His Majesty's Government of Nepal
Asian Development Bank
Japan Bank for International Cooperation
World Bank

NEPAL PORTFOLIO PERFORMANCE REVIEW (NPPR)- 2004

Memorandum of Understanding

1. His Majesty's Government of Nepal (HMGN) and three of its development partners, the Asian Development Bank (ADB), the Japan Bank for International Cooperation (JBIC), and the World Bank (WB) conducted a Joint Nepal Portfolio Performance Review (NPPR) from August 23 to 27, 2004. The evolving partnership among the three key development partners ("Partners") - ADB, JBIC and the World Bank - is promoting a new way of portfolio management and support, as has been adopted during this review. The Partners will continue to work with HMGN to make the NPPR a dynamic process, which is forward looking and linked to future assistance and operations. From the Government's perspective, HMGN will fully integrate portfolio management and review process in its aid integration process and medium-term expenditure framework. As done during this year's review, HMGN will continue to invite the other donor partners, representing "Reform and Developing Group" (comprising Denmark, DfiD, IMF, Japan and Norway, besides ADB and WB), who are supporting the sector-wide program, and helping to move the dialogue on Poverty Reduction Strategy (PRS) implementation and budget support forward. This participatory approach aims to:
   
   
   • ensure that the NPPR becomes a HMGN driven process with its full commitment and ownership;
   • place sharper focus on outcomes, strengthened project and/or sector management and administration which includes capacity building in procurement and financial management, and emphasis on operations and maintenance to ensure sustainability;
   • encourage the development partners to harmonize procedures and requirements (relating to reporting, fiduciary requirements, monitoring and evaluation, environmental and social safeguards, etc.) to avoid confusion and reduce burden on implementing agencies; and
   • ensure better exchange of information and knowledge among the partner agencies.
2. This Memorandum of Understanding (MOU) summarizes key implementation issues and recommends actions to improve portfolio performance during FY2005. This MOU and the resulting key recommended actions (Attachment) are subject to approval of the higher authorities of HMGN, ADB, JBIC and WB.
   
   
3. The three development partners prepared their Background Reports on portfolio performance as the basis for discussion during the NPPR workshops. This year the partners discussed and agreed to change the approach of review. Instead of traditional way of meeting sectoral ministries on project specific micro issues, the approach adopted this year was to focus at macro level on generic implementation issues and solicit feedback from various groups of development partners comprising (i) project managers, coordinators and directors, (ii) representatives of contractors, consultants, private sector and non-governmental organizations involved in ongoing projects, and (iii) procurement and accounts staff. Prior to the main NPPR workshop on August 26th, three separate half-day consultative meetings/workshops were organized with three groups (the last group also included project managers) to discuss on implementation challenges under the current conflict situation, and also sharing of some success stories. The third day consultative session focused more on sharpening the harmonization of fiduciary requirements and discussed on procurement reform initiatives, sector-wide operations, and the World Bank's recent simplification initiatives.
   
   
4. The main NPPR workshop on August 26th was also slightly modified from previous year structure, making it a half-day event instead of a full day. Outputs in the form of recommendations to the government and the donor partners from each day workshop were the inputs to the main workshop where each group made presentation on summaries of each day discussion. Apart from these, the three donor partners and the Ministry of Finance also presented the summaries of portfolio performance.
   
   
5. HMGN and the Partners acknowledged the improvement in portfolio quality compared to last year's review (NPPR 2003). However, due to continuing conflict, HMGN shared concerns about the declining disbursements from the portfolio of all three Partners and end results of continued negative transfer in the ADB/WB portfolios (factoring the transactions of investment projects only). HMGN agreed to continue to focus on implementation working closely with the Partners to improve portfolio performance and disbursements, to demonstrate good results and to increase the volume of commitments in future. HMGN also confirmed its commitment to work towards augmenting the government's harmonization agenda including using more sector-wide approaches, which it presented during the 2004 Nepal Development Forum. HMGN will also prepare the aid integration framework.
   
   A. Portfolio Performance
   
   
6. The 2004 NPPR agreed that the Partners continue to work closely with HMGN to improve quality of project performance. HMGN and the Partners also agreed to address generic issues, which have been persistently affecting project performance in the past. Key reform oriented recommendations resulting from the joint reviews should be considered for integration into the government's Immediate Action Plan (IAP). HMGN and the partners reiterated their earlier commitment on the need for sound project preparation and efficient project management. The National Planning Commission (NPC) will take the lead in establishing mechanisms to improve the quality of the portfolio. The World Bank in its Background Report has suggested HMGN to form core sectoral groups headed by concerned Members of the National Planning Commission to review the quality of projects at entry. This should aim to ensure that projects are well designed, suit the national requirements, and aim for "zero" effectiveness conditions.
   
   B. HMGN Commitment for Portfolio Management.
   
   
7. Portfolio implementation issues require special attention in the following areas: (i) quality-at-entry and quality-of-supervision, (ii) procurement management, (iii) financial management, (iv) project administration and staffing, (v) project monitoring and evaluation, and (vi) operations and maintenance. HMGN agrees that major reforms are required to effectively and efficiently manage development projects. Key actions that are agreed are in the Action Plan matrix - some of these actions are already part of proposed IAP, some actions are unfinished actions of last NPPR, and some new actions that emerged from the workshops are added in the matrix. In addition to the time-bound actions, HMGN agrees to consider on a case-by-case basis, to utilize loan/credit money for training and capacity building. HMGN also agrees to provide a strong emphasis to strengthen the monitoring and evaluation systems in all ministries and in the National Planning Commission.
   
   C. Donor Partners Commitment for Portfolio Management.
   
   
8. The donor partners agree to undertake the following specific actions, in addition to their fiduciary responsibilities of undertaking oversight functions in procurement reviews and financial management reviews:
   
   
   • Annually review and discuss project supervision strategies with Project Managers in order to increase the effectiveness of supervision teams inputs;
   • Consult in advance with Project Managers when planning supervision missions, especially the scope and timing of such missions;
   • Timely respond to procurement related decisions;
   • Timely process the payments to avoid disputes and accelerate reimbursement;
   • Refer to HMGN's Foreign Aid Policy while preparing and implementing projects;
   • Where possible, include the capacity building and training initiatives under grant TA assistance;
   • Share information on portfolio performance;
   • Support training programs in key areas of project management, including procurement, contract administration, financial management, monitoring & evaluation, and operations and maintenance;
   • Share and implement "good practices" in working with communities, local bodies and government local agencies, in critical project areas: monitoring and evaluation, procurement, work programs and financial management; and
   • Provide adequate emphasis to simplify their operational procedures, and to harmonize with the government's priorities and procedures.
     
     
   D. Specific Recommendations from Consultative Workshops
   
   
9. A number of useful recommendations emerged from the three consultative workshops. Most of the general recommendations fit into the above areas, and the Action Plan for this year. There are some other specific recommendations, which could be considered as possible actions for future IAPs:
   
   
   • Following the enactment of new procurement law, amend the Financial Administration Regulations repealing procurement clauses, and putting emphasis on output-based reporting.
   • Develop a mechanism for social inclusion in program design and service delivery.
   • Prepare simple procurement guidelines to be used at the local community level and local institutions such as, VDCs and DDCs.
   • Develop a harmonized contracting and contract administration system.
   • Establishment of an independent Procurement Entity to oversee procurement-related policy matters.
   • Develop strategy for motivating field-based staff working in conflict-affected areas.
   • Improve fund flow mechanism to enable faster transfer of funds to local level entities.
   
   
   E. Joint Portfolio Review Meetings
   
   
10. MOF and the Partners agreed to review the actions as contained in the MOU and the Action Plan during the mid-term tentatively in March 2005. They also agreed to hold the next annual portfolio review (NPPR 2005) sometime in August 2005.
    
    
11. HMGN agreed that the signed MOU and the Action Plan will be posted in the MOF's website and respective donor's websites to make the process transparent to all stakeholders and to provide assurance to all participants that the recommendations of the review meetings are being translated into actions.
    
    Signed in Kathmandu
    August 27, 2004