation marketing, as well as activities to ensure improved access to specific unserved and underserved groups, such as women, minority castes, the urban poor and people with disabilities in line with CWIS principles. Management of fecal waste is expected to have signficant public health and envionmental benefits by limiting sewage flooding and discharge of untreated effluents in drainage systems. The utilities will use energy efficient technology to reduce carbon footprint of water supply and wastewater treatment.65 This integrated sanitation – drainage management will increase the communities resilience to withstand the shocks of climate related extreme events like flooding. Moreover, the overal development of water and sanitation solutions will be aligned with the overal cities planning, seeking to synergize with other urban services that are beyond the scope of the project, such as roads, land use and solid waste. Table 3: Sanitation facility as per urbanization classification Classification Conveyance system Disposal system Remarks Urban Core Sewer network Stabilization pond If sufficient land is available adequately far from the settlement area system or lagoon system Activated sludge process Any appropriate modified versions of ASP Combined sewer If separate networks are not possible because of the road width. network Treatment will be done only for dry weather flow. Use uPVC/ GRP/HDPE pipes for ease of construction and leakage control Separate sewer Use uPVC/GRP/HDPE pipes for ease of construction and leakage network control Peri urban Onsite sanitation Periodic desludging Septic tank must be coupled with soak pit or sub-surface filtration area Rural Onsite sanitation Periodic desludging Septic tank must be coupled with soak pit or sub-surface filtration Double vault toilets First vault allowed to digest while second is in use b. Rural water supply and sanitation: Construction and rehabilitation of water supply schemes and sanitation facilities in selected rural municipalities of Karnali and Sudurpashchim Provinces to provide adequate, reliable and safe water supply with a year round reliability through household connections. This will also include 65 Although Nepal generates mostly run-of-river hydroelectric power, which produces negligible amounts of GHG, the country imports almost half of its electricity demand from India, which in-turn relies mostly on fossil-based electricity. Aug 16, 2021 Page 20 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) promotion of “Total Sanitation�66 and improved fecal sludge management approaches in participating rural areas. Eliminating uncontrolled dumping of fecal sludge will help to protect the population, water sources and the environment. The project will support the value-added use of treated fecal sludge in an environemntally and economically sustainable way (use of dry sludge as fertilizer or biogas or electricity production through sludge digestion etc.) c. Water Quality Monitoring and Management: Construction of water quality testing infrastructure, notably functioning laboratories at Provincial levels and selected municipalities to support water quality monitoring; and operationalization of a national water quality surveillance and governance system and integrated MIS. It will also include support for preventive water safety planning, installation of infrastructure for source protection, and community campaigns to declare municipalities as "safe water zones".67 The Water Quality Management sub- component will be implemented in conjunction with the other two sub-components as integral part of water supply and sanitation improvement under Component 2. 40. Component 2 civil works packages will be structured in phases aligned with institutional reforms implemented under Component 1 to ensure that the responsible implementing entities (MWASH Units/PIUs and Utilities/Service Providers) have acquired adequate capacity to undetake the infrastructural works and to manage sustainably the respecitve WSS services. The civil works of this component will also be designed to be climate resilient, with proper attention to the potential impacts of extreme weather and flood protection of source and infrastructure, while at the same time exploring solutions that enable a higher GHG emissions reduction. Moreover, following an integrated water management approach, the techncial solutions of component 1 and 3 (see further below) will look into the holisitc urban- water and rural-water cycle and seek to synergize with other services (eg. solid water and roads at the urban space and agriculture/irrigation at the rural space, nature-based solutions and the overal watershed management), while also promoting a cross-sector institutional coordination through Component 1. 41. Component 3: Building Resilience through Integrated Watershed Management (US$10 million IDA). This component will support urban/rural watershed management and nature-based solutions to improve upstream/downstream water quality and environmental flows, and provide adaption and mitigation measures against climate-related hazards including droughts, floods and landslides, as provided for under the Surkhet Valley Northern watershed Management Plan developed by the Forest and Environment Directorate, Ministry of Industry, Tourism, Forest and Environment, Karnali Province (MITFE-K, 2020).68 Activities to foster a net positive water balance situation in the Northern Watershed will be implemented including a combination of reforestation/conservation techniques, ground water recharge, rainwater harvesting, wastewater reuse, etc. based on integrated water resources management (IWRM) principles and a participatory approach with the engagement and strong ownership local communities and community associations within the watershed. This component will also support a feasibility study on water source augmentation. Figure 5 below shows the location of the Surkhet Valley Northern Watershed within Birendranagar. These activities embed the linkages between climate change, water and public health in an integrated water supply planning. For instance, source protection will help these municipalities build resilience against droughts, which have known impacts on access and worsening water quality, and thereby negatively impacting people’s health and productivity). Rehabilitated 66 “Total Sanitation� is a community-led approach to improve sanitation and hygiene practices in mainly rural communities by triggering behavior change in people, leading to spontaneous and long-term abandonment of open defecation practices. It focuses on spontaneous and long-lasting behavior change of an entire community. Source: Water and Sanitation Program (WSP), 2007. https://www.communityledtotalsanitation.org/institutions/wsp 67 “Safe water zone� is the community where every household is using at least one Household Water Treatment (HWT) option. Community people and active groups are trained and intensively mobilized to relay messages on safe water & HWT options such as boiling, filtration, chlorination etc. 68 Forest and Environment Directorate, Ministry of Industry, Tourism, Forest and Environment, Karnali Province (MITFE-K) 2020. Prioritization of Sub Watersheds in Northern Watershed and Management Plan/DPR Preparation of Critical Sub-Watershed Birendranagar, Surkhet District. Birendranagar, Nepal. Aug 16, 2021 Page 21 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) watersheds and reforestation will also act as protected carbon sinks with climate change mitigation benefits. Error! Reference source not found. below provides a proposed road map for the synchronized implementation of component 1, 2 and 3 activities. Figure 5: Location of Northern Watershed and Sub-watersheds in Birendranagar Municipality, Surkhet. Source: Forest and Environment Directorate, Ministry of Industry, Tourism, Forest and Environment, Karnali Province, 2020 42. Component 4: Contingency Emergency Response (US$0 million): A provisional zero amount component is included, which will allow for rapid reallocation of credit proceeds from other project components during an emergency. An Annex will be developed during the preparation stage with detailed description of how this component will be used in case of an emergency. Table 4. Tentative Project costs and IDA financing by component (in US$ million) Project components Project IDA Counterpart cost financing funding 1. Improving Sector Governance and Institutional Capacity, Project Management 20 10 10 2. Access to Improved and Safe Water Supply and Sanitation 70 50 20 a. Urban WASH 50 35 15 b. Rural WASH 15 10 5 c. Water Quality Monitoring and Management 5 5 0 3. Building Resilience through Integrated Watershed Management 10 10 0 4. Contingent emergency response 0 0 0 Total 100 70 30 Aug 16, 2021 Page 22 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 Yes Projects in Disputed Areas OP 7.60 No Summary of Screening of Environmental and Social Risks and Impacts . Overall, the environmental and social risks of the project is rated high considering the potential for significant adverse impacts on the environment and host communities of project installation. The major environmental concerns include loss of vegetation/forest; erosions from excavations of rugged terrain; dust and noise pollution from earthworks; vibration from moving equipment during construction; exposure of workers to occupational hazards and incidents; water pollution; impacts on aquatic life. Other pertinent risks include increased traffic movement and congestion in localized rural environments which may accidents. The operation of water and wastewater treatment facilities may also pose additional risks and impacts in the form of odor and noise from operations of equipment, sludge production and disposal as well as occupational health and safety hazards including chemical handling. The source of water for the proposed water treatment facilities is the Bheri River and its tributary, which incidentally serves other purposes including irrigation, hydropower, recreation (rafting), and cultural uses. Thus, competition over the source could cause water-use conflicts. The river joins the Karnali River downstream which ultimately flows into the Ganges of India and could trigger cross-border concerns on water access and pollution, although this risk is insignificant. On social risks and impacts, components 1 and 2 involves civil works in urban and rural settings and are likely to induce land acquisition, economic displacement, and temporary relocation of public and private assets particularly in urban areas. In some project locations, indigenous communities may be affected and suggest the need for Free, Prior and Informed Consent (FPIC) of IPs. During construction, other potential risks and impact which may rise include labor influx, SEA/SH, child labor, community health and safety. There is also potential for excluding vulnerable and marginalized groups from the planning process, stakeholder engagements, opportunities and benefits offered by the project. These impacts combined with weak institutional capacity of the implementing agencies present an overall high-risk rating relative to the environmental and social aspects of the project. The weak capacity is more pronounced in the Provincial and Local Governments. As the locations of the infrastructure and other activities are not-precisely known at this concept stage, the Borrower will prepare, consult with stakeholders, and disclose an Environmental and Social Management Framework (ESMF) and Resettlement Frameworks prior to appraisal. The frameworks will define the procedures for screening, assessing, and managing E&S risks and impacts of project operations; and outline procedures for uptake and resolution of project-related grievances and complaints. A Cumulative impact study or Strategic environmental and social impact study may be necessary and would need to be conducted prior to appraisal. Based on the ESMF, the borrower may also need to prepare site specific ESIA/ ESMP and RAP of the infrastructure / activity if the infrastructure/ activity is planned to be implemented in the first year of project and for which engineering and development plans are available. Aug 16, 2021 Page 23 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) . CONTACT POINT World Bank Feriha Mukuve Mugisha Water Resources Specialist Borrower/Client/Recipient Ministry of Water Supply Sunil Kumar Das Joint Secretary sunilkumardas1@gmail.com Implementing Agencies Provincial Ministry of Physical Infrastructure Development (Karnali Province 6) Khadga Bahadur Khatri Mr. mopidskt@gmail.com Department of Water Supply and Sewerage Management Meena Shrestha Director General dg@dwssm.gov.np Birendranagar Municipality, Surkhet Tikaram Dhakal Chief Administrative Officer ito.birendranagarmun@gmail.com FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects Aug 16, 2021 Page 24 of 25 The World Bank Nepal Water Governance and Infrastructure Project (P176589) APPROVAL Task Team Leader(s): Feriha Mukuve Mugisha Approved By APPROVALTBL Country Director: Lada Strelkova 27-Aug-2021 Aug 16, 2021 Page 25 of 25