DRAFT (9 June 2006)

PROJECT ADMINISTRATION MEMORANDUM

FOR THE

URBAN INFRASTRUCTURE DEVELOPMENT PROJECT

[LOAN NO. 2258-BHU(SF)]

KINGDOM OF BHUTAN

JANUARY 2007

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CURRENCY EQUIVALENTS (as of 4 September 2006)

Currency Unit – ngultrum (Nu)

Nu1.00 = $0.02149

$1.00 = Nu46.52

ABBREVIATIONS ADB – Asian Development Bank DADM – Department of Aid and Debt Management Danida – Danish International Development Aid DMS – design, monitoring, and supervision DUDES – Department of Urban Development and Engineering Services EIRR – economic internal rate of return EMP – environmental monitoring plan EUSPS – environment and urban sector program support FYP – 5 year plan IA – implementing agency ICB – international competitive bidding IEE – initial environmental examination LIB – limited international bidding LP – land pooling MoCHA – Ministry of Culture and Home Affairs MoWHS – Ministry of Works and Human Settlement NCB – national competitive bidding NEC – National Environment Commission O&M – operation and maintenance OLA – Office of Legal Affairs PCC – Phuentsholing City Corporation PIU – project implementation unit PMC – project management consultant PMU – project management unit PPMS – Project Performance Management System PSC – project steering committee SDS – social development specialist SOE – statement of expenditure SWM – solid waste management TA – technical assistance TCC – Thimphu City Corporation UFW – unaccounted-for water UIIP – Urban Infrastructure Improvement Project WSS – water supply and sanitation WTP – water treatment plant WWTP – wastewater treatment plant

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GLOSSARY

dzongkhag – district or province dungkhag – Subdistrict dzongda – district administrator geog – County thrompon – Mayor

NOTES (i) The fiscal year of the Government and its agencies ends on 30 June. FY before a

calendar year denotes the year in which the fiscal year ends, e.g., FY2000 ends on 30 June 2000.

(ii) In this report, "$" refers to US dollars.

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CONTENTS PURPOSE OF THE PROJECT ADMINISTRATION MEMORANDUM v KEY PERSONS INVOLVED IN THE PROJECT vi LOAN PROCESSING HISTORY vii REFERENCE MATERIALS viii MAP ix PROJECT FRAMEWORK x I. PROJECT DESCRIPTION 1

A. Project Area and Location 1 B. Objectives and Scope 1 C. Components and Outputs 1 D. Special Features 6

II. COST ESTIMATE AND FINANCING PLAN 7

A. Cost Estimates 7 B. Financing Plan 7 C. Allocation of Loan Proceeds 8

III. IMPLEMENTATION ARRANGEMENTS 9 A. Executing Agency 9

B. Project Management 9 IV. IMPLEMENTATION SCHEDULE 10 V. PROCUREMENT 10 VI. CONSULTING SERVICES 11 VII. DISBURSEMENT ARRANGEMENTS 11

A. Imprest Account 11 B. Second General Imprest Account 12 C. Statement of Expenditures 12 D. Minimum Withdrawal Application Size 12 E. Direct Payment 12 F. Reimbursement Procedure 12 G. Issuance of PCSS Numbers 12 H. Advice of Withdrawals 13

VIII. ACCOUNTING AND AUDITING 13

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IX. PROJECT PERFORMANCE MONITORING AND EVALUATION 13

A. Monitoring and Evaluation 13 B. Project Review 14 C. Midterm Review 14

X. REPORTING REQUIREMENTS 14 A. Quarterly Progress Reports 14 B. Project Completion Report 14 C. Other Reports 14 XI. ASSURANCES AND MAJOR LOAN COVENANTS 15 A. Specific Assurances 15 B. Major Loan Covenants 17 XII. ANTICORRUPTION POLICY 17 APPENDIXES 18

1. Project Organization Chart 2. Detailed Cost Estimates, Financing Plan, and Allocation 3. Implementation Schedule (Gantt or Bar Chart) 4. Implementation Schedule by Years (graph for appraisal estimate versus actual) 5. Contract Awards Projections by Years (graph for appraisal estimate versus actual) 6. Disbursement Projections by Years (graph for appraisal estimate versus actual) 7. Terms of Reference for Consulting Services 8. Procurement Plans 9. Disbursement Modalities (statement of expenditure, imprest fund) 10. Project Performance Report 11. Reporting Requirements 12. Sample Progress Report 13. Sample Audit Letter 14. Copy of ADB’s Anticorruption Policy

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PROJECT ADMINISTRATION MEMORANDUM

1. This Project Administration Memorandum (PAM) should be read along with the Report and Recommendation of the President (RRP) and Loan Agreement. The PAM contains project data and information that allows the borrower, executing agency (EA), implementing agency, and ADB to monitor project implementation and evaluate project impact. 2. The PAM

• provides concise and accurate detail, including diagrams, on major aspects of project implementation

• specifies roles and responsibilities of the EA, implementing agency, consultants, and ADB

for the various actions required for satisfactory project implementation

• assists project administration staff of the EA, implementing agency, and ADB to anticipate problems and initiate timely remedial actions or recommendations

• contains a logical framework, including subsequent revisions that confirm the goal,

purpose, outputs, activities, inputs, targets, indicators, key assumptions, and risks

• provides a framework and checklist for monitoring progress to allow remedial actions and midstream modifications to meet project objectives

• promotes systematic monitoring and evaluation of project objectives, and assessment of

impacts on project beneficiaries through surveys, studies, and periodic and midterm reviews

• provides the format and instruction for the EA and implementing agency to periodically

update the project performance report in its current revised format

• references ADB’s Anticorruption Policy, indicating how ADB may be contacted about allegations of corruption and fraud.

3. The PAM is a very important tool for the Implementing Agency for monitoring the implementation and compliance with the agreed upon implementation arrangements and covenants. It is being provided to the Government for its overall monitoring of external assistance programs, and to facilitate government intervention in project implementation issues, should the need arise. In cases of discrepancies between the PAM, RRP and the Loan Agreement, the Loan Agreement always prevails.

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XI. KEY PERSONS INVOLVED IN THE PROGRAM A. ASIAN DEVELOPMENT BANK 1. The ADB’s Urban Development Division (SAUD) of the South Asia Department is responsible for the implementation of the Urban Infrastructure Development Project in ADB. All official communication related to the Project should be addresed to the following key personnel: Director : Hun Kim Urban Development Division Tel No. (632) 632-6858 South Asia Department Urban Development Specialist : Tomoo Ueda Tel No. (632) 632-5824 tueda@adb.org Assistant Project Analyst : Hannelli Austria Tel No. (632) 632-5603 haustria@adb.org Address : Asian Development Bank P.O. Box 789 0980 Manila, Philippines Facsimile : (632) 636-2293 Telephone : (632) 632-4444 ADB’s Website : http://www.adb.org B. EXECUTING AGENCY (EA) 2. The EA for the Project is the Department of Urban Development and Engineering Services (DUDES) and the Thimphu City Corporation (TCC) is the implementing agency (IA) for Component A, Phuentsholing City Corporation (PCC) for Component B, Dagana Dzongkhag for Component C, and DUDES for Components D and E. Department of Urban Development and Engineering Services (DUDES) Project Director : Facsimile : Telephone : Email : Address :

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Project Management Unit Project Director : Jigme Dorji

Facsimile : Telephone : Email : Address :

Thimphu City Corporation (TCC) Project Manager : Facsimile : Telephone : Email : Address : Phuentsholing City Corporation (PCC) Project Manager : Facsimile : Telephone : Email : Address :

Dagana Dzongkhag Project Manager : Facsimile : Telephone : Email : Address : C. EXCHANGE OF COMMUNICATION 3 All official letters/correspondences/fax messages, etc, must be signed by the Project Director of DUDES and addressed to Director, SAUD and copied to the Project Officer and Assistant Project Analyst.

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LOAN PROCESSING HISTORY

MILESTONES DATES (a) Approval of PPTA 23 December 2004 (b) Fact Finding Mission 6-12 September 2004 (c) Management Review Meeting (MRM) 7 June 2006 (d) Appraisal Mission 26 June – 3 July 2006 (e) Staff Review Committee (SRC) 28 July 2006 (f) Loan Negotiations 17-18 August 2006 (g) Board Circulation 6 September 2006 (h) Board Consideration and Approval 27 September 2006 (i) Loan Agreement Signing 30 November 2006 (j) Loan Effectiveness 31 January 2007

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XIII. REFERENCE MATERIALS

A. Project-Related

• Report and Recommendation of the President to the Board of Directors for BHU Urban Infrastructure Development Project and Loan Agreement between the the Kingdom of Bhutan and ADB

• ADB’s Policy on Involuntary Resettlement • ADB’s Policy on Indigenous People. • Environment Policy of ADB (November 2002) • Environmental Assessment Guidelines (2003)

B. General

• Anticorruption Handbook • Anticorruption Policy (2 July 1998) • Anticorruption Policy: Description & Answers to Frequently Asked Questions (2000) • Handbook on Management of Project Implementation (revised 1988) • Handbook on Benefit, Monitoring and Evaluation • Ordinary Operations Loan Regulations (Applicable to LIBOR-Based Loans Made from

ADB’s Ordinary Capital Resources) (dated 1 July 2001) • Special Operations Loan Regulations (Applicable to Loans Made by ADB from its Special

Funds Resources) (dated 1 May 2004) C. Consultants

• Guidelines on the Use of Consultants by ADB and its Borrowers (April 2006) • Handbook for Users of Consulting Services, Volume 1, Procedures and Practices

(February 2005) • Handbook for Users of Consulting Services, Volume 2, Standard Request for Proposals

(Loans) (February 2005) • Handbook for Users of Consulting Services, Volume 3, User Guide for Preparing Terms of

Reference (February 2005) • Handbook for Users of Consulting Services, Volume 4, Guidelines for Executing Agencies’

Susbmissions (February 2005) Documents are posted on the ADB website and can be downloaded from: http://adb.org/Consulting/default.asp

D. Procurement

• Procurement Guidelines (April 2006) • Guide on Bid Evaluation (August 2005) • Handbook on Policies, Practices and Procedures Relating to Procurement Under ADB

Loans (Revised February 1990) • Handbook on Problems in Procurement for Projects Financed by the ADB (Revised

November 1987, reprinted October 1995) • Standard Bidding Documents – Procurement of Goods (April 2006) • Standard Bidding Documents – Procurement of Works (April 2006) • Standard Bidding Documents – Procurement of Works – Small (April 2006) • Standard Bidding Documents – Procurement of Plant-Design, Supply, Install (April 2006) • Standard Procurement Document - Prequalification of Bidders (September 2005)

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Documents are posted on the ADB website and can be downloaded from : (http://adb.org/Procurement/default.asp)

E. Disbursement

• Loan Disbursement Handbook, January 2001

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INSERT MAP

DESIGN AND MONITORING FRAMEWORK

Design Summary

Performance Targets/Indicators Data Sources/Reporting Mechanisms

Assumptions and Risks

Impact Improved standard of living and sustained economic growth in Thimphu, Phuentsholing, and Dagana

By end of Project plus 3 years: • Improvement in well-being as

measured by the UNDP national human development indicators and vulnerability index in urban areas • Improvement in the

Millennium Development Goals achievement indicators

UNDP Human Development Report for Bhutan Census data for Bhutan Reports from aid agencies working in Bhutan ADB’s country strategy and program and its updates Statistics from the Ministry of Works and Human Settlement and the Planning Commission of the Government of Bhutan

Assumptions • Macroeconomic stability • Political stability and peace • Continued complementary external assistance, and the Government’s commitment to developing other economic infrastructure and providing basic social services Risks • Natural disaster • High migration into the cities

Outcome • Improved urban infrastructure planning and management • Improved road access and drainage in South Thimphu, Phuentsholing, and Dagana • Increased quantity and improved quality of water supplied in project areas • Broadened sanitation coverage in Project areas

By end of Project: • Over 280 Government staff from DUDES, TCC, PCC, and Dagana Dzongkhag trained on various aspects of project implementation and municipal and infrastructure management, such as water supply and sanitation operations • New networks constructed to provide road access ultimately to over 70,000 people in South Thimphu, Phuentsholing, and Dagana, representing approximately 28.5 km of newly constructed roads • Infrastructure developed, including new WTPs with a capacity 6,000 m3/day in Thimphu and 300 m3/day in Dagana, and 27 km of supply main and associated infrastructure, to provide an additional 55,000 people with access to safe water through piped household connections or public water points in Thimphu and Dagana • Increase in sewerage coverage in Thimphu from 12% to around 20% through a 16.5 km expansion of the wastewater collection network; upgrade of WWTP from 1,750 m3/day to 5,250 m3/day, and over 50% of residents of Dagana served by newly constructed sewage treatment plant and collection system.

Training reports from project consultants ADB mission reports TCC and PCC financial statements PPMS reports (follow-up on before and after the Project on Millennium Development Goal to reduce by half the proportion of people without sustainable access to safe drinking water) ADB project completion reports

Assumptions • Landlords will donate their land for the land pooling exercise based on local area plans. • Households will connect to the new water supply system. • Key road and water engineers and utility and sanitation staff with suitable qualifications are appointed on time. • TCC and Dagana adopt adjusted tariff structures and improve collection efficiency. Risks • Communities are not fully engaged and committed to protecting water resources. • Delays in recruitment and appointment of key staff • Poor collection efficiency

Design Summary

Performance Targets/Indicators Data Sources/Reporting Mechanisms

Assumptions and Risks

• Improved solid waste management in Thimphu • Improved community awareness on solid waste disposal, hygiene, and sanitation • Increased capacity of TCC, PCC, and Dagana Dzongkhag to undertake operational and management activities and reduce unaccounted-for water

• TCC’s solid waste collection and management capacity improved to potentially cover 10 years of waste generation, through rehabilitated landfill and composting plant, and new waste collection and landfill facilities • Thimphu and Dagana residents participated in the hygiene education and sanitation promotion programs through various campaign measures • Operational efficiencies of TCC, PCC, and Dagana Dzongkhag significantly improved; UFW reduced from 34–50% to 15–20%.

Outputs Component A: Thimphu Urban Improvement 1. City-level improvements achieved in urban water supply, sanitation, and solid waste management (4Q2006–3Q2011) 2. Urban Development in four local areas in South Thimphu

• Over 55,000 people with access to safe water through newly constructed WTP with 6,000 m3/day capacity, 19 km of supply mains, two break-pressure tanks, 12 supply tanks, and associated infrastructure and reticulation network including household connections • Over 19,000 people with access to safe sanitation through an expansion of more than 16.5 km of the sewerage network, and the population of Thimphu with access to safer sanitation through upgraded WWTP from 1,750 m3/day to 5,250 m3/day • TCC’s solid waste collection and management capacity improved to potentially cover 10 years of waste generation, through rehabilitated landfill and composting plant, and new waste collection and landfill equipments. • 11,000 people, or 1,800 households, start house construction in southern Thimphu (development approval in Thimphu increased by 40%)

TCC annual reports and financial statements PMU and PIU reports PPMS of implemented subcomponents Detailed site surveys, contract supervision reports, and project completion reports Groundwater pollution tests by NEC and MTI Hydrology Unit ADB’s semiannual review and aide memoires Beneficiaries monitoring reporting

Assumptions • Landlords will donate their land for the land pooling exercise based on local area plans. • Households will connect to the new water supply system. • Key road and water engineers and utility and sanitation staff with suitable qualifications are appointed on time. • TCC and Dagana will adopt adjusted tariff structures and improve collection efficiency. • Ability and willingness of consumers to pay Risks • Communities are not fully engaged and committed to protecting water resources. • Delays in recruitment and appointment of key staff • Poor collection efficiency • Slow progress with getting 100% agreement in land pooling • Compensation according to resettlement plan and resettlement framework not strictly adhered to by the EA

Design Summary

Performance Targets/Indicators Data Sources/Reporting Mechanisms

Assumptions and Risks

New urban road networks, utility conduits, and drainage connection achieved in Project areas in South Thimphu (4Q2006–3Q2011) 3. Water supply and sewerage networks completed in Project areas in South Thimphu (4Q2006–3Q2011)

• 19.4 km of secondary and tertiary roads with drainage constructed, approximately 14.6 km of ducting for power and telecommunications, 650 meters of service pits, and associated structures constructed. • Access to safe water for residents of southern Thimphu through a secondary and tertiary water distribution network of about 30 km and a sewerage collection network of about 16.5 km, with 300 manholes and associated structures. • All facilities, including treatment plants (water, sewage, and composting) adequately functioning by 2011 • Tariffs on water, sewerage, and SWM set to recover sufficient O&M and service debt ratio by 2011.

• No statutory legal framework for land pooling

Component B: Phuentsholing Urban Improvement Improvements in road network, junctions, footpaths, and parking lots achieved for the city (4Q2006–3Q2011) Social infrastructure (archery ground, pedestrian bridge, footpaths, and street lights) provided to the city (4Q2006–3Q2011)

• 2.4 km of road network and road junctions improved; four parking lots and 1.2 km of footpaths developed • All facilities, including a pedestrian bridge, approximately 100 street lights, five hydrants, an archery ground, and a mini-stadium completed and satisfactorily functioning by 2011.

PCC annual reports and financial statements PMU and PIU reports PPMS of implemented subcomponents Detailed site surveys, contract supervision reports, and project completion reports ADB’s semiannual review and aide memoires

Assumptions • Key staff, such as road, water utility, and sanitation engineers with suitable qualifications are appointed on time. • Effective O&M program is implemented. Risks • Beneficiaries are unable to pay charges for O&M of services.

Component C: Dagana Urban Improvement 1. Water supply and sanitation facilities provided in Dagana (4Q2006–3Q2011)

• Approximately 1,200 people with access to safer water through source augmentation and construction of a new WTP with 300 m3/day capacity, 8 km of supply mains, associated secondary and tertiary pipelines, and 200 household connections and public water points • Approximately 790 people with access to safer sanitation through connection to the new sewerage

Dagana or MoCHA annual reports and financial statements PMU and PIU reports PPMS of implemented subcomponents Detailed site surveys, contract supervision reports, and project completion reports Groundwater pollution

Assumptions • Government’s continued support to devolve financial resources and decision-making authority to Dzongkhag • Multi-agency commitment to water and environmental protection • Participation sought from all government levels

Design Summary

Performance Targets/Indicators Data Sources/Reporting Mechanisms

Assumptions and Risks

2. New urban roads and drainage provided in central areas of Dagana (4Q2006–3Q2011)

network and a sewage treatment plant with capacity of 300 m3/day • Approximately 1,000 people with access to 1.1 km of newly constructed roads with drains • All facilities, including treatment plants (water, sewage, and composting) adequately functioning by 2011 • Tariffs for water, sewerage, and SWM set to recover sufficient O&M and service debt ratio by 2011

tests by NEC, MTI Hydrology Unit ADB’s semiannual reviews and aide memoires Beneficiaries monitoring reporting

Component D: Technical Support 1. Public awareness support 2. Operational efficiency improvement

• Consultants recruited by early 2007 • Public hygiene and sanitation

campaigns implemented for TCC, PCC, and Dagana • Public hygiene workshop and metering workshop held in Dagana • DUDES, TCC , PCC, and Dagana Dzongkhag staff attend training (approximately 288 individuals)

Consultancy contract Training records PMU and PIU reports

Assumptions • Implementing agencies amenable to capacity building • Only qualified permanent staff with direct responsibilities in the urban infrastructure are trained. • Key staff with appropriate qualifications and skills are appointed on time. Risk • Delayed recruitment of consultants • Central Government may not allow TCC, PCC, and Dagana to recruit additional staff.

Component E: Project Management Support 1. PMU support 2. Design, monitoring and supervision support for PIUs

• Consultants shortlisted by 4Q2006 and fielded by January 2007 • Bidding and contract award documents are processed according to manner and timing agreed by the Government and ADB, and civil works and capacity-building subcomponents are implemented according to the schedule.

PMU and PIU reports Withdrawal application, disbursement, and contract award records

Assumptions • Implementing agencies amenable to capacity building • Timely recruitment of consultants • Key staff with appropriate qualifications and skills are appointed on time.

Activities with Milestones Output 1: Improving urban Infrastructure planning and management in DUDES, Thimphu, and Phuentsholing 1.1 PMU and PIUs formed by 4Q2006 Output 2: Improved road access and drainage in Thimphu southern extended areas and Dagana 2.1 Environmental clearances obtained from NEC by end 2Q2007 2.2 Land acquisition or pooling related to roads and drainage completed and resettlement plan implemented for Lungtenphu by end 4Q2007 (other three areas to follow within 8Qs) 2.3 Detailed engineering design prepared by end 4Q2007 2.4 Bidding documents tendered and evaluated and contractors selected by end 4Q2008 2.5 TCC PIU staff trained by contractor on O&M as part of construction process by end 4Q2008 2.6 Construction activities of the roads in Lungtenphu completed by end 4Q2010 (other three to follow within 2Qs) 2.7 Road O&M turned over to TCC, Phuentsholing, and Dagana staff by end 2Q2011 Output 3: Increased quantity and improved quality of water supply in Thimphu and Dagana 3.1 Water gauging in Thimphu starts from 2Q2006, and by end 3Q2006 water source decided 3.2 Benefit monitoring survey conducted by end 2Q2007 3.3 Environmental clearances obtained from NEC by end 2Q2007 3.4 Land acquisition or pooling related to WTP and WWTP sites completed and resettlement plan implemented by end 4Q2007 3.5 Detailed engineering design prepared by end 4Q2007 3.6 Bidding documents tendered and evaluated and contractors selected by end 4Q2008 3.7 TCC PIU staff trained by contractor on O&M as part of construction process by end 4Q2008 3.8 Construction activities of the treatment plant completed by end 4Q2010 3.9 Tariff for financially sustainable O&M revised for individual consumer and bulk supply by end 4Q2010 3.10 Initial households connections provided by end 2Q2011 3.11 Water treatment plant commissioned and O&M turned over to TCC staff by end 2Q2011 Output 4: Increased sanitation coverage in Thimphu and Dagana 4.1 Topographical and current surveys and investigations undertaken by end 2Q2007 4.2 Environmental clearances obtained from NEC by end 3Q2007 4.3 Land transfer completed and short resettlement plan implemented by end 4Q2007 4.4 Detailed engineering design prepared by end 4Q2007 4.5 Bidding documents tendered and evaluated and contractors selected by end 3Q2008 4.6 TCC and Dagana staff trained by contractor on O&M as part of construction process by end 4Q2008 4.7 Construction activities completed, including (i) sewerage system, (ii) aerated sewage treatment plant, (iii) outfall, and (iv) sludge drying beds by end 1Q2011 4.8 Tariff for financially sustainable O&M revised for (i) individual consumers (household and commercial connections) and (ii) institutions (hospitals, etc.) supply by end 1Q2011 4.9 Household connections provided, prioritized based on water supply connections 4.10 Sewage treatment plant commissioned and O&M turned over to TCC and Dagana staff by end 1Q2011 Output 5: Improved community awareness of the link between proper hygiene, sanitation, and health 5.1 Sanitation and environmental educational activities undertaken to date through Kuensel newspaper countrywide by end 3Q2007 5.2 Taylor-made Dagana water awareness and environmental campaign formulated by end 4Q2007 Output 6: Increased capacity of TCC and PCC to tackle unaccounted-for water and water billing 6.1 Detailed needs assessment and formulation of a 4-year capacity-building program conducted by end 2Q2007 6.2 Course providers and key staff to be trained identified by end 2Q2007 6.3 Annual training programs formulated (for submission in previous October) by end 3Q2007 6.4 Course delivery and attendance completed by end 2Q2011

Inputs • ADB ($24.60 million) • Government ($6.15 million)

ADB = Asian Development Bank, BUDP = Bhutan Urban Development Project of the World Bank, EA = executing agency, km = kilometer, m3 = cubic meter, MoCHA = Ministry of Culture and Home Affairs, MTI = Ministry of Trade and Industry, NEC = National Environment Commission, O&M = operation and maintenance, PCC = Phuentsholing City Corporation, PIU = project implementation unit, PMU = project management unit, PPMS = project performance monitoring system, Q =

quarter, RMA = Royal Monetary Authority, SWM = solid waste management, TCC = Thimphu City Corporation, UNDP = United Nations Development Programme, NSC = National Steering Committee, UFW = unaccounted-for water.

I. PROJECT DESCRIPTION A. Project Area and Location 1. The Project will be implemented Bhutan’s two largest cities (Thimphu and Phuentsholing) and one regional center (Dagana). B. Objectives and Scope 2. The Urban Infrastructure Development Project (the Project) entails improving, upgrading, and expanding urban infrastructure facilities and basic urban services in Bhutan’s two largest cities (Thimphu and Phuentsholing) and one regional center (Dagana). It includes institutional strengthening and building staff capacity in urban management and urban service provision, as well as enhancing public awareness on public hygiene. C. Components and Outputs 3. The Project will have five components. Component A: Thimphu Urban Improvement will include (i) city-level works consisting of water supply source augmentation, treatment, and distribution; upgrading of the existing wastewater treatment plant; and providing solid waste management infrastructure and equipment; and (ii) local urban infrastructure provision in four of the five new local areas of southern Thimphu currently being developed by TCC. Component B: Phuentsholing Urban Improvement will include (i) roads and drainage, (ii) footpaths and a pedestrian bridge, and (iii) social infrastructure such as fire hydrants and street lighting. Component C: Dagana Urban Improvement will include (i) water supply source augmentation, treatment and distribution system improvement; (ii) sanitation improvement; and (iii) roads and drainage provision. Component D: Technical Support will include (i) capacity building in DUDES and the implementing agencies, and (ii) public awareness enhancement. Component E: Project Implementation Support will include consulting services for (i) the project management unit (PMU), and (ii) to support project implementation unit (PIU) design, monitoring, and supervision. 1. Component A: Thimphu Southern and City-level Improvement

a. City-Level Water Supply Augmentation and Distribution 4. To meet projected water demand in the southern areas of Thimphu, a new water supply system will be developed. This new South Thimphu water supply system will serve the areas on the eastern left bank of the Wang Chhu, extending from Changjiji in the north to Serbithang in the south. To design an appropriate and least-cost water supply system that would ensure distribution to all project areas by gravity and so minimize resource requirements—both financial costs and human resources for O&M—project preparatory technical assistance assessed various options for siting the water intake and treatment plant, such as at Ola Rongchu, Ngabi Rongchu, or Megoipang, as well as treatment methods. Based on these assessments, the option of constructing a water intake and treatment plant that uses a simple sand filtration process in the Megoipang valley was adopted for the Project. The subcomponents will therefore include (i) constructing at Megoipang an intake and water treatment plant (WTP) with a capacity of 6,000 cubic meters (m3)/day; (ii) installing 19 kilometers (km) of water supply mains and an associated distribution network; (iii) constructing break-pressure and storage tanks; (iv) improving 5 km of access road to the WTP; (v) purchasing and installing five bulk meters; and (vi) helping TCC develop guidelines and standard operating procedures for water services, including, among other things, how households will connect. The intake and WTP site will

occupy approximately 1 hectare of land and include the plant, workshop, and administrative buildings; living quarters for operations staff; and tanks for water storage and clearing. The WTP will consist of simple sedimentation and filtration units, to minimize operation and maintenance (O&M) and human resource costs, and use chlorine to disinfect.

b. City-Level Waste Water Treatment Plant Upgrade 5. With the increase in population and water supply, the capacity of the existing wastewater treatment plant (WWTP) in Babesa, currently estimated at 1,750m3/day, will need upgrading. The Project will install mechanical aerators in the existing facultative ponds to increase WWTP capacity to 5,250m3/day. The WWTP has adequate adjacent land on which to further expand capacity to meet projected requirements for the next 20 years. The Project will install a flow meter at the WWTP.

c. City-Level Solid Waste Management 6. To help TCC minimize and manage its growing municipal solid waste burden, a project subcomponent will include (i) rehabilitating the existing landfill site in Mimilakha and providing landfill site machinery (e.g., a compactor), to increase capacity and potentially cover the next 5 years of municipal waste generation; (ii) providing an electrical substation, upgrading the access road, and fencing the perimeter to make operational the existing Serbithang Pilot Composting Plant; (iii) constructing a sorting and recycling center to enable waste separation and recycling;1 and (iv) purchasing waste collection equipment to allow the separation of waste at source and minimize the need for waste disposal at the landfill. The detailed design of the physical works and procurement of equipment will only be carried out pursuant to the completion of the Solid Waste Management Strategy and Action Plan for Thimphu covered under a piggy-backed advisory TA (see para. 47). Works under this subcomponent will be carried out in conjunction with a public awareness campaign covered under Component D (para. 25). Pursuant to the completion of a solid waste management (SWM) strategy and action plan acceptable to ADB, and discussions at the midterm review, the Project may include necessary preparatory works, including surveys for the future landfill site for Thimphu.

d. Local Area Infrastructure Development in South Thimphu

7. Out of 10 new local areas currently being developed by TCC, the Project will develop under this subcomponent infrastructure in four local areas (Lungtenpu, Babesa, Simtokha and Changbandu)2 located adjacent to the existing Tashi Chhodzong–Babesa Expressway. The subcomponent will include (i) approximately 20 km of secondary and tertiary roads, as well as associated drainage, to connect the four local areas to major service roads and the expressway; (ii) a network of approximately 30 km of secondary and tertiary water distribution pipes; (iii) a sewerage collection network of approximately 16.5 km, including 300 manhole chambers and associated structures; and (iv) the provision of approximately 14.6 km of ducting for power and telecommunication networks, 650 meters of service pits, and associated structures.

1 The subcomponent will include facilitating the involvement of households and communities in waste separation

and recycling through public awareness programs developed through the piggy-backed TA (para. 47). 2 Listing of local areas is in the order of development stage; Luntenphu is most advanced in reaching landlords’

land pooling agreement.

2. Component B: Phuentsholing Urban Improvement

8. The component will include (i) improvements to 2.8 km of the road network; (ii) improvements to road junctions; (iii) developing four parking lots and 1.2 km of footpaths; (iv) constructing one pedestrian bridge over the Om (Dhoti) River; (v) providing approximately 100 street lights; (vi) purchasing and installing five hydrants; and (viii) developing social infrastructure consisting of a mini public stadium, a central public square (Upper Market Precinct Improvement), and river bank improvements. 3. Component C: Dagana Urban Improvement

a. Water Supply 9. Various options were assessed while designing an appropriate and least-cost water supply system to ensure distribution to all Project areas by gravity and minimize resource requirements for O&M. Based on these assessments, the construction of two new intakes, rehabilitation of the existing intake, and construction of a WTP using simple sand filtration units at the existing site (using the existing break-pressure tank) was adopted. The subcomponents will therefore include (i) developing two new intakes and rehabilitating the existing intake; (ii) constructing a WTP of 300 m3/day capacity consisting of simple sand filtration units, with chlorine disinfection and storage tanks located in an area of 0.5 hectares; (iii) installing 8 km of water mains supplied by gravity to all areas of the town; and (iv) constructing two break-pressure tanks. The installation of secondary and tertiary distribution networks, approximately 200 household water supply connections,3 and subcomponents B and C below, will be carried out pursuant to the completion and acceptance by ADB of the Dagana Geotechnical and Slope Stability Study, to be carried out under the piggy-backed advisory TA (para. 47). For secondary reticulation of the water supply, 1.2 km of the 50 millimeter supply pipelines recently installed by Dagana Dzongkhag will be reused.

b. Roads and Drainage

10. The subcomponent will provide improvements and extension to 1.1 km of main roads in the new high street development area and the road leading to the National Housing Development Corporation colony, as well as associated roadside drainage.

c. Sanitation 11. The subcomponent will include (i) installing a collection network for overflow from household septic tanks in the densely populated high street development area, as well as constructing a simple sewage-stabilization pond on 1 hectare of land, and (ii) providing a septic desludging machine.

4. Component D: Technical Support

12. The subcomponent will include technical support by providing (i) consulting services and procuring equipment required for the following: (a) capacity building of DUDES, TCC, PCC and Dagana Dzongkhag; (b) public awareness support in Thimphu to improve community health and sanitation and promote civic responsibility;4 and (ii) training courses for professional, operational, and technical staff of DUDES, TCC, PCC, and Dagana Dzongkhag through 3 The Project will provide connection to the meter point. 4 This will include public awareness support to educate waste generator, and health impacts on waste handlers.

medium- and long-term training courses. This will assist staff members of DUDES, PCC, TCC, and Dagana Dzongkhag enhance their managerial and operational capacity for the proper planning, operation, and maintenance of urban services.

5. Component E: Project Implementation Support 13. The subcomponent will include consulting services for the PMU and to support PIU design, monitoring, and supervision. It will help the PMU and PIUs design, implement and supervise the various interventions under the Project. Consulting support will include (i) project management and monitoring; (ii) the detailed design of subcomponents; (iii) contract document preparation and structuring, tendering, evaluation, execution, and management; (iv) construction supervision; and (v) the preparation and execution of capacity-building programs. C. Special Features 14. Public Awareness Support. The Project will improve community awareness and promote civic responsibility. For example, the solid waste management subcomponent will, with effective awareness-raising activities, contribute to solving the problem through better waste segregation at source and a reduction of non-biodegradable items, such as plastic bottles, to enable management measures such as recycling and composting of biodegradable items to become cost effective. It will also support raising public awareness of the need for cost recovery in urban services, i.e. the need for tariff collection as well as promote general hygiene, sanitation, water conservation, and traffic management. Experts will be engaged to review the current household- and city-level practices and recommend changes to improve services. 15. Land Pooling (LP) Process. In Thimphu’s local areas, almost every plot is irregularly shaped and is landlocked without any infrastructure facilities, which leaves very limited options for urban development. One option is to develop only those land parcels where services and amenities can be easily fitted through guided land development, but this would incur uneven development skewed by the original agricultural layout and further fragment urban land. Where field boundaries are irregular, road alignments tend to remain irregular and lack proper geometry or allotment. Infrastructure servicing can be inefficient and expensive, as agricultural needs have very little in common with those of modern services (e.g., drinking water), and accommodating proper drainage in narrow lanes is difficult. The other option is site-and-services provision through land acquisition, to be developed by public authorities or through private real estate agencies. TCC or private developers would acquire the whole local area for planned development, but this would not necessarily benefit many original landowners; as in many other countries, real estate companies usually buy land cheaply from owners and later sell at a much higher price to well-off households. In addition, there is no private real estate developer in Bhutan to take all the financial risks of such a large investment or commit to providing sufficient urban services, nor does TCC have the required resources. LP has been appraised as the most appropriate tool for local area planning in Thimphu in the 10 newly incorporated areas. LP is a technique used to redefine ownership of land in a way that creates a new configuration of plots more appropriate for urban structures and uses. Urban land development is realized through the contribution of a certain portion of land from each owner, proportionate to his or her holdings, which produces sufficient land for the provision of public roads, public infrastructure, social facilities, and open space. The LP plan will include safeguards and, to further ensure compliance with ADB safeguards policies, the following needs are addressed: (i) ensuring consultation with non-titled affected persons (APs), (ii) identifying impacts on all affected persons (APs) and ensuring compensation at replacement cost for vulnerable and non-titled APs, (iii) agreement from 100% of landowners verified by the Office of

Legal Affairs (OLA) as a third party,5 and (iv) improving mechanisms for grievance redress. In these areas, further consultations were conducted, particularly with non-titled APs; the summary resettlement framework was disclosed and explained to APs particularly regarding entitlements and the strengthened grievance redress mechanism.6

II. COST ESTIMATE AND FINANCING PLAN A. Cost Estimates

16. The total cost of the Project is estimated at $30.75 million equivalent, including taxes, duties, interest charges on the ADB loan, and physical and price contingencies. Table 1 gives a summary of the estimated costs. Details are in Appendix 5.

Table 1: Cost Estimatesa

($ million) Component Total Cost A. Basic Costb 1. Component A: Thimphu Southern and City-level Improvement 15.6 2. Component B: Phuentsholing Urban Improvement 2.6 3. Component C: Dagana Urban Improvement 1.5 4. Component D: Technical Support 1.2 5. Component E: Project Implementation Support 3.3 Subtotal Base Cost 24.2 B. Contingencies 1. Physical Contingenciesc 1.0 2. Price Contingenciesd 2.6 Subtotal Contingencies 3.6 C. Financial Chargese 0.9 D. Taxes and Dutiesf 2.0 Total 30.7

a Exchange rate of Nu44 = $1 has been used throughout the project period. b Base costs are as of April 2006. c Physical contingencies are computed as 5% for civil work and equipment and 3% for training, surveying, resettlement, office equipment, incremental recurrent cost, and land. d Price contingencies are estimated at 6% in 2007, 4.5% in 2008, 4.3% in 2009, and 4.1% in other years for local costs, and at 2.8% in 2007 and 1.2% in other years for foreign costs. e Financial charges are computed as 1% during the grace period of 8 years and capitalized during the implementation period for ADF loans. f Taxes and duties are 20% on eligible items, and consultancy and local expenditures are subject to a 5% tax rate. Source: Asian Development Bank estimates.

B. Financing Plan

17. A loan of $24.60 million equivalent (SDR16,597,000) from ADB’s Special Funds resources will be provided to finance the Project. The loan will have a term of 32 years, including a grace period of 8 years, with interest charged at the rate of 1% per annum during the 5 Another third party will be identified and included as witness on the side of the landowner in line with a legal

opinion from OLA (19 July 2006). 6 Attached as Appendix 11 is the Draft Summary Resettlement Framework for LP related works of Component A,

which sets out the basis, structure, and detailed process proposed for LP in this case.

grace period and 1.5% per annum thereafter. The loan will cover 80% of the total project cost. Interest during the project implementation period will be capitalized. The remaining $6.15 million equivalent (20% of the total project cost) will be provided by the Government to finance taxes and duties, resettlement cost, land acquisition, and part of the civil works. The financing plan is summarized in Table 2.

Table 2: Financing Plan

($ million)

Source Total Cost Percent Asian Development Bank 24.60 80 Government 6.15 20

Total 30.75 100 Source: Asian Development Bank estimates.

D. Allocation of Loan Proceeds 18. As specified in the Loan Agreement (Attachment to Schedule 3), the table below sets forth the Categories of goods, services and other items to be financed out of the proceeds of the Loan and the allocation of amounts of the Loan to each category.

ALLOCATION AND WITHDRAWAL OF LOAN PROCEEDS (Urban Infrastructure Development Project)

CATEGORY ADB FINANCING

Number Item Amount Allocated SDR

Percentage and Basis for Withdrawal

from the Loan Account

1 Works 9,099,000 79 percent of total expenditure

2 Equipment 2,258,000 100 percent of total expenditure*

3 Consulting Services 1,766,000 100 percent of total expenditure*

4 Training, Survey, Project Management Costs, Vehicle Rental, and Office Equipment

808,000 100 percent of total expenditure*

5 Interest Charge 631,000 100 percent of amount due

6 Unallocated 2,035,000

Total 3,903,000

*Exclusive of local taxes

III. IMPLEMENTATION ARRANGEMENTS A. Executing Agency 19. MOFT will be the Project's Executing Agency, and MOAD, the Implementing Agency. A national project steering committee (NPSC) will be established to oversee the Project, and will consist of senior-level representatives from MOFT; MOAD; Ministry of Planning and National Development; MOH; MEC; MHUDB; Ministry of Gender, Family Development and Social Security; at the director level or above, and representatives of the atolls. The NPSC will be chaired by the deputy minister of MOAD; the deputy director general of MOAD will be the secretary. The NPSC will advise and guide the Project on policy decisions and operations. The NSPC will hold its first meeting within 3 months of loan effectiveness and meet quarterly. A regional project advisory committee (RPAC) will be established on each focus island to advise on atoll development coordination. The RPAC shall consist of representatives from IDC, WDC, island office, PIU and as applicable, the local NGOs and chaired by a senior officer to be appointed by the Minister of Atolls Development. B. Project Management

20. MOAD will set up a PMU, led by a full-time project director with adequate sector-related and managerial experience, and communication skills. The project director will be charged exclusively with the Project’s execution and will have no other duties within MOAD. A core team of staff members from MOAD (deputy project director, financial and accounting manager, social development specialist); MOH (environmental engineer); and MHUDB (land-use planner) will assist the PD. Supported by the PMU, the project director will be responsible for (i) coordinating all activities under the Project; (ii) liaising and reporting to ADB; (iii) managing the PMU account; (iv) managing finances and reporting project accounts; (iv) liaising with other government agencies; (v) developing training materials, policy manuals, and technical guidelines; (vi) monitoring and evaluating PIUs; and (vi) giving management and policy support to the PIUs. 21. The PMU will (i) prepare the overall project implementation plan and consolidated annual work plan, (ii) help the PIUs implement island and atoll development plans, (iii) supervise all project management activities, (iv) organize monitoring and evaluation activities, (v) supervise the implementation of the gender action plan and other activities under the summary poverty reduction and social strategy, and (vi) prepare overall progress reports and the project completion report. 22. Each focus island will have a PIU, with three sections: (i) environment and sanitation, (ii) governance and social development, and (iii) planning. Qualified staff will head each section. The PIU will be headed by a project manager working from the region, with suitable qualifications and good managerial and communication skills. ADB endorsement will be sought. The PIUs will employ full-time at least one accountant, one sanitation and environmental technical expert, and one social development specialist for the duration of the Project; and one land-use planner for at least the first 3 years of project implementation. Depending on the size of the region and the workload, additional technical staff may be deputed from line agencies and ministries, thus transfer skills and technology to the regions and improve capability. The PIU will be active in developing the structure of the regional development management office and contribute to the technical and regional development functions. 23. The PIU will help the Project (i) prepare the island and atoll development plans concurrently with the required land-use plan, (ii) mobilize communities, (iii) coordinate between

the Project and community, (iv) tender works and services for project subcomponents, (v) implement construction works, (vi) implement the gender action plan, (vii) account for expenditures, (viii) monitor and report on project activities, and (ix) prepare project progress reports. PIU staff will be trained at the beginning of the Project in civil works, sanitation, solid waste management, planning, and regular project administrative responsibilities. Each PIU will have an accounting section, directly under the project manager, to deal with procedural aspects and recording of financial transactions and to prepare liquidation of statements and replenishment requests to the PMU. 24. The PMU and PIUs will be supported by a team of consultants headed by a project advisor and team leader and deputy team leader.7 Other consultants supporting the Project will include a financial management and procurement specialist, a monitoring and evaluation specialist, a land-use planner, and a social development specialist. Detailed training requirements will be assessed at the beginning of the Project, providing staff from the PMU, PIUs, atolls, islands, MOAD, MHUDB, and MOFT, and other stakeholders with timely training opportunities at the atoll, regional, and national levels.

IV. IMPLEMENTATION SCHEDULE

25. The Project will be implemented over 5 years. Implementation is expected to commence in the fourth quarter of 2005. Start-up activities will include the establishment of the national and regional steering committees, recruitment of project staff and consultants, preparation of the training assessment, conducting feasibility studies, and procurement of immediately required equipment. Physical works may not start until the first quarter of 2007 due to the need to draw up land-use plans for approval and to prepare detailed engineering designs and contract documents. The project implementation schedule is in Appendix 6.

V. PROCUREMENT 26. Procurement will generally be carried out by the PIUs under the PMU’s guidance. Goods and related services, and civil works to be financed from loan proceeds will be procured in accordance with ADB’s Procurement Guidelines and the Government’s procurement procedures acceptable to ADB. The sanitation schemes will be integrated into a combined design and supervision, and supply and construction packages for international competitive bidding. Equipment packages valued at $500,000 equivalent or less will be procured following international shopping procedures acceptable to ADB and packages valued at $100,000 equivalent or less will be under direct purchasing procedures. Civil works contracts for the catchment rehabilitation under the rainwater tank component will be small, with an average value in the range of $10,000 to $15,000 equivalent, and will follow ADB's Guide on Community Participation in Procurement. The first contract of this type within each of the Northern Central, Central Region and Southern Central Region will be subject to ADB‘s approval. The proposed procurement packages are in Appendix 7.

7 The team leader (international) and deputy team leader (domestic) will be environmental engineers.

VI. CONSULTING SERVICES 27. An estimated 141 person-months (61 international, 80 domestic) of consulting services are needed.

Summary Consulting Services

Training and Project Implementation Person-Months International Domestic Project Adviser &Team Leader (environmental engineer) 24.0 Sewerage Engineer & Procurement Specialist 11.0 Financial Management Specialist 5.0 Monitoring & Evaluation Specialist 2.0 9.0 Land Use Planner 5.0 8.0 Institutional Development Economist 4.5 Environmental & Sanitation Engineer & Deputy Team Leader 21.0 Solid Waste Management Specialist 10.0 Hydrologist 2.0 Environmental Specialist 2.5 Participation, Gender & Social Development Specialist 20.0 Community Mobilization Specialist 3.0 Unallocated Specialist 2.0 12.0 Total 61.0 80.0

28. Consulting services are required to facilitate project implementation and to strengthen institutional, administrative, and financial capacities of the PMU and PIUs. Loan-financed consultants for the PMU and PIUs will be engaged through an international consulting firm in accordance with Guidelines on the Use of Consultants by Asian Development Bank and Its Borrowers, using a quality- and cost-based selection method and other arrangements satisfactory to ADB for the engagement of domestic consultants. The proposed outline terms of reference are in Appendix 8.

VII. DISBURSEMENT ARRANGEMENTS 29. The PMU will prepare disbursement projections, request budgetary allocations for counterpart funds, collect supporting documents, and prepare withdrawal applications and send them to ADB in accordance with its Loan Disbursement Handbook. The PMU will ensure that all imprest accounts will be established, managed, replenished, and liquidated in accordance with ADB’s Loan Disbursement Handbook, and with detailed arrangements agreed to by the Government and ADB. A. Imprest Account 30. To facilitate the timely release of loan proceeds and counterpart funds and to expedite project implementation, the Government will, immediately after loan effectiveness, open and maintain a project imprest account with the Maldives Monetary Authority, to be managed by the PMU. The total advances to the imprest account, including the initial advance, will not at any time exceed estimated ADB-financed expenditures for the next 6 months or 10% of the loan amount, whichever is lower. Detailed procedures for establishing and operating the Imprest Account are in Appendixes 9.

B. Second Generation Imprest Account 31. To facilitate project implementation and support the environmental infrastructure component, three second-generation imprest accounts for each of the PIUs will be established at a commercial bank. The initial ceiling of the second-generation imprest account will be $20,000 equivalent, or the estimated ADB-financed expenditures in each PIU in the next 6 months, whichever is lower. Because the PIUs have limited experience with implementing externally financed investment projects, the second-generation imprest accounts will be established only after the fielding of the project-financed financial management consultant. C. Statement of Expenditures 32. ADB’s statement of expenditures procedures, applicable to individual payments of $100,000 or less, will be used to liquidate advances from the imprest accounts. Under the SOE procedure, all relevant supporting documents shouldbe retained by the Executing Agencies for audit purposes and for examination upon request of ADB’s representatives. Details of the SOE procedure are in Appendix 10 and the formats to be used are shown in ADB’s Loan Disbursement Handbook dated January 2001. D. Minimum Withdrawal Application Size 33. To promote efficiency in processing loan disbursements, the minimum value of a withdrawal application is set as US$100,000 equivalent. To the extent possible, the Executing Agency is requested to consolidate claims and submit withdrawal applications after its amount has exceeded this limit. E. Direct Payment 34. ADB, at the borrower’s request, pays a designated beneficiary directly. Details of this procedure are shown in Chapter 7 of ADB’s Loan Disbursement Handbook dated January 2001. F. Reimbursement Procedure 35. ADB pays from the loan account to the borrower’s account or, in some cases, to the project account for eligible expenditures which have been incurred and paid for by the project out of its budget allocation or its own resources. Details of this procedure is in Chapter 9 of ADB’s Loan Disbursement Handbook dated January 2001. G. Issuance of PCSS Numbers 36. Before a disbursement is made for any contract issued by the EA, ADB has to prepare a Procurement Contract Summary Sheet (PCSS). Copies of all signed contracts and supporting documents should be sent to ADB as soon as they are available. This is the basis for ADB to monitor performance against the projected annual activities made at the start of each year. A PCSS number will be assigned by ADB for each contract received and these data will be relayed to EA. The PCSS serves as an acknowledgement by ADB that the award of a contract has been checked and has been found to comply with ADB’s procurement guidelines. It also serves as a basis for disbursement. The PCSS is also numbered sequentially, not exceeding four digits, i.e., 0001, 0002, etc. The PCSS consists of the following basic information:

• ADB Contract No. or the PCSS No.

• Date of ADB approval of the Award of Contract • Date of Contract Approval by the EA • Mode of Procurement • Name of Contractor or supplier • Terms of payment and currency of contract • Component to which the expenditures will be charged

H. Advice of Withdrawals

37. Advise of withdrawals and other loan disbursement information is available at the Controller’s Department website: http://lfis.adb.org. 38. Disbursement of loan proceeds shall be subject to the provisions of Attachment to Schedule 3 of the Loan Agreement

VIII. ACCOUNTING AND AUDITING 39. The PMU will obtain and consolidate relevant data from the PIUs, which will prepare project operating accounts and related financial statements, and records of the statement of expenditure. Auditors acceptable to ADB will audit the imprest account, second-generation imprest accounts, and statement of expenditures. The final audit report will include a separate audit opinion on these. The PIUs will agree to have their project operating accounts audited by the PMU before receiving any funding through the Project. Audited financial statements and project accounts, together with the auditor’s report, will be submitted within 6 months of the close of the financial year. The PMU and PIUs will have an adequate number of suitably qualified accounting staff, including a senior officer.

IX. PROJECT PERFORMANCE MONITORING AND EVALUATION

A. Monitoring and Evaluation 40. To ensure that project components are managed efficiently and that project benefits are maximized, a project performance management system (PPMS) has been developed. It will monitor and evaluate project information and data to ensure that planned interventions achieve the desired result and benefit the target population. The PPMS will establish a cause-and-effect relationship between the Project and its impact. PPMS activities will be conducted periodically to gather information from multiple sources to determine whether the input deliveries for implementing project activities have rendered expected benefits to the intended beneficiaries. Beneficiaries will be involved in project monitoring evaluation, through direct reporting to PIU and through the regional project advisory committees to be established for coordination and monitoring. The PPMS also seeks to detect any deficiencies and discrepancies between the project plan and execution in using resources efficiently so that timely corrections can be made to update the Project and thus improve its benefits, outcomes, and impact. The indicators to be monitored will have been formulated and agreed upon with MOFT, including indicators pertaining to physical progress and institutional reform activities. The monitoring process will focus on, but not limit itself to, capacity building and O&M. The PMU will gather baseline physical and socioeconomic data in each atoll and submit a detail implementation plan for monitoring performance and prepare benchmark information for ADB’s review and concurrence

within 6 months of loan effectiveness. Thereafter, the PMU will submit semiannual monitoring and evaluation reports to ADB throughout project implementation. B. Project Review 41. The PMU and PIUs will regularly review and evaluate project performance, while MOFT, MOAD, and ADB will jointly assess project implementation at least once every year. Participating island communities, island and atoll offices, and PIUs will undertake extensive internal project monitoring. C. Midterm Review 42. The Government, PMU, and ADB will conduct a comprehensive midterm review 2.5 years after the Project starts or after the first phase of the settled sewerage system is implemented, whichever is sooner. The review will (i) cover the scope, design, and implementation arrangements of the Project; (ii) identify changes needed since the time of project appraisal; (iii) assess implementation performance against project indicators; (iv) establish compliance with loan covenants; and (v) identify problems, constraints, and, if necessary, recommend changes in the design or implementation arrangements.

X. REPORTING REQUIREMENTS A. Quarterly Progress Reports 43. The Government will provide ADB with detailed quarterly progress reports on project implementation, following ADB standard procedures within ____ days after each quarter. The reports will be in a format acceptable to ADB and indicate:

• Progress against established targets • Status of performance indicators • Problems encountered and steps taken to resolve the problems • Compliance with loan covenants, and • Program activities proposed for the following quarter

A proforma of the progress report is shown in Appendix 11. B. Project Completion Report 44. Within 3 months of physical completion of the Project, the PMU will make publicly available a project completion report in the standard ADB format. C. Other Reports

(a) A detailed implementation plan for monitoring performance and preparing benchmar information for ADB’s review and concurrence within 6 mos of the effective date.

(b) Baseline information within one year of the effective date. Thereafter, the PMU shall submit semi-annual reporting evaluation reports throughout Project implementation to be included in the progress reports.

XI. ASSURANCES AND MAJOR LOAN COVENANTS

A. Specific Assurances

45. In addition to the standard assurances, the Government and the Ministry of Finance and Treasury have given the following assurances, which are incorporated in the legal documents: Assurances Responsible Party Target Date (i) The Government will ensure that within 1 month of

loan effectiveness, (a) a NPSC will have been established, and (b) each PIU will have been established and fully staffed to the satisfaction of ADB;

EA

Within one month after loan effectiveness (20 May 2006)

(ii) RPACs will be established in each of the Focus Islands within 3 months of loan effectiveness;

EA

3 months after loan effectiveness (20 July 2006)

(iii) The Government will not replace the PMU project director or any of the PIU managers without ADB’s prior approval;

EA/PMU

(iv) The Government will ensure that no physical infrastructure within the scope of the Project will be constructed on Mahibadhoo, Naifaru, and Fonadhoo until the Government, through MHUDB, has approved their land-use plan. The technical committee established under MHUDB and mandated to approve land-use plans will be required to assess them and either approve them or provide comments for review and revision within 3 months of the plans’ submission;

within 3 months of the plans’ submission

(v) The Government will provide support to facilitate IDP formulation. The Government will ensure that, within 6 months of loan effectiveness, each selected island will have (a) its IDP formulated and properly sanctioned by the authorized agency, and (b) base maps completed to the satisfaction of ADB. The selected islands refer to those islands within the North Central, Central, and South Central regions, which will formulate their land-use plans through the Project;

within 6 months of loan effectiveness

(vi) The Government will ensure that the land-use and atoll development plans will be formulated consistently and cohesively, and that they integrate the islands’ needs and aspirations as reflected in the IDP;

(vii)The Government will help establish a cooperative within each island community, and allow the cooperatives to plan, design, construct, operate, and maintain (including impose tariff charges on end users) public utilities and their infrastructure;

(viii)The Government will submit to the Parliament,

within 2 years of loan effectiveness, the draft cooperative law, which will allow cooperatives to exist as legal entities and assume the responsibility to, among other things, operate and maintain public utilities;

within 2 years of loan effectiveness

(ix) The Government will ensure that no physical infrastructure in the Focus Islands is constructed for sanitation and solid waste management until an O&M strategy has been drafted, including methodology for tariff structure and tariff collection and administration developed in a participatory and consultative manner;

(x) The Government will ensure that throughout project implementation, any involuntary resettlements will be mitigated in accordance with ADB’s Policy on Involuntary Resettlement, Handbook on Resettlement, and the proposed resettlement plan;

(xi) The Government will ensure that all environmental mitigation measures identified in the IEE are incorporated into the project design and implemented during project construction and O&M, in accordance with the Government’s environmental laws and regulations, ADB’s Environment Policy, and ADB’s Environmental Assessment Guidelines (2003). The Government will also ensure that environmental compliance with the above requirements and environmental monitoring results collected throughout the Project are reported in the quarterly reports submitted to ADB;

(xii)The Government will ensure that women will occupy 25% of managerial positions in the PMU and PIUs. The Government will implement the agreed-on gender action plan;

(xiii)The Government will ensure that throughout project implementation, adequate budgetary allocations of the required counterpart funds are made and approved and released on time;

(xiv)The Government will ensure that independent external auditors will audit project accounts, including the imprest accounts. The annual audited accounts and financial statements, together with audit reports, will be submitted within 6 months following the end of the relevant Government fiscal year;

within 6 months following the end of the relevant Government fiscal year

(xv)Before establishing the imprest accounts, the Government will appoint an accountant in the PMU

and each PIU; (xvi)Baseline information will be collected and

submitted to ADB within the first year of project implementation.

within the first year of project implementation.

B. Major Loan Covenants 46. The major loan covenants are found in the covenants section of the Project Performance Report (Appendix 12)

XII. ANTICORRUPTION POLICY

47. Consistent with its commitment to good governance, accountability and transparency, ADB reserves the right to investigate, directly or through its agents, any alleged corrupt, fraudulent, collusive or coercive practices relating to the Project. To support these efforts, relevant provisions of ADB’s Anticorruption Policy are included in the loan regulations and the bidding documents for the Program. In particular, all contracts financed by ADB in connection with the Project shall include provisions specifying the right of ADB to audit and examine the records and accounts of the Executing Agency and all contractors, suppliers, consultants and other service providers as they relate to the Project. Anyone coming across evidence of corruption associated with the Project may contact the Anticorruption Unit by telephone, by facsimile, by mail, or by E-mail as follows: Anticorruption Unit Office of the General Auditor Asian Development Bank 6 ADB Avenue, Mandaluyong City 0401 Metro Manila, Philippines Postal Address : P.O. Box 789 0980 Manila, Philippines Telephone : (63-2) 632-5004 Facsimile : (63-2) 636-2152

E-mail : anticorruption@adb.org Further information on ADB’s anticorruption policy is available through ADB’s website: http://www.adb.org (and selecting ‘anticorruption’ as topic), or directly through: http://www.adb.org/Documents/Policies/Anticorruption/default.asp.

APPENDIXES

1 General Approach to Community Organization 2 Gender Action Plan

3 Sanitation Improvements on the Focus Islands 4 Summary Initial Environment Examination 5 Cost Estimate and Financing Plan 6 Implementation Schedule 7 Proposed Contract Packaging 8 Terms of Reference 9 Procedure for Establishing and Operating Imprest Account

10 Statement of Expenditures (SOE) Procedure

11 Proforma of Progress Report

12 Project Performance Report (PPR)