Nepal - Industrial Development Corporation Project

Document of LEi COPY The World Bank FILE COPY FOR OFFICIAL USE ONLY Report NoP-2050-NEP REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A NEPAL INDUSTRIAL DEVELOPMENT CORPORATION PROJECT April 19, 1977 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Rs = Nepalese Rupees US$1 = Rs 12.50 Rs 1 US$0.08 Rs 1 million = US$80,000 Rs 1 billion = US$80.0 million ABBREVIATIONS CID = Cottage Industries Department GDP = Gross Domestic Product ISC = Industrial Services Center NIDC = Nepal Industrial Development Corporation SIDC = Small Industries Development Corporation FISCAL YEAR The Government and NIDC - July 16 - July 15  FOR OFFICIAL USE ONLY INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A NEPAL INDUSTRIAL DEVELOPMENT CORPORATION PROJECT 1. I submit the following report and recommendation on a proposed credit to the Kingdom of Nepal for the equivalent of US$4.0 million on stand- ard IDA terms to help meet the foreign exchange requirements of the Nepal Industrial Development Corporation-(NIDC) over the next two years for lending to private sector industries and tourism. The procee,ds,of the credit would be relent to NIDC at 8.2% per annum with repayment over a period of 18 years in- cluding 3 years grace on the basis of a flexible amortization schedule reflect- ing the repayment terms of the sub-loans made by NIDC. PART I - THE ECONOMY 1/ 2. The .most recent economic report entitled "'Review of the Economic. Situation of Nepal" (Report No. 1180-NEP) was distributed to the Executive Directors on July 30, 1976. The principal findings of the report and the developments since then are described below. Country data are shown in Annex I. 3. Nepal has been classified by the United Nations as one,of the least-developed countries in the world. Its per capita inucome in 1975 was estimated at $110. It has a population of 12.6 million, estimated to be growing at around 2% per year. A large proportion, nearly 96% of the popula- tion, live in rural areas. Health and education facilities are below the standards achieved in the rest of South Asia. Nepal has an infant mortality rate of 200 per thousand live births, an adult literacy rate of 14%, and a life expectancy at birth of less than 45 years. 4. The country has a difficult topography which severely limits the area of arable land. Yet population density is now 450 per,square kilometer of land for all of Nepal and 930 persons in the Hill areas where 59% of the people live, Already the results of pushing the area of cultivated land beyond economically feasible and ecologically safe limits are being felt in the Hill areas. Agricultural yields have declined, and soil erosion and landslides have resulted in these areas. In the. Terai plains where food- grains, sugar and jute are grown, little room is left for,extending the cul- tivated areas. The traditional gra-..n surpluses produced,in the Terai are declining as population has grown. 1/ Part I of this Report is reproduced verbatim from Report and Recommen- dation of the President to the Executive Directors on a Proposed Credit to the Kingdom of Nepal for a Second Water Supply and Sewerage Project (Report No. P-2041-NEP of April 11, 1977). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents,nay not otherwise be disclosed without World Bank authorization.  - 2 - 5. The landlocked position of the country imposes an additional con- straint. Far removed from sources of supplies of development goods and ac- cess to export markets, development is more costly in Nepal than in many other countries. Moreover, uncertainties of trade and transit over the sub- continent complicates all economic decision-making, necessitates the holding of relatively large foreign exchange reserves, and reduces the country's attraction to private investors. 6. The economy is predominantly agricultural. About 67% of total value added originates in agriculture, and over 90% of the labor force is engaged in this activity. Agricultural products constitute more than 80% of Nepal's exports. Ninety percent of these exports go to India. Rice, the main export, accounts for about 60% of the total export value, while jute is the second most important. Industrial value added amounts to onLy 4% of GDP and Nepal, therefore, has to import almost all of its capital goods and a large part of manufactured consumer goods. 7. In the past decade, Nepal's GDP growth rate averaged 2.4% per year, marginally above the rate of population growth. Thus far, development efforts have been mostly directed towards building an economic and administrative infrastructure. This was necessary since it was only in the early fifties that the Government adopted economic and social development as major objec- tives. The investments in infrastructure made since then were the country's first steps toward modernization. They have not yet paid off, however, in terms of accelerated economic growth. 88. There have been no significant changes in the trend of economic growth in 1975/76.'. The weather continues to be the main factor which deter- mines yearly fluctuations in growth. Last year, weather conditions were very favorable, the grain crop was large, and GDP grew by about 4%, well above the average of 2.4% of the past decade. The balance of payments benefitted from temporarily larger rice exports, improved administrative control of rice exports, increased incomes from tourism and increased inflows of remittances. At the same time, imports of petroleum products, fertilizer, cement, and iron and steel declined, because these items had been overstocked in the previous year. Foreign exchange reserves rose by 6% to $119.7 million, the equivalent of about nine months of imports. Last year's higher GDP growth rate and the improvement in the balance of payments were chiefly due to fortuitous factors rather than to an improvement in the longer term growth trend of the economy. 9. After substantial efforts in the last two decades to build up the country's infrastructure, Nepal's planners believe that the time has come for a shift in the development strategy. The leading principle of the current five-year plan (1976-80) is that Nepal should aim its development efforts at deriving increased production benefits from its past efforts to establish and expand the infrastructure. The allocation of investment funds under the plan shows a drop in the share of transport and communications (from 41% to 23% of the total) and corresponding increases in the share of agriculture, industry and the social sectors. Attention is to be concentrated on quick-yielding projects, mostly in agriculture but with an appropriate component of viable import substitution in industry.  - 3 - 10. The most important opportun ty to reap production gains lies in agriculture. Present yields in the Terai, where most of the foodgrains are cultivated, average only 1-1.3 tons per hectare. These yields can be increased substantially by improvements in agricultural extension, by in- creased application of inputs, and by minor irrigation. Similar improve- ments could also be extended to sugar and jute cultivation which also have very low yields. The wide difference between growing conditions in the Hills and in the Terai offers scope for increased specialization and ex- change of products. For the time being, the Hills must continue to empha- size food production in view of the serious food deficits in the area. However, in the long run, the Hills area is comparatively well suited to produce cash crops -- fruits, spices, vegetables, potatoes and natural silk, etc. On a limited scale these items are already being produced. Achieve- ment of production gains will also require the strengthening of marketing and credit institutions. Some progress in institution-building has already been made in recent years, as evidenced by the establishment of the Agricul- tural Development Bank and the Agricultural Projects Services Center. 11. Although agriculture must occupy a predominant position in Nepal's development strategy, opportunities also exist in other directly productive sectors, mainly industry and tourism, and these should be vigorously pursued. The.contribution of modern industry to GDP is still small, about 4%, but it has been growing. Most of the sector consists of the processing of agricul- tural products such as rice, wheat, vegetable oil, sugar and jute. The re- mainder is made up of factories producing simple consumer goods, wood products, bricks, tiles and cement. The'small size of the market, lack of raw materials, competition from Indian products, and the shortage of domestic entrepreneurs and trained workers will continue to be limiting factors for some time. Modern industry, nevertheless, has its role in Nepal's future development. The scope for processing of agricultural products for domestic use and export should increase with the intended diversification of agriculture. Further growth of the economy will also present scope for more import substitution. 12. Tourism has grown at 11.5% per year over the last five years; tourist arrivals at present are estimated to be above 85,000. Foreign ex- change earnings from this source are equivalent to those from merchandise exports. In line with a master plan for the sector, prepared with German assistance, a number of projects are to be undertaken to develop hill stations, observation points, and national parks as well as to restore ancient temples, and to strengthen the hotel school. While small in size, these projects-are important for the long-term development of tourism, 13. On the basis of these and other considerations, it appears that there is sufficient scope for development of the directly-productive secto-rs to allow a modest acceleration of GDI g-owth to perhaps 3.5% a year during the last years of the decade and 4-C% in the 1980s. The proposed develop- ment strategy appears to be appropriate to Nepal's circumstances. The past ratio of investment (8.5-10.5% of GDP) to growth (2% of GDP) appears to be very high and, in view of the scarcity of resources in Nepal, the planners are right in looking for opportunities for more rapid growth without neglect- ing the need for completion of the basic infrastructure.  - 4 - 14. Nepal has made commendable efforts to mobilize domestic resources for development. In the last five years, real revenue growth has averaged over 7% per year, much higher than the growth rate of GDP, and budgetary savings were maintained at 40% of revenue, slightly over 2% of GDP. This result was obtained in the face of serious difficulties. On the revenue side, Nepal s,uffers from the constraints of extreme poverty and low degree of monetiza- tion of the economy. The open border with India, moreover, makes it difficult to control foreign trade and to levy the trade taxes which play such a large role in the tax system of most developing countries. On the current expendi- tures side, the Government has to cope with rising claims for maintenance of infrastructure and the need to raise government salaries from levels which are low even by the standards of a poor country. 15. In view of the pressures to increase current expenditures, all that can be realistically expected in the next few years is that the Government maintains its savings rate-at 2% of GDP. Only when economic growth starts to accelerate significantly in the 1980s will there be prospects for an in- crease in this rate. Given the constraints on mobilizing domestic resources, which will prevail even with continued satisfactory fiscal management, foreign aid will remain a decisive factor in Nepal's economic.develop- ment. In fact, since public savings are likely to increase less rapidly than public investment during the period of the current five-year plan, aid will become, at least temporarily, more important. In view of this scarcity of public savings, aid will have to cover not only the foreign exchange cost of projects, but, as a rule, also at least part of local cost. Total aid dis- bursements during 1971-75 (the previous five-year plan) averaged $33 million a year in constant (1974/75) prices and covered 45% of public investment. During 1976-80 (the present five-year plan), this proportion would have to rise to 57% if public investment is not to be held back by lack of financial resources. Under these circumstances, disbursements in real terms would have to rise by around 12.5% per year to average -about $60 million in constant (1974/75) prices and about $90 million in current prices. 16. The international community has thus far been very responsive to these aid needs of Nepal. Shortage of finance has not yet been a bottleneck, and prospects are that aid flows of the required magnitude will continue to be available. The real factor determining Nepal's development pace will remain the growth of absorptive capacity, and it is this factor which will determine the actual level of aid disbursements. The essential questions regarding aid to Nepal are, therefore, what donors should do to attune their aid programs to Nepal's development priorities and what they can do to raise absorptive capacity. 17. These questions, obviously requiring consultations between the Nepal Government and the donors, provide the focus for the Nepal aid group which had its first meeting in Tokyo last December. On the basis of sector and project documentation prepared by the Government, the meeting reviewed the type of projects needed to support the Government's development strategy and the type of technical assistance programs needed to build up absorptive capacity. Sus- tained attention to these matters in the framework of the aid group is expected  -5- to lead to improvements in the composition of aid and to speed up the still very slow rate of disbursement of aid funds. 18. As of December 31, 1975, official foreign debt amounted to only $120 million, of which 28% was to IDA. Of the $120 million, $86 million re- mained undisbursed. This low utilization is largely due to the fact that 80% of foreign loans has been contracted since 1970. Debt service was about $1.5 million in 1975 or equivalent to about 2% of exports of goods and services. However, future assistance may increasingly take the form of loans. Most of them will probably be on concessionary terms, which is highly desirable in view of Nepal's poverty and limited export prospects. In view of the accel- erated development efforts, external public debt is expected to rise and, based on the trend in recent years, may reach about $350 million by 1980, of which approximately 50% could be in IDA credits. The total debt service ratio by 1980 is, however, projected to remain below 10%. Debt service to the Bank Group alone would be less than 2% of exports of goods and services. PART II - BANK GROUP OPERATIONS IN NEPAL 19. The first IDA credit to Nepal in the amount of $1.7 million equiva- lent was made in FY70 for a telecommunications project. This was followed by credits for highways ($2.5 million), tourism ($3.2 million), irrigation ($6.0 million), a second telecommunications project ($5.5 million), a water supply and sewerage project ($7.8 million), a settlement project ($6.0 mil- lion), a power project ($26.0 million), a rural development project ($8.0 mil- lion), a groundwater project ($9.0 million), a technical assistance project ($3.0 million), additional financing ($4.0 million) to assist in meeting an anticipated cost overrun in the first water supply and sewerage project 1/, and a second water supply and sewerage project ($8.0 million) 2/. The pro- posed credit would bring the total amount of IDA assistance to Nepal to $94.7 million equivalent, net of cancellations. No Bank loans have been made to Nepal. IFC made its first investment in Nepal ($3.2 million) in a hotel pro- ject in Kathmandu in FY75. Annex II contains a summary statement of Bank Group operations as of March 31, 1977, and notes on the execution of ongoing IDA projects. It shows that delays in the implementation of these projects are common, particularly during the initial periods. These delays are largely due to Nepal's limited technical and managerial capabilities. In order to assist Nepal in coping with this constraint, considerable technical assistance is being given by Bank Group staff, including our Resident Mission in Kathmandu. As a result, improvement in the rate of disbursements is being realized. During the first nine months of FY77, $4.2 million were disbursed compared to $6..9 million disbursed during the entire previous six years. There is, however, scope for substantial further improvemelnt. 1/ The proposal has been circulated to the Executive Directors on a no- objection basis. 2/ Scheduled for presentation to the Board on April 26, 1977.  -6- 20. Bank Group lending to Nepal has so far been at a modest level com- pared to the country's need for, and total receipts of, external assistance. The international community has persistently shown considerable interest in Nepal's economic development and, to date, shortage of funds has not been a bottleneck. The main constraint on utilization of increased aid has been Nepal's limited absorptive capacity, affecting the pace of project prepara- tion and implementation. The Bank has agreed to assist the Government in project preparation through the technical assistance credit and by acting as Executing Agency for a number of technical assistance projects in the current UNDP Five-Year Program. The Bank Group has addressed the problem of ab- sorptive capacity also through its role in organizing an aid group for Nepal (para 17). 21. The Bank Group's current strategy places major emphasis upon directly productive sectors (particularly agriculture) and the development of comple- mentary infrastructure, including feeder roads (particularly connecting the Hills to the Terai), communications and hydroelectric power. A feeder roads project has been appraised and is expected to be negotiated by the end of the current fiscal year. Preparation of projects in irrigation, telecommunications, rural development and horticulture is underway. PART III - INDUSTRY AND TOURISM IN NEPAL 22. Although the modern industrial sector in Nepal has been growing rapidly, it still accounts for only 4% of GDP. There are approximately 2,400 manufacturing establishments in Nepal, employing about 50,000 workers. Most of these are small, with 80% employing less than 10 workers and only about 3% employing 100 or more workers. 23. Most modern industry in Nepal, aside from tourism, is an extension of the agricultural sector. Of these, rice and oil mills account for 76% of the total number of establishments, 50% of the value added, and employ 10,000 workers. Next in importance are jute mills, employing about 5,000 workers. Other industrial activities include sugar processing, cigarette and shoe fac- tories, sawmilling, brick and tile manufacturing, mechanical workshops, a brewery, and a recently established cement plant. Capacity utilization for the major industrial subsectors appears to be running at a reasonably high level and does not seem to be severely hampered by shortages of agricultural raw materials. Productivity is low, however, due to overstaffing of most establishments and frequent temporary closures caused by shortages of im- ported raw materials and spare parts. 24. Most industries were established or expanded after 1955, when the Government's policy became more specific with the adoption of five-year plans, a general statement of industrial policy (in 1957), and the creation of NIDC in 1959 to finance private industry. The Government's attitude towards the private sector has remained positive, illustrated by the generous incentives it has granted. Despite this encouragement, in the initial years of indus- trialization, entrepreneurs were slow in making investments in industry  - 7 - primarily because entrepreneurial and managerial talent was in short supply and the domestic market small-and geographically dispersed. Furthermore, other lucrative investment opportunities have been available in such areas as trade and real estate. Due to lack of private interest, the Government under- took a number of industrial projects which had been initially reserved for the private sector, but it has been less active in recent years. At the same time, the Government has recently increased the number of industries open to private investment. The Government's current primary objectives for develop- ment of the industrial sector are the encouragement of both import substitution and export industries based mainly on local agricultural raw materials and forest products.- Generation of employment opportunities is also given high priority. 25. Cottage and village industries (defined as enterprises having capital investment of less than Rs 200,000) accounted for approximately 7% of GDP in 1975, which is almost double the contribution of the modern indus- trial sector. The sector is also the second main source of employment, after agriculture, providing over a million workers with full or part-time jobs. The goods produced by cottage and village industries include handloom cloth, curio goods, rugs, footwear, simple tools, and household utensils. 26. Long-term funds for public sector industrial development are provided by the Government and foreign aid, while-funds for private investment come from NIDC and entrepreneurs' own resources. To date, commercial banks have not-made long-term industrial loans to any significant extent. NIDC is, therefore, the leading financial institution providing long-term financing in local currency and foreign exchange for private industries with capital investment greater than Rs 0.2 million. While the two commercial banks in Nepal have been the main source of working capital financing for industry, it was not until 1975, when the Commercial Bank Act was amended, that they could extend term loans. Although the commercial banks have access to some foreign exchange from the Government, it appears doubtful that they will compete to any extent with NIDC given their weakness in project appraisal. In the event they do make industrial term loans, it may be done jointly with NIDC, which could do project appraisal and supervision for a fee. The commercial banks are, however, expected to become more actively involved in small-scale and cottage industry lending (those units with investment below Rs 1.0 million). They have been instructed by the Nepal Rastra Bank (the Central Bank) to lend 7% of their total deposits to these sectors, including small-scale agriculture. From 1972, NIDC was involved in cottage and village industry financing through its fully owned small-scale industries development corporation (SIDC). In July, 1976, however, the Government required NIDC to transfer SIDC's lending responsibilities to the Cottage Industries Department (CID). The commercial banks, with their wide branch system, are better placed than NIDC to provide financing to village and small-scale iAdustry while the CID will provide extension services. 27. The tourism sector in Nepal has expanded rapidly in recent years, growing by an average of about 11.5% per year over the last five years. Gross foreign exchange earnings by tourism are estimated at $13.6 million in FY76, roughly equal to earnings from all merchandise exports and representing an  - 8 - increase of 41% over FY75. The sector also provides employment to a growing number of people (currently 7,500). In 1976, approximately 85,000 tourists visited Nepal and the number is expected to reach more than 130,000 by 1980. Guided by a tourism master plan which was prepared in 1972 with German techni- cal assistance, the Government set out to remove the hotel accommodation constraint in the Kathmandu area. When all extensions and new hotels under construction are completed, it is expected that this capacity constraint will be eliminated. The Government's present objectives for development of tourism focus on expansion of areas of interest outside the Kathmandu Valley, through construction of a few selected hotels and trekking lodges, and on the provision of appropriate training of guides, hotel staff, and employees of tourist information centers to benefit the sector as a whole. Financing for tourism projects has come primarily from NIDC and private entrepreneurs, and to some extent from foreign aid. 28. In 1972, NIDC was selected as a channel for a $3.2 million IDA credit to the Government for tourism (see Annex II). NIDC faced some difficul- ties during the initial phase of implementation of this project, largely due to its unfamiliarity with IDA procedures. Its performance has subsequently improved and is now satisfactory. Bank Group involvement in the industrial sector in Nepal began in a significant way in 1973 when, at the request of the Government, a mission reviewed NIDC's operations and found NIDC's foreign currency resource position to be comfortable and IDA funding unnecessary for several years. At present, there is scope for a credit of $4.0 million in foreign exchange to NIDC for private industrial investment and a need for technical assistance over the next two years. IDA will also be contributing to development of the sector through feasibility studies of industrial projects to be financed out of the Technical Assistance credit (Cr. 659). The projects thus prepared could be financed by the Government, NIDC, IDA, or other foreign donors. PART IV - THE PROJECT 29. The proposed project was appraised in September, 1976, and incor- porates the findings of a reconnaissance mission in late October, 1973, and a preparation mission in December, 1975. A report entitled "Nepal - Appraisal of the Nepal Industrial Development Corporation" (No. 1398a-NEP of April 15, 1977) is being distributed separately to the Executive Directors. Negotiations were held in Washington on March 15 to 22, 1977. The Borrower's delegation was led by Mr. T.B. Prasai, General Manager of NIDC. A credit and project summary is attached as Annex III. History and Past Operations 30. NIDC was established in 1959 as a fully government owned institution with the responsibility for promoting and financing private industry, in- cluding tourism. Its authorized capital has been gradually increased from  - 9 - Rs 10 million in 1959 to Rs 250 million in 1976. The paid-in capital is cur- rently Rs 139.3 million, Rs 130.3 million of which has been provided by the Government and Rs 9.0 million by the Rastra Bank. NIDC's operations have fluctuated widely from year to year. Net approvals amounted to Rs 41 million in FY74, Rs 145 million in FY75, and Rs 16 million in FY76. From its inception to the end of FY75, there has been a large gap between approvals and disburse- ments due to the high level of cancellations resulting from changes in investors' interest and slow rate of implementation of the projects. In FY76, approvals dropped to a very low level, primarily because interest rates increased sharply from an average of 7.5% to 14%. Disbursements grew from Rs 16 million in FY73 to Rs 29 million in FY74 and Rs 58 million in FY75, and were Rs 43 million in FY76. Loans and investments outstanding have increased strongly in recent years from Rs 98 million in July, 1974 to Rs 173 million in July, 1976, in- dicating that private investor interest is gaining momentum. As of July, 1976, tourism projects accounted for 37% of loans outstanding, food manufacturing 28%, and cement 14%. The rest of the portfolio is reasonably well diversified among various other industries.. Financing of manufacturing projects has in- creased significantly in recent years, from 42% of loans outstanding in FY72 to 58% in FY76, while transportation and power financing has declined. Manu- facturing is expected to become more important in the future, whereas NIDC's exposure in tourism will decline (to about 25% of the portfolio by FY80) when the hotels under construction are completed. 31. - NIDC's loans are generally small; the average size over the past two years was about Rs 2.0 million compared to Rs 0.4 million in the pre- vious five years. Since July, 1976, NIDC no longer lends to cottage and vil- lage industry by Government directive (para 26). More than 75% of NIDC's loans by amount and number have been for new projects over the past six years. The bulk of its loan approvals since FY71 have been directed towards metro- politan areas, following the national pattern of industrial distribution. The geographic distribution of NIDC's portfolio should widen in the future with the recent, opening of three branches (in the Central, Eastern, and Western Regions). Institutional Aspects 32. In order to strengthen the organizational structure of NIDC, its management, with IDA assistance, made the following changes which became effective on February 13, 1977: (a) NIDC's organization was divided into two major parts, administration and operations departments, each headed by a Deputy General Manager; (b) the responsibilities for financial and accounting activities were merged from two' divisions into one; (c) project implementation, supervision, and follow-up activities were merged into one division; (d) the research and planning branch was put under direct supervision of the General Manager; and (e) the regional offices w(re upgraded and will be more fully used for follow-up and, to a limitec ex.ent, appraisal work. 33, NIDC's Board of Directors consists of six members, all appointed by the Government; four are from the public sector and two are from the private sector (industry or trade). NIDC's General Manager, who was appointed in July, 1976, is from the public sector. Although he is a capable administrator,  - 10 - he lacks development banking experience. Consideting this, it was agreed to attach an experienced development banker to NIDC as an advisor for about two years (Section 2.10 of the Project Agreement). This advisor will be financed by UNDP with IDA as executing agency. In view of weaknesses in the accounting and management information systems as well as limited resource and planning expertise, it was also agreed that an accounting and information systems advisor will be attached to NIDC for about two years (Section 2.10 of the Project Agreement). The United Kingdom has agreed, in principle, to finance this advisor subject to review of the formal request from the Government. The advisors are expected to cost about $54,000 per man year each and their appointment is a condition of effectiveness of the proposed credit (Section 5.01 (c) of the Development Credit Agreement). As of July, 1976, NIDC had a staff of 75 reasonably well qualified professionals. However, NIDC lacks qualified accountants and has confirmed its intention to hire one by September 30, 1977 (Section 2.11 of the Project Agreement). NIDC must follow rules set by the Public Service Commission for hiring, firing, promotion, and pay-scales. New rules have recently been issued, allowing NIDC increased flexibility in personnel policies. In July, 1976, NIDC's Industrial Planning and Feasibility Division was transferred by the Government to the Industrial Services Center (ISC). ISC was given the task of undertaking feasibility studies and promotion activities for the public as well as private industrial sectors. Because of its large responsibilities, ISC has been able to devote little attention to the private sector. NIDC, therefore, has been assigning a few of its staff to work on industrial promotion and feasibility studies and will contihue to do so in the future. 34. NIDC's appraisal standards are in need of improvement. Cost esti- mates, coverage of marketing aspects, and appraisal of management tend to be weak and have contributed to cost overruns on many projects. Internal finan- cial and economic rates of return are seldom calculated. NIDC, has, therefore, agreed that (i) the internal financial rate of return will be calculated for all projects costing more than Rs 1 million, and (ii) the economic rate of return will be calculated for all projects costing more than R-s 2.5 million (Section 2.12 of the Project Agreement). Special attention will be paid to capacity utilization within an existing industry before financing new under- takings. Policies and Procedures 35. Prior to September, 1976, NIDC had no formal policy statement and made policy decisions on an ad hoc basis as circumstances required. In September, 1976, NIDC drafted a formal policy statement, with assistance from IDA, which was approved by NIDC's Board on April 7, 1977. NIDC's financing will be limited to private enterprises only and assistance can take the forms of medium and long-term loans, equity participation, guarantees, and technical and managerial advice. The maturity of NIDC's loans will vary, depending upon the client's debt-service capacity, but will not exceed 15 years. NIDC will acquire or retain more than 50% ownership in any manufacturing enterprise only in exceptional circumstances, and the total commitment to any single enterprise will not normally exceed 25% of NIDC's share capital and reserves.  - 11 - 36. NIDC's procurement practices are generally satisfactory. NIDC's technical staff are competent in advising on simple projects, but should make use of outside consultants on technically more complex projects. Bids are usually invited from-at least three sources and,selection of a supplier is based on price, delivery time, availability of service and spare parts, as well as quality and reputation.. NIDC's disbursement practices are also gener- ally satisfactory. 37. NIDC's.follow.up activities are-inadequate. Due to lack of staff, few follow-up visits.,are made and, in many cases, NIDC.does not receive the quarterly reports from its clients required in the loan agreements. In addi- tion to the organizational changes and increased use of regional offices that were adopted (para 32), NIDC intends to assign additional staff to follow-up activities and-to coordinate its reporting requirements with those of the Ministry of Industry and Commerce. Lending Rates and Resource Mobilization 38. NIDC's lending ratestfor both local and foreign currency were re- duced from 14% to 11%, on the average, in July, 1976, in accordance with the Rastra Bank's.general-interest rate adjustment. These rates-vary between geographic districts- no less than 10%, 11%, and 12% in the least developed areas, most developed areas, and elsewhere, respectively - and are in line with those of commercial banks.. NIDC has agreed,to charge no less than 11% on loans provided from the IDA credit, exc.ept.for loans made to projects located in the least developed areas which will be made at no less than 10% (Section 3.09 of the Project Agreement). This would give NIDC an overall spread of about 3.0%.on IDA funds, as the volume of lending at 10% for least developed areas is. expected to be more than offset by lending at 12% or more to the most developed areas.. NIDC's spread on local.currency borrowings is also projected to be about 3.0% and.no equity contributions are,expected to be made until after FY81 (para 40). This will produce a total spread of about 3.0% on lending operations for the-next few years. Although this represents a reduction from prior years, 1/ it is sufficient.in view of NIDC's low administrative costs which were 1.6%-of.average,total assets in.FY76 and are expected to decline to 1.0%. in-FY81., NIDC's lending rate is positive in real terms. Since NIDC's loans-are all denominated in Nepalese rupees, the.foreign exchange risk on loans from.foreign sources.is not passed on to the sub-borrowers but is assumed by NIDC which,. in turn, is reimbursed for any losses by the Rastra Bank. In.view of.the, early stage of-industrialization and the aversion of Nepal's generally small entrepreneurs to risk taking, the Government has agreed that under the proposed credit the Rastra Bank will continue to .compensate NIDC for all foreign exchange losses (Section 3.04 of the Development Credit Agree- ment). This will be done.on an annual basis,- as soon as possible after the close of NIDC's financial year. 1/ In the past, NIDC's large base of free equity (para 40) contributed greatly to low financing costs. As further contributions are made in the form of loans, however, the impact of this base will diminish and overall financial costs are expected to rise from 1.0% of ave 7age total assets in FY76 to 5.3% in FY81.  - 12 - 39. During the past two years, the Rastra Bank has adjusted interest rates twice; in April, 1975, and July, 1976. As part of the April, 1975., rate changes, all financial institutions, including NIDC, were directed to provide a clause in their loan agreements to the effect that loans made subsequent to that date would carry rates of interest which are to be adjusted retro- actively in the event of changes by the Rastra Bank in the interest rate structure. the Government has since reconsidered the wisdom of applying the policy to institutions doing long-term lending and has concluded that it might have a negative impact on the demand for long-term loans. The Government has, therefore, exempted NIDC and the commercial banks from the retroactive interest rate adjustment policy effective February 13, 1977. 40. For local currency resources, NIDC has relied, so far, on the Gov- ernment. The Government subscriptions to NIDC's share capital constitute over 90% of its local resources, the remainder coming from a Rastra Bank loan, loan collections, and reserves and retained earnings. As a result, NIDC has an extremely unleveraged capital structure with a debt to equity ratio of 0.5:1. This practice of funding NIDC with large amounts of free equity, which rarely carried dividends, has constituted an unjustified subsidy to NIDC and its sub-borrowers. For the foreseeable future, the Government intends to make local currency resources available in the form of loans either from the Government or the Rastra Bank. NIDC also expects to generate local currency through issuing debentures. However, after FY81, further equity might be required. Indian currency resources have been available to NIDC through conversion of Nepalese currency into Indian rupees and this is expected to continue. In the past, NIDC has obtained, in addition, four lines of credit in Indian rupees, most of which have been utilized. As of July 15, 1976, total inconvertible resources available to NIDC for disbursement were Rs 17.8 million. Commitments at that time amounted to Rs 62.1 million, the balance to be covered through borrowing from the Rastra Bank under a line of credit amounting to Rs 90.0 million. 41. NIDC's non-Indian foreign currency resources have come from eight loans and credits from five different sources. In a few cases, part of the loans and credits were cancelled when NIDC proved unable to use all the funds provided, either because there was insufficient demand for goods from the particular source to which procurement was tied or because available funds exceeded demand from investors. As of mid-July, 1976, NIDC had Rs 25.'3 mil- lion equivalent available to cover estimated requirements of Rs 34.4 million equivalent, creating a shortfall of Rs 9.1 million. This will be covered in FY77 by an allocation of Rs 10.0 million in foreign exchange from the Government to NIDC. Profitability and Financial Position 42. NIDC's net profits after tax increased from Rs 144,000 in FY71 to Rs 1,469,000 in FY76 and assets grew from Rs 86.6 million to Rs 226.4 million over the same period. NIDC's profitability was low in the past but has increased in recent years from net profit/average equity of 0.2% in FY72 to 1.1% in FY76. It is expected to rise to 2.8% by FY81. A debt-equity  - 13 - limit of 5:1 has been set (Section 3.05 of the Project Agreement), although NIDC is not expected to reach this limit within the next five years. Prin- cipal and interest in arrears over six months as a percentage of loans out- standing have decreased dramatically from 30.3 in FY73 to only 11.5 in FY76, indicating strong improvement in NIDC's collection performance. Projected Operations and Resource Requirements 43. NIDC expects to commit Rs 208 million over the next two years to July, 1979:- Rs 51 million ($4.0 million) in non-Indian foreign currency loans, Rs 78 million equivalent in Indian currency loans, and Rs 79 million in local currency loans and investments (Annex III). NIDC's Strategy State- ment, which was approved by its Board on April 7, 1977, outlines its plans for strengthening its operational capability so as to be able to cope with this increase in the lending program, and outlines future lending strategy which is guided by the Government's industrial policies. Although NIDC will continue to seek other sources of funds, at the present time it has no sources of non-Indian foreign currency other than an annual allotment from the Govern- ment (para 41). The proposed credit of $4.0 million equivalent would cover 40% of NIDC's total foreign exchange requirements of $10 million (including Indian rupees) for the'period July 1977 - July 1979. Though the IDA credit can be used for the import of Indian machinery and equipment, it is expected that these imports will be met by local currency sources (para 40), which are convertible into Indian rupees. The Proposed Credit 44. The proposed credit would be used to meet 100% of the foreign ex- change expenditures for directly imported capital goods and services for sub- projects sponsored by private productive enterprises to be broadly defined to include not only manufacturing, but also agro-industries, construction, and tourism projects. 45. The credit would be made to the Government to be relent to NIDC through a subsidiary loan agreement on terms and conditions satisfactory to the Association (Section 3.02 of the Development Credit Agreement). NIDC would pay the Government interest at 8.2% per annum with repayment over a period of 18 years including 3 years grace on the basis of a flexible amortization schedule reflecting the repayment terms of the sub-loans made by NIDC. NIDC would also pay to the Government a commitment fee of 0.75% on the undisbursed amounts, to be passed on to NIDC's sub-borrowers. The foreign exchange risk would be borne by the Government through the Rastra Bank. Considering that this is the first NIDC project, a low free limit of $80,000 has been set (Section 2.03(b) of the Development Credit Agreement). This will allow IDA prior approval of about 40% of subprojects by number and 75% by amount. In order that NIDC lending covers a broad range of activities rather than just a few large projects, the amount to be withdrawn from the proceeds of the credit for any one sub-project shall not exceed $1.0 million equivalent (Section 2.03 (a)(ii) of the Development Credit Agreement).  - 14 - Project Benefits and Risks 46. The proposed credit is expected to have a significant impact on the development of the industrial sector. The projects contained in NIDC's current pipeline seem to be closely in line with the Government policies for the sector and to correspond to the type of industrial development appropriate to Nepal. The proposed project will contribute to mobilization of domestic resources for investment, increased foreign exchange earnings/savings, and generation of employment. (A sample of NIDC's projects in recent years has shown a total investment cost per job of about $3,000). The proposed credit is also designed to strengthen NIDC considerably as an institution - through organizational changes, improved appraisal and follow-up practices, and technical assistance - and thereby to enable NIDC to play a more effective role in development. 47. Possible risks associated with the proposed credit would be slower than projected commitments and disbursements due to problems inherent in Nepal's location, geography, and absorptive capacity. These risks appear to be small, however, since NIDC's loan approvals, which dropped to a very low level in FY76 largely due to a sharp increase in interest rates (para 30), are expected to increase in response to a subsequent partial decline in rates in July, 1976 (para 38). This can be seen from the fact that the project pipeline upon which projections for the proposed credit were based represents a substantial reduction from NIDC's list of project applications at the time of appraisal. In addition, significant improvements in management are expected to arise from the technical assistance to be provided as a condition of effectiveness of the proposed credit. It is possible, though, that the advisors may not be put to beneficial use as has been the experience with some of the technical assistance given to NIDC by bilateral donors in the past. Current NIDC management recognizes the benefits that the institution would derive from the employment of these advisors, which was not always so in the past, and leads us to expect that the program of institution building, that forms part of the proposed credit, will reach its goals. PART V - LEGAL INSTRUMENTS AND AUTHORITY 48. The draft Development Credit Agreement between the Kingdom of Nepal and the Association, the draft Project Agreement between the Association and NIDC, the Recommendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement, and the text of a draft resolution approv- ing the proposed credit are being distributed to the Executive Directors sepa- rately. 49. Execution of the Subsidiary Loan Agreement on behalf of the Borrower and NIDC and employment of the two advisors for a period of two years each are conditions of effectiveness (Section 5.01(b) and (c), respectively, of the draft Development Credit Agreement). Special conditions of this credit are listed in Section III of Annex IV.  - 15 - 50. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 51. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments April 19, 1977   ANNE.XI Page- 1of 4~ pages NEPAL- SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2)---------------- --------- --------------- ~~~~~NEPAL REFERENCE COUNTRIES (1970) TOTAL 140.8 MOST RECENT AGOIC. 42.3 1?60 1970 ESTIMATE AFGHANISTAN BOLIVIA TUIKEY- GOP PER CAPITA (USO) 0.8.0 8 0.0 0 00 180. 480.O0 POPULATIJN AND VITAL STATISTICS POPULATIUN (MIO-YR. 4ILLION) 9 .2 1.1I 1 2.6 15.6 4. 9 3 5.7 POPULATION DENSITY PER SQUARE AM. 6 6. 0 79.0O 9P.o 2 4.0 4.0 46.o PER SO. KM.~ AGRICULTURAL LAND . 272.0 28 4.0 /a 107.0 . 67.0 VITAL STATISTICS CRUD: BIRrH RATE PER THOUSAND 4a. 3 4 4. 7 4 2.9 4 8.? 4 4.4 4 0. 6 CfRUDE- DEATH RATE PER THOUSAND 27 .8 24. 6 2 0. 3 27.6 1 9. 7 1 4. 4 INFANT MO9TALITY RATE (/THOU) . 200.0-300.0 . 18 2. 0 1 54. 0 145S. 0 LIFE EXPECTANCY AT BIRTH (YRS) 35. 6 40. 6 4 3.6 37.8 4 5. 3 5 4. 4 GROSS RE0RIJDUCTION RATE 3. 0 3. 0 2 .9 3 .4 2.8 2.-6 /a, b POPJLATION GROWdTi RATE (Z) VT- AL 1 .5 1.8 a2.6 2 2 2.6 2. 5 UJRBAN 4.4 4.0 5 .6 5.2 /a 4. 2 4. 2 URIAN POPULATION (% JF TJTAL) 3 .6 4. 0 4 .0 /a 10.? 3 4.6 31.2 AGE STRUCTURE CPERCENT) 0 To 14 YE-ARS 39.9 . 9 I40. h /a A 3. 2 4 1. 9 4 1. R 15 TO 64 TEARS 57.0 . 56.5 7-a 54 .2 54.6 5 3. 9 65 YEARS AND OVER 3. 1 *3 .1 7-a 2 .6 3. 5 4. 3 AGE 0EPENDE4CY RATIO 0.8 . 0.8 0.8 0.8 0.9 ECONOMIC DEPENDENCY RAT13 1.0 .1 .2 ..1. 0/a 1.1I /c rAMILY PLANNING ACCEPTORS (CUMUiLAT IVE. THOU). 8 6.5 3 78 .9 USERS (1 OF HARRIED WOMEN) .. 13.? .. . EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 4300.0 . 4900 0 /a . 2300.0 14500.0 /d LABOR FORCE IN AGRICULTURE (1) 9 4. 0 9 4.077 . 65.0/If 67T. 0 UNEMPLOYEO CZ OF LABOR FORCE). .... 16. 0 4.0 Ie INCOME DISTRIBUTION Z OF PRIVATE INCOME REC9D 8Y- HIGHEST 5Z OF HOUSEHOLDS ... . 36. 04 32.8 If HIGHEST 201 OF HOUSEHOLDS . ... 59. 077 6c. 7Y LOWEST 201Z OF HOUSEHOLDS ..... 4.0o 7E 2.9 77 LOWEST 403 OF HOUSEHOLDS ..... . 3.0 75 9.4 77f DISTRIBUtION OF LAND OWNERSHIP I OWNED BY TOP 101 OF OWNERS . .. .. 53.0 I OWNED BY SMALLEST 10Z OWNERS ... .. .0. 9 HEALTH ANO NUTRITION POPULAtION PER PHYSICIAN 72000.0 49770.0 20450.0 23000 2220.0 POPULATION PER NURSING PERSON . 35600.0 a . 22120.04/ 2730.00 1880.0 POPULATION PER HOSPITAL BED ?000.0/a 6750. 0 .6a90.0 7c 490.0 490.0 PER CAPITA SUPPLY Of- CAL'ORIES (X OF REQUIREMENTS) 92.0 9 3. 0 95.0 /b 80.0 77.0 11 0.0 PROTEIN (GRAMS PER DAY) 51.0l 52.0 49.o7E 58.0 46.0 78.0 -OF WHICH ANIMAL AND PULSE 9.-04 b 1. 0 II . 0 34.0o/a 22.o A OEA%tH RATE (/THOU) AGES 1-4 F.. .. . 4 15. 0 A EDUCATION ADJUSTED ENROLLR4ENT RATIO PRIMARY SCHOOL 10. 0/c 31. 0 /c S4.0 O/a 22.0 /d ?1.0/e 111.0 /i SECONDARY SCHOOL 6. 0 77 7.0o77 . 6.0 7a 20.0o77e 28. 0 YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL) 1 0. 0 1 0. 0 1 0. 0 12. 0 1 2. 0 1 1. 0 VOCATIONAL ENROLLMENT (I Of SECONDARY) 0.2 6.0 ..4.0 13.0/ 14.0 ADULT LITERACY RATE (I) 10.0 14.0 . 10.0 40.00 55.0 /I HOUSING PERSONS PER ROOM (AVERAGE) Z.0 /d . .. 1. 9 OCCJPIED DWELLINGS WITHOUT PIPEO WATER Cxl 32. 0 /d -.752 Id . 6 4. 0 ACCESS TO ELECTRICITY (I OF ALL DWELLINGS) 30.D /d . -.. 4 1. 0 RURAL DWELLINGS CONNECTED TO ELECTRICITY (2) I S . . .1. 0 CONSUMPTION RADIO RECEIVERS (PER THOU POP) 1.0 5.0 9.0 /c 16.0 288.0 89.0 PASSENGER CARS (PER THOU POP) O.z 0.4 -.2. 4.0 4.0 ELECTRICITY (KWH/YR PER CAP) I1.0 6. 0 9.0 23.00 160.0 27.0 NEWSPRINT (KG/YR PER CAP) D.. . .4 1.0 0.7 SEC- ROlES AND DEFINITIONS ON REVERSE  ANNFX I Pog. 2 of 4 pagee NOYTES Unless otherwise noted, dot. for 1960 refer to aoy year between 1959 end 1961, for 1970 betweec 1968 and 1970, ond for Most Recent E.timate between 1973 and 1975. Re Over the poet forty yeors, Turkey's economy hoo grown, at s respectable pace, starting from a very .mell baoe. In so doing the coontry has fornu1oted objecrioeo .nd faced problems and constraints which, to a considerable degree, are quit. similar to thooe which Nepal io now focing. Among others, these include iceaigoutput from the productive.. cecr., agriculture end industry, ac-eler.ting import sub.titotione. diversifying and incr.osing euporto, sobelielng re-ur..s, improving education, health , troining Sod enplvy.net oppnrtunities, land reform and improving income distribution. NEPAL 1960 / 1965, /b 1964-66, /c 6-10 and 11-15 yearn of age resepctively; /d l.at for capital and main cities; /e 1963 1970 / Pers onnel in government services only; /b Including midwives; /c 6-1f sod 11-16 pears of age respectively. MOST RECENT ESTDA1ATE, /a 1971. /b 1969-71 overage, /c l972j /d lmta for capital and main cities. AFGIMANISTkN 1970 Ia 1966-70; /b Including ...sistast nuss idwives end ass istant nidwives; Ic Including maternity and rural hospitals, /d Pabli education only. BOLIVIA 1970 / Ratio of popolotion under 15 and 65 end over to total labor force; /b Population; / 1964-66; /d Between 1965 and 1970 the duration of general secondary education wos reduced from 6 tn 4 years; /e 6-13 and 14-17 years of sge rq.p.cti-ely; /f As percentage of labor force in euployment. TfIRKEY 1970 / E fcludes 17 -torer provinces; /b 1965-67; /c Ratio of Population onder 15 and 65 and ever to labor force 15 years old and o-r, /d 15 yearo and over, enclodea ....oploynd, /e Registered only; /f Disposable income; /I Including assistant nur.es and midwives; /h 1564-hi; /i 7-Il yeare of age, Li. Pe rsons six years old and over h.o tell Lhe cenauc t.bers that they c-n read and write. 8.10. April 13, 1977 DiFINITIONS OF SOCIAL INDICATORS tand Aree (thou in 2 Population set n.roing person - Population divided by number of practicing Total- Total surface area comprising land urea and inland eatoers mal and fmale graduate nurss, 'trained" me "certified"~ nurses, and Agric.. Moat recant estimate of agricultural area used tomporerily or aux iliary pero..nnel with training or experience. permo..netly for crops, pastures, markst 4 hitches gordene no to lifs Population pee hospital bed - Population divided by number of hospital beds fellow. available in public and Private g.ense1 and apeciali..d hospital and rehabilitation centers; excludes nursing homes and establiehmenta for INP pe- capita (USS) - GMP par cepit. entixotas at current macbat prices, cus todioI and preventivs care.. calculated by san cn-ae-on method ea World Bank Atlee (1973-75 basis); Par capita Supply of calories(. sEo ressirement$) - Computed iron enrgy 1960, 1970 and 1975 data. equimaent of met food eupplies available in country Per capita per day; available supplies comprise domestic production, imparts Seas exports, Pelinand vita Statatista and changes in stock; net Supplies exclude animal fend, esade, quanti- Popul.ti.. mi-y. ili) - A. of July first: if not available, ties used in fond procesa ing and lessee in distribution; requiresenta a--rge of two and-year Setimis 1960, 1970 and 1975 data, were sstineted by FAO base.d on physiological useds fur sra activity end health considering snvironnenta1 tonparature, body weights, .a5n cd Poaaio esty-pe square ho - Mid-year population per square bile- see distributions of population, and allowing 107. for waste at house- metera (100ihectanda-)Coftotalbares, held leonl. Popultls ensiy - prSquare in of aic lnd-Cmue asboefr per tesit suppl of proitinp(grlams par dam) -Protein content of per agricultural land only. caPita saI upyo odprdy upply ppy f fIe is d,ine S. ahuv; requ.iconents for all countries established by USDA Econemic Vital Statiatica.. Reeccl Servicxs provide for a minimu allowansce of 60 gr-am of total Crude birith rate_...Le th ...and. averuge - Annual live births per thousand protss Par day, and 20 geaoe of animal and pulse protein, of which Of -id-yeaSr Population; ten-year arithmetic averages ending in 1960 and 10 grams Should he animal Protein; those Standards are lamer thee thoosa 1970. and five-year average ending in 1975 for moot recan.t estimate, of 75 grava of tstal protein and 23 grams mf animal protein me. son Crude death rate per thousand.- evrg - Annual deaths per thousand of mid- average for the world, propoae.d by FAQ in the Third World Feund Survey. year population tenyea erto aeae nigI 90sd1970 end eraptpotein supy rm aimal.and ple- Protein supply of food five~ear verae ening v 195 fo neatrecet eaimat. deivedfromanimas as pules i gras peu day atbrh sal ieya aticr aerage endn nd1960, 1970 end 17 o de -eravloigeosraglendns n17f.E. eIducrioenr I dw prdy Gnfoss reroutlion rate -/h. Avrg Ann.ber ofth liv daugteude a ..woman wil Daduted rntrullnent ratio- - primary dnuho Pa tnousaend of all agesoas bearpin thenormanIlvreplroutive peid_fse aeisce rsntae pecntg of phrimacy thios-ag proupulto; Suggestd .anchidren toged f specirtic fetlt ae;usual ly'_ Sr.irg cdn fin-yer 9verge 1ndin ind 1960, i-lyashtfjaedfrdfeetlnts fpiayeu.is 1970 and 175 for developin contries for. cun,tree with universal educa.tion, enrollment may excee d 100% Poplultion growh rate 71)-tta - Compound annual growth rates of mid- nic som e pupils are below or above the official School age. yea poulaio fo 190-0, 96010and 1970-75. Adju-tad enrollmntraIo- ondarm School - Comuted saabove; Population rcowih rate (7.) - urban - Computed like growth rate of total Secondary educantion require atlat four yea0rs of appawdprmy population; different defiaitions of urban areas may affect sonpara- instruction; provides general. vo...tisna1 or teac.her training billt.y of data amon countries. instruction fur pupils of 12 to 17 years of age; correspondence Urba poulation (7. of total) - Ratio of urban to total population; ..u.see are generally eac luded. different definitions of urban areas aay affect ...xpatability of data Years of Schooling provided (first and Second Levels) - Total years of among countries, Schooling; at seco ndary level, vocational instruction may he Par- AeStructure (peecent) - Chi,ldren (10-14 yas,working-age (15-64 years), tially or completely excluded, and retired (65 yearS and oer) paspesrageat of mid-year population. voca.tional enro1lloot M7 af secndm ..Voctional institutions include Ag. dependency ratio - Ratio of population under 15 and 65 and over to technical, industrial orohrpgan which operate independently at those of ages 1.5-through 64. as departmients of Secondary institutions, Ecnmcdependency ratio _Ratixi of pupulation under 15 and 65 end over Adult literacy,rate (7.) - Literate adults (able to read and write) as to the labor force is age grouPof15-64 YearS. percen tageo total adult population aged 15 years and aver. Famil planing aupetors(cum Sltiva thou -Cmltv number of acc eptars of birth-control dsvices under auSpices of national familyMusn Planning program, aince inception. Fatou par room (urban) - Average somber of peresmas par room in Family planning - users M7 of married women) - Percentages of married occupied conventional dwellings in urban areas; dwellings exclude womn of child-hearing age (15-44 yeara) who use birth-control devices non-permanent struetursa aad unoccupied parts. ts all married women in sane age group. - Occupied dwellings without piped water (7. - Occupied conventional dwellings in urban and rueai areas withouit inside or oustide piped Employment eae fyltisa percentage of all occupied dwellings. Total labor force (thousand) - Economically active persons, including Acces to eletrIcity (7. ofal dwellings) - Conventional dwellings witb armed forces aod unmployed but excluding housewives, students, etc. electricity in living quartrer as percent of total dwellings tn urbas definitin in various countries, are not comparable. and rural arese. Labor force in aaricultur.r (7 - Agricultural labor force (in farming, Riural d..lli.g cnnected to slectrtcity (7.) - Computed as above for forestry, heating and fishing) as percentage of total labor force, rural dwellig os.lny. Unm_pismed (7. of labor force) - Unemploye'd are usually defined a persons who are able and wiliing to take a job, out of a job on a given day, Conuampti 2n remained met of a job, and Seeking work for a Specified minimu period Rdorceivers (par thou pop) - All types of receiv-ra for radio bread- not exceeding one week; nay not be comparable between countries due to casts to general public Per thousand of popelation; excludes unlicensed differen.t.defis itlons of unemployed end source of data, e.g., -nploy- receivers is countries and in years when registration of radio Setswa ent office Statiaticn, sample surveys, conpuleory u-epliynent insurance, in effect; data for recen years may inot be comparable Since anst countries abe1iohod licensisg. income distribution - Percentage of private income (both in cash and kiod) Psegr cars per thou pop) - Passenger cars comprise omtor care aest- received by richest 57., richeat 207., poorest 207., and pcore.e 0%o ig lSs than( eght pe-rs...sS eaclude. ambulances, hearses an d military households. vehicles. El-trircity (kwh/yr par cap) - Annual consumption of indusLiril, con- Distribution of land ownership - Percentages of land owoed by wealthiest meca,Public and private elestricity in kilowa.tt hourt per oaphta; 107. and poorest 107. of land owoers, generally base.d on produci-o data, ilthot allowancet forI . oue. In grids hot allowing for ipyorta ad eptsof coctric-ty. Health and gutrition Ospnt(gyr per cay) - Per cpit annual consumption iv i.ro Population Par physician - Population divided by somber uf practicisg estimated from domestic production plus net imports of n-.p-It. physicians qualified from a medical School at uni-erity level.  ANNEX I Page 3 of 4 COUNTRY DATA - NEPAL AREA 2/ POPULATION DENSITY 140,797 kma 12.6 million (mid-1975) 90 per k6t/ Rate of Growth: 2.2% (from 1965 to 1975) 452 per k_;/of arable land POPULATION CHARACTERISTICS ( 2l97/) HEALTH (1975) Crude Birth Pate (per 1,000) 40 Population per physician 36,000 Crude Death Rate (per 1,000) 20 Population per hospital bed 5,800 Infant Mortality (per 1,000 live births) 200 INCOME DISTRIBUTION (year) DISTRIBUTION OF LAND OWNERSHIP (year) % of national income, nighest quintile *- % owned by top 10% of owners lowest quintile *- % owned by smallest 10% of owners ACCESS TO PIPED WATER (1974) ACCESS TO ELECTRICITY (1975) % of population - urban .. 7 of population - urban - rural .. - rural 7.00 3.0 NUTRITION (year) EDUCATION (year) Calorie intake as % of requirements .. Adult literacy rate 7 (1971-72) 14 Per capita protein intake Primary school enrollment % (1974-75) 43 1/ GNP PER CAPITA in 1975 : us $110 GROSS NATIONAL PRODUCT IN 1974-75 ANNUAL RATE OF GROWTH (7.. constant prices) US $ Mln. % 1965-75 GNP at Market Prices l,424 100.0 .2.2 Gross Domestic Investment 150 10.5 Gross National Saving 100 7*.Q Current Account Balance - 2 -1.8 Exports of Goods, NFS 104 7-3 Imports of Goods, NFS 154 10.8 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1971-72 Value Added Labor Force V. A. Per Worker US$ Mln. % Mln. % US $ % Agriculture 698 68 4.6 14.4 1.5 6 Industry 92 9 0.1 2.8 667 26 Services 237 23 0.1 2.8 1,743 68 Unallocated ._. Total/Average 1,027 100.0 TB 100.0 2,T 56 100.0 GOVERNMENT FINANCE Central Government (NRs Mln.) % of GDP 1974-75 1,048 7.1 Current Receipts 576 3.9 Current Expenditure Current Surplus 484 3.3 Capital Expenditures 926 6-3 External Assistance (net) 483 3.3 1/ The Per Capita GNP estimate is calculated by the same conversion technique as the 1975 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 2/ Social data indicated here are estimated on the basis of latest information and therefore differ from thoRe given in Annex I, page 1. not available not applicable  ANNEX I Page 4 of 4 COUNTRY DATA - NEPAI MONEY, CREDIT and PRICES 1965 1971 1972 1973 1974 197t (Million NRs outstanding mid-July) Money and Quasi Money 554 1,055 - 1,240 1,493 1,850 2,027 Bank Credit to Public Sector -149 -103 -39 138 238 795 Bank Credit to Private Sector 136 320 400 459 732 843 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 9.9 11.6 11.9 13.3 14.1 13.7 General Price Index ( 1962/3 - 100) 2/ 167 169 188 218 255 Annual percentage changes in: General Price Index 1.2 11.2 16.0 17.0 Bank credit to Public Sector 6.4 164.1 v 72.5 2314.0 Bank credit to Private Sector 15.0 25.0 14.8 59.5 15.2 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1965/66-to 1970/71) 1973/4 1974/5 US Mln 7 (Millions US $) Exports of Goods, NFS 100 104 Food grains & live animals 25.9 54.0 Imports of Goods, NFS 116 154 Inedible crude materials 13.4 27.9 Resource Gap (deficit = -) IZ 347 Consumer goods 8.2 17.1 Interest Payments (net) 11 9 All other commodities 0.5 1.0 Workers' Remittances 11 16 Total 100.0 Other Factor Payments (net) Net Transfers EXTERNAL DEBT. DECEMBER 31. 1975 Balance on Current Account 6 25~ US $ Mln Direct Foreign Investment Net MLT Borrowing 8 10 Public Debt, incl. guaranteed 119.8 Disbursements -2 Non-Guaranteed Private Debt Amortization Total outstanding & Disbursed TTir8 Subtotal -Wl 87 Capital Grants 21 25 DEBT SERVICE RATIO for 1975=, Other Capital (net) Less than 27. Other items n.e.i -28 - 49 Increase in Reserves (+) 7 41 Public Debt, inel. guaranteed Non-Guaranteed Private Debt Gross Reserves (end Dec.) 132.0 110.4 Total outstanding & Disbursed Net Reserves 110.4 90.1 RATE OF EXCHANGE IBRD/IDA LENDING.(End of Dec. 1976) (Million US $): Through Feb. 1973 Feb. 1973 - Oct, 1975 IBRD IDA us $ 1.00 = NRs 10.125 US $ 1.00 = NRa 10.56 NR 1.00 = US $ 0.099 NR 1.00 * US$ 0.095 Outstanding & Disbursed -- 9.2 Undisbursed -- 69.5 Since Oct. 1975 Outstanding incl. Undisbursed -- 78.7 US $ 1.00 = NRs 12.5 1.00 = US $ 0.08 1/ Ratio of Debt Service to Exports of Goods and Non-Factor Services. 2/ Consumer's Price Index (Kathmandu). .. not available not applicable January 27, 1977 South Asia Programs Department  ANNEX II Page 1 STATUS OF BANK GROUP OPERATIONS IN NEPAL A. STATEMENTS OF IDA CREDITS (as of March 31, 1977) Ia US$ Million Amount (less cancellations) Credit Undis- No. Year Borrower Purpose IDA bursed One credit fully disbursed 1.7 223 1970 Kingdom of Nepal Highways 2.5 0.5 291 1972 Kingdom of Nepal Tourism 3.2 0.8 373 1973 Kingdom of Nepal Irrigation 6.0 4.1 397 1973 Kingdom of Nepal Telecommunications 5.5 4.8 470 1974 Kingdom of Nepal Water Supply and Sewerage 11.8/b 9.9 505 1975 Kingdom of Nepal Settlement 6.0 5.6 600 1976 Kingdom of Nepal Kulekhani Hydroelectric 26.0 26.0 617 1976 Kingdom of Nepal Rural Development 8.0 8.0 654 1976 Kingdom of Nepal Groundwater 9.0 8.9 659 1976 Kingdom of Nepal Technical Assis- tance 3.0 3.0 1977 Kingdom of Nepal Second Water Supply and Sewerage 8.0 /c 8.0 Total Outstanding 90.7 Id Total Undisbursed 79.6 B. STATEM4ENT OF IFC INVESTMENT (as of March 31, 1977) Amount of US$ Million Year Obligor Type of Business Loan Equity Total 1975 Soaltee Hotel Hotel 2.70 0.48 3.18 (Pvt) Ltd. Total commitments now held by IFC 2.70 0.48 3.18 Total Undisbursed 1.25 0.48 1.73 /a No Bank loans hayeibeen made to eNepal. lb Includes-additWi-o-nAL financing of $4 milli&n,'for which a proposal has been circulated-to t-he-Exeecutive Dirbecto-rs on a no-objection basis. /c Scheduled for Board presenta-tion on April 26. /d Priot to exchange adjustments.  ANNEX II Page 2 C. Projects in Execution 1/ Credit No. 223 - Highway Project US$2.5 million Credit of December 21, 1970; Effective Date: February 3, 1971; Closing Date: June 30, 1975 - Revised Closing Date: June 30, 1977 Initially, project implementation was delayed mainly due to land acquisition difficulties and a national shortage of cement and fuel. With a delay of about eighteen months, the last of the five project road bridges and the remaining two of the five porter suspension bridges were opened in 1976. All project road maintenance equipment has been received and is now part of the Road Department fleet. Equipment workshop construction was slowed due to contractual difficulties stemming from price escalation, but the workshop construction is now almost completed. Although the total pro- ject cost is approximately 11% above appraisal estimate, the economic rate of return is not affected due to the effect of general inflation on the benefits. The project is virtually complete, with remaining disbursements to be made by the closing date. Credit No. 291 - Tourism Project US$3.2 million Credit (Net of Cancellation) of March 22, 1972; Effective Date: November 9, 1972; Closing Date: September 30, 1975; Revised Closing Date: December 31, 1977 Due to delays in appointing qualified architectural, engineer- ing and project management consultants, and repeated changes in scope proposed by the sponsors of the sub-projects, the proj4ect is two years behind schedule. Construction of the Yak and Yeti sub-project is underway and is expected to be completed by April, 1977. On the other hand, it was not possible to reach a firm agreement with the sponsors on an appropriate revision of the Annapurna sub-project, and $1.0 million of the Credit was cancelled from the original allocation ($2.88 million) for that sub-project. The remaining $1.88 million will meet increased costs of the Yak and Yeti sub-project and finance feasi- bility studies for further tourism facilities outside the Kathmandu Valley. Consultants have been engaged and the feasibility studies are under way. 1/ These notes are designed to inform the Executive Directors regarding the projects in execution and, in particular, to report any problems which are being encountered and the action being taken. They should be used in this sense with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.  ANNEX II Page 3 Credit No. 373 - Birganj Irrigation Project US$6.0 million Credit of April 18, 1973; Effective Date: July 9, 1973; Closing Date: December 31, 1978 Implementation of the project is progressing satisfactorily after initial delays in appointing engineering consultants, in field surveys and in procurement. About one third of the credit amount has been disbursed. Civil works are being completed in one irrigation block and are in progress in two further blocks and contracts have been awarded for civil works in another two (out of the original total of twelve). Construction of tubewells is 70% com- pleted in the groundwater areas. Due to a 50% cost overrun, a reduction in the project area is being considered. The project remains viable as a result of increases in agricultural product prices, and higher-than-expected intensity of cultivation. The project should be completed by mid-1978. Credit No. 397 - Telecommunications Project II US$5.5 million Credit of June 20, 1973; Effective Date: September 11, 1973; Closing Date: June 30, 1980 Due to organizational problems, lack of continuity in senior manage- ment, and delay in obtaining expert assistance, there have been delays in the procurement process and the project is about two years behind schedule. Good progress is now being made with the assistance of experts and consultants pro- vided by the United Kingdom and a new manager has been appointed. The project is now expected to proceed satisfactorily and present estimates are for completion by early 1980, six to twelve months behind schedule. Credit No. 470 - Water Supply and Sewerage Project US$7.8 million Credit of May 8, 1974; Effective Date: June 26, 1974; Closing Date: June 30, 1978 Design work is complete and most of the-major contracts have now been let. Project implementation is about one year behind schedule, because of delays in letting the contracts. A management team of four experts pro- vided by the United Kingdom has been assisting the Water Supply and Sewerage Board. The total project cost is likely to exceed the appraised total by US$6.0 million and the Government has requested IDA assistance in financing this cost overrun. 1/ Credit No. 505 - Settlement Project US$6.0 million Credit of August 14, 1974; Effective Date: February 20, 1975; Closing Date: July 15, 1982 Project implementation is two years behind the original schedule but indications are that it is being accelerated. Twenty-three winch lorries have been procured and operators are being trained in their use. Work has 1/ A proposal for additional financing of $4.0 million has been circulated to the Executive Directors on a no-objection basis.  ANNEX II Page 4 also begun on clearing the timber from projected settlement areas. However, the project is not yet free of problems, particularly in management and plan- ning by concerned agencies, and intensive supervision of the project is con- tinuing. In addition, changes in the Government's land use policy have led to requests, which are now under consideration, to restructure the project by reducing its size about 40%. Credit No. 600 - Kulekhani Hydroelectric Project US$26.0 million Credit of January 9, 1976; Effective Date: May 18, 1976; Closing Date: December 31, 1981 Bids for the major civil works have been received and are being evaluated. Bid documents for plant and equipment are expected to be issued around the end of April and contracts to be awarded around the end of August 1977. Preliminary estimates indicate that cost overruns of 60% may materialize and sources of supplementary funds are being explored. A super- vision mission visited Nepal in March, 1977, to assist the Government in re- viewing the civil works bid evaluation report. Credit No. 617 - Rural Development Project US$8.0 million Credit of April 30, 1976; Effective Date: July 16, 1976; Closing Date: December 31, 1981 Progress to date has been most satisfactory, with almost all planned pgroject actions being implemented ahead of schedule. Inter-ministerial coopera- tion is good and at the district level, sound and practical development plans have been produced which are fully supported and understood by project farmers. Adequate financing to carry out project proposals has been made available in the budget by the Government; sites and plans for most district construction projects have been completed, and construction is expected to begin in April; the seed exchange program has begun a year early; and five water.supply schemes are expected to be completed by end-July. Shortage of middle-level staff in the project area for construction supervision and agricultural extension may hinder project implementation in the coming year. However, arrangements have been made for more efficient deployment of existing staff and for special training of agricultural assistants resident in the project area to meet project needs. Under the associated Bank executed UNDP technical assistance project, the assistant to the Project Coordinator, the Irrigation Advisor, and the advisor to the Project Evaluation Unit have been appointed. Credit No. 654 - Bhairawa - Lumbini Groundwater Project US$9.0 million Credit of July 9, 1976; Effective Date: November 9, 1976; Closing Date: December 31, 1980 The project authorities have been established, the main consulting firm has been appointed and have recently started their work, and arrangements for procurement have been instituted. Drilling of tubewells is expected to start in May, 1977.  ANNEX II Page 5 Credit No. 659 - Technical Assistance Project US$3.0 million Credit of September 16.,-1976; Effective Date:: November 16, 1976; Closing Date: December 31, 1980 A list of six priority projects to be financed under the Credit is being discussed with the Government, and arrangements for initiating studies are being made.  ANNEX III Page 1 NEPAL - NEPAL INDUSTRIAL DEVELOPMENT CORPORATION PROJECT Borrower: The Kingdom of Nepal Beneficiary: Nepal Industrial Development Corporation (NIDC) Amount: US$4.0 million equivalent Terms: Standard Relending Terms: The Government will relend to NIDC at the rate of 8.2% per annum with repayment over a period of 18 years including 3 years grace on the basis of a flexible amortization schedule reflecting the repayment terms of the sub-loans made by NIDC. The foreign exchange risk will be assumed by the Government through the Central Bank. Project Description: The credit will meet NIDC's estimated foreign exchange requirements over the next two years for lending to private sector industrial projects and tourism. Procurement Arrangements: Through normal commercial channels. Free Limit: US$80,000 for individual sub-loans. Debt Covenant: Maximum debt/equity ratio of 5:1, as defined in the draft Project Agreement (Section 3.05).  ANNEX III Page 2 Projected Total NIDC Commitments: (In Rs millions) FY77 FY78 FY79 FY80 FY81 Indian Currency Loans 45.2 39.8 38.6 44.5 51.3 Non-Indian Foreign Currency Loans 2.6 21.8 29.3 33.0 37.8 Local Currency Loans 10.8 25.7 33.6 38.8 44.5 Local Currency Investments - 5.0 15.0 15.0 15.0 Total 58.6 92.3 116.5 131.3 148.6 Projected Credit Utilization: (In Rs millions) FY77 FY78 FY79 FY80 FY81 Commitments - 21.8 29.3 - - Disbursements - 15.0 22.5 7.5 5.0 Projected Balance Sheet (In Rs millions) As of End FY FY76 FY77 FY78 FY79 FY80 FY81 (Actual) Assets Current Assets 35.7 43.8 48.6 53.4 59.6 73.3 Loans and Equity Investments (net) 186.8 243.7 339.0 449.6 573.6 707.6 Guarantees 2.0 2.0 2.0 2.0 2.0 2.0 Net Fixed Assets 1.9 1.7 1.5 1.3 1.1 0.9 Total Assets 226.4 291.2 391.1 506.3 636.6 783.8 Liabilities Current Liabilities 10.3 10.3 10.3 10.3 10.3 10.3 Provisions and Other 5.6 5.7 6.2 6.8 7.8 9.7 Long Term Debt 63.9 115.2 210.5 320.1 443.1 581.1 Equity 14-6.6 160.0 164.1 169.1 175.1 182.5 Tot-al LiabiLities and Equity 4226.4 291.2 391.1 506.3 636.3 783.6 Long-Term Debt/Equity Ratio -0.5 - 0.8 1.4 2.1 3.0 3.9  ANNEX III Page 3 Projected Income Statements: (In Rs millions) FY76 FY77 FY78 FY79 FY80 FY81 (Actual) Total Revenue 11.7 14.7 21.7 32.1 44.4 59.5 Total Expenses 6.7 9.4 15.8 25.2 35.9 47.9 Profit before Taxes 5.0 5.3 5.9 6.9 8.5 11.6 Taxes 3.4 3.5 4.0 4.6 5.6 7.5 Net Profit 1.6 1.8 1.9 2.3 2.9 4.1 Net Profit as % of average net worth 1.1 1.3 1.3 1.5 1.9 2.8 Appraisal Report: Report No. 1398a-NEP of April 15, 1977.  ANNEX IV Page I NEPAL NEPAL INDUSTRIAL DEVELOPMENT CORPORATION PROJECT Supplementary Project Data Sheet Section I. Timetable of Key Events (a) Time taken to prepare the project. A project preparation mission reviewed NIDC's operations in December, 1975, and recommended that an appraisal mission be sent in mid-1976. (b) Date of first presentation to the Bank and date of first mission to consider the project. In November/ December, 1973, a mission reviewed NIDC's operations in detail and found its domestic and foreign resource position to be strong at that time. (c) Date of departure of appraisal mission. September, 1976 (d) Date of completion of negotiations. March 22, 1977 (e) Planned dated of effectiveness. August 31, 1977 Section II. Special IDA Implementation Action None Section III. Special Conditions (a) As conditions of effectiveness of the proposed credit: (i) NIDC-will employ an experienced development banker as an advi-sor for a pgeriod of about two years (para 33); and (ii) NIDC will employ ani rcc!ounting and information systems advisor for a period of about two years (para 33).  ANNEX IV Page 2 (b) An interest rate of no less than 11% will be charged to sub-borrowers on all loans provided from the IDA credit except those for projects in the least developed areas of Nepal on which a rate of no less than 10% will be charged (para 38). (c) In the appraisal of investment projects, NIDC will cal- culate (i) the internal financial rate of return for all projects costing Rs 1.0 million or more and (ii) the eco- nomic rate of return for all projects costing Rs 2.5 mil- lion or more (para 34). (d) NIDC will employ on or before September 30, 1977, on a full-time basis, a qualified and experienced accountant (para 33). (e) The amount to be withdrawn from the proceeds of the credit for any one sub-project shall not exceed $1.0 million equiva- lent (para 45).  IBRD -11462 8_ , r .2A 86 818 APRIL 197N ~~~~N. ~~~~~~~C H INA N EPA L iNDIA ~~~~~~~~~~\( T I BET) I N DIA A ROAD, RAIL TRANSPORTATION NETWORK 5,011CR UNDER ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~30- EXISTING ODSTRCTION '______ P