Nepal - Arun III Access Road Project

Docunent of The World Bank FOR OFFICIAL USE ONLY t RepwtNo. P-4910-NEP MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 24.4 MILLION TO THE KINGDOM OF NEPAL FOR THE ARUN III ACCESS ROAD PROJECT MAY 12, 1989 This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its coatents may not otherwise be disclosed without World Bank authorization.  CURRENCY AND EQUIVALENT UNITS (As of May 1, 1988) Currency Unit = Nepalese Rupee (NR) Nepalese Rupee = 100 paisa US$1.00 NRs 24.4 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) 1 hectare (ha) 2.47 acres (ac) 1 square kilometer (km?-) = 247 acres (ac) 1 megawatt (MW) = 1,000 kilowatts (103kW) 1 gigawatt (Gw) = 1,000,000 kilowatts (lO6kW) 1 gigawatt-hour (GWh) = 1,000,000 kilowatt hours (lO6kWh) 1 kilowatt-hour (kWh) = 1,000 watt-hours PRINCIPAL ABBREVIATIONS AND ACRONYMS ACRP - Acquisition, Compensation and Rehabilitation Plan HMG - His Majesty's Government GOVERNMENT FISCAL YEAR FY89 = July 16 to July 15  FOR OFFICIAL USE ONLY tlEPAL ARUR III ACCESS ROAD PROJECT Credit and Project Sumary . Borrower: The Kingdom of Nepal Beneficiaries: Nepal Electricity Authority, Ministry of Water Resourcesand Department of Roads, Hinistry of Works and Transport Amount: SDR 24.4 million (US$32.8 million equivalent) Terms% Standard, with 40 years maturity Financing Plan: Government US$ 7.2 Hillion IDA US$ 32.8 Million Total US$ 40.0 Million Economic Rate of Return: 14% Staff Appraisal Report: Report No. 7461-NEP Map: IBRD No.21127 This document has a nsited dstibutn and may be used by repints only in the pfonrnce of thok ofAcbddutisL Its contents may n otherwise be discoed wtho Wod Bank authodiati  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR THE ARUN III ACCESS ROAD PROJECT 1. The following memorandum and recommendation on a proposed development credit to the Kingdom of Nepal for SDR 24.4 million (US$32.8 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms, with a maturity of 40 years. It would help finance the construction of an access road to the site of the future Arun III hydroelectric development scheme and a maintenance depot for the project road. 2. Background. depal has a huge potential for hydroelectric power. estimated at about 83,000 MW, but these reserves have scarcely been tapped. The per capita electricity consumption of only 25 kWh/month of its 186,000 customers (6 percent of the population) is one of the lowest in the world, drawing on only 160 MW of this vast potential. His Majesty's Government (HMG) of Nepal considers the timely exploitation of this resource as one of the country's highest economic priorities. There is a pressing need to reduce the cost of power to consumers as well as to improve its availability to the domestic market, and further, to earn income and strengthen NepAl's external account by exporting competitively priced electricity to India. To achieve these objectives, the Government's plans for the subsector's development include, in the medium term, identifying and implementing a series of projects to meet generation requirements at least cost, while providing an opportunity for increasing annual bulk sales to India from the current 21 GWh to 400-800 GWh by year 2000. These activities form the basis of IDA's power subsector strategy for Nepal, as indicated in the NePal: Power Subsector Review (January 1988). HMG is also arranging site studies of regional export-oriented projects at Karnali and Pancheswar to be commissioned after the year 2008. 3. To identify high priority investments, IDA and the Canadian International Development Agency assisted HMG in financing a least cost generation expansion plan which analyzed eight potential hydroelectric projects. The clear priority scheme which the least cost generation expansion plan identified is the two-stage (201 MW each) Arun III hydroelectric scheme. To meet projected domestic load requiretents, the first phase must be commissioned in 1996, followed by the completion of the second phase by 2003. Phased development of the Arun III hydroelectric scheme is the least cost approach to satisfying domestic demand, but the project's benefits could be enhanced if its capacity were developed faster than that necessary to meet domestic demand and surplus power sold to India. HMG has already initiated discussions with the Government of India to expand existing power sales agreements. The Bank chaired a donor coordination meeting in Paris during May 1988 at which a consensus was reached on the priority of the Arun III hydroelectric scheme in Nepal's least cost generation expansion plan and the donors made tentative expressions of  -2- interest adequate to finance construction costs of the entire Arun III scheme in one stage. The sequencing of the development of this scheme will be reviewed during the initial phase of detailed ongineering (para. 5). 4. Initiation of road construction in 1989 is essential if the first phase of the Arun III hydroelectric scheme is to be commissioned on schedule, since the site of the hydroelectric development scheme is located about 192 km from the nearest road-head. In order to start work on the power scheme by early 1992, a road construction contract would have to be awarded by mid-1989 so that the road contractor can mobilize to start construction after the monsoon season ends in September. 5. HMG has requested IDA to take the lead in coordinating financing for the Arun III hydroelectric scheme, for which a four-step approach has been adopted. The first step consists of the construction of the access road under the proposed project. The second step is to obtain firm donor commitments for the financing of the hydroelectric scheme (para. 3). The third step consists of a Technical Assistance Credit (Credit 1902-NEP), under parallel financing with Kreditanstalt fuer Wiederaufbau (Germany), with the primary objectives of preparing final designs and engineering for the Arun III hydroelectric scheme and strengthening the Nepal Electricity Authority's capability to develop and manage an expanding power system. Engineering consultants employed under Credit 1902-NEP started detailed engineering in January 1989 to prepare final designs and contract documents for the hydroelectric scheme. The last step would consist of construction of the hydroelectric plant and ancillary items, including the switchyard, and the connecting transmission lines to the national grid with a possible onward connection to the Northern India grid. Board presentation for the Arun III hydroelectric project (IDA financing of about US$90 million) is tentatively scheduled for April 1991. 6. International Water Rights. Arun III hydroelectric scheme involves international water rights issues. The project is located on the Arun River, which originates in China and flows into Nepal where it joins the Koshi River. It then flows into India and becomes part of the Ganges River which empties into the Bay of Bengal. With regard to India, Nepal's right to use the water of the Arun River is covered by an agreement between the Government of India and HMG on the Koshi 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 raised no objections in response to IDA's indication that it was considering supporting development of the proposed Arun III hydroelectric scheme. 7. Rationale for IDA Involvement. IDA has been actively involved in Nepal's road subsector (Credit 223-NEP, Credit 730-NEP, Credit 1515-NEP and Credit 1922-NEP) as well as in the power subsector (Credit 600-NEP and Credit 1478-NEP). This involvement has resulted in expansion of the road network and development of the national power system. In addition, IDA is financing the prefeasibility study of the Karnali hydropower development scheme under Credit 1452-NEP and the preparation of a transmission/distribution master plan, a long-run marginal cost and tariff study and detailed engineering for the Arun III hydroelectric scheme under the Third Technical Assistance Project (Credit 1902-NEP). Given the depth of IDA involvement in Nepal's road and power subsectors described above, the  -3- funding of the hydroelectric scneme is consistent with IDA's strategy of supporting the development of hydropower and acting as a catalyst for and coordinator of external financing for such development. 8. Project Objectives. The main objectives of the project are to: (a) provide an access route to the Arun III power station and headworks sites from Tumlingtar by early 1992, and by 1993 from Basantapur; (b) provide a motorable road to the Koshi Hills to 'ink the food deficit areas in the north and surplus areas in the south; and (c) assist HMG implement environmental protection and conservation measures and properly plan and administer rehabilitation of families affected by the road construction. 9. Project Description. To achieve the objective noted above, the proposed project would consist of the following components: (a) a gravel-surfaced 192 km road to the site of the Arun III hydroelectric development scheme; (b) a road maintenance depot at Tumlingtar; (c) rehabilitation of the families adversely affected by the construction of the access road through implementation of a land acquisition, compensation, and rehabilitation plan (ACRP); and (d) consultancy services for: (i) construction supervision; (ii) training of Department of Roads maintenance personnel; and (iii) preparation and implementation supervision of the ACRP. 10. Environment. Under the project, significant efforts are being made to: (a) protect the environment; and (b) ensure the welfare of families affected by the project. On the environment, comprehensive action plans are to be developed for the protection and conservation of the entire Arun Valley including its flora and fauna. Similarly, the Department of Roads and the Ministry of Forests and Conservation are to take measures on the environment, including a master plan for tourism and trekking in the Sagarmatha National Park. During construction of the road, access is to be controlled by the road contractor who is also responsible under specific articles of his contract to protect the environment. To ensure that families affected by the project are fairly treated, a management plan is in place to acquire the land, and to provide adequate compensation and assistance. 11. Implementation of the proposed project would be over four years by the Department of Roads which has established an effective Project Implementation Unit. The project provides funds for civil works, vehicles, furniture, equipment, and technical assistance. The total project cost is estimated at US$40.0 million equivalent with a foreign exchange component of US$28.4 million (71Z). A breakdown of costs and the financing plan are shown in Schedule A of eligible expenditures incurred after January 31, 1989. Up to US$3.3 million would be financed retroactively for expenditures made after January 1, 1989. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status  -4- of Bank Group operations in Nepal are given in Schedules C and D, respectively. A map is also attached. The Staff Appraisal Report, No. 7461 dated May 12, 1989, is being distributed separately. 12. Agreed Actions. HMG has agreed on the following key actions: (a) a Project Monitoring Comnittee will be maintained under the Chairmanship of the Minister of Water Resources; (b) a Project Implementation Unit maintained in the Department of Roads and managed by an officer with qualifications and experience acceptable to IDA, will be responsible for the day-to-day implementation of the Project, and assisted by supervising consultants; (c) the MFSC would implement the Forestry Action Plan in the project area; (d) an Environmental Management Unit will be maintained within the Department of Roads, headed by an officer with qualifications and experience acceptable to IDA to implement the agreed staffing and work program; (e) HMG would prepare the second year ACRP, to be furnished to IDA by November 1, 1989, and the final third year ACRP to be furnished to IDA by April 1, 1990 following implementation reviews; and (f) Acquisition, Rehabilitation, and Compensation Committees in the Sankhuwasabha and Terhathum Districts in the project areas will be maintained. 13. Condition of Credit Effectiveness. A legal opinion will be furnished on the Development Credit Agreement by the Secretary of Law and Justice confirming that the provisions contained in the Land Acquisition Guidelines approved by HMG on January 5, 1989 are enforceable in accordance with the laws of Nepal. 14. Benefits. The primary benefits of the project would be to facilitate the development of least-cost electricity generation for domestic consumers. A conservative estimate of eccnomic benefits, including consumer surplus from the combined hydroelectric scheme and the Access Road Project, indicates an economic rate of return of 142. The project would also open up an area inhabited by some half a million people presently served only by porterage trails and thus stimulate commerce between the Hills and the Terai by reducing the transport costs of agricultural products and brass work produced in the project area. Discussions have been initiated between India and Nepal on a possible new power sales agreement. If this is concluded, the installation of generating capacity under the Arun III Hydropower Project could be accelerated and the surplus of domestic demand exported to India. 15. Risks. Risks associated with the project include delayed implementation of the first stage Arun III hydroelectric scheme and increases in costs above those projected in the feasibility study of the Arun III hydroelectric scheme. Sensitivity analysis indicates that the combined road and hydroelectric projects would be justified even if the  total costs were 26.92 higher than currently estimated. Consultants have already been hired for the final engineering designs of the power scheme. Because of the current impasse between India and Nepal on reaching new agreements on trade and transit, it is also possible that there vill be delays and increased costs for this project. However, HMG is making every effort to resolve this issue, and the financial contingencies provided in the cost estimates for this project are expected to cover any cost increases caused by delays. 16. Recomnmendation. I am satisfied that the proposed project would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington, D.C. May 12, 1989  Schedule A NEPAL ARUN III ACCESS ROAD PROJECT Estimated Costs and Financing Plan Estimated Costs /a Local Foreign Total -------USS (Million)------- Road Construction 6.57 19.87 26.44 Maintenance Depot 0.09 0.09 0.18 Land Acquisition for ACRP 1.21 -- 1.21 Consultancy Services for: Construction Supervision 0.60 2.39 2.99 Training - 0.09 0.09 Preparation and Implementation Supervision of ACRP 0.52 0.42 0.94 Base Costs 8.99 22.86 31.85 Physical Contingency 1.35 3.43 4.78 Price Contingency 1.31 2.06 3.37 Total Project Cost 11.65 28.35 40.00 /a The total cost net of taxes and duties (US$3.5 million) is US$36.5 million. Financing Plan Local Foreign Total --------US$ (Million)------ Government 7.25 - 7.25 IDA /a 4.40 28.35 32.75 Total 11.65 28.35 40.00 la IDA's share of total costs would be 89.9Z excluding taxes and duties.  -7- Schedule B NEPAL ARUM III ACCESS ROAD PROJECT Procurement Method and Disbursemets Procurement Method Project Components ICB Other Total -------US$ (million)-------- 1. Civil Works 33.2 (27.6) -- 33.2 (27.6) 2. Maintenance Depot 0.2 ( 0.2) -- 0.2 ( 0.2) 3. Consultant Services -- 4.9 (4.9) 4.9 ( 4.9) 4. Training -- 0.1 (0.1) 0.1 ( 0.1) 5. Land Acquisition for ACRP -- 1.6 1.6 Total 33.4 (27.8) 6.6 (5.0) 40.0 (32.8) NOTE: All costs include contingencies. Figures in parentheses are the respective amounts to be financed by IDA. Disbursements Category Amount X (US$ million) Civil Works 27.8 832 (of expenditures) Consultant Services 4.9 1002 (of foreign expenditures) Training 0.1 1002 (of expenditures) Total 32.8 IDA Fiscal Year Estimated IDA Disbursements Ia- 90 91 92 93 94 - -----------US$ Million---------- Annual 12.2 9.0 6.5 3.5 1.6 Cumulative 12.2 21.2 27.7 31.2 32.8 a/ Includes retroactive financing of US$3.3 million, incurred by Department of Roads in FY89.  -8- Schedule C NEPAL ARUN III ACCESS ROAD PROJECT Timetable of Key Project Processing Events (a) Time taken to prepare: 18 months (b) Prepared by: Government in collaboration with UNDP, consultants and IDA (c) First IDA mission: August 1987 (d) Appraisal mission departure: February 1988 (e) Post appraisal mission departure May 1988 (f) Negotiations: January 1989 (g) Planned date of effectiveness: September 1989 (h) List of relevant PCRs/PPARs: PPAR No. 2016-NEP PPAM No. 6177-NE? PPAR No. 6296-NEP  -9- Schedulo 0 NEPAL ARUN III ACCESS ROAD PROJECT The Status of Bank Group Operrtions In Nepal A. STATEMENT OF CREDITS .1 b/ As of March 31, 1980 Amount (low eene llotlono --- u million --- No. Year Sorrower Purpose IDA Undisbursed Twonty-seven credits fully disbured 298.4 - 105S 1980 Kingdo of Nepal Irrigation (Mahakeli) 16.0 .7 1100 c/ 1981 Kingdo of Nepl Agricultural Ext. & Re_erch 17.5 4.4 1101 e/ 1901 Kingdo of Nepal Hill Food Production 6.0 8.7 1198 u/ 1082 Kingo of Nepal Second Education 14.3 6.1 1260 u/ 1902 Kingdom of Nepl Petro. Exploration Promotion 7.9 2.4 -1318 c 1908 Kingdom of Nepal Irrig. VI-Sheirarw Lumbint 16.0 5.5 1810 e/ 198$ Kingd" of Nepal Cash Crop Develope nt 6.0 1.7 1879 e/ 1988 Kingdom of Nepal Technicel Assistance 11 6.0 2.4 1400 e/ 1984 Kingdo of Nepal Second Forestry 16.0 16.9 1452 / 1984 Kingdo of Nepal Karnali Prpoaration 11.0 8.6 1468 / 1984 Kingdom of Npal Primary Education 12.0 10.? 1478 e/ 1984 Kingdom of Nepal Harryangdp Hyrdoelectric Power 107.0 81.2 1516 e 1965 Kingdo of Nepal Third Highways 47.6 40.0 1584 e/ 19S6 Kingdom of Nepal Agricultural Manpower Dev. 6.4 9.0 16356 / 19865 Kingdom of Nepal Industrial Devetlopmnt 7.5 6.2 1670 c/ 105 Kingd of Nel Agricultural Extension II 7.2 6.0 1608 c 1905 Kingdom of Nel Ttlecomunication IV 22.0 20.9 100 c/ 106 Kingdom of Neal Cottag ond Smll Ind. II 10.0 6.1 1715 1 Kingdom of Nepal Naraysni III Irrigation 24.6 27.0 1727 c/ 1986 Kingdo of Nepl Third Rural Developmnt 19.1 20.1 1014 c/ 1907 Kingdom of Nepal Sunuart Morang Irrigation UI 40.0 37.2 1902 c/ 1900 Kingdom of Nepl Third Technical Assistance 14.4 18.7 1022 =c 196 Kingdom of Nepl Road Flood RehabIitati on 165. 12.6 1924 c/ 1900 Kingdom of Nepal Mlhakeli Irrigation It 41.8 38.1 1966 ?/ 1909 KIngdom of Nepl Municipal D0v. A Housing Recon. 41.5 39.9 Total 885.0 420.1 of which has been rep Id 4.7 Total now o3 ndinb/ 681.1 Aj ou soldIa Tot l now hold b% IDA Total undibu Id U31.1 420.1 a/ No Bank loans have been made to Nepal. / Prior to exchange adjustmten. c IDA th and 7th Replenishment Credits, principal amunts shown In US Dollar eulvalent at deat of negotiations, as shown in President'o Reports, and undisbursd amounts shown In US Dollor equivlents are valued at the exchange rate applicable on the data of this statement. In som ces, therefore, the undisbursed balance Indicates a dollar amount greater than the original principal credit amount expressed In dollars. y Not yet offective.  - 10 - Schedule D Pog 2 of 2 NEPAL ARUN III ACCESS ROAD PROJECT S. STATEMENT OF IFC INVESTMENTS (As of March 31, 1989) Investment Type of Amount (US$ million) No. Year Obliger Business Loan Equity Total 312 1975 Soaltee Hotel (Private) Ltd. Hotel 2.7 0.4 3.1 624 1982 Nepal Orind Magnesite Mine and (Private) Ltd. process magnesite ore 5.0 _ 5.0 Total gross commitments 7.7 0.4 8.1 Less cancellations, terminations, repayments and sales - - - Total commitments now held by IFC 7.7 a/ 0.4 8.1 Total undisbursed (including participants' portion) - - - a/ Exchange adjustments account for variance in total gross commitments, less cancellations, etc., and total commitments now held by IFC.  4 ~~~~~~~~~~~~~~ * de - . ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~IND 21 1: ,\N~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. A"- , <cRood IN D IA ,< mkNEPAtL y^ru j CAR(:HULA < 4 H sA - ~~~~~~~~~~~~~~~ARUN III ACCESS ROAD PROJECT _ - All-W.W)WNW- _S % t ) d ,2 \ ~~~~~~~PROJECT LOCATION.__ U,Y