Document of The World Bank FOR OFFICIAL USE ONLY Report No: 35462 IMPLEMENTATION COMPLETION REPORT (IDA-38300) ON A CREDIT IN THE AMOUNT OF SDR 51 MILLION (US$75 MILLION EQUIVALENT) TO THE KINGDOM OF NEPAL FOR THE FIRST POVERTY REDUCTION SUPPORT CREDIT March 28, 2006 Poverty Reduction and Economic Management South Asia Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of The World Bank
FOR OFFICIAL USE ONLY
Report No: 35462
IMPLEMENTATION COMPLETION REPORT(IDA-38300)
ON A
CREDIT
IN THE AMOUNT OF SDR 51 MILLION (US$75 MILLION EQUIVALENT)
TO THE
KINGDOM OF NEPAL
FOR THE
FIRST POVERTY REDUCTION SUPPORT CREDIT
March 28, 2006
Poverty Reduction and Economic ManagementSouth Asia Region
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
Pub
lic D
iscl
osur
e A
utho
rized
CURRENCY EQUIVALENTS
(Exchange Rate Effective March 1, 2006)
Currency Unit = Nepali Rupees (NRs.) NRs 1.0 = US$ 0.014
US$ 1.0 = SDR 0.7013
FISCAL YEARJuly 15 - July 14
ABBREVIATIONS AND ACRONYMS
ADB Asian Development BankASYCUDA Automated Systems for Customs DataBFIO Banking and Financial Institutions OrdinanceCAS Country Assistance StrategyCFAA Country Financial Accountability AssessmentCIAA Commission for the Investigation of Abuse of AuthorityCPAR Country Procurement Assessment ReportDDC District Development CommitteeDFID Department for International DevelopmentEDIFACT Electronic Data Interchange for Administration, Commerce and TradeEHCP Essential Health Care PackageFSRP Financial Sector Restructuring ProjectHMGN His Majesty’s Government of NepalIAP Immediate Action PlanICD Inland Container DepotIMF International Monetary FundIRD Inland Revenue DepartmentLPG Liquid Petroleum GasLSGA Local Self Governance ActMTEF Medium Term Expenditure FrameworkNEA Nepal Electricity AuthorityNBL Nepal Bank LimitedNOC Nepal Oil CorporationNTC Nepal Telecommunications CorporationNVC National Vigilance CenterOPCS Operations Policy and Country ServicesPAD Project Appraisal DocumentPAF Poverty Alleviation FundPDF Power Development FundPIS Personnel Information SystemPRGF Poverty Reduction and Growth FacilityPRSP Poverty Reduction Strategy PaperPRSC Poverty Reduction Support CreditRBB Rastriya Banijya Bank
RCCC Royal Commission for Corruption ControlRTS Rural Telecom ServiceSAR South Asia RegionSHP Sub-Health PostsSMC School Management CommitteeSOE State Owned EnterprisesSWAp Sector wide approachesUNCITRAL United Nations Commission on International Trade LawVAT Value Added TaxVDC Village Development CommitteeVRS Voluntary Retirement SchemeWTO World Trade Organization
Vice President: Praful C. PatelCountry Director
Sector DirectorKenichi OhashiSadiq Ahmed
Sector Manager Ijaz Nabi Team Leader Hassan Zaman/Roshan D. Bajracharya
NEPALFirst Poverty Reduction Support Credit
CONTENTS
Page No.1. Project Data 12. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 24. Achievement of Objective and Outputs 95. Major Factors Affecting Implementation and Outcome 216. Sustainability 227. Bank and Borrower Performance 238. Lessons Learned 259. Partner Comments 2710. Additional InformationAnnex 1. Key Performance Indicators/Log Frame Matrix 32Annex 2. Project Costs and Financing 38Annex 3. Economic Costs and Benefits 39Annex 4. Bank Inputs 40Annex 5. Ratings for Achievement of Objectives/Outputs of Components 42Annex 6. Ratings of Bank and Borrower Performance 43Annex 7. List of Supporting Documents 44
Project ID: P074685 Project Name: First Poverty Reduction Support CreditTeam Leader: Hassan Zaman TL Unit: SASPRICR Type: Core ICR Report Date: March 29, 2006
1. Project DataName: First Poverty Reduction Support Credit L/C/TF Number: IDA-38300
Country/Department: NEPAL Region: South Asia Regional Office
Sector/subsector: General public administration sector (40%); Health (15%); Primary education (15%); Water supply (15%); Banking (15%)
Theme: Public expenditure, financial management and procurement (P); Regulation and competition policy (P); Decentralization (S); Administrative and civil service reform (S); Participation and civic engagement (S)
KEY DATES Original Revised/ActualPCD: 03/02/2003 Effective: 11/01/2006 12/12/2003
Borrower/Implementing Agency: GOVERNMENT OF NEPAL/His Majesty's Government of Nepal/Ministry of Finance
Other Partners:
STAFF Current At AppraisalVice President: Praful C. Patel Mieko NishimizuCountry Director: Kenichi Ohashi Kenichi OhashiSector Manager: Sadiq Ahmed Sadiq AhmedTeam Leader at ICR: Hassan Zaman Hassan ZamanICR Primary Author: Sailesh Tiwari
3. Assessment of Development Objective and Design, and of Quality at Entry
3.1 Original Objective:
Political Context: Since November 2003, Nepal has witnessed an escalation in the Maoist conflict and heightened political turmoil. Following the dismissal of the Deuba coalition cabinet—the third consecutive palace-appointed government since the dismissal of the democratically formed cabinet in October 20021/
—King Gyanendra took over executive powers on February 1, 2005, declared a state of nation-wide emergency and suspended a number of civil liberties. The state of emergency was subsequently lifted on April 29, 2005. Civil liberties were restored gradually but the government has pursued various means to clamp down on the media and NGO activity. Although municipal elections have been announced the situation remains extremely fluid with the major parties likely to boycott these elections. More recently, the major political parties have forged an understanding with the Maoists that could potentially evolve into an active alliance for the full restoration of democracy.
The primary objective of the Nepal Poverty Reduction Support Credit (PRSC) was to support HMGN’s effort to reduce poverty in Nepal by (i) generating broad based growth; (ii) improving service delivery; (iii) promoting social inclusion, and (iv)improving governance. This four-pronged strategy was articulated in the Poverty Reduction Strategy Paper (PRSP) finalized in May 2003, following a highly consultative process. PRSC I was presented to the Board in November 2003 alongside the Bank’s Country Assistance Strategy (CAS), which proposed a series of annual PRSCs to support HMGN’s reform program.
The program objectives were designed following an acceleration of reforms since 2001. These reforms were wide-ranging and included important policy shifts in public expenditure management, the financial sector, service delivery and anti-corruption. First generation reforms such as trade liberalization and the removal of price controls in the early to mid nineties contributed to growth averaging 5% in the second half of the nineties. However the need for further growth-enhancing reforms was brought home following the sharp downturn in growth in early 2000s.
The PRSP, which the PRSC program (defined as the series of three IDA credits – PRSC I, II and III - designed to support a medium run reform program) supports, was also designed to address some of the root causes of an intensifying Maoist conflict that, to a large extent, reflected widespread disenchantment of the poor with the performance of the state in providing essential public services, generating broad-based growth and curbing corruption. ______________________1/ Following the dissolution of Parliament on May 22, 2002, Mr. Sher Bahadur Deuba remained as interim Prime
Minister. Subsequently, Mr. Deuba was dismissed by the King on October 4, 2002, and replaced by Mr. Lokendra Bahadur Chand as Prime Minister. Mr. Chand resigned on May 30, 2003 and was replaced by Mr. Surya Bahadur Thapa. After serving eleven months, Mr. Thapa resigned on May 7, 2004 and nearly one month later was replaced by Mr. Deuba. The Deuba coalition contained Ministers from a number of different political parties, including the Unified Marxist-Leninist (UML), Nepali Contress (Democrat) NC and Rashtriya Prajatantra Party (RPP).
- 2 -
The PRSC program supported and relied on the government’s ongoing efforts to bring the delivery and management of resources closer to the people as a way of mitigating the impact of conflict on basic service delivery. Devolution of authority from the center to local communities in the provision of essential services like education, health, drinking water and irrigation were designed to ‘de-politicize’ service delivery. The PRSP recognized the need to make reforms broad based to ensure their sustainability. To this end, the program supported reforms that were designed through highly participatory processes and therefore palatable across the political spectrum (e.g. Roads Board) or contained built-in mechanisms to expand the constituency for change through rapid demonstration effects (e.g. community school handover).
3.2 Revised Objective:
No revisions.
3.3 Original Components:
(i) Generating broad based growth
Maintaining macroeconomic stability: A stable macroeconomic framework is a pre-condition for any credible poverty reduction program. Hence satisfactory progress with the IMF’s Poverty Reduction and Growth Facility (PRGF) was a key part of the PRSC program. Capacity within key agencies (Ministry of Finance, Central Bank) was considered adequate to achieve macro targets, as shown by Nepal’s satisfactory macro track record.
Increasing fiscal space: Creating the necessary fiscal space to increase public investments in growth-enhancing sectors, as well as improving the effectiveness of these investments, is an integral part of Nepal’s poverty reduction strategy. In order to create this fiscal space, HMGN maintained a prudent macro-economic stance, increased domestic revenue mobilization efforts, pruned unnecessary expenditures, improved expenditure management and took steps to limit the fiscal burden caused by public enterprises. The PRSC program supported these reforms and developed benchmarks to measure progress in these areas.
• Raising revenue: The PRSC program supported HMGN’s efforts to improve domestic resource mobilization (e.g. by broadening the tax base, raising VAT, creating a Large Taxpayer Unit) and streamline taxation procedures. The Bank team worked closely with the IMF in setting realistic revenue targets in light of the difficulties with raising revenues during conflict.
• Strengthening public expenditures: The PRSC program supported the rationalization of the development budget and the introduction of the MTEF as an integral component of the budget planning process. The objectives were (i) increasing the share of pro-poor expenditures; (ii) making budget planning and execution more outcome focused, and; (iii) at a broader level, coordinating aid and harmonizing donor practices.
- 3 -
• Managing contingent liabilities: The PRSC program supported HMGN’s efforts to
improve transparency and efficiency in the parastatal sector by completing annual audits of all parastatals and progressively privatizing public enterprises. The benchmarks for the pace of privatization were based on a realistic assessment of the relatively weak capacity of the Privatization Cell and the experience of litigation slowing down the divestment process. The PRSC program identified the petroleum sector as the biggest potential liability to the Budget. The Nepal Oil Corporation losses averaged around 1 percent of GDP in 2002/03 due to subsidized fuel prices; one of the triggers for PRSC I, that was met at the time, was raising fuel prices to cover the costs of purchase, transport and distribution. Medium term measures included implementing an automatic pricing mechanism for petroleum products, the setting up of a professional regulatory body and liberalization – these were at best partially implemented as we discuss in section IV.
Improving the investment climate: The PRSP clearly recognized the adverse impact of an increasingly violent conflict on both foreign and domestic investment. However, there are also a number of critical non-conflict related investment climate issues that need to be addressed to generate economic growth. The priorities identified in the PRSP were similar to the structural impediments identified by earlier Bank analytical work
2/
• Reducing transport costs: Nepal’s landlocked and mountainous terrain imposes high transport costs which are in turn key impediments to agricultural commercialization and manufacturing exports. The PRSC program supported government’s efforts to improve connectivity, overhaul existing institutional arrangements for funding road maintenance and reduce transit costs for Nepali exports to India.
• Increasing access to power: HMGN’s strategy to increase access to power centered around promoting private sector investment in the generation and distribution of electricity, particularly in rural areas. Measures to improve the efficiency of the Nepal Electricity Authority (NEA) together with the implementation of the Electricity Theft Control Act, to reduce NEA’s system losses, were also an important part of the power sector reform strategy.
• Improving access to telecom services: HMGN committed to the development of a competitive telecom sector with a focus on improving rural coverage. Specific reform benchmarks included establishing an independent regulatory body, taking steps to privatize the Nepal Telecommunications Corporation (NTC) and the licensing of a private rural telecom operator to address the lack of connectivity in remote areas.
____________________2/
Biggs et al (2000) ‘The Business Environment and Manufacturing Performance in Nepal’ World Bank / Federation of Nepalese Chambers of Commerce and Industry and Nepal Trade and Competitiveness Study, 2003.
- 4 -
• Strengthening the financial sector: Nepal’s financial sector – dominated by Nepal Bank Limited (NBL) and the Rastriya Banijya Bank (RBB) – was plagued by widespread mis-management, political interference and consequently high NPA levels. A prior action for PRSC I was the appointment of external management teams for these Banks and the performance benchmarks were set for these two new management teams. The reform agenda also included measures to restructure Nepal Rastra Bank to improve its supervisory and regulatory functions.
• Increasing labor market flexibility: Nepal’s labor market is currently defined by some
of the most rigid laws in the region. The PRSC program supports HMGN’s efforts to amend labor legislation in order to introduce the flexibility to hire and fire workers based on performance and market conditions; this was a prior action for PRSC II.
• Improving customs efficiency: Given the nexus between governance, infrastructure and customs procedures, HMGN embarked on a multi-faceted program of customs reform. Measures included introducing more selectivity in customs inspections, harmonizing its trade classification to facilitate transshipment; re-drafting the Customs provisions to make them consistent with WTO provisions; developing a code of conduct specific to Customs employees; and creating a post-entry valuation section.
(ii) Improving service delivery
Improvements in service delivery in Nepal’s PRSP were built upon a gradual process of decentralization, greater empowerment of local communities in the management of social services and increased private provision of social services. Improving the decentralization framework: Building on the 1999 Local Self Governance Act (LSGA) HMGN had made notable progress in the decentralization of functions to local bodies. However since the elected terms of most local level leaders ended in 2002, and elections could not be carried out due to the deteriorating security climate, HMGN appointed civil servants to carry out local level administrative functions. Despite the setback, the PRSP recognized the need to consolidate the progress made on decentralization and proposed activities that could be carried out even in the absence of elected representatives. For instance, HMGN identified 23 sectoral acts that needed to be reconciled with the LSGA. The piloting of a new fiscal framework in 2-3 districts was also a medium run HMGN objective.
Strengthen local community participation in service delivery: The PRSC supported the government’s efforts to handover management of primary schools to local communities as a way of improving the quality of education. Targets that HMGN had committed to on the number of community managed schools were prior actions for both PRSC I and PRSC II. Specific reforms included creating the legislative basis for these transfers as well as ensuring that community-managed schools had sufficient funding and autonomy. The PRSC program also supported handing over the management of Sub-Health Posts (SHPs) to management committees and implementation of the Essential Health Care Package (EHCP). Measures to strengthen
- 5 -
community user groups in irrigation and rural roads were also part of HMGN’s poverty reduction strategy.
Strengthen private provision of social services: In the water sector the PRSC supported the process of making the Rural Water Supply and Sanitation Fund Development Board an autonomous agency (prior action for PRSC II). HMGN aimed to redress the poor management of urban water supply in Kathmandu by taking the necessary steps to facilitate entry of a private sector operator. PRSC program benchmarks included HMGN’s efforts to contract out district hospitals to the private sector and textbook publication to private firms.
(iii) Promoting social inclusion
There were two distinct components of the government’s inclusion agenda that were supported by the PRSC program. First, establishing a Poverty Alleviation Fund (PAF) to channel resources for community development projects focusing on areas with high levels of deprivation. The PAF was considered one way of addressing the vicious circle of social exclusion, poverty and conflict. Cross-country experience with social funds of this nature highlights the importance of autonomous boards in order to reduce the risk of political interference with the allocation of resources. Hence, one of the prior actions for PRSC I was to ensure PAF’s autonomy.
Second, the PRSC took into account the cross-cutting nature of social inclusion. The fact that specific ethnic groups are under-represented in the workforce is partly to do with low levels of educational access for these groups. As such the PRSC program supported the implementation of a scholarship package for girls and Dalit children in secondary schools (prior action for PRSC II). Civil service reforms also incorporated components to make the demographic composition of the civil service more representative of the larger population. HMGN’s reform program included improved tracking of the diversity of the civil service by publishing data on an annual basis and reviewing the civil service entry exam to assess possible sources of ethnic, caste and gender bias.
(iv) Improving governance
HMGN’s strategy to improve governance included: (i) improving financial management and procurement practices; (ii) strengthening anti-corruption and accountability institutions; (iii) improving the effectiveness of the civil service; and (iv) improving the functioning of key agencies. The reforms supported by the PRSC program were part of HMGN’s strategy to strengthen the financial management system as well as the incentives for compliance building on the Country Financial Accountability Assessment (CFAA) carried out in 2001/02. The key ingredients of this strategy included initiatives to tie budgets with performance, improve financial transparency, improve accounting and auditing practices, and an array of anti-corruption measures. The PRSC program supported strengthening the Commission for the Investigation of Abuse of Authority (CIAA) with the legal power to initiate cases against all top officials (prior action for PRSC I). HMGN’s anti-corruption strategy included setting up a National Vigilance Center (NVC), tasked with strengthening prevention and raising public awareness about corruption as well as monitoring the performance of corruption prone Government departments.
- 6 -
Greater transparency in public procurement is also an essential part of reducing corruption. A Country Procurement Assessment Report (CPAR) was conducted in 2002 and a prior action for PRSC I was to amend the Financial Administrative Regulations to comply with its key recommendations regarding bidding rules and procedures. A prior action for PRSC II was the enactment of a new Procurement Law based on the UNCITRAL model law for procurement. The creation of an independent procurement agency; and more widespread procurement related training in the civil service were also part of HMGN’s effort to strengthen procurement.
A key part of the PRSC program’s support to improve civil service reforms was the enactment of the Governance Ordinance to delineate the roles and responsibilities of senior civil servants and Ministers in order to minimize interference in administrative and transfer decisions (prior action for PRSC II). Other reforms aimed at making the civil service more efficient and accountable. In order to reduce over-staffing at the lower levels, Cabinet ordered the elimination of approximately 7,500 vacant positions in late 2002 out of a total of 17,000. HMGN is also linking the Personnel Information System (PIS), with the payroll system to create a comprehensive human resource database.
3.4 Revised Components:
No revisions were made to the original components.
3.5 Quality at Entry:
The quality at entry is rated satisfactory. First, the reforms supported by the PRSC program are founded on the PRSP – a home-grown product developed after a highly participatory process. As a result, the desired outcomes of the program were aligned squarely with the government’s medium term reform goals. The PRSC program was also an integral part of the Bank’s CAS which articulates the importance of moving towards a more ‘programmatic’ approach to support HMGN’s reform agenda.
The Bank put together a multi-sectoral team to support the reforms identified in the PRSP and worked closely with key counterparts to ensure that the selected prior actions focused on the key issues. The PRSC program built upon appropriate structural, social and fiduciary analysis. Board approval was based on the implementation of a significant set of reforms agreed during the preparation of the Credit. PRSC I disbursed US $75 million in early December 2003, three weeks after Board approval. For subsequent operations in the series, a set of indicative prior actions were agreed upon. As with PRSC I, subsequent credits under the PRSC program were designed to link subsequent cash releases to delivered reforms rather than to promised actions.
Another key part of the operation was the strengthening of HMGN’s monitoring and evaluation systems. Bank staff worked closely with HMGN over the past three years to rationalize the number of surveys, improve the quality of administration and household survey data and establish an institutional focal point for monitoring and evaluation.
- 7 -
The PRSC program built upon a large volume of analytical work. These included a Poverty Assessment, Public Expenditure Review, Investment Climate Assessment, Trade and Competitiveness study, CFAA and CPAR. Reforms supported by the Bank were selected taking into account the Bank’s comparative advantage in each reform area vis-à-vis other donors. For instance the ADB had a budget support operation in place that focused on privatization and civil service reform – there was close coordination on these issues between the Bank PRSC preparation team and the ADB. The IMF’s work on revenue issues, and DFID’s on the MTEF, were also closely coordinated with the Bank’s program.
The Credit also incorporated relevant Safeguard Policies. An OPCS working group reviewed the environmental implications of the Credit, prior to Appraisal, concluded that OD 8.60 applied to the operation3/
. PRSC I followed the Bank’s simplified disbursement procedures for adjustment operations. The disbursement was not linked to any specific purchase and all necessary procurement was done in accordance to the normal policies and procedures of the government.
A PRSC in an environment of conflict and political uncertainty is clearly a complex operation with significant risks. Key risks identified in the PRSC I President’s Report were: (i) the protraction and/or escalation of conflict dampening growth prospects and aggravating service delivery challenges; (ii) political interference crowding out reform minded technocrats; (iii) the pace and breadth of the reforms overtaking the government’s capacity to implement them, and; (iv) exogenous shocks undermining the impact of growth-enhancing structural reforms. These risks were addressed by designing reforms that were sensitive to the conflict environment (e.g. transfer of management responsibilities to communities) and in certain cases reforms that were independent of conflict (e.g. customs reforms). Capacity constraints were addressed by supporting the Government in prioritizing a limited set of reforms through the annual Immediate Action Plan process. Nevertheless the design of the PRSC program recognized that the combined impact of these risk factors, should they all materialize at the same time, would make it difficult for reforms to stay on track and have their desired impact.
_______________3/
There were three types of policy reforms supported by the PRSC that contained potential environmental impact: (i) sale or liquidation of public enterprises; (ii) phasing out of the kerosene subsidy and (iii) expanding access to electricity. In cases where SOE’s were leased or sold to the private sector, HMGN would retain liability for any past irreversible impacts (stemming from land use changes and air pollution emissions). Assets that were sold would be operated under existing environmental regulations pertaining to soil excavation and control of industrial emissions. The phasing out of the kerosene subsidy was also unlikely to lead to any significant increase in firewood consumption as it is mainly used for cooking in urban areas and among the relatively well-off. Moreover, the expansion of grid connected electricity was expected to reduce the demand for kerosene used for lighting thereby reducing the impact of kerosene subsidy elimination on poor households. Hence the environmental impact was expected to be negligible. Finally, the reforms to increase access to electricity in rural areas centered around the promotion of small and edium scale hydropower projects that would replace the need for fossil fuel based power generation plants.
- 8 -
4. Achievement of Objective and Outputs
4.1 Outcome/achievement of objective:
The PRSC program assessment reviews the outcomes achieved over the past two years following the Board approval of PRSC I in November 2003. The overall outcome of the PRSC program is assessed as moderately satisfactory as many of the policy changes and outcomes expected by late 2005 were achieved. However due to the shortcomings in achieving certain prior actions for PRSC II, and the uncertainties resulting from the February 1st royal take-over, it has not been possible to move forward with PRSC II. The outlook has recently improved as three key prior actions were met over a two week period in late February 2006. Table 1.0. reports on the progress made towards PRSC II prior actions while Annex 1 provides a more detailed analysis of reforms (prior actions and ‘reform benchmarks’) that could be supported by PRSC II once the prior actions are met.
Table 1.0: Progress on PRSC II prior actions
PRSC II prior actions Progress to Date
§ Draft relevant legislation to make labor employment and retrenchment laws more flexible. (DONE)
§ Transfer fuel levy receipts to Roads Board in a timely manner to ensure regular resources for road maintenance. (DONE)
§ Move to at least quarterly petroleum price adjustments using an automatic pricing formula (PARTIALLY DONE)
§ Make the Birgunj ICD operational through finalizing the (Nepal-India) rail agreement and appointing a terminal management operating company through competitive tender. (DONE)
§ Implement scheme to rationalize excess staff at NRB, NBL and RBB and resolve a number of large defaulter cases (PARTIALLY DONE)
§ New Labor Ordinance approved by Cabinet in February 2006 following three years of negotiations between employers and unions.
§ A separate revenue code has been designated to make fuel levy receipts directly available to the Roads Board through the budget.
§ Some progress in reducing differential between international and domestic prices. Decision to implement automatic pricing formula announced in late February 2006.
§ Birgunj ICD has been made operational with the appointment of a terminal management company in place. The Nepal-India rail agreement has been signed.
§ Three phases of VRS have been completed in RBB and NBL and the targeted staffing level has been achieved. However progress in recovering claims from large defaulters have been stalled through legal appeals.
§ Transfer 600 primary schools, 100 secondary schools and 200 lower secondary schools to community management. (DONE)
§ Make Rural Water Board autonomous to improve effectiveness of community based drinking water services (DONE)
§ Implement Essential Health Care services in 14 districts, prioritizing those with poor health indicators.(PARTIALLY DONE)
§ A cumulative total of 2270 schools have been handed over in 60 districts.
§ Rural Water Board has been made autonomous.
§ EHC packages are under implementation, albeit in various degrees, in all 75 districts.
§ Begin implementation of scholarship package for girls and Dalit children in secondary schools. (DONE)
§ Scholarship packages for girls and students from disadvantaged groups are under implementation. There are also additional incentive grants to supplement block grants for community schools that enroll certain numbers of Dalit and female students
§ Enactment of legislation delineating powers of Ministers and civil servants (PARTIALLY DONE)
§ Prepare and enact a new Procurement law and begin implementation. (PARTIALLY DONE)
§ Draft Governance Ordinance approved by Cabinet in February 2006 – sent to the King for enactment.
§ The Procurement Act has been drafted but not yet promulgated.
- 9 -
A discussion of poverty trends between 1996 and 2004, followed by the description of outcomes to date under the PRSC program are presented below.
Poverty trends and determinants
With an average per capita Gross Domestic Product (GDP) of US$260, Nepal remains the poorest country in South Asia. However, over the last decade Nepal has made considerable progress in reducing poverty, with analysis showing that the headcount poverty rate fell sharply—from 42 percent to 31 percent—between FY95/96 and FY03/04 (see Table 2)
4/.
Declining from 22 percent to 10 percent, the incidence of poverty in urban areas has more than halved, while poverty in rural areas has also declined appreciably (from 43 percent to 35 percent), although remains higher than in urban areas. Poverty rates have also declined across all of Nepal’s development regions and ecological belts.
Table 2: Nepal 1995-96 and 2003-04, Poverty Trends
Headcount rate (P0) Poverty Gap (P1) Squared Poverty Gap (P2)
1995-96 2003-04 change in % 1995-96 2003-04 change
Source: Nepal Poverty Assessment (World Bank forthcoming)
There are a number of explanations for Nepal’s impressive achievements in reducing poverty over the last decade. First, a significant increase in remittances – per capita real increase of 80 percent in this period - has propped up consumption of Nepali households. Second, following improvements in productivity and a tightening of the labor market, agricultural wages have increased by about 25 percent in real terms over the period. Increased demand, coupled with improved connectivity and better access to markets, stimulated entrepreneurial activities and allowed for non-agricultural wages and incomes to increase. Further, increased urbanization moved workers from low productivity jobs in rural areas to higher productivity jobs in urban areas. Finally, the decline in fertility (starting in the 1980s) paid off in terms of considerably reducing household size and the dependency ratio.
A number of the factors described above, such as remittances and fertility decline, are not related to the PRSC program. However there are certain reforms within the PRSC program that are likely to increase the sustainability of Nepal’s poverty reduction as we look forward. For instance, improving the institutional mechanisms by which roads are maintained, and investments in improving connectivity, will promote greater access to markets. Reforms in the education sector, _________________4/
This is based on data from the FY95/96 and FY03/04 Nepal Living Standards Surveys (NLSS-I and NLSS-II) and analysis carried out by the Nepal Central Bureau of Statistics (CBS). In the near future, a World Bank Poverty Assessment reporting on these and other poverty-related results will be finalized.
- 10 -
in primary and post-primary, will lead to higher skill levels and access to better-paid jobs, in urban Nepal and abroad. Making labor laws more flexible will encourage manufacturing investment, create employment and reduce poverty.
Key outcomes achieved under the PRSC program
Table 3 outlines the key outcomes achieved under the PRSP/PRSC program. Key outcomes include:
• Nepal has maintained a stable macro-economic framework with low inflation. Growth during the 2003-05 period (3.2% average) is disappointing when compared to targets though needs to be viewed in the context of a deteriorating conflict situation.
• The share of pro-poor expenditures has gone up from 27% of total spending in FY03
to 31% in FY05, and the MTEF process has become an integral part of budget management during this time.
• The number of Village Development Committees (VDC) with telephones rose by 16% between 2003-05.
• The two largest commercial banks registered operating profits for the first time in FY05.
• Transit and transport costs for Nepali goods to Kolkata port have fallen by around 37% due to setting up the Inland Container Depot at Birgunj, contracting a private operator and signing the India-Nepal rail agreement.
• Primary school completion rates increased from 60% in FY02 to 69% in FY04. Adult literacy increased from 44% to 48% over the same period.
• Percentage of births assisted by skilled attendants increased from 15% in FY03 to 20% in FY05.
• The number of corruption cases adjudicated by the Special Court more than doubled (from 55 to 129) between FY03 and FY04.
The PRSC program has had a significant impact on institutional development outcomes in a number of areas. First, the MTEF has now become an integral part of budgetary management and has changed the institutional norms of budgeting. The linking of proposed expenditures with sectoral strategies has been particularly important in protecting pro-poor expenditures during a time of heightened political uncertainty and conflict. Clearly a lot remains to be done to strengthen the MTEF process (e.g. improving the performance based release mechanism, increasing the comprehensiveness of the budget etc) but it has already had a significant institutional development impact.
- 11 -
Another prominent institutional impact of the PRSC program has been to strengthen community-led development in Nepal. The past few years has seen greater community involvement in the provision of essential services like education and health, but also in the construction and management of infrastructure services like roads, medium and large irrigation, and hydropower. Although a rigorous analysis of the improvements in the performance of community managed schools is yet to be seen, the pace at which the handover has occurred (exceeding all previous expectations) is to an extent symptomatic of the demand that exists for this reform. HMGN has to be credited for creating the framework for greater community involvement. For instance the Eighth Amendment of the Education Act suspended central recruitment of teachers and provided greater autonomy to schools to recruit directly; block grants to community managed schools have also increased the incentives for schools to be transferred from state to community management.
Monitoring and evaluation is the third area where there has been tangible institutional development following the PRSP / PRSC process. The National Planning Commission carried out a survey prioritization and rationalization exercise in order to match the data required for PRSP monitoring, with the types of surveys being conducted. A timetable for periodic national household surveys, Demographic and Health Surveys, public expenditure tracking surveys and the collection of administrative data has been set. Impact assessments of programs in education, health, drinking water and agriculture were also conducted in 2004.
Finally, the PRSC program’s support to ensure the autonomy of various service delivery institutions has also been important for institutional development. The prior actions for PRSC I related to the autonomy of the Roads Board and the Poverty Alleviation Fund. A prior action for PRSC II was the autonomy of the Rural Water and Sanitation Fund Board which was also granted. These institutional delivery mechanisms are set up to improve service delivery of these respective services; retaining their autonomy will be an important challenge going forward.
- 12 -
Table 3: Key Outcomes Envisioned by the End of the PRSP Program (2003-2007) and Interim Results
GOALS STRATEGY MONITORING INDICATOR Achievement during PRSC period (2003-2005)
Envisaged Outcome(2003-2007)
Anticipated Impact
Broad based economic growth
• Prudent fiscal and monetary stance.
• Improve the efficiency of public expenditure management.
• Enhance domestic revenue mobilization.
• Improve the efficiency of factor markets (labor, financial) and create environment conducive to private sector investment.
• Increase access to basic infrastructure facilities (roads, power, telecom)
• Average inflation rate contained below 5%, low net domestic borrowing and healthy reserves
• Increase in the share of pro-poor expenditure in the budget.
• Increase domestic revenue to GDP ratio to 14% by 2007.
• Private sector investment increased to 16.7% of GDP from 12.7% in FY03
• Macro-environment conducive to generate growth and reduce poverty. Average real GDP growth of 4.3-6.2%
• Increased realism and a tighter output alignment of the budget.
• Increased fiscal space for poverty reducing public investments.
• Reduction in the costs of doing business, enhanced productivity and the elimination or mitigation of “behind the border” constraints on exports.
• Stable overall macroeconomic framework; net domestic borrowing fell from 2.9% in FY02 to 0.2% in FY04; inflation below 5%, over six months of reserves during entire period
• GDP growth averaged 3.2% between FY03 and FY05
• Significant progress has been made in using the MTEF as a core budgetary management tool. Pro-poor expenditures rose from 27.8% of government expenditures in FY03 to 31.1% in FY05; the deviation between actual and budgeted expenditures fell sharply.
• Widespread administrative reforms and simplification of customs procedures bolstered domestic revenue as it rose to an estimated 13.0% of GDP in FY05.
• Secured Transactions Ordinance, Insolvency Ordinance and Company Ordinance approved in September 2005 and new Labor Ordinance approved by Cabinet in February 2006.
• NBL and RBB – the two largest commercial banks – generated operating profits for the first time in FY05.
• Telephone penetration increased from 1919 VDCs in 2003 to 2234 VDCs in 2005.
• Private investment rose from 12.7% of GDP in FY03 to 13.7% in FY05.
• Transit and transport costs of Nepali goods going through Birgunj have fallen by 37%
Improve service delivery
Education• Devolve school
management to communities /local bodies.
• Improve access of girls, Dalits, and disadvantaged groups to education.
• At least 6000 schools transferred to local communities.• NER in primary schools increased from 82 to 90%.• Increase in the percentage of students completing primary
schools.
• Increased immunization.• Contraceptive prevalence rate increased to 55%.• All sub health posts, 50% of the health posts and 25
district hospitals handed over to local management.
• Adult literacy increased to 63%.• Female literacy increased to 55% from 44%
in FY02
- 13 -
Health• Expand the provision of
essential healthcare services.
• Devolve operation and management of hospitals, health posts and sub-health posts.
Drinking water• Scale up demand driven
approach to rural water supply and sanitation schemes.
• Access to safe drinking water increased to 85%.• Access to sanitation facilities increased to 50% of the
population.
• 2257 schools transferred to community management.
• Net primary enrollment increased from 81.1% in FY02 to 84% in FY04.
• Primary school completion increased from 60% in FY02 to 69% in FY04.
• Adult literacy increased from 44% in FY02 to 48% in FY04.
• Female literacy increased from 19.1% in FY96 to 33.8% in FY04.
• Gender parity index for net enrolment rate in primary schools increased from 70 in FY96 to 86 in FY04
• Percentage of women receiving adequate post-natal care visits increased from 14.4% in FY02 to 28.3% in FY04.
• Percentage of fully immunized children rose from 36% in FY96 to 59.4% in FY04.
• Percentage of births by skilled attendants increased from 15% in FY03 to 20% in FY05.
• Contraceptive prevalence rate increased from 39% in FY02 to 42% in FY05.
• 1273 sub-health posts and 2 hospitals handed over to community management
• Access to safe drinking water increased from 71.6% to 73% between FY02 and FY04.
• Access to sanitation facilities increased from 20% in FY02 to 39% in FY04
Promoting social inclusion
• Improve access to schooling for girls, ethnic and caste minorities.
• Increase representation of women, Dalits and Janajatis in the civil service.
• Improvements in the poverty and human development indicators for deprived communities.
• Reduced ethnic and caste disparities • Number of female students receiving
scholarship at the primary level increased from 151,568 in FY02 to 224,656 in FY04.
• Incentives to increase enrollment of girls and Dalit students incorporated in the block grants to community schools.
• An affirmative action plan is being developed on the basis of the amendments to the Civil Service Act passed by Cabinet.
Improving governance
• Governance Act enacted• Improve civil service
composition• Scale up anti- corruption
measures• Improve financial
management and procurement practices.
• Clearly delineate roles of civil servants and politicians.• Maintain transfers at normal rotation levels
• Reduce political influence in the civil service.
• Reduction in both the perception and incidence of corruption.
• Improved accountability and transparency of public resources
• A cumulative total of 7160 vacant positions abolished FY02-FY05.
• Number of transfers reduced from 4417 in 2002 to 3335 in 2004.
• New Governance Act approved by Cabinet in February 2006
• Doubling of number of corruption cases filed and adjudicated from FY03 to FY04.
• Draft Procurement Law developed following extensive consultations.
- 14 -
4.2 Outputs by components:
4.2.1 Reforms to accelerate broad-based growth (Rating: Moderately satisfactory)
The Maoist conflict intensified over the past two years which contributed significantly to Nepal’s modest growth performance - 3.3 percent over the 2003-2005 period. The fact that growth rates have not deteriorated further in the face of a worsening conflict is partly due to the fact that certain growth-enhancing reforms have been fully implemented. These reforms are important to counter the negative impact of the Maoist conflict and political instability on the investment climate, as well as to create a basis for sustainable growth once peace is restored in Nepal. On the other hand certain other reforms have only been partially implemented and this three year growth record is significantly lower than Nepal’s performance in the mid-late nineties (5% average growth). As discussed above, Nepal’s strategy to revive broad-based growth is based on increasing the fiscal space for pro-poor public investments and improving the investment climate.
Increasing fiscal space
• The overall macroeconomic framework remained stable. Prudent fiscal and monetary policies have helped contain inflation (less than 5%) and maintain a comfortable level of reserves (minimum of six months of imports). As a result, the macro targets for Nepal’s PRGF program with the IMF are on track. However, PRGF reviews have been delayed due to slippages on structural benchmarks. Financing provided by PRSC I contributed to a reduction in net domestic borrowing, (2.9% of GDP in FY02 to 0.5% in FY05) and ensured that the Government budget was financed in a sustainable, non-inflationary manner.
• Tax mobilization and administration: The revenue GDP ratio has increased by 1.5 percentage points (from 11.5% to 13%) between FY02 and FY05. This increase was due to the widening of the tax base, an increase in VAT from 10 percent to 13 percent in 2005 and improvements in revenue administration. Tax administration reforms in recent years included splitting the Inland Revenue Department (IRD) into audit, collection and taxpayer service units and the establishment of a Large Taxpayer Unit that focuses on a select number of taxpayers whose payables constitute roughly three-quarters of income and VAT tax collection. The implementation of ASYCUDA at major customs points and implementation of the customs reform agenda also contributed to the improvement in domestic revenue. A post entry valuation section has been created within the Department of Customs, and within four other major custom points, in order to modernize and make the custom valuation procedures more scientific.
• Expenditure management: In addition to revenue increases, fiscal space for pro-poor investments was also created by sharply reducing the number of projects in the development budget. In FY03, 160 projects were dropped (30% of the total number of projects) in an effort to prioritize development spending – this rationalization was a prior action for PRSC I. Since then the number of projects has increased marginally (434 projects in FY04 to 454 in the FY05) and the average allocation per project has increased
- 15 -
by around 10% in real terms from FY03-FY05. Budget realism has also improved – the deviation between total expenditure allocations and actual expenditures declined from 20% in FY02 to 12% in FY05. Building on the process of scaling down development expenditures, HMGN devised a priority classification of its projects and high priority activities are fully funded when budgets are released.
5/ The MTEF process that was
introduced in a few pilot ministries in FY03 has now been extended to all ministries. Sector wide approaches (SWAp) have been set up in education and health over the past two years using the MTEF program-based budgeting framework. The result of the budget rationalization and prioritization exercise has been to increase the share of pro-poor spending (from 27% of total expenditures in 2002/03 to 31.1% in 2004/05) within a fiscally prudent expenditure framework. Security spending has not crowded out pro-poor spending and is around 3.4 percent of GDP - low by both regional and conflict-affected country standards.
6/
• Managing contingent liabilities: Reforms in the parastatal sector have moved at a slow pace. A combination of bureaucratic delays and litigation resulted in only two (out of thirty) non-financial parastatals being privatized / liquidated, while another five are in progress. Nepal Telecoms Corporation has been converted into a public limited company. The parastatal that poses the biggest threat to fiscal stability is the Nepal Oil Corporation (NOC). Petroleum prices have gone up by 25-60 percent (depending on the fuel) since December 2003 but adjustments continue to be made in an ad hoc manner. As a result, current NOC losses stand at around 1 percent of GDP on an annualized basis. However a recent Cabinet decision to raise fuel prices to cover NOC costs and implement an automatic pricing formula (a prior action for PRSC II) henceforth is an important step forward whose implementation needs to be monitored. HMGN has liberalized the LPG market allowing dealers to source directly from suppliers of their choice. Liberalization is also planned for other petroleum products, and a draft law for a petroleum regulatory framework is being finalized.
Improving the investment climate:
Progress on reforms designed to improve the investment climate are as follows:
• Reducing transport costs: High transport costs and the lack of connectivity are major impediments to Nepal’s development. Over the 2003-05 period an additional 575 kms of roads (or equivalently 3.5 percent of the existing length) were built focusing on connecting district headquarters with the national network and improving access between rural areas and market centers. A major road that will link districts in the impoverished Mid and Far-western regions will be completed in 2006. Conflict has disrupted construction in this
__________________________5/ The fund release system was changed in 2004 to ensure that high priority activities receive one-third of the allocated budget
at the start of the fiscal year compared with one-sixth for lower priority projects.6/ Sri Lanka’s security spending averaged 5 percent of GDP between 1992 and 2001, a period during which its own internal
conflict was most pronounced, and Pakistan’s spending on security averaged 3.7 of GDP between 2000 and 2004..
- 16 -
important project but the involvement of road user groups has helped to reduce tensions between the two opposing sides. A prior action for PRSC I was the establishment of an autonomous Roads Board funded mainly by a fuel levy to oversee road maintenance. This new institutional structure faced initial teething and coordination problems during the first year which have now been largely resolved. A prior action for PRSC II related to making the Birgunj Inland Container Depot operational – this was achieved through a bilateral agreement between India and Nepal and the appointment of a private terminal manager. Six months into the ICD becoming operational, container traffic increased from an initial 150 containers a month to about 800 a month. Additionally, figures collected over the six month period showed that the ICD reduces the transport and transit cost by around 37 percent.
• Increasing access to power: In mid-2004, a Power Development Fund (PDF) was established to stimulate private investment in small and medium hydropower plants and the results so far have been encouraging. While only 0.5 percent of national power generation was produced by the private sector in 2003/04, this will increase to around 9 following agreements signed in 2005. NEA’s operations have been unbundled into functional units and performance contracts were signed in mid-2003 for generation, and distribution units. A performance audit of 18 distribution units (which together capture 70 percent of revenue) that were given functional autonomy shows that losses have been significantly curtailed. Moreover, an Electricity Theft Control Ordinance was passed in 2004 to further check leakages and a cooperative based rural electrification program has recently been launched.
• Increasing access to telecom services: A Rural Telecom Service (RTS) license was provided to a private operator and operations began in 2005. The number of VDCs with access to telecom services increased by 16% between FY03 and FY05. A new Telecommunications Policy was approved in March 2004 and the Nepal Telecommunications Corporation has been registered under the Company Act enabling the government to divest its equity.
• Financial sector reforms: Financial sector reforms progressed steadily on multiple fronts though recovering dues from large defaulters has proved difficult. The PRSC I prior action related to the appointment of the foreign management teams in two of the largest loss-making commercial banks (RBB and NBL). Staff right-sizing took place with the implementation of the three phases of a Voluntary Retirement Scheme (VRS). The reduction in overheads and improved lending practices meant that these banks generated operating profits in FY04. The two banks now produce audit reports within six months as compared with several years in the past. Concurrent to these measures, the Banking and Financial Institutions Ordinance (BFI) promulgated in February 2004 unifies five separate banking laws under a single umbrella act and strengthens the regulatory and oversight functions of Nepal Rastra Bank (the Central Bank). In September 2004, Article 86 of the Nepal Rastra Bank Act was amended to further strengthen the Central Bank’s ability to deal with troubled banks and paves the way for the privatization of Nepal Bank Limited. The pursuit of large defaulters, however, has been difficult despite the setting up of a Debt
- 17 -
Recovery Tribunal.
• Labor market flexibility: Nepal has one of the most restrictive labor laws in the region and the PRSC program supported efforts to amend the rigid provisions in the existing legislation. A series of tripartite dialogue between government, employers and employees over the past three years led to an agreement on making labor laws more flexible subject to the introduction of some form of social security for workers. A new much-improved Labor Ordinance was approved by Cabinet in February 2006.
• Regulatory environment for private sector development. The Secured Transactions Ordinance, Insolvency Ordinance and Company Ordinance was approved in September 2005. Subsequent discussions with the private sector suggest that these pieces of legislation are generally viewed positively though implementation arrangements within Government need to be further streamlined.
4.2.2. Improving service delivery
Component rating: Moderately Satisfactory
Despite the constraints imposed by conflict on the delivery of basic services, many social sector outputs and outcomes have improved since 2003. Completion rates in primary have increased by almost 10 percentage points, an increasing number of communities have management control over school, health and rural drinking water facilities, the proportion of deliveries attended by professional health workers increased from 15% in FY03 to 20% in FY05.
Decentralization: The Local Bodies Fiscal Commission was instituted in 2003 and the use of a block grant formula for the allocation of grants between districts piloted in FY2003/04 budget. In August 2005, HMGN decided to allow 14 District Development Committees (DDCs) full authority to decide and implement development programs on a pilot basis. This is a significant move and involves sectors like education, health, drinking water, electricity, roads and communication. However, minimum progress was made in the reconciliation of sectoral acts that are in conflict with the LSGA.
Education: The devolution of primary schools to School Management Committees (SMCs) started in 2003 and has gained significant momentum. Currently, about 2,300 primary schools (about 10% of the total) —in 59 of 75 of Nepal’s development districts—have been handed over to SMCs. Legislative changes to the Education Act were made which created a legal basis for this transfer. The Eighth Amendment to the Education Act in 2005 suspended central recruitment of teachers. While a rigorous evaluation of the performance of SMC-managed schools is currently being undertaken, an initial evaluation of a sample of 63 such schools conducted in July 2004 shows overall enrolment, as well as enrolment of Dalit and other excluded students, has increased and teacher absenteeism has decreased in the schools in the sample. The number of girl students receiving scholarships almost doubled between FY2003 and FY2004. Completion rates in primary have increased from 60% in FY 2002 to 69% in FY2004.
- 18 -
Health: The devolution of health facilities to local management groups has reached sizeable proportions particularly at the lowest tier. Almost half of the 3100 sub-health posts have been transferred to community management, along with a far smaller portion of health posts and primary health care centers. An initial evaluation suggests that contracting-out has been positive from the users’ perspective though awareness campaigns regarding the new roles and responsibilities of various health delivery actors need to be stepped up. The management of one district hospital has also been contracted to local management. The number of births attended by skilled attendants has gone up from 15% if FY2003 to 20% in FY2005, and the percentage of pregnant women receiving iron tablets has risen sharply from 57% to 88% over the same period.
Drinking water: Relevant regulations to grant operational autonomy to the Rural Water Supply and Sanitation Fund Board were introduced in 2004. This Board funds and supervises NGOs to help communities form Water Users Groups who build, manage and maintain their own water systems. Kathmandu water management has not yet been contracted out to a private operator, though steps towards this end have been taken.
4.2.3. Improving social inclusion
Component rating: Moderately Satisfactory
Reforms to improve inclusion are integrated into on-going overall sectoral reforms. For instance the Ministry of General Administration has developed an affirmative action plan for the civil service that is included in the draft revisions to the Civil Service Act. However implementation of this action plan has been slow. In education, scholarships for girls, Dalits and children from other marginalized groups are in place and mechanisms for the social audit of these schemes are being introduced. The number of female students receiving scholarships at the primary level increased from around 150,000 in FY02 to 225,000 in FY04. In the health management committees, there are reserved seats for Dalits and women.
The prior condition of PRSC I was the establishment of the Poverty Alleviation Fund (PAF) as an independent body that channels resources to poor communities. The PAF is now operational, governed by an autonomous board, and 65 partner organizations in six districts have been identified. As of mid 2005, the PAF Board had approved funding for 54 projects covering 168 Village Development Committees (VDCs). 60% of beneficiaries from the PAF can be classified as ‘extreme poor’ and the targeting of ethnic minorities is reflected by the fact that 44% of beneficiary households are from the ‘Dalit’ group.
4.2.4. Improving governance
Component rating: Moderately Unsatisfactory
There have been a number of “technical improvements” on governance issues. However there have also been a number of policy initiatives, such as the creation of the Royal Commission for Corruption Control (RCCC) following the royal take-over on February 1st 2005 that compromised the achievements made thus far. We discuss these issues below:
- 19 -
The drive towards improving transparency is reflected in a number of ways. Eight new auditing standards and four accounting standards have been published by the independent Accounting Standards Board and the Auditing Standards Board. The annual reports of three constitutional bodies – Auditor General, Public Service Commission and Commission for Investigation of Abuse of Authority (CIAA) – that had been withheld for the past three years due to the absence of the parliament were released in February 2005. The reports paved the way for effective reconciliation of overdue revenue and other unsettled accounts.
The anti-corruption drive led by the CIAA made some progress during the 2003-2005 period (see table 4). HMGN has completed necessary consultations with stakeholders and is in the process of promulgating the new Procurement Ordinance. The Nepal Administrative Staff College is building its capacity in delivering procurement-related training. However, the Royal Commission for Corruption Control (RCCC), formed after February 1st 2005 and disbanded a year later by the Supreme Court undermined the role of the CIAA. There are clear indications that certain individuals investigated on corruption grounds by the RCCC were questioned due to their political affiliations. Hence this is an area where there was a clear reversal of the progress made in earlier years – however on the positive side, the recent dissolution of the RCCC is clearly an important step forward.
Table 4: CIAA activities and outcomes, 2000/01 to 2003/04
Particulars 2001/02 2002/03 2003/04Number of complaints received 2,000 3,687 3,732 Number of cases filed/registered 61 147 98 Number of cases adjudicated 55 129 Number of full convictions 43 120 Number of partial convictions 4 -
Source: PRSP Progress Report
Concurrently, the government has also taken several actions to improve the efficiency and accountability of the civil service. HMGN has made some progress in rationalizing the process of transfers, tenures and promotions; transfer data available from the Personnel Information System (PIS) shows a decline from 6560 transfers in 1999/2000 to 3335 transfers in 2003/04. This has allowed for greater stability of tenures and policy coherence. Furthermore, the comprehensive PIS – which has now been linked to payroll information – enables a greater accuracy in civil service records and allows for the management of postings and transfers. A hiring freeze at the lower levels of the civil service (‘non-gazetted’ staff) has been enforced. The Civil Service Act is being amended in order to improve the diversity of the civil service and introduce greater performance-related incentives.
4.3 Net Present Value/Economic rate of return:Not applicable.
4.4 Financial rate of return:Not applicable.
- 20 -
4.5 Institutional development impact:(Rating: Modest)There are three areas where the PRSC program has had an institutional impact. First, the MTEF is being implemented as a result of which, a forward looking, medium term fiscal strategy bridges the perceived gaps between the annual budget and the five-year PRSP. As a result, the traditional budget pathologies pertaining to unrealistic budgets with the proposed expenditures not anchored in any particular sectoral strategy and not linked to any clear output have dissipated to a large extent. But a lot remains to be done before one can conclude that the MTEF has had a highly significant impact on budgetary institutions. For example, there is room to make the performance based release mechanism more effective by vetting not just the financial performance of any particular budget line but also the underlying physical progress. Similarly, HMGN is already in a considerably advanced stage of preparation of sector-wide business plans. These plans will sharpen the output focus of the budget on the one hand and, by their links to the MTEF, pave way for the implementation of HMGN’s aid integration strategy on the other.
Another key institutional impact of the PRSC program is in supporting reforms that have given greater autonomy to communities in managing education, health, roads, irrigation and hydropower services. HMGN has provided a supporting framework for this change such as through the Eighth Amendment of the Education Act which suspended central recruitment of teachers and gave greater autonomy to community managed schools in hiring teachers. Progress in expanding community management in health has been slower than in education, but the pattern is similar. HMGN has also introduced similar strategies in roads, irrigation and cooperative based micro-hydro projects. A related area where the PRSC has had ‘institutional impact’ is in supporting reforms that have established new public-private implementing bodies such as the Roads Board and the Poverty Alleviation Fund. However coordination and implementation challenges remain both with the community transfer of services as well as with these new public-private entities.
At the same time there are areas where clearly there has been little institutional development. For instance the royal take-over of February 1st has weakened oversight institutions such as the CIAA and the Public Accounts Committee has not been functional since the abolition of Parliament in 2002. Overall we rate institutional development impact as modest due to these weaknesses and also because important challenges remain in the areas where progress has been made (MTEF, community involvement, public-private partnerships).
5. Major Factors Affecting Implementation and Outcome
5.1 Factors outside the control of government or implementing agency:
Maoist conflict. The Maoist conflict has had a significant impact on PRSC outcomes. Although the Nepali economy has shown some resilience to conflict so far, it is unlikely that this can be sustained. The late 1990s was a period of ‘low intensity conflict’ and growth averaged around 5%. As the conflict has intensified in the past few years average growth rates have also declined averaging around 3%. The conflict also has negative repercussions on the delivery of basic services. There are reports of widespread harassment and extortion of local Government officials,
- 21 -
school teachers and school going children. Periodic strikes have disrupted the flow of goods and education and health service schedules. At the same time innovative mechanisms such as mobile health camps have been developed to ensure that basic services, such as immunization, are provided on a timely basis and the Maoist insurgents have not in general disrupted these essential services as they recognize their importance to the community.
5.2 Factors generally subject to government control:
Political climate. The implementation of the PRSC program in Nepal was significantly affected by the uncertain political climate. This uncertainty was “outside the control of government” when “government” is defined as the technocrats who spearheaded Nepal’s reforms since 2000. Since the suspension of the parliamentary process in October 2002, the country has been ruled by four interim governments. These changes had an impact on the speed of decision-making particularly during the initial ‘settling-in’ period of each new administration. They also had an impact on the emphasis given to specific reform issues. On February 1, 2005 the King assumed executive control over the government for a period of three years. Though the King has made strong commitments to keep the reform process on track the political climate has become more polarized and with it the chances of broad-based support for contentious reforms. Moreover, in the absence of a free press and transparent information, monitoring and evaluation of the effectiveness of these programs will need to rely even more on independent survey based sources.
Capacity constraints and bureaucratic sluggishness partially affected the implementation of certain reforms. The experience with setting up new implementation modalities, be it in roads, education or health, is that it takes time to get these up and running smoothly. The Roads Board and the devolution of authority in the social sectors all faced “teething problems” during the first year or so following these changes. These problems arise due to capacity constraints, the lack of clarity on roles and responsibilities and the inevitable adjustments required when a new system is tried out.
5.3 Factors generally subject to implementing agency control:(same as section 5.2)
5.4 Costs and financing:Not applicable
6. Sustainability
6.1 Rationale for sustainability rating:Rating: Unlikely
1. The main risk to PRSP outcomes arises from a further escalation of the conflict. As discussed above this will discourage investment and tourism, reduce Nepal’s competitiveness in export markets thereby resulting in lower growth. Service delivery outcomes will also be affected as basic supplies (teaching materials, essential medicines etc) will take more time to reach remote rural areas and Maoist harassment of service providers is likely to continue.
- 22 -
2. Moreover there is uncertainty regarding the continuity of certain parts of the reform agenda, and therefore development outcomes, under the current political environment where frequent turn-over at the Cabinet level appears to be the norm. 3. However as the earlier discussion indicates there are many reforms that have proven fairly resilient. These include reforms in the community provision of services, financial sector, labor, customs, MTEF all of which are broadly on track. The recent initiatives by the royalist administration to change the labor law, introduce the new Governance Act and raise petroleum prices also are important signals that the overall direction of the PRSC program could be sustained. Our rating is due to the uncertainty associated with the current political / security situation and the implications for PRSP outcomes, rather than progress with reforms per se.
6.2 Transition arrangement to regular operations:Not applicable.
7. Bank and Borrower Performance
Bank7.1 Lending:
The quality at entry is rated satisfactory. The PRSC was based on the PRSP priorities and was fully consistent with the medium term strategy for the Bank’s assistance to Nepal as outlined in the CAS. The program design had strong analytical underpinnings and had been identified by taking into account the Bank’s own comparative advantage vis-à-vis other donors engaged in Nepal.
The Bank put together a multi-sectoral team with team members drawn from every sector unit within the South Asia region, complemented by specialists from the networks (e.g. on poverty and petroleum issues). Macro-economic issues, and certain structural discussions (e.g. financial sector, public expenditure) were coordinated closely with the IMF. Fiduciary aspects were included by supporting reforms that strengthen financial management and procurement practices; credit proceeds were disbursed using standard Bank rules for adjustment operations. The team was assisted by a working committee of Bank specialists who assessed the environmental implications of the PRSC program. The gender and social development aspects were an integral part of the Credit through the ‘social inclusion’ component and a Lead Social Development specialist was a core member of the preparation team. Monitoring and evaluation indicators were discussed with counterparts from the beginning of the Credit and in order to ensure adequate focus on this issue a separate task was created in the Nepal work program for strengthening monitoring and evaluation focusing on PRSP/PRSC requirements. There was no change in task management and minimal changes in team composition from project identification to Board presentation. The Credit amount and timing of the disbursement were appropriate for Nepal’s fiscal needs.
7.2 Supervision:
The supervision work is rated satisfactory. The Bank provided timely advice on PRSC I implementation issues (e.g. on the Roads Board, timing and impact of petroleum price
- 23 -
adjustments, financial sector reform). Particular attention was paid to areas which were not already covered by the dialogue on specific investment projects. A month after PRSC I Board approval a country team retreat was held to discuss PRSC implementation issues. The discussions focused on the implications of conflict and political turmoil on reform implementation, cross-cutting themes (civil service reforms and decentralization) and the prior actions for PRSC II.
The supervision combined day to day dialogue carried out by country office staff, missions every two months on average and visits by headquarters specialists (e.g. on petroleum sector issues). One task leader was based in the Katmandu office and the other in the region – this contributed to early detection of implementation problems and timely advice. The task, sector and country management of the PRSC program has remained unchanged since the preparation of PRSC I. This continuity has been important in being able to make judgments on the appetite for reform within the various administrations and retain the institutional memory required to assess the extent, or lack of progress.
7.3 Overall Bank performance:
Based on the satisfactory ratings for both lending and supervision, overall Bank performance is rated satisfactory.
Borrower7.4 Preparation:
The quality of borrower preparation is rated satisfactory. The PRSC program was based on the strategy and specific reform actions laid out in the PRSP. The Joint Staff Assessment of the PRSP concludes that the strategy is “coherent, comprehensive and explicit in its emphasis on implementation”. The PRSP also marked the beginning of participatory plan formulation grounded in a medium term budgetary framework. Government commitment to the PRSC program was shown by the strong track record of reforms during the 2000-2003 period (see section 3.3. for a detailed discussion). This track record resulted in Nepal moving from low to base case of the CAS in late 2002.
7.5 Government implementation performance:
Government implementation performance is rated moderately satisfactory. Several reforms involved fundamental changes in the ways of doing business (e.g. service delivery devolution, Roads Board etc) and detailed implementation arrangements were not thought through carefully prior to announcing the policy decision. Nevertheless these ‘teething problems’ in the first year did not derail these reforms and these initial coordination and role clarity issues have now largely been resolved.
As discussed earlier Government commitment to reform, and correspondingly implementation performance, varies by type of reform. The anti-corruption drive, centered around the proper functioning of the CIAA, lost considerable credibility following the establishment of the RCCC. In the financial sector several potentially difficult reforms have been implemented such as the downsizing of the two largest banks. At the same time the large defaulters issue has not been
- 24 -
resolved. On the other hand, reforms in public expenditure, customs administration, enhancing community management of social services are largely on track. In short, Government implementation performance has clearly been mixed, though on balance it is rated as moderately satisfactory (further details are in section 4.0).
7.6 Implementing Agency:
There is no one single implementing agency for the PRSC program. While the Ministry of Finance was the key counterpart agency for the PRSC process, responsibility for reform implementation lay with many different agencies. Hence it is more appropriate to rate the performance of HMGN as a whole, rather than an individual agency.
7.7 Overall Borrower performance:
Overall borrower performance is rated moderately satisfactory in line with the outcome rating (page 1).
8. Lessons Learned
Nepal’s current image matters for the PRSC program. Nepal’s image has suffered tremendously due to the political instability and ensuing polarization between the key political actors. This image has clearly worsened the investment climate, particularly foreign investment, and has dampened growth prospects. Events post-February 1st have also led to a polarization within the donor community. There are certain development partners who feel that a return to democracy is a pre-requisite for development assistance. An alleged escalation of human rights abuses by both sides of the military conflict is also a prime concern for a group of development partners. Some of these donors are represented on the Executive Board of the World Bank and feel strongly that the current political/military situation in Nepal is not conducive for World Bank budget support. Therefore in addition to the new government’s progress on the medium term agenda, it is clear that Nepal’s PRSC program is also dependent upon the unfolding political scenario.
The implication of the uncertainties in Nepal for the PRSC program is the need to continue to link releases to up-front actions and to remain engaged. The frequent changes at the Cabinet level meant that it was particularly important for the Bank to remain consistent in its messages on the PRSC. The Bank repeatedly stressed that PRSC II was contingent on up-front reform actions particularly since the frequent changes at the political level dampened the credibility of promises of reform. A related important lesson is that the dialogue between the Bank and the borrower needs to be maintained at all levels during this uncertain period. The Bank can play a constructive role by continuing to support the reform-minded technocrats who spearheaded the PRSP. The costs of not remaining engaged would likely be serious as it would leave the reform champions isolated and the momentum for certain reforms would be lost.
The distinction between technocrat and politician-driven reforms is important. There remain many important reforms that are relatively non-controversial (e.g. reducing transit costs and improving connectivity) and can be spearheaded by committed technocrats. At the same time there are other reforms that can have a clear short run political cost such as adjusting petroleum
- 25 -
prices. There is a limited number of this second type of reforms that any Government, particularly one which does not have a clear mandate from the people, are prepared to carry out in any given time period. Hence, another lesson is that it is important to classify prior actions according to their degree of ‘political costs/benefits’ and limit the ones with high political costs in any given year. Related to this is the fact if technocrat-driven reforms are to be sustained, there has to be a concerted effort to limit transfers in key secretary-level positions.
There is a trade-off between the predictability of budget support and the strength of the annual reform programme. One of the objectives underlying the PRSC program was to align budget support with the annual budget cycle and improve the predictability of resource flows. The experience in Nepal suggests that this objective needs to be traded-off with the type of reforms that are possible within the space of twelve months. The first PRSC was based on a track record built over two years. Hence if providing predictable annual budget support is a primary objective then expectation levels on the type of reforms that are achievable within a twelve month period may need to be lowered. Conversely, if the decision to provide budget support is based on a similar quantum and depth of reforms for each PRSC, then it is likely that the time interval between PRSCs will be longer than one year – as experience has borne out in several countries.
The sustainability of reforms supported by the PRSC program also depends on the ability to communicate the rationale behind such reforms. HMGN needs to hold regular consultations with relevant stakeholders, including people within the government, to discuss reform strategies and objectives. Simple analytical work in a few crucial reform areas can help in this domestic dialogue. The work on the poverty impact of fuel prices using the latest household survey data, for example, helped assure key decision-makers that the social costs would be minimal. This was used as part of an awareness raising campaign in late 2004 prior to the increase in fuel prices announced in January 2005.
Experience with PRSC I also shows that reforms in the judiciary system clearly lag behind reforms on other fronts. This manifests itself most clearly in the loopholes in the judiciary that some large willful defaulters have been able to exploit, dampening the progress on reforms in the financial sector. Similarly, despite CIAA’s commendable success on multiple fronts, prosecution of some large corruption cases has been difficult. These experiences call for some realism, both at the time of program design and evaluation, in areas where the judiciary is integrally involved.
Major policy shifts in service delivery require a detailed implementation plan: While ‘learning by doing’ is clearly an important part of the process, future policy changes that involve large shifts in business processes will require a more careful roll-out plan. For instance several of the problems faced by the Roads Board in the first year of operation were due to the lack of clarity on roles and responsibilities between the Board and other agencies involved in the road sector.
- 26 -
9. Partner Comments
(a) Borrower/implementing agency:Introduction
The singular objective of Nepal’s Poverty Reduction Strategy Paper (PRSP)/Tenth Plan (2002-2007) is poverty reduction, which has also been the focus of the First Poverty Reduction Support Credit (PRSC). To achieve this overarching goal of poverty reduction from 42 percent to 30 percent, PRSP is structured around generating equitable and broad based growth; improving service delivery; inclusive development and governance improvement as four strategic pillars to address Nepal’s development challenges in a conflict environment. The PRSC focused on the core reform areas identified in the PRSP that aimed at: (i) ensuring macro-economic stability and creating fiscal space; (ii) improving the investment climate; (iii) enhancing decentralization of services to empower and increase access of public goods by beneficiaries; (iv) expeditious implementation of targeted programs to mainstream development to underserved regions and people; and, cognizant of prerequisite of governance improvement for overall pro-poor growth and improvement in service delivery, (v) strengthening effectiveness of civil service, anti-corruption drives, accountability and transparency.
The beginning of the implementation of PRSC reform programs
The Bank approved the first PRSC in the amount of SDR 51 million on November 18, 2003, immediately after the conclusion of PRGF arrangement with the International Monetary Fund by HMGN. The Fund program provided for balance-of-payment support that hinged on HMGN’s successful adherence to critical macro-economic and financial sector reform benchmarks. The combination of PRGF and PRSC created an environment for far-reaching reforms while at the same time ensuring short-term macro-economic and financial stability.
The timing of PRSC and its funding modality have also played an important part in successful implementation of critical reform programs. For consecutively three years prior to PRSC years, HMGN was running huge fiscal deficits, substantial portion of which was unplanned and was financed through overdraft from the central bank. There was a growing sense within the government that some kind of strong measure for ensuring fiscal discipline needs to be institutionalized, which subsequently gave rise to the Medium-term Expenditure Framework (MTEF). The government had also credible policy document prepared through wider stakeholder consultation that charted out clear road-map for its goal of poverty reduction. These events and instruments provided PRSC reform program a sound platform for implementation.
Overall assessment of the PRSC instrument
PRSC funding was a major departure from the traditional project financing. The flexibility of allocation made MTEF implementation much easier for the government and at the same time, as will be explained later, domestic borrowing could be kept at a reasonable limit that was deemed suitable for the macro-economic stability.
- 27 -
The beauty of PRSC instrument is that it fully embodies the aid alignment and harmonization principles. There is no better way than this for financing domestic development priorities while focusing on the outcomes and critical reforms that are necessary for a robust and equitable growth in the future.
Along with the PRSC implementation, the government also initiated the outcome-based budget preparation and implementation in critical sectors, such as education and health. The government also has been regularly monitoring the progress of PRSP implementation and annual progress report has been made public.
This is not an exaggeration but the Nepalese economy performed reasonably well in 2004 and 2005 in spite of threatening conflict environment, which was possible mainly due to the implementation of PRSC reforms. With the increasing involvement of local communities in the public expenditure process, there was less erosion in the effectiveness of development spending and also in the government outreach programs.
The PRSC process was not, however, entirely a smooth sailing for the government. There were difficulties at times. Although PRSC program drew almost entirely from domestic PRSP in identifying critical reform agenda, there was some tendency of disowning the reform agenda in different segments of the government. This can partially be attributed to HMGN’s inability to properly educate the system, but mainly it is due to conventional attitude of disowning the donor-driven reform program.
Achievements under the first PRSC
The PRSC reform program tied itself to the four pillars of HMGN’s PRSP, namely, broad-based economic growth, improving service delivery, promoting social inclusion and governance. It would be more relevant if achievements are discussed under each of these pillars of poverty reduction.
(i) Broad-based economic growth
Overall indicators: In a conflict environment that thwarts development space, His Majesty’s Government of Nepal (HMGN) was able to implement a number of reform activities to maintain a growth rate of 3.4 percent in 2003/04, from a negative growth rate of 0.6 percent in 2001/02. Fiscal space augmented through revenue growth of 1.6 percent of GDP, gross expenditure maintained at 19 percent of GDP, domestic borrowing reduced by 1.8 percent of GDP between 2001/02 to 2004/05 while donors’ confidence increased, deficit after grants reduced from 5.6 percent of GDP to 3.5 percent of GDP and pro poor expenditure increased. Since FY 200/03, the inflation level has been contained at less than 5 percent annually with prudential fiscal deficit and money supply.
Custom reforms: In order to implement systematic and coherent revenue improvement measures, HMGN had constituted Fiscal Reform Taskforce as part of the preparatory work for first PRSC. Most of the recommendations of this taskforce are implemented and that led to the
- 28 -
amendment of Income Tax Act and Regulations, broadening of the base of both income tax and value-added tax. Inefficiency in custom administration was the reason for low revenue performance, while at the same time, it was bottleneck to trade facilitation. The government is now implementing three-year custom reform program. This includes strengthening and expansion of ASYCUDA computerized custom clearance system to more custom points so that human interface in custom clearance is minimized; selectivity based on risk-assessment is in place in large custom point that eliminates time and hassles for the importers at the custom point; custom tax clearance procedural has been simplified; subjective judgment in custom valuation has been replaced by transaction value system.
Inland revenue reforms: Strengthening of Inland Revenue included broadening of income and value-added tax base, introduction of dedicated and specialized large tax payers’ unit, and computerization of tax assessment and administration and limitation of exemptions. HMGN increased the VAT rate from 10 to 13 percent during this period and surveillance and supervision of VAT compliance has been strengthened through the introduction of lottery system for the customers, mandatory provision of displaying tax plates by shopkeepers and through the provision of qualified tax auditors. The government has also made all the preparation for the introduction of pilfer-proof excise duty stamps/stickers. This is expected to reduce excise leakages particularly in the case of cigarette and alcohol through in-built enforcement mechanism.
Public expenditure reforms: The introduction of Medium Term Expenditure Framework and its improvement in successive years has ensured the following: (a) resource allocation is based on the priority of the program/project, (b) highest priority programs/projects are fully funded and fully secured against resource vulnerability, (c) security-related expenditures have been contained to a prudent level and in spite of escalating conflict in the early part of the PRSC implementation, the government stuck to its MTEF allocation and did not allow the fiscal balance to distort, (d) enhanced allocation to pro-poor programs/projects and also to the social sector. The fund-flow to the programs/projects is tied to their performance. Government’s exposure to contingent liabilities created by loss-making public enterprises has now been considerably reduced. Ten public enterprises have been closed down and they are in varying stages of privatization effectively stopping incurrence of additional contingent liabilities. As part of financial sector reform program, two large public-sector commercial banks have been put under professional management and this measure is expected to have saved government from a terrible financial burst in the future. There has been considerable reduction in their non-performing assets apparently decreasing the government’s contingent liability. Government has stopped accepting supplier’s credits and arrears to public enterprises have also been cleared.
Improving investment climate: Cognizant of the need to strengthen public-private partnership in building country’s infrastructures, bold reform measures were initiated to improve investment climate. In transportation, investment were prioritized towards district headquarter linking roads and rural roads expansion, maintenance of strategic road networks and operationalization of inland container depot, one of the many to be constructed, was handed over to private sector. Roads Board has been fully operationalized along with the provision of fuel levy and toll tax going to the Board. In irrigation, management of large and medium scale irrigation systems were contracted to private sector. Internal unbundling of Nepal Electricity Authority (NEA) was
- 29 -
completed so that generation, transmission and distribution would each function as different profit centers. This is evidently increasing the efficiency of NEA. In telecom sector, the entry of private sector has been facilitated through appropriate regulatory mechanism. As a result, tele-density has now substantially increased. These activities are expected to ameliorate impediments to agriculture productivity and manufacturing and service industries growth, all led by private sector. HMGN also introduced number of new laws and mended the existing ones with a view to improving the overall investment climate and they include: Insolvency Act, Secured Transactions Act, a new Company Act replacing the existing Act, BOOT Act. The government revised the negative list for foreign investment and opened up several areas for investment.
Financial sector reform: The focus of the reform during this PRSC period was strengthening of the capacity of Nepal Rastra Bank (NRB) as a banking sector regulator. For the first time, the external audit of NRB was conducted by an international firm. NRB developed and implemented operational manuals to standardize its core functions including the on-site supervision of commercial banks. In addition to implementing reforms in two public sector commercial banks, restructuring of Agriculture Development Bank has also been done.
(ii) Improving Service Delivery.
Improving decentralization framework: The Local Self Governance Act (1999) espoused beneficiary participation of and management by local communities in improving and bringing public goods close to door steps. In order to strengthen the fiscal position of the local governments, the legal provisions were subsequently amended giving wider revenue collection authority to District Development Committees (DDCs) and also clarifying revenue sharing arrangements in the tourism and hydro-power generation sector. The government is also implementing the Expenditure Assignment study recommendations in a phased manner and conditional grant system along with specific mandate in small infrastructure, agriculture extension, primary healthcare and primary education has been introduced. While the resources for the delivery of education, primary healthcare, drinking water services and other small infrastructures flow through the DDCs as conditional grants, the local communities take the leadership in the management, control and allocation of resources in these sectors. In education, schools were transferred to School Management Communities along with funds and right to hire and fire. Essential health care activities were made the focal thrust of health sector investment delivered through health posts, handed over to local management committees. Preliminary results of decentralized mode of service delivery are very encouraging. Encouraged by these outcomes, government has made a policy decision of piloting full-scale devolution of services in 14 districts of the country. The government also revised Irrigation Policy and Regulation to empower Water Users’ Association to sanction the defaulters.
(iii) Inclusive development.
Overall effort and the creation of PAF: Poverty reduction targets can be achieved only if inclusive development activities benefit not only historically underserved regions but also people marginalized in past development process. Targeting of such programs has always been a challenge. As part of PRSC program, HMGN is piloting targeting of demand driven community
- 30 -
activities identified by the poor themselves, especially the excluded groups, to be scaled up to community level at a later date. Under this general budget support, specific instruments such as Poverty Alleviation Fund as well as through other interventions access of excluded in primary education, civil service, credit, drinking water, health facilities and overall increase in public spending in the under served areas were initiated, among others.
Increasing access to schooling for girls and dalit households: With the introduction of targetted scholarship scheme and provision of money for stationary and ancillary study materials for girls and all dalit students, the enrolment in the primary schools from these categories has substantially increased. Encouraged by this, HMGN from current fiscal year introduced full scholarship scheme for all girl students of 22 remote districts passing school leaving certificates so that they can pursue secondary education without any financial dependence on the family.
(iv) Governance.
Effectiveness of civil service and anti-corruption drive: No development efforts can be expanded or outputs sustained without parallel improvements in overall governance. Increase of transparency and accountability are two twin objectives of the reform measures supported by this general budget support program. Transparency of allocation and accountability of use of funds were hallmarks under reforms in financial management while formulation of a new procurement act, as per international norms and standards, is being pursued. To make civil service accountable to the people, a civil service act was amended with more affirmative actions and merit based promotion while limiting premature transfers. Anti corruption institutions were strengthened enabling rise in conviction rates at the Special Court.
Enhancing public accountability: Public display of Citizen’s Charter explaining the procedures for obtaining services and expected time and fees has been mandatory in all government offices interfacing with the public. This has substantially reduced rent-seeking within the government system. This is accompanied by public disclosure of information on public works projects and regular public audit. This has been found to be an effective means of ensuring the rights of local workers in terms of their wages and work conditions. With a view to improve transparency in public procurement, a new Procurement law in the final stages of enactment and more than 200 government officers have been trained in good procurement practices. In addition to sanity in public financial management, it is also equally important to have a sound corporate sector. Autonomous Accounting Standards Board and Auditing Standards Boards have been set up and made fully functional to issue standards for the corporate sector.
(b) Cofinanciers:Not applicable.
(c) Other partners (NGOs/private sector):Not applicable.
Objectives PRSC II reform benchmarks (prior actions in bold)
Progress in meeting PRSC II benchmarks
Macro-economic stability
Satisfactory implementation of the macro-economic framework agreed with the IMF
Fiscal and monetary policies have broadly remained prudent and as a result PRGF remains on track.
Restructuring public expenditures
(i) Extend initial MTEF work to all sectors.
(ii) Annual plans of high priority projects, with each trimester’s budget allocation, included in the budget book.
(i) MTEF has been extended to all sectors and covers both capital and recurrent side of the budget. The practice of classifying the budget into regular and development spending has been discontinued in favor of GFS-consistent capital and current classification.
(ii) Annual plans of high priority projects along with their allocations every trimester are included in the budget book and a performance based release mechanism dictates subsequent releases.
Tax restructuring Begin implementation of Fiscal Commission’s recommendations.
VAT rates were revised upwards from 10% to 13%. A Large Taxpayer’s Unit set up within the Inland Revenue Department and a number of sweeping reforms successfully implemented in customs administration.
Managing contingent liabilities
(i) Move to at least quarterly price adjustments using a transparent automatic price formula for petroleum products.(ii) Liberalize LPG market by allowing dealers to source directly from suppliers of their choice.(iii) Draft legislation to establish independent regulatory agency for petroleum sector(iv) At least half of the arrears paid off to the public utilities using designated budget code in FY04 (v) Complete the liquidation/privatization of 8 state-owned companies(vi) Implement Foreign Aid Policy by banning all new suppliers credits.
(i) Trigger partially fulfilled. Decision to implement automatic pricing formula for fuel prices announced by Cabinet in February 2006 – implementation will need to be monitored.(ii) LPG market has been liberalized.(iii) Legislative preparations for liberalizing the market for other POL products currently in progress. Draft Act has been prepared and discussed among stakeholders but without closure on the pricing framework, this is unlikely to be enacted.(iv) Half the arrears were paid off in FY04 and the remainder in FY05. However new arrears build-up will need to be closely monitored.(v)Two SOE privatizations completed; five SOEs liquidated.(vi) The ban on suppliers credit remains in place.
Restructuring the transport sector
(i) Transfer fuel levy receipts to Roads Board in a timely manner to ensure regular resources for road maintenance.
(ii) Make the Birgunj ICD operational through finalizing the (Nepal-India) rail agreement and appointing a terminal management operating company through competitive tender.
Sirsiya inland container depots managed and operated by a private terminal operator.
(i) Trigger fulfilled as specified. A separate revenue code has been designated to make fuel levy receipts directly available to the Roads Board through the budget.
(ii) Trigger fulfilled as specified. Birgunj ICD has been made operational with the appointment of a terminal management company in place. However, despite the finalization of Nepal- India rail agreement, handling of cargo for bilateral trade with India remains minimal.
- 32 -
Restructuring the power sector
Establish Power Development Fund.Implement program of cooperative based rural electrification.Complete internal unbundling of NEA through signing of agreements between NEA and all generation/transmission centers.
Power Development Fund established and operationalized.NEA has been unbundled into generation and distribution units and performance contracts have been signed with private operators which are running these units as autonomous “profit centers”. NEA system losses declined from 23.6% in 2003 to 22.9% in 2005.
Restructuring the telecom sector
Rural telecom operator in place
Review privatization options and initiate privatization process of NTC.
A rural telecom service provider has begun operation in 534 VDCs in Eastern Nepal. Two private companies – UTL and Spice Mobile - have started providing basic telephone services and mobile phone services respectively. NTC has been corporatized and the government is in the process of divesting its stake in the company.
Restructuring the labor market
Draft amendments to relevant legislation to make labor employment and retrenchment laws more flexible (e.g. introducing performance based pay, reviewing 240 day rule).
Trigger not fulfilled. While various rounds of dialogue between unions, employers and the government have been held, an agreeable draft on the amendment to the law has not emerged.
Restructuring customs
(i) Implement ASYCUDA selectivity module(ii) Align transit documentation with Indian EDIFACT system(iii) Create a post-entry valuation section(iv) Develop a code of conduct specific to customs employees.
(i) ASYCUDA extended to 4 additional custom points in Mechi, Krishnanagar, Tatopani and Gaur. Implementation of selectivity and risk management module remains outstanding.(ii) Little progress in aligning transit documentation with EDIFACT system.(iii) A valuation and post-clearance audit section with the central department of customs is charged with the task of carrying out randomized post-clearance verification, inspection and audit.(iv) A code of conduct for custom employees is presently under implementation.
Restructuring the financial sector
(i) Central Bank begins implementation of an agreed on-site bank examination program for all commercial banks on a two year rolling basis.
(ii) Conduct an external audit of NRB by a reputable firm
(iii) Management teams to update accounts and comply with disclosure requirements for RBB and NBL.
(iv) Implement scheme to rationalize excess staff at NRB, NBL and RBB and resolve a number of large defaulter cases
(v) HMGN to announce decision on the medium run strategy (e.g. privatization, merger, liquidation) for RBB and NBL.
(vi) Complete statutory/external audits of two main development banks (ADBN and NIDC).
(i) The practice of on-site bank examination has been institutionalized and is presently ongoing.
(ii) The external audit of NRB has been completed.
(iii) Management teams have complied fully with disclosure requirements for RBB and NBL and quarterly financial statements are made publicly available on a timely basis.
(iv) Trigger partially fulfilled. While target staffing levels have been achieved through various rounds of VRS in NBL, progress on rightsizing at RBB and NRB has been less satisfactory. Although, both the banks have also become profitable, progress on resolving large defaulter cases is slow.
(v) HMGN has announced its decision to privatize both RBB and NBL in the medium term.
(vi) Audits of the two main development banks ADBN and NIDC have been completed.
Improve decentralization framework
(i) A fiscal framework prepared to implement the decentralization reform program according to the LSGA
(ii) Reconciliation of the LSGA and the remaining conflicting sectoral acts and legislations.
(i) The government has piloted full devolution of all development-type functions in 14 districts, and has introduced conditional and unconditional grants. However there has been very little progress in the formulation and implementation of the overarching fiscal framework to guide these efforts.
- 33 -
(ii) Reconciliation of the sectoral legislations in conflict with the LSGA remains outstanding as well.
Strengthen private provision of social services
(i) Introduce private sector water supply operator in Kathmandu.
(ii) Make Rural Water Board autonomous to improve effectiveness of community based drinking water services
(iii) Contract out the management of at least two district hospitals.
(iv) Conduct study on options for contracting out school textbook publication to private sector and introducing cash grants to schools for textbooks
(v) Rationalize incentives for irrigation to promote greater private sector investment in irrigation
(vi) Contract out the operations and maintenance of three government managed medium and large irrigation systems to the private sector on a pilot basis.
(i) Progress on contracting out the provision of drinking water in Kathmandu has been slow
(ii) Trigger fulfilled. Rural Water Fund Board is operational as an autonomous entity.
(iii) One additional district hospital was contracted out to community management taking the cumulative total of community managed hospitals to 2.
(iv) The distribution of school textbooks has been privatized on a pilot basis in five districts and cash grants for textbooks have been introduced but the publication remains in the public domain.
(v) Subsidy regime remains unchanged.
(vi) Over 300 large and medium irrigation schemes have been contracted out.
Strengthen local community participation in education, health, drinking water, agriculture, irrigation and roads
(i) Transfer 600 primary schools, 100 secondary schools and 200 lower secondary schools to community management.
(ii) Block grants to community funded primary schools to cover 50% of teachers’ salaries and to lower secondary schools to cover 25% of teachers’ salaries
(iii) Handover 24 Health Posts (HPs) and 12 Primary Health Centers (PHCs) to management committees.
(iv) Implement Essential Health Care services in 14 districts, prioritizing those with poor health indicators.
(v) Revise Irrigation Policy and Regulation to give Water Users Associations the legal power to sanction defaulters.
(i) Trigger fulfilled as specified. Number of schools handed over to local communities: 2220 in 60 districts.
(ii) Block grants to primary, lower secondary and secondary schools handed over to the community cover 50, 25 and 25 percent of teachers’ salaries respectively.
(iii) Number of sub-health posts handed over to local communities: 1114
(iv) Trigger partially fulfilled. All EHC interventions have been classified as priority one interventions and are being implemented in various degrees in all 75 districts.
(v) Irrigation Policy revised to give Water Users Associations power to sanction defaulters
(vi) Initiate improvements to three hundred farmer-managed irrigation schemes prior to hand-over to the water users association. (vii) Extension services provided through the establishment of District Agriculture Development Fund using the private sector and NGOs in six districts.
(viii) Local road tolls handed over to Road User Groups (RUGs) for the maintenance of local roads in 20 districts.
(vi) 300 irrigation schemes upgraded and handed over to water users associations.
(vii) Extension services are being provided through the District Agriculture Development Fund in six districts
(viii) Road Users Groups not receiving road tolls as toll collection impeded by insurgency
- 34 -
Ensure an effective Poverty Alleviation Fund (PAF)
PAF financed projects are primarily targeted to formerly conflict affected areas.
PAF started operation in six pilot districts.
Increase access to schooling for girls and 'Dalit' households
Begin implementation of scholarship package for girls and Dalit children in secondary schools.
Trigger fulfilled as specified. Scholarship packages for girls and students from disadvantaged groups are under implementation. There are also additional incentive grants to supplement block grants for community schools that enroll certain numbers of Dalit and female students
Improve the diversity of the civil service
(i) Inclusion of data on gender, caste and ethnic diversity for both new recruits and the civil service on an annual basis.
(ii) Carry out a review of the civil service exam to assess possible sources of ethnic/caste/gender bias and present recommendations to Cabinet
(iii) Begin implementation of scholarship program for SLC pass women, Dalits, Janjatis from low income families to prepare them for entrance in the Civil Service.
(i) Data on gender, caste and ethnic diversity for both new recruits and the civil service publicly available.
(ii) Review of civil service exam system to assess possible sources of gender/caste/ethnic bias not done
(iii) A new civil service act now provides HMGN the legal space to recruit candidates from underprivileged groups into the civil service. The Ministry of General Administration has been tasked with identifying measures to support such recruitment including the development of a scholarship scheme for such candidates to be instituted before the next civil service examination in February 2006
Improve the effectiveness of the civil service
(i) Link Personnel Information System (PIS) to payroll system to ensure accurate civil service records and prevent unauthorized recruitment
(ii) Conduct a census of teachers and expand the PIS to cover all employees within the Ministry of Education and Sports
(iii) Maintain existing hiring freeze on non-gazetted civil servants
(iv) Ensure adequate tenure at senior civil service level, strengthen capacity of Ministry of General Administration to oversee transfers and publicly report transfer data.
(v) Undertake position re-classification and grading, further decompress salaries, and develop options for lateral entry.
(i) The PIS is being linked to the payroll system.
(ii) A personnel information system for teachers is being computerized and 57,000 out of 80000 teaching positions have been captured by the TPIS.
(iii) There is a hiring freeze at levels 3 &4 which cover bulk of the civil service.
(iv) Trigger partially fulfilled. While the PIS system shows an overall decline in the number of transfers, the post-February 1 political developments have resulted in frequent and arbitrary transfers of senior civil servants.
(v) Salary decompression, position re-classification and options for lateral entry have not been carried out.
Improve the effectiveness of key public agencies
(i) Revise IRD Citizen’s Charter to incorporate shorter deadlines, penalties, grievance redressal procedures based on stakeholder consultation.
(ii) Create HMGN portal (consolidated website) with important forms, Government Orders, circulars etc.
(iii) Establish GRUs in two more ministries.
(i) The Citizens Charter has been revised to include details of taxpayers rights and the deadlines for providing services including receipts, forms and refunds have been brought down to twenty four hours in most cases. There is as yet no specific grievance redressal mechanism incorporated into the charter.
(ii) A High Level Commission on Information Technology has overseen the development of a One Stop Government ( www.nepalhmg.gov.np) which contains important citizen related information and forms. In addition most departments now have websites with important citizen focused information.
- 35 -
(iii) Governance Reform Units (GRU’s) were originally established in the Education, Health and Agriculture Ministries. Such units have now been established in two more Ministries – MLD and Ministry of Labor and Transport Management.
Improve financial management
(i) Ensure Budget fund release in FY04 is based on (i) priority for P1 projects and (ii) performance based criteria.
(ii) Publish FY04 revenue and expenditure figures each trimester and physical performance of all P1 projects. Post revenue and expenditure information in front of selected Village Development Committee offices.
(iii) Prepare and enact a new Procurement Law and begin implementation
(iv) Implement major recommendations from Audit of AG’s office
(v) Create an autonomous Financial Accounting Standards Board and Board of Auditing Standards and benchmark Nepali accounting standards with international ones
(vi) Design new Chart of Accounts in line with IMF’s General Financial Statistics classification.
(i) Performance based release mechanism for P1 projects are being implemented. However, performance is presently monitored only on the basis of financial progress as the agency handling the releases has little capacity to monitor and assess real physical progress.
(ii) Trimester revenue and expenditure are published on a timely basis but verification of physical performance of P1 projects is still only done on an annual basis.
(iii) Trigger partially fulfilled. The Procurement Act has been drafted but not yet promulgated.
(iv) Auditor General’s report released for first time since 2002. However, there is no mechanism to monitor whether the recommendations in the AG’s reports are being implemented. The CFAA had stressed the need for MOF to take a more proactive role in implementing major recommendations but mechanisms for monitoring and reporting actions taken remain absent.
(v) Accounting and Auditing Standards Boards have been created under the Institute of Chartered Accountants of Nepal (ICAN).
(vi) Starting from FY05 budget, HMGN has classified budget by recurrent and capital expenditure. This is the first step towards the IMF’s GFS. Designing new chart of accounts accordingly is in process.
Strengthen anti- corruption measures.
(i) Significantly increase CIAA resources and establish regional offices in 5 zones in FY04
(ii) HMGN to draft departmental Corruption Prevention Strategies for six departments with a major revenue, expenditure and/or regulatory function.
(iii) HMGN to review appointment procedures for personnel seconded to CIAA and NVC to ensure stability of tenure.
(iv) Review the functioning of Special Courts and provide recommendations for more expeditious processing of corruption cases
(v) HMGN to develop a public outreach and education strategy regarding corruption, including regular surveys and annual progress reports.
(i) Regional field offices of the CIAA have been set up in 5 districts.
(ii) The CIAA has released 49 sets of Working Procedures for departments aimed at creating more transparent systems that will support the prevention of corruption.
(iii) No formal review has been conducted; Civil Servants seconded to the CIAA and NVC are covered under the Civil Service Act which establishes a minimum tenure of 2 years. While overall decline of transfers has been seen, issues of tenure continue to be a problem area.
(iv) A consultative exercise has been launched by the Ministry of Law and Justice to discuss the expansion of the Special Courts to deal with the issues of delays in judicial processing of anti-corruption cases. This is a precursor to a formal review
(v) HMGN through the CIAA has developed a public
- 36 -
(vi) Formulate Freedom of Information Bill in FY04.
outreach and education strategy which includes consultative exercises with civil society organization and government bodies, and the publication and dissemination of education material through pamphlets and posters. A survey has been conducted on public perceptions of corruption prone processes which should further support institutional reform. However the survey has not yet been circulated widely or published
(vi) No progress in drafting a Freedom of Information Bill
Strengthen outcomes monitoring and evaluation (M&E)
(i) Work initiated on basic poverty profile with comparisons with NLSS I and make data publicly available.
(ii) Decide on appropriate instrument to track outcomes in between NLSS rounds.
(iii) Implement a new expenditure tracking survey covering other major sectors.
(iv) Produce first annual PRSP progress report and disseminate widely
(v) Coordinate the data collection and analysis plan presented in the PRSP
(vi) Complete capacity building needs assessment for M&E
(i) Report titled “ Poverty Trends in Nepal”, made public in September 2005.
(ii) Following survey rationalization and prioritization exercise, Demographic Household Survey was identified to track outcomes in between NLSS rounds.
(iii) Expenditure tracking survey for roads and health carried out.
(iv) PRSP progress report completed and disseminated.
(v) Central Monitoring Unit within National Planning Commission established.
(vi) District level monitoring and evaluations needs assessment on-going.
- 37 -
Annex 2. Project Costs and Financing
Credit/Grant Disbursements(SDR Million)
CATEGORY ORIGINAL ALLOCATION
ACTUAL DISBURSEMENTS
DATE OF DISBURSEMENT
SINGLE (PRSC I) 51.0 51.0 December 19, 2003
- 38 -
Annex 3. Economic Costs and Benefits
NA
- 39 -
Annex 4. Bank Inputs
(a) Missions:Stage of Project Cycle Performance Rating No. of Persons and Specialty
Counselor, 1 External Affairs Specialist, 1 Financial Manage-ment Specialist, 1 Education Specialist, 1 Drinking water and Sanitary Engineer, 1 Transport Specialist, 1 Health Specialist, 1 Trade Economist, 1 Social Scientist, 1 Finance Specialist
SupervisionFebruary 2004 - October 2004
19 2 Economists, 2 External Affairs Specialists, 1 Financial Management Specialist, 2 Private Sector Development Specialists, 1 Operations Advisor, 1 Education Specialist, 1 Drinking Water and Sanitary Engineer, 1 Transport Specialist, 1 Agriculture Specialist, 1 Health Specialist, 1 Social Development Specialist, 1
- 40 -
Procurement Specialist, 1 Local Government Specialist, 1 Energy Specialist, 1 Communication Specialist, 1 Financial Sector Specialist, 1 Public Sector Specialist
ICR1 Research Assistant
(b) Staff:
Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ ('000)
Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)
RatingMacro policies H SU M N NASector Policies H SU M N NAPhysical H SU M N NAFinancial H SU M N NAInstitutional Development H SU M N NAEnvironmental H SU M N NA
SocialPoverty Reduction H SU M N NAGender H SU M N NAOther (Please specify) H SU M N NA
Private sector development H SU M N NAPublic sector management H SU M N NAOther (Please specify) H SU M N NA
