Business Case and Intervention Summary
Nepal: Rural Access Programme 2 (RAP 2) Transition Extension
Intervention Summary
What support will the UK provide?
The UK will make an additional grant of £3.2 million available to the second phase of the
Rural Access Programme (RAP2) in Nepal. This will increase the total cost of RAP2 to £39.9
million and extend the project end date by six months from March 2013 to Sept 2013.
The extension from March 2013 to September 2013 will consist of two components:
i)
Infrastructure works, £3 million: labour intensive works on road construction and
maintenance, market infrastructure and two major RAP bridges; and
ii)
Technical assistance, £0.2 million: to ensure corruption free implementation.
The extension will be implemented by extending the contract with the current, proven RAP2
contractor who has managed corruption risks well and will ensure that more than 60% of
increased allocation will be paid out in wages to the poor, with low management charges
(6.3% for this extension). This approach will also avoid £470,000 of demobilisation costs that
would be incurred if the current contract was not extended.
The additional funds are available within DFID’s Operational Plan 2011-14 framework.
These funds were originally to be spent through the new phase of RAP but due to delays in
Government approval is 6 month behind schedule. This extension therefore moves spend
from the next phase of RAP into this phase ensuring continued delivery of results in jobs,
roads and poverty reduction during this Operational Plan period.
Why is UK support required?
What are the needs we have been addressing through RAP?
High levels of chronic poverty make Nepal the 16th poorest country in the worldi and one
which is highly prone to natural disastersii. In the hills and mountains of the country, more
than 30% of the population live more than four hours walk from a roadiii, preventing them
from accessing markets and services in areas with limited employment opportunities and
preventing them from escaping poverty. RAP addresses these challenges by providing
direct, short-term employment to poor women and disadvantaged people through
infrastructure works; such as roads, bridges, trails, markets and irrigation schemes and
skills training for poor farmers. Over a decade, RAP has created 13 million days of
employment, lifted 24,000 poor and disadvantaged people out of poverty and built 970 km
of climate and disaster resilient roads, providing access to over 900,000 people.
Why is this transitional funding required?
Transitional funds are required to:
i.
Respond to requests from the Government of Nepal (GoN): During the design of the
third phase of RAP GoN agreed that the programme should focus on the Western
region, the poorest in Nepal. This means phasing out the programme in the Eastern
region where RAP has been active for a decade. In light of this GoN requested that
additional work be undertaken in the East to ease the withdrawal and avoid generating
conflict over DFID resources. This will also ensure that DFID’s reputation is not
damaged by its perceived withdrawal from an area where HMG has been a high profile
i
Based on GNI/Capita
Nepal Vulnerability Assessment, Practical Action, 2010
iii Rural Transport Infrastructure Strategy, DFID, 2008
ii
1
actor, in various ways, for over thirty years.
ii. Add value to existing investments: The work requested by GoN include roads that
will give access to 19,000 people, two hospitals; and one airport; and the construction of
two markets. In addition the maintenance and climate proofing work will maximise the
sustainability and impact of existing RAP investments e.g. protecting roads and bridges
from the higher monsoon rains that climate change is expected to bring.
iii. Continue delivery of results: The £36.5m next phase of RAP was approved by DFID
in July 2012 and was due to start in September 2012. Due to delays in Government
approval the start date has moved to January 2012. To ensure continuous support to
RAP beneficiaries, avoid demobilisation costs (£470,000) and ensure delivery of our
Operational Plan results in jobs and poverty reduction we now need to extend the RAP
2 contract to continue delivering whilst the next phase of RAP mobilises.
What are expected results?
This transitional grant will deliver the following results:
 Employment - 890,000 person days
 No. of people gaining access from new roads - 19,000
 Roads maintained - 2,200 Km for one year
 Length of RAP roads served by completion of two RAP bridges - 280 km
The delivery of these additional results will be monitored through the revised RAP2
logframe. An independent Project Completion Report (PCR) will be prepared to evaluate
the programme by September 2013.
Acronyms
CBS
DFID
GNI
GoN
RAP
Central Bureau of Statistics
Department for International Development
Gross National Income
Government of Nepal
Rural Access Programme
2
Business Case and Intervention Summary
Nepal: Rural Access Programme Phase 2 (RAP 2) Closure
Full Business Case
ABBREVIATIONS
ADB
AMS
ARMP
CBS
DDC
DDF
DFID
DoLIDAR
DTMP
DTO
FMS
FRA
GIZ
GoN
LEP
LGCDP
LRN
LRUC
MoF
MoFALD
MoU
NPC
PrG
RAP
RBG
RTI
SED
SRN
SWAp
VDC
WB
Asian Development Bank
Asset Management System
Annual Road Maintenance Plan
Central Bureau of Statistics
District Development Committee
District Development Fund
Department for International Development
Department of Local Infrastructure Development and Agricultural Roads
District Transport Master Plan
District Technical Office
Financial Management System
Fiduciary Risk Assessment
German International Cooperation
Government of Nepal
Labour-based, Environment-friendly, Participatory
Government and Community Development Programme
Local Road Network
Local Road Users Committee
Ministry of Finance
Ministry of Federal Affairs and Local Development
Memorandum of Understanding
National Planning Commission
Procurement Group
Rural Access Programme
Road Building Group
Rural Transport Infrastructure
Safe and Effective Development
Strategic Road Network
Sector Wide Approach
Village Development Committee
World Bank
3
A. Strategic Case
General Context
Politically, Nepal remains in a fragile and transitional state. The Constituent Assembly
charged with promulgating a new constitution was dissolved in May 2012, leaving significant
uncertainty over the completion of Nepal’s peace process and the governance of the ‘New
Nepal’.
The political stalemate has left the high levels of chronic poverty, that make Nepal the 16th
poorest country in the worldi, unaddressed. Poverty that is driven by social exclusion and
geographical isolation, exacerbated by poor economic growth. For many, chronic poverty is
compounded by climatic conditions – rain, floods, landslides and droughtii and social factors
that worsen the outcomes for excluded groupsiii. In particular, gender inequalityiv is a key
development challenge in Nepal, with significant gender gaps in education, and high levels
of gender based violence. Lack of economic empowerment for most women compounds
their marginalised status in society.
Access levels in Nepal are the lowest in South Asia, 10 million people live more than two
hours walk from the nearest road and in the hills and mountains, more than 30% of the
population live more than four hours walk from a roadv. Many market centres and key
facilities (e.g. domestic airports, hospitals, schools), lack reliable road access.
Despite increases in donor support and government investment over the last decade, there
remain huge gaps between requirements and supply in the rural transport sector. The Rural
Transport Mid Term Expenditure Framework (MTEF) indicated that a resource gap of around
$1 billion exists in the sector over the next 7 years or around $130 – $140 million per yearvi if
the government’s rural access targets are to be metvii. The shortfall is even higher in rural
road maintenance. According to MoFALD regulations, 10% of the total rural road budget
should be spent on maintenance. However, actual allocations are 2-3% of rural road sector
funding, far below the amount required to maintain the rapidly growing rural road network.
Consequently, over 50% of the rural road network is no longer motorable, representing an
average loss of assets of £40 million per year, i.e. roads are failing as fast as they are being
built.
RAP Context
The poor consistently prioritise roads because they know that access is the key to unlocking
economic opportunities. DFID’s Rural Access Programme provides this access. The
proposed cost extension will ensure that the benefits of the access provided under RAP1
and 2 are as sustainable and climate proof as possible.
Phase 1 of RAP (RAP1) commenced in 2002 and finished in 2008, followed immediately by
Phase 2 (RAP2). The programme targets the poorest in Nepal, particularly focusing on
women and excluded people in seven hill districts of Nepal. It provides additional off-farm
incomes through road construction, in addition to increased access to markets and income
generating skills, with poor farmers selling cash crops to rapidly growing markets, e.g.
Northern India. In over a decade, RAP has created 13 million days of employment, lifted
24,000 of the poorest and most disadvantaged households out of poverty, built 970 km
road, provided road access to over 900,000 people under four hours of walk, and ensured
climate and disaster resilience of over 300 kms of the most climate vulnerable roads.
RAP2 provides funds to implement road construction works through Road Building Groups
(RBGs), made up of the poorest and most excluded, who receive over 60% of the extension
funds directly as daily wages. The programme also includes two 120m single-span river
bridges that will connect 3 remote eastern districts, and an institutional and capacity
enhancement component focussed on maintenance to establish the required road
maintenance capacity in the Government of Nepal (GoN) to sustain the rural road network.
4
Why is further UK support required in RAP 2?
i)
ii)
iii)
iv)
v)
vi)
vii)
During the design of the third phase of RAP GoN agreed that the programme should
focus on the Western regions, the poorest in Nepal. This means phasing out the
programme in the Eastern region where RAP has been active for a decade. In light of
this GoN requested that additional work be undertaken in the East to ease the
withdrawal and avoid generating conflict over DFID resources. This will also ensure
that DFID’s reputation is not damaged by its perceived withdrawal from an area where
HMG has been a high profile actor, in various ways, for over thirty years.
The next phase of RAP, approved in July 2012 by the Director Asia, is still awaiting
government approval, now expected in November with implementation starting in
January 2013. This has delayed the delivery of the next phase results by 6 months,
requiring additional works within the scope of RAP2 to be completed.
Similarly the maintenance pilot (started under RAP2) needs to be extended for the
coming year to allow the trialling of output based funding, ensure 2,200 km of roads
remain open and provide lessons in road maintenance for the next phase of RAP.
There have been delays on one of the two bridges being built under RAP2 requiring an
extension to September 2013. This will also allow better access roads and river
protection works to be included.
Works on 35 Km roads were stopped in Phase 1 and 2 of RAP due to lack of funds.
These can now be completed increasing connectivity to important market centres,
airports and hospitals.
Climate change is increasing the levels of monsoon damage on 200 km of RAP 2
roads, improving them to higher standards will make them less climate vulnerable.
Additional works to improve market facilities have been identified that will help increase
the level of economic activity in the RAP areas.
Map showing the intervention areas with this additional grant
5
How will support be delivered?
The activities will be implemented in the Eastern RAP 2 districts. As the scope of work has
not changed, the transition extension will be delivered through the existing contractor. The
GoN and DFID’s procurement group have agreed to this arrangement.
B. Impact and Outcome
This extension is expected to deliver the following additional results:
i)
ii)
iii)
iv)
v)
vi)
vii)
Off-season employment generated- 890,000 person days
Roads built/upgraded and opened to traffic - 35 km
No. of people gaining access from new roads - 19,000
Roads maintained - 2,200 km for one year
Road maintenance policy improved: seven districts implementing co-funded rural
road maintenance plans
People benefitting from improved access due to road maintenance - 2.5 million
Length of RAP roads served by completion of two RAP bridges - 280 km
Appraisal Case
B. Feasible Options
A. What are the feasible options that address the needs set out in the Strategic case?
Theory of Change
Jobs
20,000 short term
jobs created
High levels
of poverty and
inequality
High Climate and
Disaster
Vulnerability
Limited
opportunities for
local employment
Untapped
Potential
in Agriculture,
Forestry and
Tourism
Lack of access to
Markets and
Services
890,000 days
employment
Technical
assistance
on climate and
disaster proof
infrastructure
Economic
Infrastructure
Creation
Maintenance
systems
Piloted
Access
2200km of roads
Maintained, 31
km new road
opened to traffic
Gender and
Inclusion
Equal Wages for
women
Pro-poor
targeting
Access to
markets
for the poorest
Disaster Risk
approaches to
infrastructure
mainstreamed
RAP creates access to jobs and markets,
laying the foundations for inclusive economic growth
Access
2.5 million
people benefit
from improved
climate resistant
infrastructure
Economic
Opportunities
Increased private
sector
investment in
markets
Poverty
Reduction
and
Inclusive
Growth
Sustainable
Access
by increasing the
maintenance
budget by 50%
Sustainable Growth &
Poverty reduction
6
RAP's theory of change relies on the core narrative set out below. This is well supported by
the available evidence, which is elaborated further in the evidence section:
i)
Context - The rural poor lack access to capital to invest in economic activities, and
access to markets to sell their produce, trapping them in poverty. This is supported
by recent analysis vi in Nepal that shows that lack of access to productive assets and
remoteness are key determinants of poverty.
ii)
Inputs – the additional allocation will provide direct employment, transport
infrastructure and support to GoN for road maintenance pilots. Previous phases of
RAP have proven DFID’s ability to deliver these inputs effectivelyviii.
iii)
Outputs – RAP inputs generate savings that can be invested in cash crop production
combined with increased access to markets provided by improved infrastructure.
RAP1 studies and the international literatureix show that rural infrastructure
investments stimulate local economic activity.
iv)
Outcome – Increased level of sustainable access to markets.
v)
Impact – Increased growth and poverty reduction in RAP Districts.
As noted in DFID’s recent literature review ‘A huge body of literature reported a
causal link between road development and poverty reduction’x.
RAP 2 extension components
To deliver the results set out above, 3 components were identified;
Infrastructure works, £3 million:
 Road (£1.6 million) - labour intensive works on a few additional roads and climate
proofing for new construction, upgrading and maintenance works
 Supplementary infrastructure (£0.2 million) - market infrastructure, trails, access
roads, drainage etc. in market centres
 Bridges (£0.3 million) - access roads and extra climate protection for bridges
i)

Road maintenance (£09.m) for pilots to maintain 2,200 Km roads for a year; and
Technical assistance, £0.2 million: to ensure corruption free, high quality
implementation.
ii)
Three options for this transition extension were considered, each of which are credible
alternatives for the delivery of impact and outcome results:
1. Extend the existing project (Extension): The contract for RAP2 can be extended to
ensure completion of the works identified by the annual review of 2012 and to ensure a
responsible exit.
2. Run a separate procurement competition for the additional works (Re-bid); DFID
would run a competitive procurement process for the work. This would delay
implementation by 5-6 months and require additional mobilisation costs.
3. Sector support through government (Government): RAP2 was designed to support
the transition to a sector wide approach, if the risks were reduced to an acceptable level.
Thus, the work required to move to sector budget support was undertaken and a
framework developed for harmonised donor support to the rural transport sub-sector. It
would therefore be possible to provide funding through this framework, ‘ring fenced’ for
the extension.
Counterfactual
If DFID were not to support this extension, a number of direct and indirect effects would
result:
Direct

Operability of about 200 km RAP 2 roads would be low. Hence the significant
investments already made in rural roads would be wasted.
7


RAP 2 bridges would not be completed to the required disaster resilience levels.
Maintenance of 2200 km rural roads would be under resourced.
In-Direct
 Rural road maintenance budgets and capacity would remain largely absent; and
 Policies on rural infrastructure particularly for labour based approaches and
maintenance would suffer from the gap between RAP 2 and the next Phase.
DFID’s Reputation
 The UK’s reputation in the eastern districts (where the UK has provided achieved
substantial development results over decades) would be at risk if a smooth exit
strategy was not ensured.
Summary of Appraisals
Political and Institutional Appraisal
RAP is a well-designed programme from a political, institutional, private sector and counter
fraud perspective; however, the programme faces major challenges in achieving its
institutional and counter-fraud goals (including a lack of political will; major financial
management weaknesses in government and; a sector facing high levels of corruption).
Technical Appraisal
To date rural road maintenance has been constrained by complicated planning and
institutional arrangements, underfunding and limited institutional capacityxi. Therefore
improvements, particularly simplification and streamlining, in the existing procedures are
needed, in addition to additional resources. Piloting new simplified systems provides great
opportunities to demonstrate that much needed maintenance of rural transport infrastructure
can be delivered simply and cost effectively. This should be the focus of the next phase of
DFID support.
Conflict Appraisal
Selection of where roads and other infrastructure will be built is subject to contestation and
potential political and criminal distortion. To avoid this, the systems of decision-making will
need to be transparent and accountable, and seen by the public to be so. To avoid
frustration at the perceived slow pace of peace dividend delivery, the programme must also
deliver jobs quickly and visibly. Payment demands by criminal/political groups will require
good use of Safe and Effective Development (SED) approaches and the Basic Operating
Guidelines (BOGS). The importance of public perception relating to these risks cannot be
over-emphasized. If it is negative, even if unfairly so, the programme will exacerbate
conflict dynamics. As such, an effective communications strategy will be essential, both
locally and nationally, as will strong SED practice at all times.
Economic Appraisal
The economic appraisal focused on quantifying and monetising the returns to the mix of
investments to be made during the extension. These are mainly associated with reductions
in transport costs and the additional income generation associated with increased market
access (mainly vegetable and livestock production) for each kilometre upgraded/maintained
or newly constructed. In addition, the costs of options 2 and 3 are higher because of the
demobilisation and remobilisation costs that would be incurred (based on RAP2 start-up
costs) estimated at £470,000.
Each delivery option was then assigned an assumed ‘probability of delivery’ based on the
experience in Nepal. These probabilities were applied to the net benefit streams for each
option. A standard cost benefit analysis was then conducted based on these assumptions
and gave the following results, further details are provide in the attached economic appraisal
technical note.
8
Option 1 – extension shows positive returns largely due to the maintenance and market
access benefits. This is consistent with other maintenance-focused projects around the
worldxii, and is due to the relatively small amounts of maintenance finance required to
preserve relatively costly road assets that ensure that access benefits are sustained year
round. It is based on a 90% probability of successful delivery of the net benefits. This high
rating is based upon the performance of previous interventions (i.e. RAP1 and RAP2). The
through government option has far lower returns because of its lower probability of success
(50% for government delivery). It is also far more risky from many other perspectives e.g.
corruption and environmental management. Option 2 has the second lowest returns mainly
due to a slightly lower probability of delivery and delays in the realisation of benefits. This is
based on experience in Nepal of the ADB- RRRSDP programme, which DFID co-funded.
Summary of the Economic Appraisal
Option
1: Extension
2: Rebid
3: Government
Net
Present
Value @ 3.5%
Discount Rate
Net
Present
Value @ 12%
Discount Rate
£377,000
£77,000
-£77,000
-£341,000
-£1,595,000
-£1,577,000
Internal
Rate of
Return
Benefit/Cost
Ratio
@
3.5%
15%
1.16
2%
1.01
-29%
0.54
The economic appraisal therefore recommends Option 1 - Extension
Sensitivity analysis of the Preferred Option
Sensitivity analysis was conducted on option 1 to calculate the switching values at a 3.5%
discount rate for the main variables (the costs having largely been fixed). These were found
to make the project unviable if:
 The probability of successful delivery fell from 90% to 80%
 The number of months the roads are kept open fell to 4.7 months from 6 months
 The income generation benefits fell by 40% i.e. from £13,500/Km to £9,394/Km
These indicate that the extension relies on delivery of at least 80% of the expected benefits.
Consequently, the extension’s economic viability is dependent on ensuring the full realisation
of outcomes. This reinforces the selection of the management option with the highest
probability of successful delivery i.e. extension of the current programme and the need for
close management of the implementing contractor by DFID.
Environment, Climate and Disaster Resilience Appraisal
RAP2 is rated category ‘B’ in DFID’s Climate and Environment Assessment (CEA)
methodology, as a result a separate Climate and Environment Assessment was carried
out.xiii The CEA notes that there are significant environmental and climate risks and
opportunities for this programme. The appraisal however recognises that the works in RTI
maintenance pilots will have less environmental impact than the new road construction.
However, the labour based, environmentally sensitive approach and techniques adopted in
RAP2 will remain appropriate and should be continued in this extension.
The key environmental issues that will be addressed in the extension are:
 Increased awareness in RBGs and RMGs about the linkage between sustainability of
transport infrastructure and environmental safeguards and disaster resilience.
 Increased environmental risks due to poor construction management, e.g.: damage to
water courses and increased risk of landslides;
9
 The need to ensure increased access does not lead to increased deforestation;
 Opportunities to introduce of bio-engineering, limiting the amount of material use and
spoil and other environmentally sensitive and slope protection friendly approaches;
 Opportunities for increasing the capacity of local level government agencies on
environmental issues; and
 Opportunities to work in close collaboration with existing environmental and climate
programmes in the intervention areas.
What is the likely impact (positive and negative) on climate change and environment
for each feasible option? (See Environmental Appraisal Section for justification)
Option
1
2
3
Climate change and environment risks Climate
change
and
and impacts, Category (A, B, C, D)
environment
opportunities,
Category (A, B, C, D)
B
B
B
B
A
D
A, high potential risk / opportunity; B, medium / manageable potential risk / opportunity;
C, low / no risk / opportunity; or D, core contribution to a multilateral organisation
C. Options Analysis Summary
1. Extend the existing project and implementation arrangements: This option
provides continuity for the existing workforce and avoids the financial and time costs
of de-mobilisation and re-mobilisation.
2. Run a separate competition for the extension: The re-bid option will result in very
similar outcomes to the extension option but at a greater cost, disruption, delay and
reputational risk.
3. Sector support through government: Full sector support is inadvisable at present
due to the high fiduciary risks in the sector and capacity is built within the
government system. This option is far less likely to be labour intensive,
environmentally sensitive or technically sound. It would however provide more
institution building opportunities.
On the basis of appraisals above, Option 1 (extension) is the recommended option.
Assessing the strength of the evidence base for each feasible option
Option
1
2
3
Evidence rating
Strong
Medium/Strong
Medium
The evidence of impact is medium/strong throughout the theory of changexiv. The
international evidence is strong on the impacts of rural roads on rural poverty reduction, the
World Bankxv and IFPRIxvi both concluding that physical access to markets is a necessary,
but not sufficient requirement for poverty reduction in rural areas. In simple terms the global
evidence shows that communities without roads are poorer than those with roads (after
controlling for other factors)xxvii. This is confirmed by a number of studies conducted in Nepal
where remoteness (measured as the time taken to the nearest road head) is highly
correlated with poverty, most notably in the recent DFID Chronic Poverty and Vulnerability
Study based on Nepal Living Standard Survey Data from 2010. In addition, several studies
quantify the reduction in transport costs associated with moving from porters to road
transport, i.e. up to 90% reduction in transport costs per tonne/KmXIX after road opening.
10
This lays the foundation of the evidence base for RAP i.e. that improved access is
fundamental to stimulating economic growth.
In addition, the theory that employment is effective in reducing short-term poverty is
supported by the evidence from RAP where the average household incomes of those
working on the roads increased by 220%. This was enough to lift all workers above the
poverty line whilst being employed by RAP, reducing debt levels and increasing investment
in income generating activities. RAP experience also shows that it is possible to target
benefits effectively; women made up 51% of RAP beneficiaries and 54% were from socially
excluded groups.
The evidence that savings from wages increases farmers likelihood to invest in cash crop
production is also strong. Only 20% of the rural poor have access to formal creditxvii making
them reliant on money-lenders who charge 40% or more for credit, discouraging any risk
taking with borrowed money. Evidence from RAP impact studies shows that RAP’s approach
of generating savings from wages and then lending them out through savings groups
reduces interest rates to below 15%, making investment in cash crop production from loans
far more attractive. Here the evidence from RAP shows that farmers are willing to invest if
access to finance, skills training, and markets are available. For example in RAP1, farmers
earned an additional £50 - £280 per yearxviii from cash crop production, based on a RAP
survey of 1,544 Households. These returns are similar to those found in the recently
completed Market Access to Smallholder Farmer Project supported by DFIDxix that showed
an average income increase of around £130 per farmer per year. The area where the
evidence is weaker is on the wider impact on the ‘road influence area’, defined as within 2
hours walk of the road. RAP impact work has, so far, only able to measure that 70% of poor
households in the road influence area experienced an increase in food security as a result of
RAP.xx This is currently being addressed through the Koshi Hills Impact Study.
The assessment of delivery options performance (in particular to inform the economic
analysis) is all also based on strong evidence from the on-going RAP2 performance in
Nepal. Evidence of direct delivery is based on the experience gained in RAP1 and 2.
Evidence of MDB delivery is based on experience from the Rural Reconstruction and
Rehabilitation Sector Development Programme (RRRSDP) an ADB financed project
managed by the Ministry of Federal Affairs and Local Development (MoFALD) and cofinanced by DFID. Evidence of government delivery is based on experience from the Local
Government and Community Development Programme (LGCDP) working with MoFALDxxi
and Fiduciary Risk Assessments completed in early 2012.
C. What are the costs and benefits of each feasible option?
Cost
Benefit
B/C Ratio
B/C Ratio@3.5%
Option 1 Extension
3,200,000
3,751,144
1.16
1.11
Option 2 Rebid
3,670,000
3,751,144
1.01
0.97
Option 3 Government
3,670,000
2,083,969
0.56
0.54
As set out in the economic appraisal, the costs are the same for all the options apart from the
mobilisation and demobilisation costs. The benefits depend mainly on the success of delivery
applied to each delivery option.
D. Measures that will provide Value for Money
As noted above the option 1 (Extension), provides the best value for money by avoiding
demobilisation and mobilisation costs which would add nearly £0.5m (or 20%) to the cost of
11
the extension. In addition the programme already has a number of specific VFM measures in
place to ensure the maximum impact is achieved with the programme, in particular:
Economy Indicators: Technical assistance will remain below 12% and pre-financing cost
will remain below 2%;
Efficiency Indicators: Labour intensive road construction and road maintenance works will
deliver results directly to the poor and excluded people. The use of and output based
approach for the design and supervision contract will ensure delivery efficiency.
Effectiveness Indicators: More than 60% of the additional grant will be used to pay wages
to RBG and RMG members, who are from poor and disadvantaged groups. This will
promote greater effectiveness in delivering the intended income generation and inclusive
growth objectives for tackling poverty. Completion of climate and disaster resilient bridges
will also maximise the sustainability of previous investments in RAP roads.
E. Summary Value for Money Statement for the preferred option
Based on the assessments above Option 1 will deliver the maximum benefits and
value for money. Option 1 provides the highest likelihood of successful delivery and impact
on poverty reduction and sustainability of RAP interventions, the least investment in time and
cost
12
Commercial Case
Direct procurement
A. Clearly state the procurement/commercial requirements for the intervention
The current RAP2 budget is £36.7 million. This time and cost extension is for a cost
increase of £3.2 million for extension of the current contract (awarded previously through
OJEU procurement). This increases the total programme allocation to £39.9m. The
preferred option is to negotiate the amendment with the current supplier. This has been
discussed and agreed with PrG as it represents the best value for money. Any gains from
a full further tendering process are unlikely to outweigh the benefits for ensuring timely
completion and continuity of implementation.
B. How does the intervention design use competition to drive commercial
advantage for DFID?
The current RAP2 contract was awarded following an OJEU procurement process. The
proposed cost extension of this contract till September 2013 will drive commercial
advantage for DFID in the following ways:




A contract amendment will only be issued if the supplier can demonstrate clear
value for money;
Non-escalation clauses will be included for fee rates in the amended contract.
The programme will continue to provide a significant stimulus to the local
consulting industry in terms of awarding corruption free, performance based
contracts, which is helping to develop the local construction supervision and
engineering markets; and
The DFID team will closely supervise and monitor supplier performance to ensure
value for money is obtained in delivery.
C. How do we expect the market place to respond to this opportunity?
Given the cost of preparing bids this extension would be unlikely to attract many bidders,
due to its short duration and because it would make new suppliers responsible for
programme closure. Procurement Group has already asked for Expressions of Interest from
interested suppliers for the next phase of RAP implementation, a much large and longer
contract. Only three suppliers responded. We would expect fewer bidders to bid for this the
works contained this extension.
D. What are the key underlying cost drivers? How is value added and how will we
measure and improve this?
The cost drivers are; RBG and wages 60%, Material 22%, maintenance pilots 6%,
supervision cost 10% and financing cost 2%. These are monitored closely within the
contract and reduced wherever possible by negotiations with suppliers. In addition, the
TA costs are closely monitored by DFID and are decreasing as an overall percentage of
the programme. However, there are external cost drivers over which DFID and the
supplier will have limited control, including the value of the GBP relative to the Nepali
Rupees and the inflation rate in Nepal, currently around 10% per annum.
E. What is the intended procurement process to support contract award?
DFID (PrG) will negotiate directly with the existing contractor to achieve good value for
money on the contract extension. The contract will be awarded only if the supplier is able to
provide demonstrable value for money savings. This approach is consistent with
Procurement Group advice as the most efficient and cost effective procurement method for
managing the extension.
13
F. How will contract and supplier performance be managed through the life of the
intervention?
PrG and DFID-Nepal will oversee the negotiation process, the latter providing local
inputs. Effective management of supplier performance will be ensured through the RAP2
steering committee, DFID’s close technical and programme management monitoring and
regular meetings between DFID, Government and Contractor. As this is a critical phase
leading to programme closure, utmost care will be taken to ensure proper exit and
handover plans with the government particularly in the Eastern districts. RAP2 will also
be subject to a Programme Completion Review towards the end of the extension phase
to independently evaluate the impacts and outcomes.
Financial Case
A. What are the costs, how are they profiled and how will you ensure accurate
forecasting?
The total £3.2 million additional cost required to meet the current commitments on RAP2
including exit are profiled as follows:
RAP sub-components
CDEL Civil works
RDEL Technical Assistance
TOTAL
Estimated spend FY
12/13
£1.29 m
£0.31m
£1.6m
Estimated spend FY 13/14
£1.28m
£0.32m
£1.6m
RAP has a proven track record of accurate forecasting. Detailed planning and
implementation of works and timely payments to RBGs ensures cash flow is accurately
forecast and linked directly to outputs against which results will be measured.
B. How it will be funded: capital/programme/admin?
 All civil works are treated as capital spend – CDEL, Total £2.47m
 All technical assistance as programme spend – RDEL, Total £0.63m
C. How funds will be paid out?
The TA Consultant will pre-finance the expenditure for work (as currently) and will invoice
DFID for the Capital Works and associated TA costs on a monthly basis. The TA
Consultant will apply a 2% charge for the financing of the Capital Works as is done
currently.
D. What is the assessment of financial risk and fraud?
The fiduciary risk assessment for Government systems in the rural infrastructure sector is
high on all but one of the 15 DFID assessment criteriaxxii. However, RAP2’s risk rating is
moderatexxiii, primarily due to its direct funded, private sector implementation modality. This
does not eliminate the risk of loss or misuse of funds. To protect taxpayers money further the
RAP contractor will be paid on a purely reimbursable basis and be responsible for ensuring
their sub-contractors are aware of DFID’s anti-corruption policies and be responsible for
enforcing these policies.
E. Disbursement of funds
DFID’s funds will be fully reflected in the annual budget (White Book) of the GoN and the
budgets of the implementing Districts.
Funds will be allocated and agreed by the Project Steering Committee and flow directly
from the contractor to the implementing groups after evidence of expenditure and delivery
and has been provided. DFID will in turn reimburse the contractor based on the
consolidated evidence of expenditure.
14
Where the funds flow through the government, i.e. payment for results for maintenance, the
contractor will reimburse the District Sub-account on a monthly basis for eligible payments
for the agreed maintenance and economic infrastructure works carried out. The DDC will
forward a monthly statement of expenditure accounting for these funds. While replenishing
the amount, the Contractor will oversee that the DDC has fulfilled its commitments and
obligations in accordance with the agreed provisions and deliverables. Once payments
have been made, the contractor will seek reimbursement from DFID based on the
consolidated evidence of expenditure in the same way as for direct implementation.
F. How expenditure will be monitored, reported, and accounted for?
The TA Team will prepare progress reports on a trimester (4 monthly) basis. The report
includes progress on individual road corridors, updated cost projections and progress
against the log frame indicators. A formal presentation of the Trimester Report to the
RAP2 Steering Committee provides an opportunity to inform the government on the
overall progress and resolve issues requiring actions from DoLIDAR or MOFALD. Public
audits at six monthly intervals are conducted to verify wage payments made to the RBGs
and contractors. The funds allocated to the DDCs for the supplementary projects are
subject to the annual audit conducted by the Auditor General’s Office. In addition, the TA
Team conducts an annual audit to verify that allocated funds are only used on approved
supplementary projects. To assure that the user groups do not misuse funds and to
encourage accountability of DDCs, public audits are carried out before the final
settlement of accounts. Interim payment requests are also checked against actual
physical progress before payments are released to the DDC. Copies of all Audit reports
are held by the project Consultants.
Management Case
A. What are the Management Arrangements for implementing the intervention?
A.1 Oversight
DFID Nepal will manage the RAP2 programme. The Infrastructure Adviser will be
responsible for overall management and technical oversight. The Programme Officer
and the Senior Programme Manager will ensure compliance with DFID procedures. This
core team will draw in support where required on social, governance, conflict and
economic issues, backed up by the team leader of the Inclusive Wealth Creation team.
Externally the MoFALD has established a Joint Steering Committee for Rural
Infrastructure with participation from seven key ministries and agencies and the donor
partners involved in rural infrastructure. The RAP2 project steering committee has been
established with Ministry of Federal Affairs and Local Development (MoFALD), National
Planning Commission (NPC), Ministry of Finance (MoF), Districts and DFID to manage
project related issues and ensure good communication on implementation.
This extension has been discussed and approved in principle by the steering committee.
Following approval, revisions to the DFID Memorandum of Understanding (MoU) will be
signed with the MoF. DFID will also extend the contract for a Technical Assistance (TA)
Team to manage the RAP2 programme.
District based NGOs and private sector consultants will have their contracts amended to
take on the additional social mobilisation and road engineering activities included in the
new allocation.
A.2 Management
This programme is solely funded by DFID and delivered through IMC Worldwide Ltd. The
programme has robust management arrangements and roles in place are as follows:
15

DFID – funder, setting of strategic direction (with GoN), lead technical oversight and
programme management including monitoring and evaluations; lead on transparency
issues around the financial flows associated with the entire programme and particularly
the maintenance pilots. Progress will be monitored across the revised logframe and
amended ToRs of RAP2.

Government – Chairing steering committee meetings, direction and support;
implementation of maintenance pilots; monitoring and evaluation and programme
sustainability.

IMC (Contractor) – Effective planning and implementation and conclusion of the
programme both TA and works, oversight and supervision of sub-contractor delivery;
capacity development, manage public audits and performance quality assurance,
financial management and audits. They are directly responsible to DFID for the
Technical Co-operation Fund, the technical assistance and management costs of the
programme. They will report on financial progress on a monthly basis.
GoN will continue to exempt the UK Government, DFID and its consultants including the
programme from any taxes, fees, Value Added Tax, import or customs duties imposed
directly or indirectly by GoN on all goods and services provided as per our MOU
arrangement.
B. What are the risks and how these will be managed?
Overall risks on the project are judged Medium.
One of the key risks in RAP2 was that the political and security situation in the
programme areas would deteriorate. At the time of writing, the constituent assembly has
come to an end without promulgating new constitution and there is significant uncertainty
about the future political settlement, but the peace is still holding.
However conflict related risks remain and will be addressed by the adoption of SED (safe
and effective development principles) developed by DFID Nepal. Risks related to conflict
will continue to be monitored by the DFID/GIZ Risk Management Office who provide
advice to this and other programmes.
If not monitored properly, the infrastructure sector provides scope for the misuse of funds
in Nepal because of the large volume of funds involved, weak governance and the
relative impunity of contractors and users’ committees. As a result funding for road works
will be provided through the TA Team, with all major procurement undertaken by them to
DFID standards, until sufficient confidence in DDCs has been developed. The
procurement within the programme also offers opportunities to build transparency and
good governance. Funding for bridges will also be provided through TA team ensuring
timely completion with good quality.
Public auditing of RBGs and SBGs has proved successful in RAP2 and will continue
under this extension. RAP2 will also encourage greater transparency by requiring more
disclosure by DDCs and RAP management of contract details, fund transfers and
payments for construction of infrastructure.
In addition, and as noted in DFID Nepal’s recently updated Country Governance
Assessment there are increasing risks at the local level from criminal gangs. It is also
likely (though not proven) that SBGs members have been involved in theft of workers’
wages, with two robberies (one attempted and one successful) occurring in the last six
months. In response to this rising threat and we are reducing the risks of wage theft by:
16




Dividing up the wages being carried, so each individual carries less money
Ensuring they move in groups and their movement plans are varied and only
known by the programme
Using telephone tracking to monitor the position of the wages so that any delays,
indicating a problem, can immediately be investigated; and
Providing project transport where possible to transport cash
With these measures, the risk of misuse of funds under RAP2 is considered medium and
manageable. RAP2 experience shows that the Income Generating Activities in
association with road building have led to an increased demand for transport. This
extension will focus in expanding the income generation capacity and help strengthen
forward and backward supply chain linkages. This risk is considered medium but more
manageable because of the extended programme timeframe.
C. What conditions apply (for financial aid only)?
Not applicable.
D. How will progress and results be monitored, measured and evaluated?
The monitoring plan for RAP2 is based on that developed in the design of RAP1. These
include a management information system that monitors costs, physical progress on
works and social inclusion indicators. The Consultants are providing DFID and GoN with
Trimester Progress Reports immediately before monitoring is due. The reports include
progress on individual road corridors, updated cost projections and progress against the
log frame indicators. DFID Nepal are required to undertake joint reviews of RAP with
MoFALD/DoLIDAR and other donors involved in the rural infrastructure sector at least
once per year. Reviews are led by MoFALD. If required, DFID may organise additional
bilateral reviews in coordination with MoFALD/DoLIDAR. DFID also uses the Risk
Management Office, to inform the programme on handling risk-related issues.
A project completion report will be prepared in 2013 in advance of the project end date.
DFID-Nepal, in collaboration with the DFID-South Asia Research Hub (DFID – SARH), is
currently conducting two research works that we will aim to conclude: i) the Koshi Hill
Study which is an impact study of overall development investment in the eastern region;
and ii) a study on poverty in Mid and Far West region. The RAP 2 project completion
report, the DFID-SARH studies, recently completed DFID/WB/ADB/SDC Road Sector
Assessment Study for Nepal and RAP2 independent evaluation will together form a
valuable knowledge base for not only for the next phase of RAP but also for the entire
rural road sector in Nepal.
E. Results and Benefits Management (Logframe)
See attached logframe.
The attached logframe with detailed outcome and outputs indicators will be the main tool for
measuring progress on key performance indicators. In addition, the ex-post evaluation of
RAP1 will provide important evidence of the impacts and outcomes of RAP2. This is
important as the full benefits of RAP2 cannot be measured until several years after the
completion of the project, as traffic numbers increase on the roads, agricultural production
increases, markets develop and climate/disaster resilience of rural transport infrastructure
increases.
i
Based on GNI/Capita
Nepal Vulnerability Assessment, Practical Action, 2010
iii
Multi-dimensional poverty assessment, WB, 2010
ii
17
iv
NLSS 3, CBS, 2011
Rural Transport Infrastructure Strategy, DFID, 2008
vi
Rural Transport Infrastructure SWAp Medium Term Expenditure Framework, GoN, 2009
vii
These targets are; all Districts headquarters reachable by road; all people in the hills and mountains
within 4 hours of improved access; and all people in the Terai (plains) within 2 hours of a road.
viii
RAP 1 project Completion report, DFID 2009
ix
Khandker S R, Bakht Z and Koolwal G B, 2006, The poverty Impact of Rural Roads: Evidence from
Bangladesh (Policy Research Working Paper 3875), World Bank, Washington DC
Fan S and Chan-Kang C, 2005, Road Development, Economic Growth, and Poverty Reduction in China
(Research Report 138), International Food Policy Research Institute, Washington D. C.
Deolalikar A B, 2001, The Spatial Distribution of Public Spending on Roads in Vietnam and its Implication
Dercon S, Gilligan D O, Hoddinott J and Woldehanna T, 2007, The Impact of Roads and Agriculture
Extension on Consumption Growth and Poverty in Fifteen Ethiopian Villages (CSAE WPS/200701),
University of Oxford
x
Poverty Related Impacts of Investments in Road Sector, DFID literature review 2012.
xi
Nepal Road Sector Assessment, DFID/WB/SDC,2012.
xii
Economic evaluation of Rural Transport 3, World Bank, 2007
xiii
Rural Access Programme - Environmental and Climate Assessment, Dr. Toran Sharma, 2012.
xiv
To address this acknowledged gap RAP 2 is conducting a long term (30 year) impact study of the Koshi
Hills where the UK as has invested over £200m, more than half on roads. This is due to complete in
September 2012.
xv
Rural Roads and Poor Area Development in Vietnam, Ren Mu &Dominique van de Walle, World Bank,
2007
xvi
Analysing the impact of public investment on rural development, Fenggan Shan Et AL. IFPRI 2005
xvii
Asian Development Bank (Rural Finance Sector Analysis 2012, unpublished)
xviii
RAP 1 Impact study, WSP 2011.
xix
Market Access for Small-holder Farmers, Project Completion Report, DFID Nepal June 2012
xx
RAP 1 Impact study, WSP 2011.
xxi
Economic Analysis of Local Government Investments in Rural Roads, Dr. Govind P. Koirala for UNDP
2010
xxii Rural Transport Infrastructure Fiduciary Risk Assessment, Keith Cornish for DFID, 2012
v
xxiii
RAP 2 Annual Review, DFID, 2012
18