Finance and financial aspects

The requirement for counterpart funding to finance land acquisition and resettlement (LAR) should be clearly communicated to government counterparts during project preparation. Due to delayed and inadequate counterpart funds, particularly to support LAR, works were begun in several subprojects even before compensation payments were completed. This comprised noncompliance to ADB safeguards and caused the suspension of works in pertinent subprojects.

Lack of tariffs and insufficient operation and maintenance (O&M) budgets threaten the sustainability of water supply and sanitation facilities in FSM. The water supply and wastewater components are unlikely to be sustainable because of the unwillingness to charge for services, and the insufficiency of annual O&M budgets.

A unified bill covering both water supply and sanitation services provides a practical approach to improving the revenue stream for wastewater management. Compared to water supply; it is often harder to collect tariffs for wastewater management services. The local water supply company in Medan; the capital city of the North Sumatra province; has provided a practical solution to this by installing a unified billing system for water supply and wastewater management services.

Government’s effective and responsive implementation of the program and use of funds highlighted the importance of being able to adjust allocations as demanded by the crisis. The government successfully utilized its ADB countercyclical loan to support its relief and stimulus program under its two pandemic emergency decrees and funds (FY2020 and FY2021). In particular; the Cabinet responded rapidly to the successive waves of COVID-19; allocating and reallocating budgets to work plans and projects where they were most needed at any one time.

Incorporation into the project design of cost-sharing arrangements with irrigation water users broadens the scope for promoting project sustainability and improving related approaches and practices. In the Lao PDR, forming a water users’ group and assigning it the responsibility of collecting water charges is an important step toward project sustainability. However, this was not fully integrated into the project design and no relevant output Indicators were included in the design and monitoring framework.

Overestimated project costs lead to unutilized loan amounts and wastage of commitment fees. At appraisal, the investment program was estimated to cost $920.0 million, comprising ADB loans of $730.0 million (79.4%) and government contributions of $190.0 million (20.6%). At completion, the program cost totaled $669.3 million, of which ADB provided $253.8 million (37.9%).

A detailed market assessment is necessary to come up with reliable cost estimates. The actual costs deviated significantly from the original estimates, aggregating to only $29.35 million or 49% of the $60 million total estimated cost. This was mainly because of the nearly 30% drop in the actual cost of equipment realized through the international competitive bidding process, the reduction in the number of distribution transformers installed, and the reduction in the scope of underground cable installation actually undertaken.

Compliance with financial covenants on institutional reforms and asset valuation and reconciliation, need a high level of commitment, capacity, and resources from the executing agency. Further, substantial changes in state-owned enterprises take time to get implemented in full. Despite efforts made by executing agency, the Assam Power Generation Corporation Limited (APGCL), lack of capacity and resources resulted in some of loan covenants to be achieved only partially.

To avoid unnecessary financing commitments and fund allocations, it is important to undertake a detailed needs assessment of all planned components. The project cost was 31% lower than estimated because of lower bid prices received under the international competitive bidding, the transfer of part of the project scope to another tranche project, and non-implementation of some project activities. ADB financing was 22% lower than its $50 million loan commitment.

Timely planning of project extensions and a more realistic extension period will improve loan utilization. Undisbursed amounts under this project resulted largely from new government policies as well as contextual and operational factors. Various activities were canceled because of government restrictions on the use of loan proceeds for soft components (e.g., training, workshops, etc). Non-disbursements were also associated with other policy modifications, such as restrictions on the recruitment of international consultants. But contextual and operational factors also played a role.