The population in the urban centers along the major highways, district headquarters and market centers has been increasing rapidly in the past decade mainly as a result of rural migration. The inadequate water supply and sanitation systems in these newly formed small towns have adversely affected the quality of life and health conditions of people living in them, with women spending more than two hours a day fetching water during the dry season. To address the problem of inadequate water supply and sanitation facilities in emerging small towns, His Majesty's Government with the financial assistance of Asian Development Bank is implementing Small Towns Water Supply and Sanitation Sector Project in the country.

The 15 year Development Plan for Small Towns Water Supply and Sanitation Projects adopted by Nepal Government has identified 209 towns and the cost to improve water supply and sanitation services required is estimated at NRs. 12.132 billion (US$ 177.11 million). The Small Towns Water Supply and Sanitation Sector Project presently under implementation with the financial assistance of the Asian Development Bank is a part of the 15-year plan for small towns water supply and sanitation development and will be implemented for a period of 6 years. The project will provide water supply, limited drainage and sanitation facilities in 40-50 towns following a demand-driven, interactive procedure that ensures full participation of the local water users' groups. About 0.6 million people is expected to be benefited from improved water supply and sanitation services by the implementation of the project.

A project agreement between TDF and Asian Development Bank (ADB) has been signed on 18th December 2000 According to the agreement the ADB has agreed to make the borrower a loan in carious currencies equivalent to Twenty Six Million Six Hundred Forty Nine Thousand Special Drawing Rights (SDR 26,649,000) on the terms and condition set forth in the Loan Agreement but only on condition that the portion of the proceeds of the loan be made available to TDF and that TDF agree to undertake certain obligations towards the Bank.
Similarly a sub loan agreement between Nepal Government and TDF has been signed on March 5, 2001. According to the agreement Nepal Government will provide fund of USD 12,000,000.00 to TDF @ 5% interest per annum for the period of 20 years, whereas YDF will onlend this fund to the water Users Authority of small town Water Supply and sanitation support programme to meet 30% of total project cost @ 8% per annum for the period of 15 years with 3 years grace period.

Drawing a clear boundary around" emerging small towns" is somewhat arbitrary. After consideration of the various indicators, the specific characteristics that define an emerging small town for water supply and sanitation facilities development purpose include the following:

• The current population of the service area should be at least 3,000 (hills) and 5,000 (Terai or Inner Terai), with a maximum service area population of 40,000 consumers.
• The service area population density should be at least 40 persons/hectare to insure that it is indeed urban, so VDCs or Municipalities with widely dispersed populations do not qualify.
• The town must be on an all weather road along the East-West Highway or a main North-South feeder road, or be a district Headquarters.
• The town should have grid electricity and basic telecommunications facilities.
• The town should have basic infrastructure of emerging market towns such as banking, at least a lower secondary school and a Health Post in order to help insure that the project's health and sanitation activities can be adequately supported.

The total project cost is estimated at US$ 53.9 million equivalent, of which US$ 29.7 million (55 percent) is the foreign exchange cost, including US$ 0.7 million in interest charges during construction, and US$ 24.2 million equivalent (45 percent) is the local currency cost, including duties and taxes of US$ 4.3 million.