Nepal - Third Technical Assistance (Pancheswar) Project

Document of The World Bank FOR OFFICL USE ONLY Report No P-4613-NEP MEMORANDUM AND RECOHHENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 10.6 MILLION TO THE KINGDOM OF NEPAL FOR A THIRD TECHNICAL ASSISTANCE (PANCHESWAR) PROJECT April 1, 1988 This documest has a resticted disibution and may be und by recpients only In the perfonnance of their offidal dutes. Ift contns may not othrwise be disclosed withu World Bank authorization.  CURCY UVALETS 1 Nepalese Rupee - 100 Nepalese Paise US$1 (at appraisal, - NRs 22.0 (Official Rate) November 1987) - NRs 22.0 (Free Market Rate) WEIGHTS AND MEASURES 1 kilovolt (kV) - 1,000 volts (v) 1 kilowatt (kU) - 1,000 watts (W) 1 megawatt (MW) - 1,000 kW 1 kilowatt-hour (kWh) - 1,000 watt-hours (Wh) 1 megawatt-hour (MWh) - 1,000 kWh 1 gigawatt-hour (GWh) - 1,000,000 kWh 1 hectare (ha) - 2.47 acres (ac) ABBREVATIONS FRG - Federal Republic of Germany GOI - Government of India HMG/N - His Majesty's Government of Nepal ICB - International Competitive Bidding JGE - Joint Group of Experts LCB - Local Competitive Bidding LCGEP - Least Cost Generation Expansion Plan KOF - Ministry of Finance MWR Ministry of Water Resources NEA - Nepal Electricity Authority O&M - Operation and Maintenance PSR - Power Subsector Review RE - Rural Electrification SOE - S%atement of Expenditure TA - Technical Assistance WECS - Water and Energy Commission Secretariat FISCAL YE 15 July 16 - July 15  FOR OFFICIAL USE ONLY THIRD TECHNICAL ASSISTANCE (PANCHESWAR) PROJECT CREDIT AND PROJECT SUHMARY Borrower: Kingdom of Nepal haneficiaria: Ministry of Water Resources Nepal Electricity Authority Amount: SDR 10.6 million (US$14.4 million equivalent) Terms: Standard, with 40 years maturity Onlending Terms: Not applicable il.MLJ Plan: Government US$ 2.2 million FRG (KfW) US$ 5.3 million IDA USSl4.4 million Total US$21.9 million Economic Rate of Return: Not Applicable Staff Apnraisal ReRort: Not Applicable. A Technical Annex is attached. * kIn: IBRD 19917 Thisdcumentba austricted d butionan may be used by mpWts onlb the pefeonunce ofteir officialduties. tscontents may not othewe be diskned without V-orTd E}-* aUUthorizatin.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAX DEVELOPKENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A THIRD TECHNICAL ASSISTANCE (PANCHESWAR) PROJECT 1. The following memorandum and recommendation on a proposed development credit to-the Kingdom of Nepal for SDR 10.6 million (US$14.4 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms with 40 years maturity and help finance a Third Technical Assistance (Pancheswar) Project. The Federal Republic of Germany (FRG) through KfW would provide parallel cofinancing in a grant totalling US$5.3 million equivalent. 2. Background. Nepal's hydroelectric potential has been estimated at about 83,000 MW, of which about 25,000 MW have been investigated at different level.s of detail and only 160 MW developed thus far. His Majesty's Government of Nepal (HMG/N) and IDA view the exploitation of this enormous resource as one of Nepal's most important economic priorities, and the Power Subsector Review (Report No. 6879a-NEP dated January 15, 1988) outlined a subsector development strategy and identified key studies, some of which are to be supported through the proposed project. Efficient development of the subsector would reduce the cost and improve the availability of power to the domestic market for development purposes and induce a shift away from fuelwooJ use. It would also enable the export of power to India, which represents Nepal's most attractive long-term foreign exchange-earning option. The prospects for implementing a hydropower-led export strategy are particularly good in view of the Government of India's (GOI's) estimates of India's load growth, which indicate the need for an addition of more than 5,000 MW capacity per annum in the foreseeable future, and economies of scale that can be realized by the development of Nepalese projects in the 2,000 MW-plus range. 3. Pancheswar Multipurese Project. GOI, accordingly, has supported the principle of joint investigation of sites in Nepal which appear suitable for long-term development (after 2005) as regional power schemes, and IDA is currently financing feasibility studies under the Karnali Preparation Project Phase I (Cr. 1452-NEP) for a project on the Ka-nali River which could have a total generation capacity of about 16,000 MW. The proposed project's major component would assist HMG/N in conducting field investigations of another large-scale scheme, the Pancheswstr Multipurpose Project, on the Mahakali River bordering India and Western Nepal, which has an estimated capacity of 2,000-3,000 MW, an estimated cost of about US$2 billion and a prospective commissioning date of 2010 (see map). India and Nepal established a Joint Group of Experts (JGE) to oversee the studies of the Pancheswar site. The two governments agreed in early 1984 that each country would undertake field investigations on its own side of the river as the basis for a subsequent project feasibility study; this credit would enable HMG/N to fulfill its obligations. 4. The project would also include studies related to the medium-term development of the power subsector. In March 1987, HMG/N, supported by IDA technical assistance funds and with the assistance of consultants, completed a least-cost generation expansion plan (LCGEP) for 1986-2005.  - 2 - This determined that the next addition of generating capacity should be the 402 MW Arun-3 Hydropower Project, for which a feasibility study has been completed. Arun-3 would cater to internal power demand until 2005; it also could enable Nepal to develop a bulk export market for electricity in India. In this case, project implementation could be accelerated to accommodate any economically beneficial export sales agreement. The proposed credit would finance the consultancy services required for the detailed engineering of the Arun.-3 project as well as other studies related to its preparation. It would also finance a number of ancillary studies necessary for the medium-term strengthening of the power subsector, especially the institutional capacity of the Nepal Electricity Authority (NEA), identified in the Power Subsector Report (PSR). 5. The Arun-3 hydroelectric power project involves international water rights issues. This project would use the water of the Arun River, an international inland waterway that originates in Tibet, People's Republic of China, and flows through Nepal to India. With regard to the immediate downstream riparian, India, Nepal's right to use the water of the Aren River is covered by an agreement between the Government of India and HMG/N on the Kohsi Project dated April 25, 1954, as amended on December 19, 1966, which does not require formal notification regarding the project component. The Government of China (GOC), the upstream riparian, raised no objections in response to IDA's indication that it was considering supporting development of the proposed Arun-3 Hyrdoelectric Project. Although the field investigations of the proposed Pancheswar Multipurpose Project would not involve any use or alteration of the flow regimes in the border river, IDA has, nonetheless, notified (October 26, 1984) GOI of its interest in supporting the investigations. 6. In addition to supporting assistance to the power subsector, the proposed project would extend IDA support to meet Nepal's need for studies of priority investments in other infrastructure sectors begun under the First and Second Technical Assistanice (TA) Projects (Crs. 659-NEP and 1379-NEP for US$3.0 and US$6.0 million equivalent, respectively). TA 1, approved in 1976, primarily sc.pported the preparation of projects subsequently financed by IDA, plus cartographic surveys; it is now fully disbursed. TA 2 was approved in 1983 and is now fully committed. The credits have been useful vehicles for identifying and preparing priority projects in power and irrigation such as the Arun-3 Hydroelectric Project and the Sunsari Morang Irrigation II Project (Cr. 1814-NEP). The proposed credit includes US$5.0 million for assistance to be defined in detail by December 31, 1989; this will, be used primarily to finance studies of high priority subprojects in the agriculture, irrigation, power and other infrastructure subsectors. These would assist HMG/N to address the fundamental agricultural issue of poor productivity in the food grain are.- by optimizing the development of irrigation. The studies would focus on potential new irrigation schemes, improvement of existing projects and issues, policies, technologies and institutional strengthening needed for efficient irrigation development. Each study would be subject to prior review and agreement by IDA. 7. Rationale for IDA Involvement. HMG/N sought IDA's support for the proposed project because of its experience in the power subsector and its capacity as a multilateral agency to ensure the adequacy of technical investigations and to coordinate donor support. The Pancheswar preparation component would support IDA's strategy of promoting Nepalese power exports and acting as a catalyst for and coordinator of external financing for  -3- power development. IDA's participation would also be consistent with its promotion of least-cost power development in India. Mobilizing the funds required to develop schemes such as Pancheswar or Karnali constitutes a major challenge, the success of which would depend on the production of technically sound, objective studies. The Nepalese and Indian governments view IDA's participation in the preparation, financing and construction of such projects as helpful to bilateral cooperation and as a means of ensuring that both parties' interests are adequately taken into account. Also, the recently completed LCGEP and PSR identified a number of studies necessary for the implementation of the medium-term power expansion plan. Studies are also necessary to formulate an institutional development plan for NEA to prepare the organization to cope with the increased responsibilities that will result from the implementation of the expansion plan which is estimated to account for approximately 20% of HKG/N's investment program over the next 10 years. IDA's support for the proposed studies would facilitate their timely execution and provide an opportunity to strengthen IDA's dialogue with HMG/N on its sector development strategy. Finally, the inclusion of a component oriented towards irrigated agriculture studies is justified in view of HMG/N's emphasis in its Seventh Development Plan on food production and its recently announced basic needs initiative. 8. Proiect Objectlyes. The proposed project is designed to support HMG/N's development strategy through: (a) assisting the Government to secure the least-C. c supply of electricity for both domestic needs and exports by financing preparation of specific priority projects; and (b) financing high priority studies in agriculture, irrigation, power and other infrastructure sectors. 9. Prolect Description. The project would provide the technical assistance, equipment and exploratory works required for: (a) the engineering, socio-economic, resettlement and environmental field investigations on the Nepalese side of the border for the Pancheswar Multipurpose Project; (b) detailed engineering for the Arun-3 Hydroelectric Project and a resettlement and rehabilitation plan for the population affected by the project; (c) study of evacuation of power from Arun-3, including the technical aspects of Interconnection with India and detailed engineering for the recommended facilities; (d) a 10-year master plan for transmission and distribution of electricity in Nepal; (e) a long-run marginal cost study and a plan to gradually adjust tariff structures and levels to reflect the economic costs of supply; (f) the preparation of a corporate consolidation and development plan for the Nepal Electricity Authority (NEA); (g) the preparation of a strategy and ten-year plan for rural electrification; and (h) other high priority studies or technical assis:ance in agriculture, irrigation, power and other infrastructure subsectors. 10. The proposed project, to be carried out over 4 years, provides funds for civil works, equipment, vehicles, materials and consultant services. The project's total cost is estimated at US$21.9 million equivalent, with a foreign exchange component of US$16.8 million (77%). A breakdown of the costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and disbursements, and the disbursement schedule are shown in Schedule B. A timetable of project processing events and the status of Bank Group operations in Nepal are shown in Schedules C and D, respectively. A map is also attached. The detailed engineering for the Arun-3 Hydroelectric Project will be supported by the FRG under  parallel financing (estimated at US$5.3 million equivalent). A Staff Appraisal Report has not been prepared; however, a technical annex is attached as Schedule E. 11. Agreed Actions. HMG/N has agreed to the following: (a) submission to IDA by December 31, 1989, of TORs for the studies and technical assistance mentioned in para. 9(h); (b) informing the JGE of the technical aspects of the work for Pancheswar to ensure that the studies to be carried out in Nepal are consistent in nature and scope with investigations already done by GOI; (c) TORs for all power-related studies financed by IDA, a draft letter of invitation (including evaluation criteria) for consultant selection and a schedule to expedite consultant recruitment; (d) exchange views with IDA on the TORs and the short list of consultants for the Arun-3 detailed engineering studies; and (e) provision by NEA of appropriate counterpart staff and adequate administrative, budgetary and logistical support for each of the studies. HMG/N and IDA also agreed on short lists of consultants for: (a) the ten-year master plan for transmission and distribution; (b) the study for power evacuation from Arun-3; (c) the long-run marginal cost and tariff study; and (d) the rural electrification plan. The selection of these consultants, the consultants for NEA's institutional development plan, and the effectiveness of the agreement for the FRG parallel cofinanctizg would be conditions of Credit effectiveness. 12. Benefits. The field investigations for Pancheswar are justified by findings from the reconnaissance work conducted by GOI, which indicate the project's potential as a low-cost multipurpose hydropower facility. The proposed investigations of the Pancheswar project are necessary to develop the framework for a full feasibility study. Similarly the LCGEP and the feasibility studies for the Arun-3 project indicate that unless preparation of this project's final engineering is begun in mid-1988, Nepal would experience power shortages after 1995. The proposed studies are necessary to complement the LCGEP and to implement the recommendations of the Power Subsector Review and would be building blocks for an integrated strategy fur medium-term power sector development in Nepal. The infrastructure studies, particularly for the agriculture sector, would improve HMG/N's planning of sectoral investments in infrastructure to meet key strategic targets. 13. Risks. The risk that the project would start slowly due to delays in the selection of consultants has been minimized by agreements (a) and (c) in para.11. The rationale and TOR for the studies have been reviewed thoroughly and the counterpart arrangements agreed in detail to ensure that effective uba will be made of the assistance to be provided. 14. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President By: W. D. Hopper Attachments Washington, D.C. April 1, 1988  -5- tcbedluleX THIRD TECHNICAL ASSISTANCE JPANCHESWAR) PROJECT Estimated Costs and Finawcing Plan Estimated Costs Local Foreign Total Project Component ------(US$ Million)--------- Field Investigations for Pancheswar 1.40 3.40 4.80 Detailed Engineering for Arun-3 0.95 3.55 4.50 Power Evacuation from Arun-3 0.10 0.40 0.50 Ten Year Transmission and Distribution Plia 0.10 0.65 0.75 Long-run Marginal Cost and Tariff Study 0.07 0.33 0.40 Institutional Development Plan for NEA 0.50 1.20 1.70 Rural Electrification Plan 0.10 0.45 0.55 Other Studies 0-75 4.25 5.00 Base Cost 3.97 14.23 18.20 Physical Contingencies 0.40 1.42 1 82 Price Contingencies DIU 1.X8 1.87 Total Project Costs /a 5.06 16.83 21.89 /A Inclusive of taxes and duties of US$0.6 million. Financing Plan Local Foreign Total Financier ----- (US$ Million)--------- HMG/N 2.20 - 2.20 FRG 1.18 4.12 5.30 IDA 1.612.I 14.39 Total 5.06 16.^'3 21.89  Sch,edule PAge 1 of 2 NEPAL THIRD TECHNICAL ASSISTANCE (PANCHKSWAR) PROJECT Procurement Method and Disbursements Procurement 4e,o" Method Total Project Component ICB LCB Other N.A. Cost ---(USS Million)-............... Civil Works 3.2 - - 3.2 - (1.5) (1.5) Equipment, Vehicles and 0.2 3.7 - 3.9 Materials . (0.2) (1.9)/A - (2.1) Consulting Services - - 14.8 - 14.8 (10.8)/b (10.8) Total 3.4 18.5 21.9 (1.7) (12.7) (14.4) Note: Figures in parenthesis are the amounts to be financed by IDA /A International -nd local shopping. 1k Remainder of consulting services will be financed by FRG.  -7- Schedule B Page 2 of 2 DEburse*3fts Category Amount 8 o. Expenditures (US$ Million) to be financed Civil Works 1.5 81% Equipment, Vehicles, and 2.1 100% of foreign expenditures; Materials 100% of local expenditure4 (ex-factory cost); and 65% of expenditures for other items procured locally Consulting Services 5.0 100% Subprojects 5.0 100% Unallocated .0.8 Total 14.4 IPA Fiscal Year 89 90 91 92 Estimated IDA Disbursements -(US$ million)--- Annual 5.9 3.9 2.5 2.1 Cumulative 5.9 9.8 12.3 14.4  -8- Schedule C THIRD TECHNICAL ASSISTANCE (PANCHESWAR) PROJET Timetable of Key ?roiect Processing Events (a) Time taken to prepare: Three years (b) Prepared by: Government with IDA assistance (c) First IDA mission: September 1984 (d) Appraisal mission departure: Desk Appraisal (e) Negotiations: February 1988 f) Planned Date of Effectiveness: October 1988  -9- kghtdiL2 Page I at 2 1fl ?KCLJL ASSISTANCE tAN ? Th Status of *ank CGoua Oaerm l ins 4p Naoal A. gAt5fdT OF 1DA CEDIT tk (As of October 31, 1987) Aomt (loss cancellations) Undis- Credit FisCl IDA bursed no. Year eorrowvr Puzpos -(US$ aillIon)- 22 credits fully disbursd 168.1 812 1978 Kingdom of Nepal Irrigation (Suwsarl-orsng) 30.0 0.1 938 1979 ingdom of Repl Second Rural Pevlopment 11.0 6.3 1008 1980 Kinedm of Nepal Conmunity Forestry 17.0 3.1 1055 198O Kingdom of Nepol Irrisgtion (mahekeli) 16.0 3.6 1059 1981 Kingdom of Nepal Third Water Supply & severage 27.0 1.5 1100 1981 KIngdom of Nepsl Agricultural Extension & Research 17.5 6.3 l10l /i 1981 Kingdoa of Nea BHill ood Production 8.0 4.9 1198 Is 1982 Kngdom of Nepal Second Nducatlon 14.3 6.9 1260 /