The World Bank Group in Nepal, 2014-23
Overview
This Country Program Evaluation (CPE) assesses the relevance, effectiveness, and adaptability of the World Bank Group’s support to Nepal from FY 2014 through FY23. The evaluation period spans the FY14–18 Country Partnership Strategy and the FY19–24 Country Partnership Framework (CPF). The CPE’s scope includes the financing, knowledge, and convening support from the World Bank, the International Finance Corporation, and the Multilateral Investment Guarantee Agency to the government of Nepal. The CPE looks closely at three areas of the Bank Group’s support—namely, its support for Nepal’s transition to federalism, private sector development (PSD) and job creation, and climate and disaster resilience. The CPE provides lessons to help the Bank Group rethink its development approach as it designs a new CPF for Nepal.
This evaluation finds that the Bank Group was successful in supporting Nepal, including in mounting rapid and large-scale responses to devastating earthquakes and the COVID-19 pandemic, but did not always effectively consider the country’s capacity and political economy challenges. The World Bank’s earthquake and COVID-19 responses showed the World Bank at its best, with the World Bank building on these successes during the evaluation period by further strengthening Nepal’s resilience to major disasters and shocks. However, both country strategies covered by this evaluation acknowledged implementation challenges. At times, the significant financing support of the Bank Group program surpassed the government’s absorptive capacity and did not sufficiently consider lessons from past projects. At other times, program support insufficiently considered political barriers to advancing the program. This reduced the outcomes from the Bank Group’s support, including for more complex policy and institutional reforms.
Navigating Challenges in Strategy and Program Implementation
The Bank Group was a trusted and effective partner to Nepal and coordinated well with other development partners. The Bank Group was effective in several areas of the portfolio. These areas included postdisaster housing reconstruction, roads rehabilitation, hydropower generation, and support for reforms in the financial and energy sectors. The World Bank facilitated development partner coordination and joint financing and successfully mobilized postearthquake reconstruction. The Bank Group was at its best when it offered flexible responses to changing circumstances, effectively coordinated with development partners, focused on output-based disbursements, and generated strong political buy-in for reforms.
The support of the International Development Association to Nepal more than doubled over the evaluation period and ultimately exceeded the country’s absorptive capacity. The World Bank grew International Development Association commitments from $2.2 billion in FY04–13 to $5.2 billion approved in FY14–23—from $172 million approved in FY14 to $320 million in FY23. However, several projects faced implementation challenges and struggled to meet their ambitious objectives. Implementation challenges included the inability to resolve procurement issues and the counterpart’s institutional weaknesses, such as intergovernmental coordination challenges and frequent personnel changes. Consequently, disbursement rates for investment project financing declined from 21 percent in FY15 to 9 percent in FY24.
A more deliberative response by the Bank Group to Nepal’s complex political economy challenges could have improved program implementation and enhanced the Bank Group’s influence. The political settlement after a decade of conflict resulted in government fragmentation, the use of public office for party politics, inadequate interministerial coordination, and resistance to change. Unresolved issues in the shift to federalism weakened subnational governments’ capacity and mandates. These challenges made it difficult for the Bank Group to facilitate reform on politically sensitive issues, such as federalism, civil service reforms, and regulatory reforms for jobs and PSD. By anticipating these challenges and adopting more recommendations from its own diagnostics for increasing citizen engagement and support to subnational governments, the Bank Group could have improved its program’s implementation and results.
The Bank Group could have provided more complementary program support to its development policy operations (DPOs) to generate stronger outcomes. The government policy does not allow borrowing for technical assistance in support of policy implementation, and trust funds and partners did not cover the shortfall in implementation support. DPO prior actions on electricity and financial sector reforms that benefited from complementary implementation support achieved better results. By contrast, DPO-supported policies on accelerating fiscal decentralization, removing binding constraints to private investment in hydropower, and strengthening Nepal’s disaster risk resilience were less successfully implemented.
The country program’s technical staffing shortcomings contributed to a few missed opportunities. For example, there was a long delay between Nepal’s passage of a federal constitution in 2015 and the mobilization of staff with sufficient decentralization expertise. The absence of expert international staff, particularly at the early stages of the reforms, led to the World Bank not recognizing opportunities to advocate for the passage of the Civil Service Act. The arrangement to rely on staff with close ties to senior civil servants who were hesitant about federalism also led to perceptions of bias.
The Bank Group’s results reporting documents could have been more candid about implementation challenges and focused more on the achievement of well-identified higher-level outcomes. Country engagement documents and Project Completion Reports could have at times benefited from a more thorough analysis of the nature of challenges to implementation. Their results frameworks frequently focused on outputs and intermediate outcomes, such as the number of assets constructed, rather than the articulated higher-level outcomes identified in underlying Bank Group diagnostics, such as improvements in public sector performance. More candid and outcome-oriented reporting could have better facilitated timely course corrections and promoted a culture of learning about risks and challenges in the program.
Addressing the Complexities of Nepal’s Transition to Federalism
The World Bank supported the government’s efforts in implementing federal fiscal arrangements. Several sectoral projects had local government capacity building or other federalism components. A total of 10 percent of lending was allocated to public administration integrated into sectoral projects, and the World Bank coled the federal capacity needs assessment and assumed a leadership role on the topic among development partners. However, beyond this, support for transitioning Nepal’s public sector to federalism required broader support for public sector management reforms, including civil service reform and capacity building.
Overall, the World Bank’s program provided uneven support to the legislation and institutions that would advance federalism. Building institutions in postconflict countries is typically slow and depends on strong government leadership and commitment. In hindsight, the World Bank could have done more to help projects successfully navigate the institutional dynamics created by federalism. For example, some projects supported local governments, but very few supported the provincial governments, although doing so is vital to meaningfully devolve power.
On balance, the Bank Group’s program could have adapted better to Nepal’s transition to federalism. Nepal’s move to federalism emerged from the 2006 Comprehensive Peace Accord that ended its armed conflict. However, there was a prolonged political stalemate before the adoption of a federal constitution with a three-tiered government system in 2015. The FY14–18 CPF did not build a program in support of federalism—only after 2018 did the World Bank’s advisory services and analytics and new projects begin to systematically incorporate federalism. The World Bank’s portfolio did not include large-scale investments supporting citizen engagement or civil service reform for subnational capacity building.
Providing Critical Support for Private Sector Development and Jobs
The Bank Group’s country strategies were grounded in robust diagnostics on PSD constraints and addressed several critical barriers to private sector growth. The Bank Group’s diagnostics showed that road and electricity infrastructure deficits hold back private sector competitiveness and domestic job creation. Diagnostics also identified tourism and hydropower as potential drivers of private sector growth and job creation. Other diagnostics, such as the joint World Bank–International Monetary Fund Financial Sector Assessment Program, identified shortcomings in the Nepal Rastra Bank (central bank) supervision of the financial sector as a risk. The Bank Group’s country strategies aimed to address several of these critical PSD constraints by prioritizing improving governance and policy frameworks before implementing projects. However, the World Bank did not consistently adhere to these priorities, with projects proceeding amid weak governance and policy frameworks without fully tackling regulatory and institutional challenges.
The Bank Group’s support led to notable successes in the financial and electricity sectors. The World Bank effectively supported government efforts to strengthen the Nepal Rastra Bank’s supervisory capabilities and consolidate Nepal’s banking and financial system, including measures to improve capital adequacy ratios and create new banking licenses, resolution schemes, and minimum capital requirements. These actions led to improved operational efficiency in the sector and enhanced financial sector stability. The Bank Group used infrastructure financing, DPOs, trust funds, International Finance Corporation advisory services, and a donor-funded convening platform to support hydropower. The International Finance Corporation successfully convened a consortium of lenders and leveraged resources from the Multilateral Investment Guarantee Agency and the International Development Association’s Private Sector Window to finance Nepal’s largest foreign direct investment in hydropower. The World Bank’s regional integration unit also convened Power Secretaries Roundtables to help build a regional energy market. These interventions helped end load shedding, reduced transmission and distribution losses, increased electricity trade, enhanced the financial viability of the Nepal Electricity Authority, and supported the adoption of social and environmental standards in the hydropower sector.
The World Bank’s transport and trade infrastructure investments improved connectivity but met counterpart capacity constraints. The World Bank contributed to improving Nepal’s transport and trade connectivity through road and bridge improvements and maintenance, which led to reduced travel times and increased employment. However, project designs focused insufficiently on building counterparts’ capacity, communication between the government and beneficiaries, and ensuring the maintenance of completed facilities. The size and complexity of the World Bank’s transport projects were incompatible with the counterparts’ implementation capacity, leading to delays and low disbursement rates. While all transport projects achieved their targets, results were not always sustained beyond project closure: the Independent Evaluation Group’s field visits to project sites revealed that World Bank–supported trade logistic facilities faced such sustainability challenges.
Some Bank Group program interventions to address key barriers to private sector–led job creation were dropped because of opposition to proposed reforms and interventions. The country strategies set out to address barriers to competition and job creation. The program’s implementation was successful in building skills for youth and women but was less successful in addressing economywide trade, taxation, and labor market regulations to facilitate private investment and job creation. The World Bank did not foster broad reform coalitions in these areas and had to drop several planned interventions intended to improve PSD, job creation, and market competitiveness—including in the tourism sector—when parts of the government opposed.
Responding Strongly to Earthquake Reconstruction and Disaster Resilience
The World Bank’s convening of stakeholders and large, sustained financing in response to the 2015 earthquakes built resilient homes for affected populations. The World Bank facilitated development partner coordination and joint financing for postearthquake housing reconstruction, successfully financed more than 320,000 disaster-resilient homes, and supported vulnerable populations and women through skills training and job creation. The World Bank’s successful efforts at reconstructing houses are attributed to an owner-driven construction approach, output-based disbursements, effective development partner coordination, strong political buy-in, and the World Bank’s flexible responses to changing circumstances. Despite the project disbursing grants to affected households for housing reconstruction, several became indebted as the cost, on average, exceeded the grant size provided by the project.
The government’s limited capacity constrained the World Bank’s efforts to build Nepal’s disaster resilience. The World Bank contributed to the government’s enactment of the Disaster Risk Reduction and Management Act of 2017 and the establishment of the National Disaster Risk Reduction and Management Authority. The World Bank also mainstreamed resilience aspects into its investment lending portfolio. However, integrating resilience into government practices proved more challenging. The World Bank’s investments in early-warning systems suffered from inadequate counterpart capacity for operating and maintaining equipment and the limited response by the public to weather alerts. The 2023 earthquake exposed additional gaps in Nepal’s disaster preparedness, including inadequate contingent funding, a delayed postdisaster needs assessment, and local governments’ limited disaster management capabilities. It also highlighted the need to enact building codes at subnational levels to strengthen the resilience of housing to withstand multiple hazards.
Conclusions and Lessons
The Bank Group was effective in several portfolio areas during the evaluation periods; however, building institutions and reforming policies was more challenging. The Bank Group achieved notable results in road construction and hydropower development, disaster reconstruction, and finance and energy reforms. These achievements were particularly evident in areas free from political contention and coinciding with elite interests or during periods of national solidarity after disasters. They were also aided when Bank Group interventions could build on the foundations of existing governmental programs. However, progress in building robust institutions that support sustained policy reforms was slow and relatively small.
The Independent Evaluation Group offers the following lessons for the next CPF based on the evidence, analysis, and conclusions in this evaluation:
- The Bank Group could focus more on promoting counterparts’ capacity and fostering coalitions for change among counterparts, stakeholders, and development partners for achieving higher-level development outcomes—in line with the Bank Group’s comparative advantage of providing long-term development support.
- The Bank Group could strengthen program implementation through more technical support or early project restructuring, including complementing policy development operations with technical assistance. Stronger results frameworks and more candid results monitoring would allow for earlier feedback on implementation challenges.
- The Bank Group could give greater attention to political economy issues to inform the program of potential challenges during project design and implementation, including in Bank Group staffing capabilities. In this regard, a stronger program focus on citizen engagement and strengthening subnational institutions could be beneficial.