$ Report No: RES00056 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF Water Sector Governance and Infrastructure Support Project APPROVED ON 02-Jun-2022 TO Nepal Water South Asia Regional Vice President: Martin Raiser Regional Director: Dina Umali-Deininger Country Director: David N. Sislen Practice Manager: Josses Mugabi Task Team Leader(s): Amelia Midgley The World Bank Water Sector Governance and Infrastructure Support Project (P176589) ABBREVIATIONS AND ACRONYMS IDA: International Development Association PDO: Project Development Objective MTR: Mid-Term Review PMU: Project Management Unit WSS: Water Supply and Sanitation IWRM: Integrated Water Resources Management ESRC: Environmental and Social Risk Classification CD: Country Director SDR: Special Drawing Rights XDR: Currency Code for SDR The World Bank Water Sector Governance and Infrastructure Support Project (P176589) @#&OPS~Doctype~OPS^dynamics@restrhybridbasicdata#doctemplate BASIC DATA Product Information Operation ID Operation Name Water Sector Governance and Infrastructure Support P176589 Project Product/Financing Instrument Geographical Identifier Investment Project Financing (IPF) Nepal Approval Date Current Closing Date 02-Jun-2022 15-Jul-2028 Environmental and Social Risk Classification (ESRC) Substantial Organizations Borrower Responsible Agency Department of Water Supply and Sewerage Management, Nepal Ministry of Water Supply @#&OPS~Doctype~OPS^dynamics@restrhybridoperationstatus#doctemplate OPERATION STATUS Project Development Objective (DO) Original Development Objective The Project Development Objective (PDO) is to strengthen sector institutional capacity for service delivery under federalism and increase access to improved water supply and sanitation services in the participating municipalities. Disbursement Summary (in USD million) Source of Funds Net Commitment Disbursed Undisbursed % Disbursed IBRD -- -- -- 0 i The World Bank Water Sector Governance and Infrastructure Support Project (P176589) IDA 79.19 3.36 75.81 4.24 Grants -- -- -- 0 Policy Waivers Does this restructuring trigger the need for any policy waiver(s)? No @#&OPS~Doctype~OPS^dynamics@restrhybridmpa#doctemplate @#&OPS~Doctype~OPS^dynamics@restrhybridmpa#doctemplate ii The World Bank Water Sector Governance and Infrastructure Support Project (P176589) TABLE OF CONTENTS I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING ........................................................................................1 II. DESCRIPTION OF PROPOSED CHANGES ....................................................................................................................2 III. PROPOSED CHANGES ................................................................................................................................................2 IV. DETAILED CHANGE(S) ...............................................................................................................................................3 The World Bank Water Sector Governance and Infrastructure Support Project (P176589) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Summary of Restructuring 1. This restructuring paper seeks to (i) cancel SDR 7,473,289.45 (US$ 9,944,482 equivalent) from Credit No. 7132-NP and adjust category allocations; and (ii) update disbursement projections to align with the cancellation. The Government of Nepal (Recipient) has requested the partial cancellation of this credit to allow for reallocation to new IDA operations in the pipeline that address emerging needs. A formal request to this effect was received on April 8th, 2025. Following this partial cancellation, the Government of Nepal will submit a request to restructure the project to adjust (i) the Project Development Objective (PDO), (ii) project components, and (iii) the results framework to correspond to the revised scope and envelope, as was agreed during the Mid-Term Review (MTR), concluded in March 2025. B. Project Status 2. The project became effective on September 8, 2022, and is in its third year of implementation. The project has been in problem status since March 2024 (12 months). The MTR determined that while the project remains relevant, the PDO is no longer achievable within the remaining implementation period. At MTR, only limited progress had been made on PDO outcome indicators, and major project interventions critical to the PDO are behind schedule. The project has suffered delays resulting from issues related to its initial readiness and design, the poor performance of consultants, and the low capacity of municipalities to implement the scope of activities as originally envisaged, and as a result, commitment and disbursement targets have not been met. At MTR, the project has only committed 29 percent of IDA, and disbursements are 4 percent of total IDA financing. These figures underscore the need to accelerate implementation by streamlining the project to focus on priority interventions that are realistically achievable within the remaining implementation period. C. Status of Project Components 3. Component 1 (Strengthening Sector Governance and Institutional Capacity, Project Management) is rated as Moderately Unsatisfactory (MU). A large allocation of funds was originally planned for activities under Component 1, to support strengthening the sector governance. Implementation and absorption of these funds have been slow. The MTR determined that the initial scope was overly ambitious. As a result, the scope will be substantially narrowed to prioritize key impact areas, namely the establishment of a professional service provider in Birendranagar, the strengthening of regulatory capacities at both local and federal levels, and the provision of project management support. 4. Component 2 (Increasing Access to Climate Resilient, Improved and Safe Water Supply and Sanitation) is rated as Moderately Unsatisfactory (MU). Infrastructure activities critical to achieving the PDO are behind schedule and no results have been reported at MTR. Works contracts totaling US$20 million have been signed, and a further batch of water supply investments totaling US$14 million are currently under procurement, expected to be awarded by December 31, 2025. Birendranagar Package 2 (distribution network), estimated at around US$20 million, is at the design stage and is to be advertised by July 31, 2025, and awarded by March 2026. Thus, in March 2026, two years before project closure, the project is expected to still have around 30 percent (US$23 million) of the IDA uncommitted. The MTR concluded that the original scope of Component 2 will be largely retained for now and the PMU will prioritize those activities that have a high chance of being committed within the next 9-12 months and have a high impact on Page 1 The World Bank Water Sector Governance and Infrastructure Support Project (P176589) the PDO, including Birendranagar Package 2 and the batch of water supply projects under procurement or at the bid document stage. 5. Component 3 (Reducing Climate Hazards impacting WSS Infrastructure through Integrated Water Resources Management (IWRM) and Watershed Management) is rated as Moderately Unsatisfactory (MU). At MTR, no progress was reported under Component 3. The original scope of watershed management activities is considered too ambitious given capacity constraints, and the institutional arrangements for IWRM in Nepal are still evolving. Thus, the MTR concluded that Component 3 is to be dropped from the project. However, infrastructure investments under Component 2 will incorporate resilience design principles to mitigate the impact of climate-related hazards on water supply infrastructure. The MTR concluded that Component 3 should be dropped from the project. D. Rationale for Restructuring 6. The MTR recommended several measures to accelerate project implementation, including a significant reduction in the scope of Component 1 and the removal of Component 3. These adjustments require the cancellation of the corresponding IDA allocation of SDR 7,473,289.45 (US$ 9,944,482 equivalent). II. DESCRIPTION OF PROPOSED CHANGES 7. Partial cancellation of Credit. This restructuring records the cancellation of SDR 7,473,289.45 of IDA Credit No. 7132-NP, as per the category-wise reductions reflected below (Reallocation Between Disbursement Categories). The resulting disbursement projections are reduced to reflect the lower IDA envelope. 8. There are no changes to the Environmental and Social Framework of the project. Environmental and Social risk classification remains “Substantial,” and the Environmental and Social risk management performance remains “Moderately Satisfactory.” @#&OPS~Doctype~OPS^dynamics@restrhybridsummarychanges#doctemplate Summary changes III. PROPOSED CHANGES Operation Information Proposed Changes Operation Information Proposed Changes Disbursements Estimates Yes Loan Cancellations Yes Development Objective No Reallocations Yes Summary Description No Implementation Schedule Yes (Operation Abstract) Legal Operational Policies No Loan Closing Date Extension No MFD/PCE No Financial Management No Results No Procurement No Risks No Institutional Arrangement No Legal Covenants No Page 2 The World Bank Water Sector Governance and Infrastructure Support Project (P176589) Conditions No Implementation Modalities No Disbursements Arrangements No DDO No Clients No Appraisal Summary No Components No @#&OPS~Doctype~OPS^dynamics@restrhybriddetailedchanges-disclose#doctemplate IV. DETAILED CHANGE(S) COSTS & FINANCING Private Capital Facilitation Is this an MFD-Enabling Project (MFD-EP)? Is this project Private Capital Enabling (PCE)? LOANS Cancellations Reason Value Loan/Credit/ Current Cancellation New for Status Currency Date of Trust Fund Amount Amount Amount Cancellati Cancellation on BORROWE R'S IDA-71320- Disbursi 59,600,000.0 REQUEST XDR 7,473,289.45 08-Apr-2025 52,126,710.55 001 ng 0 FOR COUNTRY REASONS Reallocations IDA-71320-001 Cancellations (if any): New Allocation: Currency: XDR 7,473,289.45 52,126,710.55 Page 3 The World Bank Water Sector Governance and Infrastructure Support Project (P176589) Financing % (Type Total) Category Expenditure Current Actuals + Proposed No. Category Allocation Committed Allocation Current Proposed 1 Wrks and cnstg pt 1; 6,100,000.00 577,663.83 3,275,002.23 85.00 85.00 2 Gds & NCS under Pt 1; 1,600,000.00 70,884.20 287,156.51 70.00 70.00 3 .A Trs to prtc mun Trg & 1,400,000.00 0.00 1,064,551.81 70.00 70.00 Inc un P1; 3.B Trng and incrm Cost 1,450,000.00 114,421.58 1,450,000.00 85.00 85.00 un P1 & P2; 4 Trs to Part Mun for 46,050,000.00 1,775,791.14 46,050,000.00 80.00 80.00 Wks un P2; 5 Gds,wrks,Ncs,Inc op 3,000,000.00 0.00 0.00 80.00 80.00 Cst,Trg,un P3; Total 59,600,000.00 52,126,710.55 DISBURSEMENTS Operation Dates & Projection Details Reasons to change the full Disbursement date and/or the projection Implementation Start Date Operation Closing Date 02-Jun-2022 15-Jul-2028 Projected Date for Full Disbursement 22-Nov-2028 Expected Disbursements (in US $) (Absolute) Original Estimation at Preparation Actual Year Revised Estimation (Approval Package – 02 Jun 2022) FY2022 0.00 0.00 0.00 FY2023 1,340,000.00 37,205.46 37,205.46 FY2024 6,550,000.00 403,930.95 403,930.95 FY2025 10,010,000.00 3,000,000.00 2,916,032.68 FY2026 14,480,000.00 11,560,000.00 0.00 FY2027 14,670,000.00 15,000,000.00 0.00 FY2028 17,090,000.00 20,000,000.00 0.00 Page 4 The World Bank Water Sector Governance and Infrastructure Support Project (P176589) FY2029 15,860,000.00 20,000,000.00 0.00 ENVIRONMENTAL & SOCIAL Environmental & Social Assessment According to the E/S Specialist are there changes proposed to the operation’s design that No would impact the Bank’s E&S assessment?” Page 5