Nepal - Settlement Project

Report No. 377a-NEP /WITHIN Appraisal of Settlement Project Nepal FILE COPY May 24, 1974 Regional Projects Department Asia Regional Office Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank G(roup authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS Currency Unit = Nepalese Rupee (NR) US$1 = NR 10.6 Indian Rupee 1 = NR 7.58 NR 1 = US$0.094 NR 1,000,000 = US$94,340 WEIGHTS AND MEASURES Metric System 1 kilogram (kg) = 2.20 pounds 1 quintal = 100 kg = 220 pounds 1 metric ton (ton) m 1,000 kg = 2,204.62 pounds - 0.98 long ton 1 millimeter (mm) = 0.039 inch 1 meter (m) = 39.37 inches = 3.28 feet = 1.09 yards 1 kilometer (km) = 0.62 mile 1 bigha = 0.68 ha = 1.7 acres 1 hectare (ha) = 10,000 m2 2.47 acres 1 square kilometer (km2) = 100 ha - 0.39 square mile 1 cubic meter Cm3) - 35.31 cubic feet 1 liter (1) 0.26 US gallon Crop Year: June 1 - May 31 Financial Year: July 16 - July 15 GLOSSARY AND ABBREVIATIONS ADBN - Agricultural Development Bank of Nepal AMC - Agricultural Marketing Corporation CP - FAO/IBRD Cooperative Programme ERTS - Earth Resources Technology Satellite RMG - His Majesty's Government of Nepal M - Million NSC - Nepal Settlement Company Ltd (Nepal Punarvas Company) ROR (E) - Estimated rate of return to the economy ROR (F) - Estimated financial rate of return TCN - Timber Corporation of Nepal  NEPAL SETTLEMENT PROJECT TABLE OF CONTENTS Page No. SUMMARY ................... i-iii I. INTRODUCTION.... 1 A. Project Preparation. . . 1 B. Previous Credits.. 1 II. BACKGROUND.... 1 A. General ................ 1 B. Forestry... 2 C. Agriculture and Settlement. . 2 D. Health and Nutrition. . . 4 III. THE PROJECT AREAS .4 IV. THE PROJECT ........................................... 5 A. General Description ........ ...................... 5 B. Detailed Features ......... ....................... 6 V. COST ESTIMATES AND FINANCING ...... .................... 10 VI. ORGANIZATION AND MANAGEMENT . .......................... 14 VII. PRODUCTION, MARKETING AND FINANCIAL RESULTS ........... 17 A. Yields and Production ...... ...................... 17 B. Marketing and Prices' .. . 18 C. Farmers' Benefits ....... ......................... 19 VIII. ECONOMIC BENEFITS AND COSTS . .......................... 19 IX. RECOMMEND&TIONS ....................................... 21 This report is based on the findings of an IDA appraisal mission to Nepal in October/November 1973, comprising Messrs P.G. Nelson, D.W. Lister, W.P. Panton (IDA) and G.H. Grayum (forestry consultant), and on data in the CP Report (para 1.02). The mission was assisted by Bank and FAO Resident Representatives.   NEPAL SETTLEMENT PROJECT ANNEXES 1. Forest Industry and Management 2. Agricultural Background Appendix - Recommended Terms of Reference for NSC Scheme Site Surveys 3. Nepal Settlement Company Ltd 4. Banking and Credit Appendix - Documentation Table 1 - Main Assets and LLabilities of Commercial Banks 2 - Interest Rate Structure of Commercial Banks 3 - Rediscount Rates 5. Agricultural Development Bank of Nepal Table 1 - Nepal Rastra Bank Rediscount Rates 2 - Maximum Permitted Lending Rates 3 - Summarized Actual & Forecast Balance Sheets 4 - Summarized Actual & Forecast Profit and Loss Accounts 5 - Past Due Accounts at July 15, 1973 6. Forestry Operation and Sawmilling Appendix A - Equipment Specifications B - Forest Working.Program 7. Farm Development, Yields and Budgets Table 1 - Model A 2 ha Farm in Western Terai - Production 2- ;' " " - Value 3 - Model B 2 ha Farm in Eastern Terai - Production 4- _ " " - Value 5 - Settlers Medium-term Credit 6 - Settlers Medium Term Credit Repayment Schedule 8. Table 1 - Land Development Schedule (NSC) 2 - Land Development Schedule (Number of Families) 9. Environmental Impact 10. Technical Assistance Appendix A - Terms of Reference for TCN Technical Assistance B - Terms of Reference for NSC Agricultural Adviser C - Terms of Reference for Soil Surveyor Table - Technical Assistance Cost Estimates 11. Project Cost Summary 12. Forestry Capital Cost Summary Table 1 - Local, Foreign and Total Cost 2 - Consolidation 13. Table I - Kanchanpur Forestry Capital Cost 2 - Bardia Forestry Capital Cost 14. Forestry Production & Income Table 1 - Forestry Production a Income 2 - Forestry Operating Costs 15. Settlement Capital Cost Summary Table 1 - Summary 2 - Consolidation 16. Settlement Costs  -2- Table 1 - Kanchanpur A 2 - Bardia A 3 - Kanchanpur B and Eardia B 4 - Jhapa 5 - Settlement Staffing and Salaries 17. Proposed Financing 18. TCN Cash Flow 19. Government Cash Flow 20. Estimated Schedule of Disbursements 21. Timber Corporation of Nepal Ltd Appendix A - Shareholdings at July 15, 1973 B - Summarized Profit & Loss Accounts 1967/68 - 1972/73 C - Summarized Balance Sheets 1967/68 - 1972/73 D - Significant Financial Ratios E - Disposition of Average Revenue (1969/72) 22. TCN Staffing 23. Settler Selection and Legal Status 24. Guidelines for Independent Auditors 25. Marketing of Forest Production Tables - 1972/73 Indian Market Prices, Railhead (Bardia) 1 - Logs 2 - Sal Phanta 3 - Sal Gatu 4 - Sal Sleepers 5 - Sal Scantlings and Boards 6 - Transmission Poles 7 - Firewood 26. Marketing of Agricultural Products 27. Opportunity Cost of Labor Table - Opportunity Cost of Labor 28. Economic Impact and Rate of Return Table 1 - Economic Rate of Return 2 - Gross Consumed and Marketable Agricultural Production 3 - Net Benefit Without the Project MAPS 10800 Kanchanpur 10801 Bardia A 10802 Jhapa  NEPAL SETTLEMENT PROJECT, SUMMARY i. The proposed seven-year project is for removal and sale of timber from areas suitable for agriculture in the Nepal Terai plain, and settlement thereon of families from the lowest: income groups in Nepal, comprising mainly landless farm workers from the overcrowded Hills. An IDA credit for the equivalent of US$6.OM to help finance the project, estimated to cost a total US$11.5M equivalent, is recommended. ii. Nepal is a small country (141,000 km ) and one of the 25 least developed, with per capita GDP about US$90. Nearly two-thirds of its 11.9M population live in the Hills, where one-third of the country's arable land is situated. Population pressure there is great. iii. The Terai plain, in southern Nepal, became suitable for agri- cultural settlement with virtual elimination of malaria over the last 20 years or so. Hill people (among others) have moved in rapidly but their uncontrolled settlement has resulted in inequitable distribution of land and destruction of much valuable timber. His Majesty's Government of Nepal (HMG) asked the FAO/IBRD Cooperative Program to prepare a settlement project for three areas in the Terai, and an IDA mission visited Nepal in October/November 1973 to appraise the project. iv. IDA has made six credits to Nepal, totalling US$27.7. The only credit for agriculture (US$6.OM for Birganj Irrigation in eastern Terai) has made a good start. v. Agriculture (including forestry) accounts for about 70% of Nepal's CDP, 80% of export earnings and 90% of employment. Agricultural GDP, largely through opening up of new land in the Terai, grew at about 2.4% per year from 1964/65 to 1970/71 - barely faster than population, estimated to be growing at 2.2% per year. vi. Forest covers some 46,000 km (about one third of the total area), much of it inaccessible. The Terai and adjoining Bhabar foothills have the most significant areas, with a commercially valuable hardwood, Sal, as the most common species. The contribution of forestry to the economy cannot be accurately measured, but is believed to be about 15% of GDP. Commercial forest exploitation is mainly by Indian contractors, though HMG's Timber Corporation of Nepal (TCN), successor to a USAID operation, has a signifi- cant concession and operates profitably. vii. Organized settlement under HMG's Nepal Settlement Company (NSC) began with one scheme in 1965; four others have since been added. The World Food Program (WFP) provides valuable food supplies during the period preceding  - ii - first harvests. NSC has settled about 4,300 families in previously forested areas; but timber removal and settlement were not properly coordinated and settlers had a hard time growing crops under trees. viii. The project is: (a) felling of timber by TCN over five years from about 17,600 ha of new land and 1,000 ha of land, already allocated for settlement, in the Terai; (b) sale of logs, followed by sawmilling and sale of lumber as well, when sawmills are established by TCN; (c) settlement by NSC of about 7,900 families and provision of timely availability of cultivable land for about 1,500 more; (d) provision of timber extraction and sawmilling equipment, farm inptits, settlement infrastructure (including villages, village roads, warehouses, schools, clinics); and (e) technical assistance for logging, sawmilling, soil surveys and irrigation investigations. ix. Two project areas are in western Terai at Kanchanpur and Bardia, each of which would have two new settlement sites, and one is in eastern Terai at Jhapa, which would have one new site. A sixth site, already settled at Kanchanpur, would have timber removed. The new project sites are uninhabited forest owned by HMG. They are close to the Indian border and railway terminals. x. Timber would be extracted from Kanchanpur and Bardia by winch lorries of a type developed in Malaysia for similar conditions. Technical assistance would be provided to TCN for operation of these lorries and for installation of sawmills, of a tvpe commonly used in India. A Sales Adviser would help TCN gain access to the substantial market for its products, parti- cularly lumber, in India and elsewf.ere. xi. Each NSC settlement site would comprise four or five villages of 250 families. NSC would be strengthened by appointment of an agricultural adviser who would be attached to NSC headquarters to assist NSC's chief agricultural officer in planning and implementing the special kind of extension work needed for farmers moving to a completely new environment. xii. Credit for farm inputs would be supplied by the Agricultural Development Bank of Nepal (ADBN) through settlement cooperatives. xiii. The estimated project cost of US$11.5M includes US$1.8M WFP food supplies and US$1.OM working capital for TCN forestry operations. It is equivalent to an overall cost per settler of about US$1,400 and net cost of US$100, after deduction of net incremental forest revenue. The proposed IDA credit of US$6.OM would finance 100% of the foreign exchange cost of imported  - iii - equipment and technical assistance; 75% of civil works, field settlement costs, ADBN medium term sub-loans and the incremental amount of ADBN short- term subloans for farm inputs. WFP would provide US$1.8M and HMG and farmers the balance of US$3.7M in local currency. IDA would thus cover 52% of total cost, WFP 16% farmers 3% and HMG 29% (including NR 10M working capital (9% of the total) from TCN revenues which HMG would otherwise receive). xiv. Purchases of equipment would be bulked into single contracts wherever possible and bids would normally be invited for delivery over two years. For contracts above US$50,000, procurement would be by inter- national competitive bidding, in accordance with Bank/IDA guidelines, except that prudent shopping would be permitted for items not exceeding a total of US$50,000 to be purchased off-the-shelf,after April 30, 1974 to expedite the project. xv. Under the project, about US$23M gross value of timber would be extracted over five years compared with an estimated maximum US$7M which might accrue to the economy from this source without the project, an increase of US$16M. In addition, the project would introduce to Nepal a novel and cheap method of extracting timber and provide knowledge and experience not previously available for Nepalese loggers and sawmillers. xvi. The project would make fertile agricultural land swiftly and effectively available for settlement, increasing annual production (at full development) of maize by 13,700 tons, mustard by 6,500 tons, paddy by 4,200 tons, and quantities of other crops, such as legumes, millet and jute. Gross annual value of this production would be about US$2.9M. xvii. The project would increase exports and help feed a growing population, reducing pressure in the overcrowded Hills. It would substan- tially improve the standard of living for about 7,900 farm families, now at the lowest income level in Nepal, through increased farm production and also through village planning and the provision of roads, simple schools, clinics and drinking water. It would lead the way to further projects of a similar nature. It would provide part or full time employment in forestry to about 1,100 annually over six years, with prospects of continuance. xviii. Clearance of the project areas (less than 2.5% of the total Nepalese Terai forest) would not affect ra4nfall; runoff would be minimal, and controlled. Project surveys would lead to large areas of forested land being left under permanently productive or protective forest, thereby serving as natural conservation areas for indigenous wild life, which would also be accommodated in special reserves elsewhere in the Terai. xix. The estimated rate of return to the economy (ROR(E)) would be high at 42%, though sensitive to both price and cost changes, a 10% change in either affecting ROR(E) by 12 to 13 points. xx. Full account has been taken of recent input price increases, especially of petroleum based products. The project is suitable for an IDA credit of US$6M.   NE PAL SETTLEMENT PROJECT I. INTRODUCTION A. Project Preparation 1.01 Nearly two-thirds of Nepal's 11.9M population live on one-third of the country's arable hill area, where land pressure is acute (40% of hold- ings less than 0.2 ha). The Terai plain, in southern Nepal, totalling some 2.5 M ha, used to be heavily forested and almost uninhabitable because of malaria. With virtual eradication of malaria over the last 20 years settle- ment has been rapid and largely uncontrolled, with consequent inequitable land distribution and destruction of much valuable timber. 1.02 His Majesty's Government of Nepal (HMG) established a Department of Settlement in the 1950's and the Nepal Settlement Corporation (NSC) in 1963 to undertake resettlement; but timely removal of commercial timber remained a problem. HMG asked the FAO/IBRD Cooperative Program (CP) to prepare a project for removal of heavy timber from selected areas and orderly settlement thereon. CP report 20/73 NEP5 of July 13, 1973, was the basis for HMG request for IDA help in financing a settlement project. B. Previous Credits 1.03 IDA has made six credits to Nepal, totalling US$27.7M including the recently presented water supply and sewerage project (US$7.8M). The one credit for agriculture (US$6,QM for the Birganj Irrigation Project in eastern Terai) has made a good start. 1.04 This report is based on the findings of an IDA appraisal mission to Nepal in Oct/Nov 1973, comprising Messrs P.G. Nelson, D.W. Lister, W.P. Panton (IDA) and G.H. Grayum (forestry consultant), and on data in the CP Report. The mission was assisted by Bank and FAO Resident Representatives in Nepal. II. BACKGROUND A. General 2.01 Nepal, a small country (141,000 km ) landlocked between China and India, divides naturally into three zones: southern, Terai, an extension of India's Gangetic Plain; central, Hills, comprising rugged mountains from 1,200 to 3,600 m, intersected by Nepal's north-south river system; northern, Himalayas, up to 8,000 m, highest in the world.  -2- 2.02 About 90% of the population are Hindu, 9% Bhuddist; about 60% live in the Hills, 30% in the Terai and 10% in the Himalayas. Population density averages 620/km2 of cultivated land (compared with India, 320/km2 and Java 1,250/km ); but rises to 1,100/km2 in the Hills, spurring migration to the Terai and abroad, mainly India. 2.03 Nepal is one of the 25 least developed countries. Estimated per capita GNP is US$90; total GNP US$1,OOOM; annual growth, about 2.4%, scarcely faster than population (2.2%). Nepal's principal natural resources are manpower (largely unskilled), agricultural land, forests and water. A Sept/Oct 1973 agricultural se:tor survey concluded that high population to land ratio and lack of yield improvement were the most serious problems. B. Forestrv 2.04 Annex 1 describes Nepal's forest industry and forest management. Forest covers some 46,000 km2 or about one-third of the country, in four roughly parallel zones: Terai and Bhabar; Siwalik Hills and lower Mahabharat; Middle and upper Mahabharat; and Himalayas. The first is the most significant, with commercially valuable Sal (Shorea robusta) as the most common species. Terai density is light (about 50 m3/ha compared with Malaysian forest of 100 m3/ha or more). The contribution of forestry to the economy cannot be accurately measured but is believed to be of the order of 15% of GDP. 2.05 The Ministry of Forest is reponsible for forest management and for forest industries. Commercial forest exploitation is mainly by Indian contractors, though HMGs Timber Corporation of Nepal (TCN) has a significant concession. There are about 30 sawmills, including TCN's; most are a small semi-portable type, commonly used in India. C. Agriculture and Settlement 2.06 Annex 2 describes Nepal's agriculture which (including forestry) accounts for about 70% of GDP, 80% of export earnings and 90% of employment. Agricultural GDP growth has been largely through opening up new lands in the Terai. 2.07 Cereals are most important but, over the past decade, yields and per capita production have declined. Wheat, a relatively minor cereal, has been the only one with a dynamic upward trend, due mainly to introduction of high-yielding varieties. Minor cash crops provide significant income for many farmers, e.g. jute, sugarcane, mustard and tobacco in the Terai; fruits, vegetables and potatoes in the Hills, though transportation to market is a problem. 2.08 In 1970 there were an estimated 6.3M cattle (an average of 4.2 head/holding, compared with 2.9 in India); 3.4M buffalo, 2.214 sheep, 2.3M goats. Management is poor, genetic quality and productivity low; and there are religious bans on slaughter.  -3- Settlement 2.09 Spontaneous and illegal migration of landless hill people into t.ne Terai has averaged about 7,000 families a year over the last ten years. Most have destroyed the forest in which they settled. Organized settlement under NSC began in Nawalpur in the Terai in 1965, since when NSC has built 190 km of roads, 26 schools, 3 clinics, installed about 90 drinking wells and settled a total of approximaEely 4,300 families (Annex 3). About 1,10u have 2.7 ha (four bigha) and 3,200, two ha (three bigha) holdings; but logging and settlement were not properly coordinated and settlers had a hard time growing crops before trees were cleared. 2.10 In deciding on farm size, HMG faces the dilemma of offering fewer. larger, plots, so permitting a higher standard of living (which future generations may expect), but satisfying fewer settlers; or offering smaller plots providing a much higher standard than settlers now have, but liable to cause social tensions later, should income expectations increase. HMG also does not wish to create a privileged class significantly better off than the average farmer (see para 7.11). HMG found the average family, with bullock power, was barely able to cultivate 2.7 ha well; it now offers 2 ha, with which settlers are well satisfied, and this size is adopted for the project. Extension, Research and Training 2.11 Agricultural extension in Nepal is weak, reflecting inadequate staff training and limited research. Extension at farm level is carried out by Junior Technical Assistants (JTA) who have only one year's training in agriculture and little, if any, experience. JTA are also underpaid and materially ill-equipped. They are supervised by diplomate Junior Technicians from the Chitwan Institute of Agriculture and Animal Science. Graduate staff (e.g. Deputy Scheme Managers) have degrees from India, but the Tribhuvan University in Kathmandu now has suitable courses. The first graduates are expected in 1975. 2.12 The Ministry of Food, Agriculture and Irrigation with a large research complex near Kathmandu and twelve small stations elsewhere, carries out mainly food crop research. Horticultural research, supported by India since 1960, is concentrated in the Hills, aimed at diversification to fruits and vegetables. USAID is helping with cereal improvement based on high- yielding wheat from India and paddy from the Philippines (International Rice Research Institute). Rockefeller Foundation is helping a high protein maize program. Agricultural Credit 2.13 The mair agricultural credit institution is the Agricultural Development Bank (AD7,N). The Nepal Rastra (Central) Bank (NRB) supervises Nepal banking and provides refinance to ADBN for agricultural loans (see Annex 4 on Banking and Credit, Annex 5 on ADBN).  -4- 2.14 ADBN, established in 1968, receives valuable technical assistance from the Asian Development Bank. Authorized capital is NR 50M (US$4.7M) of which HMG owns 87%, NRB 11%. Loan disbursements increased ten-fold between 1967/68 and 1969/70. Recovery performance is fair, overdues being 11% in 1969/70, but since increasing to 17% because drought afflicted many borrowers. D. Health and Nutrition 2.15 Health and nutrition in llepal are relatively poor. Malaria and smallpox have been controlled, but other diseases, e.g. cholera, typhoid, tuberculosis and dysentery, persist. Control depends heavily on improved sanitation. Little is known about nutrition but many Nepalese, especially children, suffer from protein and vitamin deficiencies. III. THE PROJECT AREAS Location and Ownership 3.01 The three project areas, descrited in more detail in Annex 2 and illustrated in Maps 10800-802, are in the Nepalese Terai, a narrow alluvial region between the foothills of the Himalayas to the north and the Ganges plain to the south. Selected because they had suitable land, were close to India, the principal market, and formed a natural extension of nearby NSC settlement schemes, they are in different parts of the country to accommodate different settler streams. 3.02 Two areas are in western Terai, adjacent to the Indian (Uttar Pradesh) border; the third is in the extreme eastern Terai, a few kilometers from the Indian (Bihar) border. Six sites would be included; in the west, the existing Kanchanpur scheme (1,000 ha), new Kanchanpur A (2,400 ha) and B (4,450 ha) and Bardia A (4,250 ha) and B (4,450 ha); in the east, the Jhapa scheme (2,000 ha). Areas are estimated, subject to detailed survey. 3.03 The new project sites are uninhabited forest (adjoining agricultural land) owned by HMG and controlled by the Ministry of Forest. Climate and Soil 3.04 Climate is subtropical: 80% of precipitation is during the June- October monsoon, and the annual total averages 1,300 mm in the west, 1,600 mm in the east. Soils are medium to coarse. Neutral to slightly alkaline and initially fertile, they are capable of continuous cultivation at high intensities with fertilizer, to which thev are highly responsive. Drainage is good and flooding no problem. Water retention permits winter cropping after a normal monsoon. Groundwater potential is likely, but detailed irrigation planning awaits the outcome of a USAID hydrological survey.  -5G Vegetation 3.05 Characteristic vegetation is semi-tropical forest dominated by the heavy hardwoods, Sal and Asna. Forest quality varies with soil and drainage and the degree of burning and grazing. Marketable timber has been reduced in many places through illegal felling. Transport and Communications 3.06 Kanchanpur is 8 km from an Indian railhead immediately south of Dhanghari, which has a light airfield. Bardia is 2 km from an Indian railhead to the west, at Taratal, accessible by an Indian road that needs improvement to all-weather standards. A recently constructed dry weather road system provides access to the UNDP Babai Camp airstrip, about 10 km north. Jhapa is a few km southwest of Bhadrapur along an unsurfaced dry weather road joining Bhadrapur with Jhapa town, about 25 km further west. A branch of the Indian railway runs along the east bank of the Mechi river (the Indian border) within 2 km of Bhadrapur. IV. TIRE PROJECT A. General Description 4.01 The project is a major part of HMG's program to remove and sell heavy timber from areas suitable for agriculture in the Nepalese Terai, and settle families from lower income groups, comprising mainly landless farm workers from the Hills, and farmers who have suffered deprivation through flood, drought or erosion. 4.02 The project comprises: (a) felling of timber by TCN over five years from about 17,600 ha of new land, and 1,000 ha of land already allocated for settlement, in the Terai at Kanchanpur, Bardia and Jhapa; (b) sale of logs, followed by sawmilling and sale of lumber as well, when sawmills are established by TCN; (c) settlement by NSC of about 7,900 families and provision of timely availability of cultivable land for about 1,500 more; (d) provision of timber extraction and sawmilling equipment, farm inputs and settlement infrastructure; (e) technical assistance for logging, sawmilling, soil surveys and irrigation investigations.  B. Detailed Features Forestry (Annex 6) 4.03 Project forestry would comprise the felling and removal of timber above 11 inches diameter, the light density remainder being left for settlers' house building, firewood and fencing. Trees would be felled manually, then trimmed and cut by mechanical chain saws (26 in total), since hand cutting could not deal quickly or effectively with the large volume. 4.04 Kanchanpur and Bardia are ideally suited to low-cost mechanical extraction by 7.5 ton winch lorries (45 in number), of a type developed in Malaysia. During the cooler five dry months (Nov-March), they would be driven to tree stumps where felled logs would be winched on for transportation to railhead or sawmill. The customary bullock carts would be too few in number and too slow in removing the large quantities (up to 64,000 tons/year in Kanchanpur, 51,000 tons/year in Bardia). Furthermore, mechanical equip- ment can handle longer, more valuable, logs. 4.05 Logging could only be carried out during the dry season but saw- milling and lumber hauling to railhead would continue almost year-round. A sufficient supply of logs would therefore be stockpiled and all-weather roads constructed to connect sawmills to railheads. Winch lorries would sup- plement 16 lumber haulage trucks during the wet season. 4.06 The Jhapa forest is unlikely to be suited to mechanical logging, due mainly to high road costs, which could not be justified economically for the amount of timber believed available. At Jhapa, therefore, logging would be carried out mainly by contractors employing conventional manual felling and bullock cart extraction. Many already operate there, but little forest is left, except in the project area. TCN would hire them on contract to cut and deliver logs to the three private sawmills already at Bhadrapur or to railhead for direct sale in India, if this proved more profitable. However, the project could provide for additional sawmill and limited mechanical logging and extraction capacity for Jhapa if forest resources should prove to be larger than presently assumed. Any such allocation of capacity would be based on diversion of project inputs from the other project areas and would not entail additional expenditure. TCN would have to provide evidence of economic and financial viability of such investment in Jhapa. 4.07 Nepal, unlike some Asian countries, cannot economically use elephants for log extraction. There are not enough of them and not nearly enough feed for them in the heavily grazed project forests. Construction 4.08 After timber has been extracted, little vehicular traffic, except bullock carts, would use project roads, which would therefore be mainly dryweather, manually constructed and maintained. Fifty kilometers would  - 7 - be provided at Kanchanpur; the same at Bardia. All-weather roads for timber haulage would be 4 km at Kanchanpur, 11 km at Bardia. The existing road system is adequate at Jhapa. 4.09 Buildings would be provided for sawmills and machine shops, vehicle servicing, offices and residential quarters for project employees. Sawmilling 4.10 Most logs now sold in India are of high quality and large dia- meter. Project maximum annual log extraction (1976-78) would be about 80% of the present annual Terai total. While some project production would replace existing output, the total would increase substantially during 1974-80, though much project production would be small diameter low grade logs, the market for which is weak and sensitive to supply. Whether to sell project timber as logs or lumber would depend on the relative market for the two products, and suitable assurances were obtained that TCN would be free to sell as it thought fit, on local or foreign markets. 4.11 Sawmill units would be provided at Kanchanpur and Bardia, where there are none now, while logs from Jhapa would be sold to existing sawmills. 14 units would be in one complex at Kanchanpur, 12 units at Bardia. Each complex would be driven electrically by two large diesel generators. Unit capacity would be 500 ft3/day sawn lumber (100,000 ft3/year). Sawmills would comprise one horizontal bandsaw for initial log breakdown and one vertical bandsaw for resawing. Units would be sited on well drained areas, unsuitable for agriculture, and have regard to use for possible project extensions nearby. 4.12 To make the most economic use of winch lorries and avoid deterioration of felled timber, it is critical to turn them around quickly at the sawmill site. Mechanical front-end rubber-tired loaders would therefore be used, instead of labor gangs, not only to return winch lorries promptly, but also because it would be virtually impossible to man- handle the expected volume in an orderly manner, and so keep the mills continuously supplied. Two would be required for Kanchanpur and two for Bardia. In addition, one bulldozer would be provided at each area for levelling and road construction. Agriculture and Settlement (Annex 7) 4.13 As soon as logging permitted, NSC would set up a temporary head- quarters and plan villages of about 250 families, each with a house plot of 0.68 hia (one bigha). following a successful pattern on other NSC schemes. 4.14 Setcuement by farmers, chosen according to criteria referred to in para 6.10, would follow as soon as possible during Oct/Dec, when settlers would build temporary dwellings, clear initial house plots and prepare land for May/June rains. Sectlers would receive the remaining 1.36 ha (2 bigha) as one plot a year later, though normally settlers would only be physically able to open up one-third of each 2 ha holding in each of the first two years,  - 8 - followed by the remaining one-third over the subsequent two years. The sequence is described in Annex 7. 4.15 Cropping (see farm models in Annex 7, Tables 1-5) would be based on maize (mostly consumed by the family), with a little rain-fed paddy in the wet monsoon, followed by mustard (the main cash crop) and pulses in the dry season. Several years' NSC experience shows this to give a satis- factory livelihood from land properly cleared of timber. Jute would be a partial alternative cash crop in Jhapa, where it grows well and enjoys a ready market. If farmers prefer, millet and wheat would also be grown in suitable areas. There are possibilities fDr other crops, e.g., groundnuts and cotton, now being tried out by an Israeli team attached to NSC. 4.16 HMG has agreed that, as with other NSC schemes, settlers would receive free WFP food during the first 270 days and further food, if needed, on medium-term credit from ADBN to cover any short-fall between production and family consumption up to the end of the first 18 months. Application has been made to WFP for the estimated food requirements for Bardia A and Jhapa. Appropriate assurances were obtained for NSC supervision of supple- mentary food credits and ADBN finance thereof. 4.17 Short-term inputs, including seed, fertilizer and pesticide, would be supplied in kind by HMG Agricultural Marketing Corporation (AMC) on 100% short-term credit against vouchers from ADBN, which would also supply 100% credit for the purchase of medium-term inputs such as tools (axes, hand saws, shovels, plows, harrows) and bullocks (average one per farmer).. Farmers would buy additional bullocks (making an average two per farm) for cash, as needed. 4.18 NSC would build permanent headquarters on each scheme, including staff housing, a store for food and marketable produce, a small workshop, a school for each village, and a clinic to be staffed by HMG medical service. NSC would also provide drinking wells, and hand pumps (1:20 families). 4.19 The project would include, on each new scheme, a simple demonstra- tion farm and settler orientation center, equipped with a small amount of visuial aid equipment. Extension staff would provide courses to all settlers upon arrival, and follow-up extension until the last arrivals reach full development. 4.20 Other costs included are for NSC operations during the first four or five years, after which an ADBN controlled cooperative would take over. Phasing 4.21 Before operations at any site, detailed boundary, base line, forest inventory and soil surveys would be carried out and structural layout plans prepared, all to be satisfactory to IDA. They have already been prepared for Kanchanpur A and assurances were given that they would be completed for Bardia A by December 31, 1974 and, for other sites, according to a timetable to be agreed with IDA. Proposed phasing of land development (Annex 8) is:  - 9 - Year 1 2 3 4 5 6 7 Timber Extraction (Hectares) Annual 1,300 2,503 4,500 4,500 4,000 1,750 - Cumulative 1,300 3,800 8,300 12,800 16,800 18,550 - Settlement (Number of settlers - excluding 1,500 already settled at Kanchanpur) Annual - 405 855 2,045 2,015 1,800 780 Cumulative - 405 1,260 3,305 5,320 7,120 7,900 Environmental Impact 4.22 Clearing the project areas (less than 2.5% of the total forest remaining in the Nepalese Terai) would not affect rainfall. Runoff would be minimal, because soils are pervious and resistant to erosion (Annex 9) and erosion control measures would be enforced. 4.23 Project surveys would ensure that large areas of forested land, believed unsuitable for agriculture because of erosion and flood risk, would be left under permanent productive or protective forest, also serving as natural conservation for indigenous wildlife. The Terai will have three wildlife reserves; the already gazetted Chitwan National Park, Sukla Phanta, and Karnali. The project would not conflict with these. 4.24 Farm incomes are slender and cannot afford loss of crop from serious pest infestation (stemborers, sawfly and aphids). Small amounts of chlorinated hydrocarbons, less persistent than DDT, would be used. Technical Assistance 4.25 Skilled and experienced operators would help TCN (for up to two years): from Malaysia to equip and work winch lorries for logging; and from India to set up and run the sawmills. A Sales Adviser, satisfactory to IDA, would work with TCN's Export Sales Manager to gain access to the substan- tial market for TCN products in India. Assurances were given that he would be employed by August 31, 1975, on terms and conditions satisfactory to IDA, with terms of reference as in Annex 10, Appendix A; and it would be a condition of disbursement for purchase of equipment that contracts, acceptable to IDA, had been entered into between TCN and two winch lorry operators and two mechanics, for Kanchanpur and Bardia. 4.26 An internationally recruited consultant Agricultural Adviser would assist NSC's chief agriculturist for about three years with training of extension staff, establishment of demonstration farms and organisation of orientation courses for all new settlers. Another consultant would assist HMG for about one year with a soil survey of western Terai, to find out where, and how much, forest land would be suitable for further settlement. Terms  - 10 - of Reference are in Annex 10 Appendices B and C. All consultants would be expected to train Nepalese staff on-the-job, for which specific provision is included. Assurances were given that contracts, acceptable to IDA, would be entered into by December 31, 1974 between NSC and an Agricultural Adviser and between HMG and a Soil Surveyor. 4.27 There is potential for irrigation, but the extent and nature will not be known until the USAID survey, expected in a few months time, is available. US$100,000 is included for detailed test drilling and pilot command area development or such technical assistance as the survey may show to be needed in the project areas, with terms of reference to be agreed with HMG and IDA, should the USAID survey show this to be worthwhile. Working Capital 4.28 Incremental working capital, in the form of stocks and stores and cash for wages and salaries, is included in project cost and would be financed, for TCN out of its other revenue, and for NSC from HMG budget. V. COST ESTIMATES AND FINANCING 5.01 Total estimated seven-year project cost is NR 122M (US$11.5M), including contingencies, of which about US$6.9M foreign exchange. This is equivalent to about US$1,400 per settler family for total project cost, but only US$730 excluding forestry costs, which would be fully covered by forestry revenue, and US$100 after deducting net incremental forestry revenue. De- tails, summarized below, are in Annexes 11-16:  - 11 - '000 Nepalese Rupees '000 US Dollars For- For- Foreign 1974/81 Local reign Total Local reign Total Exchange Forestry Equipment Logging & extraction 895 9,044 9,939 84 854 938 91 Milling & transportation 878 9,946 10,824 83 938 1,021 91 Construction Roads 1,755 - 1,755 166 - 166 - Buildings 5,468 -3,725 9,193 516 351 867 41 Subtotal (Forestry) 8,996 22,715 31,711 849 2,143 2,992 72 Settlement Equipment 81 820 901 8 77 85 91 Construction 2,623 1,352 3,975 247 128 375 34 Administration 4,623 1,156 5,779 436 109 545 20 WFP Food 1,923 17,311 19,234 181 1,633 1,814 90 Credit items: Supplemental food 3,730 - 3,730 352 - 352 - Farm inputs Medium-term 9,768 1,085 10,853 922 102 1,024 10 Short-term 645 2,582 3,227 61 244 305 S0 Subtotal (Settlement) 23,393 24,306 47,699 2,207 2,293 4,500 51 Technical Assistance Forestry 68 2,494 2,562 6 235 241 97 Settlement 137 1,436 1,573 13 135 148 91 Subtotal 205 3,930 4,135 19 370 389 95 Working Capital 7,098 3,042 10,140 669 288 957 30 Total (before contingencies) 39,692 53,993 93,685 3,744 5,094 8,838 58 Physical Contingencies 1,681 2,589 4,270 159 244 403 6e Total (after physical contingencies) 41,373 56,582 97,955 3,903 5,338 9,241 58 Further Studies/Planning 40 2,260 2,300 4 213 217 98 Price Contingencies & Rounding 7,937 14,128 22,065 753 1,329 2,082 64 Total Project Cost 49,350 72,970 122,320 4,660 6,880 11,540 60 5.02 Estimates are based on findings during appraisal, including information from the CP report and the UNDP team in the field, and en- quiries from overseas suppliers. Basic costs date from November 1973. 5.03 For physical contingencies, 10% is added to all equipment and con- struction costs except dirt roads and minor equipment, to which 20% is added because quantities are difficult to judge. 10% is added to settlement costs and 20" to technical assistance to cover possible variations in man-months required and 20% to fertilizer costs for possible additional quantities. At the time of appraisal, 50% was added to fertilizer and fuel costs because of recent sharp price increases (resulting in on-site cost of  - 12 - US$142/ton equivalent for sulfate of ammonia and US$0.75/gallon for diesel fuel). The above physical contingencies total about 4.6% of total project cost. A price contingency, totalling about 22.5% is made up from compounded price increases for equipment and civil works as estimated to be applicable. 1/ Financing 5.04 Proposed financing (Annex 17) is based on IDA providing 100% of the foreign exchange cost of equipment and technical assistance, 75% of the cost of other selected items, including ADBN sub-loans for farm inputs (see para 5.10). This would cover 52% of total cost, leaving 16% for WFP, 3% for farmers and 29% for HMG, including NR 10M working capital (9% of total cost) from TCN revenues which HMG would otherwise receive. IDA financing of local cost is justified partly to provide a meaningful IDA participation in NSC and partly to provide a more substantial contribution to Nepal, one of the poorest of the developing countries. A summary of project financing is: IDA WEP Farmers HMG Total ----thousand US dollars--- Forestry Equipment 1,792 - - 167 1,959 Construction 775 - - 258 1,033 Working capital - - 957 957 Sub-total 2,567 - - 1,382 3,949 Settlement Equipment 77 - - 8 85 Construction 281 - - 94 375 Other 289 1,814 - 608 2,711 Sub-total 647 1,814 - 710 3,171 Farm Inputs 821 - 234 274 1,329 Technical Assistance 584 - - 22 606 Contingencies 1,381 - 150 954 2,485 Total 6,000 1,814 384 3,342 11,540 Percent 52 16 3 29 100 5.05 Credit funds not needed for the project during the seven-year disbursement period, would be used for further settlement, by agreement with HMG, or cancelled. 1/ 1971 1975 1976-80 Price Contingencies: -increase per annum--- Equipment 14% 11% 7.5% Civil Works 18% 15% 12%  - 13 - 5.O6 IDA funds would be channeled to NSC and TCN through the Treasury and central bank (NRB); to NSC (US$1.5M) free of cost, since it has no reven-ue and is, in effect, an HMG agency with a special development function; to TCN (US$3.3M) as a five-year loan with one year grace for repayments at 7.5%, the current rate for similar HMG lending, with TCN bearing the foreign exchange risk. IDA funds for further studies/planning (US$0.2M) would be disbursed directly to the departments concerned. 5.n7 IDA funds for ADBN (US$1M) would be channeled through NRB. ADBN would obtain ftnds for project sub-loans by rediscounting them at the curren.a; rate of 3% per year. ADBN would lend to project cooperatives at 7% for short-term and 5% for medium term credit (up to seven years). Cooperatives, in turn, would lend to farmers at 10% for short-term (23% of sub-loans) secured against the expected crop, and 7.5% for medium-term (77% of sub-loans, secured against assets purchased and a cooperative bond or farm mortgage. The wider margin for short-term credit is because small loans need more recora keeping and administration per unit lent. ADBN provides management to settle- ment cooperatives, through which farm credit is channeled, and has substan- tial administrative costs (see Annex 5 para 21). 5.08 The texts of a subsidiary loan agreement and a project financing agreement were agreed with IDA and it would be a condition of effectiveness that they be signed. Suitable assurances on the above were given. The financial implications for TCN and HMG are illustrated in Annexes 18 and 19. TCN cash flow is based on payment of maximum contributions to HMG, after loan servicing. These, together with royalties and taxes, would adequately finance HMG contribution to settlement and other development activities, after the first year. Procurement 5.09 For equipment (total US$2.5M), contracts above US$50,000, procure- ment would be by international competitive bidding (ICB) following Bank/IDA guidelines; except that prudent shopping would be permitted for one or two winch lorries and equipment not eyceeding a total of US$50,000 if procured after April 30, 1974. To attract the most competitive bids, take advantage of the economies of larger orders, and secure the benefit of standardization, orders for similar items would be bulked into single contracts for delivery normallv over two years. It would not be practical to bulk contracts for roads and buildings (US$1.7M) which would be widely scattered, small in size and spread over several years. They would therefore not be suitable for ICB. They would be *.ubject to NSC and TCN tender procedures, which are satisfactory. Medium-term farm investments (US$1.2M) mostly bullocks for plowing, would be purchased by individual farmers through their cooperatives; competition is adequate and purchases wovild be monitored by NSC and ADBN. Fertilizer would be supplied by HMC's Agricultural Marketing Corporation from bulk purchase by international tender procedures, which are consistent with Bank/IDA guidelines. Appropriate assurances were given.  - 14 - Disbuirsement 5.10 TIDA would disburse 100% of foreign expenditures for imported equipment. For eqtuipment supplied off-the-shelf, IDA would disbur:se 75%, representing the estimated foreign exchange component. IDA woui finance 75% of co-nstruction, field settlement costs, ADBN mediu,m, cerm sub-loans and the increTnental amount of ADEN short-term sub-loans to farmers for farm innuits. Disbursement for sub-loans would be nade annually or bi-saznually against _DBN's certification of expenditures, the doczanenttiol. z.or whLich would not be submiitted for review, but would be retained by Ak>D3- and available for inspection by IDA during project supervision. ThA would also disburse against the foreign exchange cost of expatriate proje c staff. To expedite the project, retroactive financing would be alio ed