Nepal - Third Narayani Irrigation Project

Document of The World Bank FOR OFFICIAL USE ONLY I?R / //L7 gfi Report No. 6067-NEP STAFF APPRAISAL REPORT NEPAL NARAYANI III IRRIGATION PROJECT June 2, 1986 South Asia Projects Department Irrigation II Division 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 US$1.00 = NRs 20.5 WEIGHTS AND MEASURES (METRIC SYSTEM) 1 meter (m) = 3.28 feet 1 kilometer (km) = 0.62 miles 1 hectare (ha) = 2.47 acres 1.50 bighas 1 milliost cubic meters (Mm3) = 810 acre-feet or 35.3 Mft3 1 cubic meter per second (m3/s) = 35.31 cubic fooL per second (cfs) 1 cubic foot per second (cfs) 0.028 cubic meters per second (m3/sec) 1 metric ton = 2,205 pounds FISCAL YEAR July 16 - July 15  FOR OMCuL USE ONLY NEPAL NARAYANI III IRRICATION PROJECT Credit and Project Summary Borrower: Kingdom of Nepal Amount: SDR 21.6 million (US$24.5 million equivalent)l' Terms: Standard Project Objectives The main objectives of the project are to increase and Description: dry-season agricultural production and reduce the risks to monsoon crop production by introducing an equitable, predictable and reliable irrigation system in the Narayani irrigation scheme. The proposed project is the third phase of an IDA-supported program and would complete the development of irrigation and drainage infrastructure over about 37,400 ha served by the Nepal Eastern Canal in the Narayani Zone of the Central Region of Nepal. The project would also provide for: flood protection and river training works; improvements to village roads and canal service roads; support to agricultural extension and research; a regional workshop; training of project staff; consulting services; funding for project establisment and O&M; a small component for groundwater development; and monitoring and evaluation. In view of the experience with the implementation of the first and second projects, no major risks are anticipated regarding the physical implementation of the project. Possible risks that could affect project objectives include: HMG's failure to make adequate provisions for O&M financing after contributions from the credit phase out at the end of implementation; a major flood damage to the main canal and other essential irrigation infrastruc- ture; and inadequate water management. With respect to these risks, the cost of project establishment and O&M would be financed under the redit on a declining basis; under the project, special training would be provided to project staff in water management and water users' groups would be strengthened; and project planning and design would enable the introduction of a water management system that would enable the irrigation service to be timely, reliable and equitable. 1/ The project is also supported by a grant from the Swiss Development Cooperation (SDC) of SF 15.0 million (US$7.5 million equivalent). 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 Dank authorization.  ABBREVIATIONS AADO - Assistant Agricultural Development Officer ADBN - Agricultural Development Bank of Nepal ADO - Agricultural Development Officer AC - Auditor General AIC - Agricultural Input Corporation BRVPD - Bihar River '.'alley Project Department BSC - Branch Secondary Canal CCA - Cultivated Commanded Area DE - Divisional Engineer DC - Director General (DIHM and DOA) DIHM - Department of Irrigation, Hydrology, and Meteorology DOA - Department of Agriculture EE - Executive Engineer ERR - Economic Lite of Return FAO - Food and Agriculture Organization (UN) GM - General Manager GOI - Government of India HMGN - His Majesty's Government of Nepal HYV - High-Yielding Variety _CB - International Competitive Bidding IDA - International Development Association IEC - Indian Eastern Canal System JT - Junior Technician JTA - Junior Technical Assistant LCB - Local Competitive Bidding M&E - Monitoring and Evaluation MOA - Ministry of Agriculture MSC - Main Secondary Canal MWR - Ministry of Water Resources NEC - Nepal Eastern Canal NFC - Nepal Food Corporation NZIDB - Narayani Zone Irrigation Development Board NZIDP - Narayani Zone Irrigation Development Project (Stages I, II and III Areas) OCC - Opportunity Cost of Capital O&M - Operation and Maintenance PLAA - Panchayat-Level Agricultural Assistant PPAR - Project Performance Audit Report RD - Revenue Department REC - Rice Export Corporation SA - Special Account SCF - Standard Conversion Factor SDC - Swiss Development Cooperation SF - Swiss Francs SMS - Subject Matter Specialist Stage I Area - Narayani Zone - Blocks I-VI (15,900 ha) Stage II Area - Narayani Zone - Blocks VII-XII (12,800 ha) Stage III Area - Narayani Zone - Blocks XIII-XV (8,700 .ia) TC - Tertiary Canal T&V - Training and Visit System (of Agricultural Extension) USAID - United States Agency for International Development WUG - Water Users' Group  GLOSSARY Block - An operational unit of 2,000-3,000 ha, into which the NEC command is divided. Main Secondary Canal (MSC) - Principal branch canal from the NEC serving a block of 2,000-3,000 ha. Branch Secondary Canal (BSC) - Smaller branch canal from the NEC or from MSC, serving about 200-600 ha. Check - Cross-regulating structure. Turnout - An ungated structure on a TC, commanding about 30 ha. Tertiary Canal (TC) - A canal conveying water from the 30-ha turnouts to 4-ha command areas. Outlet (Division Box) - A structure diverting (or closing) the whole flow to a field channel within the 4-ha area. Field Channel - Canal within the 4-ha command area (below the division box). Paddy - Unhulled rice Panchayat - Village-level administrative unit Ward - Subdivision of a panchayat Nalla - Natural drain Sajha - Cooperatives  NEPAL NARAYANI III IRRICATION PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. BACKGROUND .................... 1 Introduction I 1 The Agricultural Sector ......... . . .. . . . . . .............. 2 The Irrigation Subsector .. .............. ......... . . . . . 4 IDA Involvement in Irrigation Development ................ 6 Rationale for IDA Involvement .................. ........ 8 II. THE PROJECT AREA .............. ................ 10 Location ................................................ 10 Natural Resources ......... .. .... ... ...*. .............. .. 10 Development of the NEC Command Area ...... ..... 12 Land Use, Cropping Patterns, and Crop Yields .......-... 14 Agr cultural Support Services t............ 14 Other Public Services . ... .. . . ...... 15 III. THE PROJECT ........................................ L-) A. Project Formulation and Objectives ...................... 15 roect Concept .............................................. 16 Project Objectives ........... .. . .. . .. . .. . .. . .. .. . .. . .. . . 16 Summary of Project Components ........................... 17 B. Detailed Faue .............................. 17 Improvements to NEC and Repairs to the Tilawe Barrage ... 17 Stage III Area Works ......... .............*..*.......... 18 Stage I and II Area Works ............................... 19 Flood Protection and River Training Works ............... 19 Improvement to Village and Service Roads ................ 20 Vehicles and Equipment ......... ............ ............ 20 Regional Workshop ...................................... 21 Technical Support ................................ 21 Support of Project Establishment and O&M Costs .......... 22 C. Design and Implementation Aspects ....................... 23 Status of Preparation ........*......*.. ............... 23 Implementation Schedule .... ... . .... ......... . . . . . . * ... *. . 23 This report is based on the findings of a Bank mission which visited Nepal in November/December 1985, and comprised of Messrs. E. Cazit and M. Herman (Bank), B. Fawcett (CIDA), M. Barber, D. Campbell, A. Seager and L. Shanan (Consultants). Mrs. C. Leithmann-Frueh has assisted with the economic analysis. Word processing was done by Ms. Z. Kalinger, with the assistance of Mmes. C. Clay and K. Landerer.  Page No. IV. COST ESTIMATES, FINANCING, AND DISBURSEMENTS ............ 24 Project Cost Estimates ................................. 24 Financing ............................. 24 Procurement ................444....*..... 25 Disbursements .... ...........................*.... *4 27 Accounts and Audits ..................................... 28 V. ORGANIZATION AND MANAGEMENT ............................ 28 General ......*..........*****.... 28 Narayani Zone Irrigation Development Project - Present Organizaticn 29...* ........................... . 29 Proposed Project Organization .......................... 30 Quality Control 4444444 .................... 32 Monitoring and Evaluation .............................. 32 Agricultural Support Services ...... .................... 33 Regional and District Coordinating Committees 4444444444 34 Post Project Organization ...................... .. 34 VI. WATER MANAGEMENT ................ 35 Introduction ........................... 35 Water Supply and Demand ............................... 35 Water Management .... ***oe * ... ................. 36 Management Organization ................................. 38 Water Users' Groups tWUGs).............................. 38 VII. AGRICULTURAL PRODUCTION, FARM INCOME, AND COST RECOVERY 39 Agricultural Production ................................... 39 Farm Incomes ........................................ . 42 Impact on Poverty .... ..................... ............. 43 Capital and O&M Costs * ................................. 43 Cost Recovery ....a .................................... 44 VIII. BENEFITS AND JUSTIFICATION ................ ............. 47 Project Impact ................ 47 Economic Analysis ........* ....................... 47 Sensitivity Analysis *.................................. 48 Project Risk .................................................... 49 Environmental Effects ....................... ........ 50 IX. AGREEMENTS REACHED AND RECOMMENDATIONS .................. 51  ANNEX 1 - Main Supporting Tables Tables 1 - Salient Climatic Data 2 - Present and Future Cropping Patterns and Yields 3 - Existing and Future Staff Requirements - Agricultural Extension 4 - Vehicles and Construction Equipment 5 - Office, Su:rvey, Design and Supervision Equipment 6 - Estimated Schedule of Expenditures 7 - Disbursemient Schedule 8 - Credit/Grant Allocation 9 - Existing and Future NZIDP Staff Requirements 10 - Project Irrigation Requirements and Flow Rates 11 - Agricultural Production and Input Requirements 12 - Summary of Financial and Economic Prices 13.1 - Estimated Farm Budgets and Project Rent 13.2 - Estimated Project Rent and Cost Recovery 14.1 - Stage I - Costs and Benefits for Economic Analysis 14.2 - Stage II - Costs and Benefits for Economic Analysis 14.3 - Stage III - Costs and Benefits for Economic Analysis 14.4 - Total Project - Costs and Benefits for Economic Analysis ANNEXES (cont.) 2 - Detailed Cost Estimates 3 - Assumptions for Financial and Economic Analyses 4 - Selected Documents and Data Available with Project File CHARTS 1 - Implementation Schedule 2 - Organization Chart of the Department of Irrigation, Hydrology and Meteorology (DIHM) 3 - Organization of the Project (Construction Stage) 4 - Organization of the Agricultural Extension Service 5 - Historical Water Delivery at the Head of the NEC MAPS IBRD 19551 - Nepal - Irrigation Development IBRD 19552 - Nepal - Major Drainage Basins IBRD 19550 - Project Location in Relationship to the Indian Eastern Canal System IBRD 19549 - General Plan of the Narayani Zone Irrigation Project Volume II: Supplementary Data Volume ANNEXES 5 - The Regional Workshop 6 - Water Distribution System within 30-ha Tertiary Service Area and Associated Structures 7 - Terms of Reference for AADO 8 - Project Consultants 9 - Establishment and Operation and Maintenance  NEPAL NARAYANI III IRRIGATION PROJECT Staff Appraisal Report I. BACKGROUND Introduction 1.01 General. Landlocked between China and India, Nepal covers an area of 141,000 km4 that divj des into three broad ecologicaL zones: the Himalayan Mountains (21,000 km ); the Siwalik Hills (96,000 km2); and the Terai plain on the northern fringe of the Gangetic plain (24,000 km2). The mountain and h-ill zones have steep slopes, and only a limited area is suitable for any form of agriculture, even with extensive terracing. Most of the lands suitable for cultivation and irrigation are in the Terai, where the monsoon rains can by and large support rainfed agriculture, although dry spells often affect yields, as do storms, which are also common. The climate in most of the hills and in all of the mountain areas precludes the growing of winter crops. 1.02 Between 1971 and 1984, Nepal's population grew a; an annual rate of 2.7 percent and by the end of that period had reached an estimated 16.3 M, of which 94 percent were in rural areas. Because population density on arable land is now very high (356 per km2), cultivation has been extended onto marginal lands and has encroached on the forests. As a result, most of the Terai, which was covered by forest half a century ago, has been offi- cially cleared for agriculture, and the remainder has been thinned by illegal felling and unofficial settlements. Hill forests have been denuded to meet the growing demand for fuelwood (which accounts for 90 percent of Nepal's energy consumption) and this, together with overgrazing, has helped to accelerate soil erosion and the associated silting of the rivers. Flooding on the Terai has also become more frequent. 1.03 The General Economy. Agriculture, whi_ is largely rainfed, dominates the economy: it accounts for nearly 60 percent of Nepal's GDP and 55-60 percent of its merchandise exports, and provides the livelihood for over 90 percent of the population. Crop production accounts for about 60 percent of agricultural output, livestock for 30 percent, and forestry for 10 percent. Foodgrains, of which rice is the most important, are planted on some 90 percent of the cropped area; cash crops occupy the balance. 1.04 Nepal's industrial sector is small. Output consists of consumer goods (footwear, textiles, and processed foods), construction materials (bricks and tiles), and simple assembly items. Larger-scale manufacturing is undertaken by public enterprises in and around the Kathmandu Valley. Private investment is concentrated in small and cottage industries, which account for about 30 percent of the industrial value added. Since 1982, these industries have experienced impressive growth, which has even surpassed the annual rate of 11 percent achieved by the industrial sector as a whole during this period. Furthermore, cottage industry provides part-time employment for more than one million people. 1.05 The improved performance of the industrial sector was assisted by improvements in the power sector. During 1982-85, the total installed gener- ating capacity increased from 138 MW to 172 MW, or about 6 percent per annum,  -2- and consumption grew at 12 percent per annum. In addition, reliability has improved since the commissioning of the 60-MW Kulekhani hydel station in December 1982. Further development of Nepal's vast hydropower resources will require financial exploitation and export agreements with neighboring countries. 1.06 Although the road network is also being expanded, particularly in the Terai, a large part of the Hills is still inaccessible by road. Maintenance also remains a problem. The national airline at present serves 38 localities within Nepal and connects to nine Asian countries. Crowth in tourism has been dynamic and, although it accounts for only 1 percent of GDP, it provides about 20 percent of foreign exchange earnings. 1.07 Three decades of development efforts, supported by growing foreign assistance, have brought few improvements to the lives of the people. Rapid population increases since 1970 have virtually offset real GDP growth. By most indicators, Nepal is still one of the poorest and least developed countries in the world. Average per capita income is about US$170 per annum, life expectancy about 46 years, and infant mortality about 125 per 1,000 births. Adult literacy is only 19 percent. 1.08 National Development Objectives. The Sixth Plan (FY81-85) accorded high priority to developing agriculture, small-scale industries, and the country's abundant water resources. It also stressed soil conservation, population control, and measures that would promote full utilization of existing infrastructure, alleviate absorptive capacity constraints, and develop human resources. In addition, it called for increased involvement of the private sector in agricultural support services, manufacturing, trade, tourism, construction, and transport operations. These objectives have been carried over into the Seventh Plan (FY86-90), which also recognizes that successful and efficient implementation of development programs cannot be achieved without a strong and competent administration. It therefore includes details for enhancing the capability of ministries charged with formulating economic and development policies and implementing development programs. 1.09 Investment expenditures, supported by growing foreign assistance, increased rapidly during the Fifth and Sixth Plan periods, from US$146 M (9 percent of GDP) in FY75 to US$481 M (19 percent of GDP) in FY84. Moreover, there were substantial shifts in the focus of development spending from transport to agriculture, power, and social services. The Agricultural Sector 1.10 Agricultural Performance. Nepal's economy depends greatly on developments in, and the overall performance of, the agricuLtural sector, whose growth has been somewhat slow. During the 1970s, for example, the growth rate of all agricultural production was only 1.1 percent. Significant growth was achieved only in the case of wheat, which increased from a low base at an average rate of 9.6 percent per annum, largely because of increased acreage. Meanwhile, the average yields of other crops declined at a rate of 0.8-0.9 percent per annum.  -3- 1.11 Inadequate input supplies (especially fertilizers), poor price incen- tives, and poor extension services contributed to the slow growth in agricul- tural production; but even more important were the poor monsoons, since the country relies predominantly on rainfed agriculture. As a result of severe drought in 1982/83, agricultural output dropped by 2.5 percent, nonagricul- tural activities virtually stagnated and GDP declined by 1.4 percent. The economy rebounded in 1983/84 in response to a good monsoon, but a poor mon- soon in 1984/85 slowed the growth of both agricultural output and GDP. The average annual CDP growth for the period 1982-85 is summarized below: 1982/83 1983/84 1984/85 1982/83-1984/85 1970/71-1984/85 Sector Agriculture -2.5 8.7 1.7 2.5 1.5 Non-agriculture 0.4 5.5 4.5 3.4 4.9 CDP -1.4 7.4 2.8 2.9 2.8 1.12 Agricultural Institutions. Responsibility for Nepal's agricultural policy and development rests with four ministries: the Ministry of Agricul- ture (MOA), the Ministry of Forests and Soil Conservation, the Ministry of Water Resources (MWR), and the Ministry of Land Reform. The MOA includes the Department of Agriculture (DOA), which is responsible for agricultural research, training, and extension and also oversees the Agricultural Develop- ment Bank of Nepal (ADBN) and the Agricu lkural Inputs Corporation (AIC). A Director-General of Agriculture heads DOA, assisted by four Deputy-Directors General who are in charge of Crop Development, Extension and Services, Hor- ticulture and Fisheries, and Planning and Coordination. 1.13 Agricultural Research. The research service operates 52 centers. These consist of (i) research stations for cereal crops; (ii) research cen- ters for cash crops; and (iii) research farms, most of which are engaged in the production of foundation and stock seed, the latter to be passed on to AIC's contract growers (para 1.17). AIC is charged to develop suitable agricultural technologies for all the regions and climatic zones. The benefits of a coordinated approach to rice, wheat, and maize research and production can be seen in the Integrated Cereals Project (ICP), assisted by USAID. The Cropping Systems Program (an integral part of the ICP) has developed improved cropping sequences and technologies under irrigated and rainfed conditions, but most of its work pertains to conditions in the Hills. 1.14 Agricultural research activities in the Terai are being strengthened through the provision of staff, equipment, and buildings under the Agricul- tural Extension and Research Project (Cr. 1100-NEP, US$17.5 M, 1981) and the Cash Crop Development Project (Cr. 1339-NEP, US$6.0 M, 1983). At the same time, an effort is being made to decentralize the research organization, and thus four of the existing research stations have been designated as Regional Research Stations. One of these is Parwanipur, which serves the proposed project area (para 2.23). In addition, research substations are being developed for oilseeds, sugarcane, tobacco, horticulture, and cereals. A flow of relevant technology has already started. Furthermore, the extension service in 10 districts in the Terai is being strengthened through the Agricultural Extension Project (Cr. 1570-NEP, US$7.2 M, 1985). Six of these districts have major irrigation projects. 1.15 Agricultural Credit. The major source of institutional credit is the ADBN, established in 1968. Its function is to provide the overall credit  -4- requirements of agriculture and agro-based industries, and to mobilize rural savings. More recently, commercial banks have begun to provide agricultural credit, but their volume of lending is still small. The standard terms of lending by ADBN are 18 months at 15 percent annual interest for short-term loans, 7 years at 12 percent interest for medium-term loans, and 20 years at 8 percent interest for long-term loans. ADBN has offices throughout the country. Lending from private sources is also widespread, although the interest rates are much higher than those offered by institutional sources. 1.16 Cooperatives. The Sajha development program was introduced in early 1976 to revitalize the cooperative movement, mobilize local savings, provide short-term production credit to farmers using ADBN funds for on-lending, and to link economic development with political decentralization at the local level. Other objectives of the Sajhas are to provide agricultural inputs and marketing facilities, and to sell salt, kerosene, diesel oil, coarse cloth, rice, and sugar in the villages. At present, one Sajha serves three to four panchayats. At the village panchayat level, they act as the local agent of the AIC to sell fertilizers and pesticides. Most of the Sajhas suffer from poor management and a lack of resources. 1.17 Agricultural Inputs. The AIC, established in 1975, is the government agency responsible for supplying inputs. Its functions are to: (i) import and distribute chemical fertilizers and to maintain a buffer stock sufficient for at least one cropping season; (ii) contract, collect, process, store, and distribute improved seed; (iii) procure and distribute agricultural chemicals used in protecting plants and storing grain; and (iv) distribute locally manufactured agricultural tools and implements and import and distribute agricultural machinery. However, the AIC lacks the funds needed to import fertilizer on time and in adequate quantities. Thus, in recent years, about 40 percent of fertilizer imports have been in the form of external commodity aid. Chemical fertilizers are uniformly priced throughout the country; the rate takes into account import and re-ail prices in the adjoining areas of India. About 90 percent of the fertilizers are consumed in the Terai and the Kathmandu Valley. 1.18 Agricultural Prices. HMGN's policy is to subsidize inputs and to determine minimum support prices (usually fixed below the expected market prices) for major foodgrains and cash crops, with the objective of containing prices paid by the consumers, many of whom spend 70-80 percent of their income on food. The Nepal Food Corporation (NFC) procures foodgrains in the Terai for distribution to the deficit Hill areas and subsidizes transporta- tion costs to the Hills at rates that increase in direct relation to the remoteness of the deficit areas. However, public procurement of foodgrains amounts to less than 15 percent of the total marketed output, and therefore grain marketing is primarily a private sector operation. The Irrigation Subsector 1.19 Water Resources Utilization. Nepal has abundant surface water resources (seQ Map IBRD 19552). On the average, its rivers discharge about 150 billion m a year, which would be enough to irrigate 8 to 10 M ha. However, only about 1.3 M ha are suitably located for gravity irrigation. Furthermore, both the major and minor rivers can serve only a relatively small command area in Nepal, since they are costly to develop owing to the large diversion structures needed to spill the huge monsoon floods.  -5- Moreover, large quantities of sediment should be desilted out of the system every year. The development of these rivers is further constrained by the need for agreements with India. Although groundwater resources are abundant in the Terai, development is constrained by the lack of infrastructure to keep scattered pumps and engines operating reliably. Electric power needed to energize tubewelLs is severely restricted in extent and amount, par- ticularly in the more remote parts, but the situation is improving. 1.20 Irrigation Development. At present, only about 540,000 ha have some form of irrigation (see Map IBRD 19551). About 140,000 ha are under public schemes and the rest are mostly under private sector schemes. The inventory of irrigation facilities (1985) by ecological zones and development regions is as follows: Region Mountain Hill Terai Total Percent