Under the agreements for Phase II of the Town Development Program between KfW, on the one side, and HMG / TDF, on the other side, TDF can disburse grant funds for

· project preparation, viz. designs and feasibility studies

· supervision of construction

· project construction

However, the agreements presume a gradual reduction of the grant funds over the implementation period of Phase II, while at the same time expecting a significant increase in the matching funds to be provided by the municipalities. Both conditions are reflected in the grant policy, as defined in the following paragraphs.

2. Grant Funds for Project Preparation

Where TDF renders assistance for the preparation of projects, the costs for the assistance will be shared between the municipalities and TDF depending upon categorization as follows:

The TDF share will be financed from grant funds. The assistance will, however, only be available for projects for which this present policy enables TDF to provide loan or grant for subsequent implementation.

3. Grant Funds for Construction Supervision

The costs for the construction supervision provided by TDF will similarly be shared between the municipalities and TDF depending upon categorization as follows:

The TDF share will be financed from grant funds.

4. Grants for Construction of Projects

Category A municipalities are not eligible for grant construction projects. Category B and Category C municipalities are eligible for grants for sanitation, environmental and educational projects as listed below, on a matching fund basis and considering the further conditions hereunder.

Matching funds will be required as follows in percentage of the total project costs:

For projects, appraised in 2001, the matching funds will be borne half by the municipalities and/or users' groups, on the one hand, and half by the Ministry of Local Development (MLD), on the other hand. It is expected that the increase in the matching funds over the years 2002 to 2005 will be mainly met by MLD.

The further conditions are, that

• once a grant project is approved for a municipality, the project needs to be physically and administratively/financially completed before TDF appraises a new one
• grant funding per municipality, regardless of whether in category B or C, is limited to NRs. 3,000,000.- for the duration of Phase II
• for category B municipalities, no grant will be approved unless a loan agreement is concluded; the grant amount is subject to a ceiling of 50% of the loan amount or to NRs. 3,000,000.-, whichever figure is lower

Designs/studies and supervision of construction under grant funding will not be considered as "projects". Where a combination of loan, soft loan and/or grant is applied, the whole will be considered as one project only.

The municipalities apply for grant assistance from TDF using the Grant Application Form attached in Annex 3 hereto. Each application shall be supported by

• a copy of the related decision of the Municipal Board
• the detailed design together with the pertaining cost estimate and other information elevant for appraisal and construction
• evidence of land ownership

In case a detailed design, etc. is not available, the municipalities can use the same form for applying for technical assistance for design and/or study.

Upon receipt of a duly supported application, TDF appraises the concerned project in respect of the following criteria:

· need for the project
· technical feasibility
· environmental and socio-cultural impacts
· cost effectiveness
· affordability in terms of operation and maintenance

Appraisal will be in the format of the Grant Appraisal Form attached in Annex 4. Upon appraisal and approval, TDF informs the municipality accordingly.

7. Disbursement of Grant Funds

The grant funds for project preparation and for construction supervision will be directly paid by TDF. Where this policy requires municipal contributions, these will be channeled through TDF.

For grant funds for the construction of projects, municipalities will first be required to open a separate account in a commercial bank and deposit the matching fund therein. TDF will then disburse the grant funds in accordance with the progress of project execution and the utilization of the matching fund, viz. the first 40% will be disbursed once the municipality has reported that the construction agreement with the contractor has been signed or that, in case of execution by the municipality itself or by a users' committee, the construction works have started. The next 40% will be disbursed at 50% physical completion of the works and the balancing amount upon receipt of the final bill and the completion report. Notwithstanding this disbursement schedule, the municipalities shall pay for the executed works only on the running bill basis, as defined in the standard tender documents provided to them by TDF. The municipalities will keep accurate project accounts for amounts received from TDF, on the one side, and amounts paid from the grant fund and the matching fund, on the other side.

A grant project may be cancelled by TDF if

· not started within 3 months from the date of the letter of approval
· progress is delayed by 6 months or more for reasons under the control   of the municipality
· fund is used for any purpose other than intended

In case of cancellation, any fund already disbursed and not yet used for the intended purpose shall be returned to TDF immediately.