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ASIAN DEVELOPMENT BANK PPA:NEP 22268 PROGRAM PERFORMANCE AUDIT REPORT ON THE FORESTRY SECTOR PROGRAM (Loan No. 1040-NEP[SF]) IN NEPAL February 2001 CURRENCY EQUIVALENTS Currency Unit — Nepalese Rupee/s (NRe/NRs) At Appraisal At Program Completion At Operations Evaluation Nre 1.00 = $0.0341 $0.017 $0.02 $1.00 = NRs29.30 NRs58.77 NRs68.00 ABBREVIATIONS ADB - Asian Development Bank ADBN - Agricultural Development Bank of Nepal BAEDP - Biogas and Agricultural Equipment Development Pty., Ltd. DNPWC - Department of National Parks and Wildlife Conservation DOF - tment of Forests EA - Executing Agency FINNIDA -Finnish Department for International Development Cooperation (formerly Finnish International Development Agency) FPDB - Forest Products Development Board FSCC - Forestry Sector Coordinating Committee FSPL - Forestry Sector Program Loan HPPCL - Herbs Production and Processing Co. Ltd. M&E - monitoring and evaluation MED - Monitoring and Evaluation Division MFSC - Ministry of Forests and Soil Conservation MOF - Ministry of Finance MPFS - Master Plan for the Forestry Sector NPC - National Planning Commission OEM - Operations Evaluation MiPCR - program completion report PPAR - program performance audit report TA - technical assistance NOTES (i) The fiscal year (FY) of the Government ends ...



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PPA:NEP 22268 
CURRENCY EQUIVALENTS  Currency Unit — Nepalese Rupee/s (NRe/NRs)   At Appraisal At Program Completion At Operations Evaluation Nre 1.00 = $0.0341 $0.017 $0.02 $1.00 = NRs29.30 NRs58.77 NRs68.00    
ABBREVIATIONS  ADB - Asian Development Bank ADBN - Agricultural Development Bank of Nepal BAEDP - Biogas and Agricultural Equipment Development Pty., Ltd. DNPWC - Department of National Parks and Wildlife Conservation DOF - Department of Forests EA - Executing Agency FINNIDA - Finnish Department for International Development Cooperation  (formerly Finnish International Development Agency) FPDB - Forest Products Development Board FSCC - Forestry Sector Coordinating Committee FSPL - Forestry Sector Program Loan HPPCL - Herbs Production and Processing Co. Ltd. M&E - monitoring and evaluation MED - Monitoring and Evaluation Division MFSC - Ministry of Forests and Soil Conservation MOF - Ministry of Finance  MPFS - Master Plan for the Forestry Sector   NPC - National Planning Commission OEM - Operations Evaluation Mission PCR - program completion report PPAR - program performance audit report TA - technical assistance   NOTES  (i) The fiscal year (FY) of the Government ends on 15 July.  (ii) In this Report, “$” refers to US dollars.
Operations Evaluation Office, PE-557
   BASIC DATA  EXECUTIVE SUMMARY  I. BACKGROUND  A. Rationale B. Formulation C. Objectives and Scope at Appraisal D. Financing Arrangements E. Aid Agency Coordination F. Program Completion Report G. Operations Evaluation  II. IMPLEMENTATION PERFORMANCE  A. Policy Reform Measures B. Investment Component C. Procurement and Distribution D. Organization and Management E. Effectiveness of Technical Assistance F. Compliance with Loan Covenants G. Monitoring H. Use of Counterpart Funds  III. PROGRAM RESULTS  A. Performance Indicators B. Institutional Development C. Socioeconomic Impact D. Gender Development E. Environmental Impact and Control F. Gestation and Sustainability  IV. KEY ISSUES FOR THE FUTURE  V. CONCLUSIONS  A. Overall Assessment B. Lessons Learned C. Follow-Up Actions  APPENDIXES 
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BASIC DATA FORESTRY SECTOR PROGRAM (Loan No. 1040-NEP [SF])   Program Preparation/Institution Building TA No. Type Person- Amount Approval TA Name months ($) Date 1393-NEP Monitoring and Evaluation AOTA 7 208,000 23 Oct 1990  of Program Activities 1394-NEP Equitable and Efficient AOTA 17 490,000 23 Oct 1990  Energy Pricing Policies    As Per ADB Key Project Data($ million) Actual Loan Documents Total Program Cost 40.0 20.97 Foreign Exchange Cost 40.0 20.97 ADB Loan Amount/Utilization 40.0 20.97 ADB Loan Amount/Cancellation Amount of Cofinancing 00.0 0.00  Key Dates Expected Actual Fact-Finding (period with 4 missions) Feb–Sept 1989 Appraisal 19-27 Oct 1989 Loan Negotiations 23-24 Aug 1990 Board Approval 23 Oct 1990 Loan Agreement 2 Dec 1990 Loan Effectiveness 21 Jan 1991 24 Dec 1990 First Disbursement 27 Dec 1990 Program Completion 31 Dec 1995 15 Jul 1996 Loan Closing 31 Dec 1993 15 Jan 1994 Months (effectiveness to completion) 52.47 66.24  BorrowerGovernment of the Kingdom of Nepal  Executing Agency Ministry of Forests and Soil Conservation      Mission Data Type of Mission No. of Person-Days No. of Missions Fact-Finding 4 48 Appraisal 1 54 Program Administration  Inception 1 30  Review 4 41  Special Loan Administration 2 19
 Program Completion Operations Evaluation  
32 15  
1 1      EXECUTIVE SUMMARY    The Forestry Sector Program Loan was in response to the Government of Nepal’s request for assistance following its Master Plan for the Forestry Sector. The Program was to be the first phase of the Government’s systematic efforts to restore the forest cover. The rationale for the Program was appropriate given the continuing forest degradation and destruction caused by encroachment from poor people, an inappropriate legal framework for exploiting forestry resources, weak enforcement of regulations, and the lack of a well-defined, long-term forestry development plan. Formulation of the Program was carried out without the benefit of a program preparatory technical assistance. Sector analysis was inadequate with overoptimistic or unrealistic targets both in regard to the policy reform measures and the investment component.   The Program’s objectives were to (i) encourage forestry sector policy reforms, and (ii) support the necessary institutional restructuring. The Program comprised two main components: (i) policy and institutional reforms aimed at restructuring the Ministry of Forests and Soil Conservation (MFSC) and increasing the role of the community and private sector in forest management; and (ii) investment aimed at reforesting degraded forests, improving management of natural forests, restoring major watersheds, protecting the habitat, establishing biogas plants, and supporting medicinal and aromatic plant cultivation. Two technical assistance (TA) grants accompanied the Program to enable the Government to carry out (i) monitoring and evaluation (M&E), and (ii) equitable and efficient energy pricing policies. The Asian Development Bank (ADB) provided a loan of $40 million equivalent and TA grants of $698,000. The loan was to be released in two equal tranches once the specific conditions for each tranche were met.  The overall implementation of policy reform measures was partly effective. Failure to comply with some policy conditions, particularly the passage of the Forestry Act and its enabling bylaws, led to the cancellation of the second tranche. A few of the important policy conditions have remained unfulfilled to date (such as the establishment of a reforestation fund and the promotion of private forestry) because they are no longer relevant or circumstances have changed. Many of the second tranche conditions were fulfilled after the program period.  The most effective element was the policy reform on community forestry where the targets for the formation of user groups and the area of natural forests handed over to user groups were exceeded. But implementation of leasehold forestry was not effective due to practical difficulties involved and the Government’s preference for community forestry. Institutional reform measures aimed at strengthening the various departments within MFSC were implemented with varying degrees of success.  The performance of the investment component, affected by the delay in the passage of the Forestry Act, was generally poor. While targets for setting aside land for habitat protection,
for the establishment of biogas plants, and for support to farmers growing medicinal and aromatic plants were met, only partial achievement was realized in the more critical subcomponents of reforestation (less than 40 percent), natural forest management (about 20 percent), and forest plantation and other area-based soil conservation treatments (48 percent).   Program implementation was hampered by the lack of capacity in the field to organize the human resources, equipment, and material necessary to carry out the investment component of the Program. Administrative and coordination weaknesses in MFSC were compounded by the lack of an acceptable M&E system in addition to the frequent changes of staff. The close monitoring of ADB through various review missions apparently did not impact significantly on the effective implementation of the Program.  Non-compliance with loan covenants on major policy reforms relate to the failure to pass the Forestry Act, select leaseholders for award of leasehold forestry, create a reforestation fund, and specify forest products to be prohibited for export. This led to the cancellation of the second loan tranche. Compliance with administrative covenants was generally better. Compliance with covenants relating to the use of funds under the investment component was not fully fulfilled, particularly that on the use of counterpart funds to establish large-scale plantations and natural forest management.   The two TAs were not effective. An effective M&E system was not put in place. Support for the M&E division was not apparent within MFSC and the division was not in a position to exert any influence on the compliance of some of the major reform measures. The lack of a full-time program director further constrained monitoring of the Program. The Government did not follow through with the recommendations on equitable and efficient energy pricing policies.   As for program results, reforestation of forests was only partly achieved, mainly with encouraging response to community forestry. The original target of forestland to be handed over for community forestry was exceeded by more than 100 percent. The priority given to community forestry and the Government’s readiness to hand over forest management to local community user groups marked a very significant change in policy implementation.   Reforestation through leasehold forestry was only partly effective as leaseholders were mainly confined to poor farmers’ groups (with a very insignificant area allocated for industrial leasehold forestry). The issue is whether such an approach could be sustainable as no fees were levied, or whether it would be adequate as such leases were given in small parcels.   Institutional development performance under the Program was partly effective. Satisfactory strengthening was achieved with the organizational structure of the Department of Forests to reflect changing priorities brought about by the emphasis on community forestry. In contrast, the M&E capability of MFSC was not significantly improved. The success in the formation of the forest user groups is the most significant change in institutional development brought about by the Program.   Income improvement resulted from the harvesting of forest products (fuelwood, herbal plants, etc.) and employment opportunities from reforestation and conservation activities. The Program did not have a specific component targeted at gender development. However, the primary products of several of the investment projects were fuel and fodder, and the Program substantially reduced the burden of gathering these products, a major task allocated to female members of the household. The Program included training courses for women in agriculture and
forest management. It contributed positively to the environment, particularly through its subcomponents on community forestry and soil conservation.   A key issue is the role of private sector in forest management. Leasehold forestry, the apparently least effective of the measures, was intended to provide the opportunity for private sector involvement in forest management. But private sector investment was not encouraged by the various stiff conditions required for its participation. Another issue is the need to address the basic cause of forest degradation, i.e., poverty and vested interest, before reforestation and other forest activities are pursued. A third issue concerns the absorptive capacity of the Government requiring rationalization of various offers of external assistance to effectively use the existing staff capacity. This is linked to the fourth issue of streamlining the mechanism for coordination of aid agencies.   The performance of the Forestry Sector Program Loan is rated less than successful.1 The design of the Program could have focused more directly on addressing the needs of the poor. The program components taken as a whole were partly effective in terms of the policies to be pursued and the investment targets undertaken. Many of the policy reforms have since been fulfilled. A positive result of the Program was the policy thrust favoring community forestry through forest user groups. Overall impact on institutional development is partly effective.   Lessons learned include the need for components of a forest management program to address poverty and the vested interests (including illegal loggers and encroachers); program design and target setting should be based on a credible forest management plan; an M&E system should be established early during program implementation; and government ownership of TA should be obtained.   For follow-up actions, the Government should streamline the Forestry Sector Coordinating Committee and ensure that the Committee meets every quarter. The Government should have the M&E system in place by the end of 2001.      
                                               1 This is on a four-point scale of highly successful, successful, less than successful, and unsuccessful.
 A. Rationale  1. Forests and forest resources play a vital role in Nepal’s economy and ecology. Forest degradation and destruction of the decades prior to 1989 was the result of indiscriminate and excessive exploitation. A high incidence of rural poverty, an inappropriate legal framework for exploiting forestry resources, weak enforcement of regulations, and the lack of a well-defined, long-term forestry development plan are all reasons for an alarming degree of forest losses in Nepal and damage to the fragile Himalayan ecosystem. The Government developed a Master Plan for the Forestry Sector (MPFS) with joint technical assistance (TA) from the Asian Development Bank (ADB) and the Finnish Department for International Development Cooperation (FINNIDA).1 Plan, together with the new Forestry Sector Policy approved in The 1989, called for, among others, accelerated reforestation of degraded forestland, particularly through community and private sector involvement.2 At the time, various aid agencies were assisting in several individual forestry projects, most of which were investment projects focusing either on specific geographic areas or specific aspects of forestry development.3 None of them really addressed policy reform issues4 sector approach was needed to address the sector- A . wide problems (particularly those relating to the inappropriate policy and legal framework) and to fund a comprehensive program of activities. The Forestry Sector Program Loan (FSPL) of ADB was intended to be the first phase of the Government’s systematic efforts to restore the forest cover and reduce rural poverty. The rationale for the FSPL was relevant as the natural forests continued to be degraded (about 1.3 million hectares [ha] have been deforested in the last 16 years).  B. Formulation  2. No program or project preparatory TA (PPTA) was implemented, even though the FSPL included investment projects. In response to the request for assistance, ADB sent four fact-finding missions to the country from February to September 1989. The missions were part of a continuing policy dialogue initiated during the preparation of the MPFS and, concomitantly, with
                                               1 TA 670-NEP:Forestry Developmenton 20 February 1985, with $1.10 million from, for $1.35 million, approved Finnish Department for International Development Cooperation (FINNIDA) and $250,000 from Asian Development Bank (ADB). 2 The Ministry of Forests and Soil Conservation (MPFS) proposed 12 development programs with major emphasis on community and private forestry (46.6 percent of the budget) and national and leasehold forestry (with 20.2 percent). Other objectives included meeting people’s basic needs for fuelwood, timber, fodder, and other forest products, protection against degradation, and promoting participation in forestry resource development. 3 example, ForForestry Sector Institutional Strengthening Program(grant assistance of $1.156 million from FINNIDA),Forestry Development Project($8.0 million grant assistance from the United States Agency for International Development), andHill Community Forestry(Phase III - $30.5 million from the International Development Association, World Bank). ADB was implementing Loan 749-NEP:Third Forestry Development 4approved on 31 October 1985 and closed on 15 July 1991.Project, for $10 million,  The MPFS indicated that major reforms were needed in government forestry policy and regulations.
another TA to assist in the implementation of the MPFS.5These missions apparently served in lieu of a PPTA. An appraisal mission subsequently visited Nepal in October 1989 and policy reform measures were mapped out and reflected in the Government’s Development Policy Letter to ADB. While there was close consultation with the Ministry of Forests and Soil Conservation (MFSC) (the Executing Agency [EA]), and other implementing agencies in the course of the missions, there was no evidence of any intensive consultation with target beneficiaries. Neither was there much consultation with local communities or the private sector during the preparation of the MPFS upon which the investment projects and activities of the FSPL were based.6Loan negotiations were held in August 1990 and the loan was approved in October 1990. The FSPL was the 65th loanthe fourth in the forestry sector, and the to Nepal, second program loan to the country. However, many of the FSPL subprogram targets were not met; some of these targets were too optimistic or unrealistic, suggesting that any sector analysis undertaken during the preparation of the program was inadequate. No proper forest inventory or detailed forest management plans were available at the start of FSPL implementation.7   C. Objectives and Scope  3. The FSPL had the twin objectives of encouraging forestry sector policy reforms, and supporting the necessary institutional restructuring, which would ensure that the Government’s efforts resulted in an efficient and sustainable program for development of forest resources. The FSPL consisted of two main components: policy and institutional reforms and investment. The policy and institutional reforms were aimed at restructuring and reorganizing the MFSC and increasing the role of the community and private sector in reforestation, management, and utilization activities. The investment component was aimed at reforesting degraded forests, improving management of natural forests, restoring major watersheds, protecting and maintaining the habitat, establishing biogas plants, and supporting medicinal and aromatic plant cultivation. Improvements were to be achieved in (i) the quality of decisions on investment and management of reforestation programs, (ii) efficient and equitable forest-product pricing strategies on a competitive market basis, (iii) more effective forest regulations, and (iv) a policy regime that would encourage environmentally sustainable development of forest resources. No logical framework for the FSPL was prepared.8 The major investment targets were set out in the policy reform matrix (Appendix 1).  4. Two TAs relating to the forestry sector were provided along with the loan to enable the Government to carry out monitoring and evaluation (M&E), and equitable and efficient energy pricing policies. Special assistance for M&E of the program was required to ensure that a comprehensive, nationwide M&E system was established. The study on energy pricing policies was to help develop policies for rationalizing fuelwood and commercial energy demand. MFSC was the EA for the TA on M&E while the Water and Energy Commission Secretariat was the EA for the TA on energy pricing policy.  D. Financing Arrangements                                                5 TA 1120-NEP:Implementation of the Master Plan for the Forestry Sector Project, for $724,000, approved on 6 February 1989 and cofinanced with FINNIDA. 6 Report of the Government of Finland,Forestry Sector Cooperation between Nepal and Finland: Review of Past and Current Developments and Preparation of Possible Future Cooperation, December 1995, p.41. 78 mocpmelitnor peernments prograemriyb deht voG   poA t innfco dcOotebro tadetThe ur 1996. igol laco es a fwak nos amfrorew  t a requirement at the time of program preparation.
 5. ADB provided a loan of SDR29.193 million ($40.0 million equivalent) and TA grants of $698,000. The Loan Agreement became effective in December 1990. The loan proceeds were used to finance the foreign exchange component of eligible imports. The Government was expected to draw down the foreign exchange proceeds of the loan by 31 December 1993. The loan was to be released in two tranches, with the first tranche, amounting to $20 million, drawn down on the date of loan effectiveness. The second tranche of $20 million was to be released when the Government met its program commitments. The program period was intended to be from fiscal year (FY) 1990/91 to FY1994/95. Total external assistance committed to the country during the period was $1.60 billion while total disbursements amounted to $2.07 billion (Appendix 2).9The Program loan of $40 million would have represented about 12 percent of the total amount disbursed to the agriculture, forestry, and fisheries sector during the program period, if the full amount of the FSPL had been released.  E. Aid Agency Coordination  6. Coordination with other aid agencies was undertaken during loan processing through the usual consultations during fact-finding and appraisal missions. It was necessary to institutionalize coordination both among aid agencies and between aid agencies and the Government. This led to the Government’s establishing a Forestry Sector Coordinating Committee (FSCC) prior to loan effectiveness. The FSCC was scheduled to meet quarterly, but did not convene this frequently. The FSCC still existed at the time of the Operations Evaluation Mission (OEM) but had grown rather unwieldy with the inclusion of various government agencies and nongovernment organizations. Meaningful discussions of issues of concern to aid agencies were difficult in the presence of such a big group of participants with varied interests. A smaller group or subgroup of representatives from aid agencies and the relevant central agencies of the Government meeting quarterly would have been more effective. Despite such efforts at coordination, duplication of effort by the Program and projects of other aid agencies became apparent during FSPL implementation. An example is the case of the biogas component. Under the FSPL, Biogas and Agricultural Equipment Development Pty., Ltd. was to establish 5,000 biogas plants to be funded through the Agricultural Development Bank of Nepal (ADBN). However, the ongoing Biogas Support Program supported by the Dutch Government already had an agreement with the company to establish biogas plants and so the company was too busy to be able to implement the FSPL’s biogas component. Other private biogas companies were used instead. The FSPL was also seen by other aid agencies as contributing to the oversupply of development funds that could not be effectively absorbed by the country at the time of implementation.  F. Program Completion Report  7. The program completion report (PCR) was circulated in May 1998, and was, in general, adequately prepared. It provided comprehensive information on the status of implementation of program components, a balanced discussion of the status of compliance of covenants, and a                                                9commitment from the Ministry of Finance appeared to be underestimated though the difference in Data on reporting period (fiscal year and calendar year) could be a reason (see Appendix 3). Data on disbursements for the corresponding period from the Ministry of Finance were not available.
fair assessment of the impact of the FSPL. Because of delays in the implementation of policy reforms and unrealized investment targets of some components, the PCR considered the Program partly successful.10 on information available at the time, this rating was Based appropriate. The PCR indicated that the FSPL was instrumental in triggering sector policy reforms and in achieving a major shift in emphasis to community-based forest development and management of natural resources.  G. Operations Evaluation  8. This program performance audit report (PPAR) focuses on pertinent aspects of the FSPL and presents the findings of the OEM, which visited Nepal from 27 March to 10 April 2000. The PPAR also assesses the FSPL’s effectiveness in achieving its objectives, and its sustainability.  9. The PPAR is also based on a review of the PCR, the Report and Recommendation of the President (RRP), material in ADB files, and discussions with staff members of ADB, MFSC, implementing agencies, other government agencies, and with representatives of the funding institutions and the private sector. Copies of the draft PPAR were provided to the Government, MFSC, and ADB staff concerned for review and comment. Comments received were taken into consideration in finalizing the report.  II. IMPLEMENTATION PERFORMANCE  A. Policy Reform Measures  10. The overall implementation performance of policy reform measures was only partly effective due to numerous factors, including political and institutional changes. These include the democratization process in 1990-1991, a trade and transit dispute with India in 1989-1990, civil service reform in 1993 leading to staff reduction, and political instability in 1994-1995 resulting in changes in government. Most of the policy reform measures were time-bound. Some were to be accomplished prior to the loan negotiations or loan effectiveness.11 Three others were specifically dated12to be completed prior to the release ofwhile the majority were the second loan tranche. The fact that many of the latter were not accomplished led to the cancellation of the second tranche.  11. The more effective measures that contributed to the better performance of the FSPL were those aimed at encouraging local participation in forest management and protection through forest user groups. To support this approach, the Government strengthened the Community and Private Forestry Division of the Department of Forests (DOF). Formation of                                                10This is on a three-point scale adopted at the time of project completion report preparation of successful, partly successful, and unsuccessful. 11For example, selection of leaseholders for implementing the leasehold forestry program and appointment of a high-12rgor .maorppntation of the Po evsreei pmelemofl veletor cefi A val of national forestry conservation guidelines by January 1991, establishment of 600 user groups by June 1992, and the handing over of 65,000 hectare (ha) of national forests as community forests by June 1992.