Document of The World Bank FOR OFFICIAL USE ONLY MICROFICHE COPY Report No. 9077-NEP Type: (SAR) O'LEARY, D/ X80408 / D-9059/ ASlIE 4ePOrt No. 9077-NEi STAFF APPRAISL REPORT NEPAL POWER SECTOR EFFICIENCy PROJECT FEBRUARY 27, 1992 Energy & Infrastructure Divisio Cuntry Department I South Asia Region i O m n s CURRENCY EQUIVALENTS 1 Nepalese Rupee (NRs) = 100 Nepalese Paise US$1.0 (July 1991) NRs 42.7 (Official Rate) = NRs 42.7 (Free Market Rate) WEIGHTS AND MEASURES 1 Kilovolt (kV) = 1,000 volts (V) 1 Kilowatt (kW) = 1,000 watts (W) 1 Megawatt (MW) = 1,000 kilowatts (kW) 1 Kilowatt - hour (kWh) = 1,000 watt - hnurs (Wh) 1 Megawatt - hour (M7Jh) = 1,000 kilowatt - hours (kWh) X Gigawatt - hour (GWh) 1,000,000 kilowatt - hours (kWh) ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank ADB/N - Agricultural Development Bank of Nepal AHP - Arun Hydroelectric Project BSEB - Bihar State Electricity Board CIDA - Canadian International Development Agency DOR - Department of Roads EA - Environmental Assessment EAU - Energy Audit Unit EIRR - Economic Internal Rate of Return FINNIDA - Finnish International Development Agency GOI - Government of India HMG/N - His Majesty's Government of Nepal ICB - International Competitive Bidding IDC - Interest During Construction JICA - Japanese International Cooperation Agency LCB - Local Competitive Bidding LRP - Loss Reduction Program MCMPP - Marsyangdi Catchment Management Pilot Project MFE - Ministry of Forests and Environment MHPP - Marsyangdi Hydroelectric Power Plant MOI - Ministry of Industry MOWR - Ministry of Water Resources NCL - Nepal Coal Limited NEA - Nepal Electricity Authority NOC - Nepal Oil Corporation OECF - Overseas Economic Cooperation Fund (Japan) PC - Performance Contract SCF - Standard Conversion Factor SLA - Subsidiary Loan Agreement SOE - Statement of Expenditure T&D - Transmission & Distribution WtP - Willingness to Pay Fiscal Year July 16 to July 15 All years refer to the Gregorian Calendar FOR OMCIAL USE ONLY NEPAL POWER SECTOR EFFICIENCY PROJECT Credit and Project Summary Borrower: Kingdom of Nepal Beneficiary: Nepal Electricity Authority (NEA) Amount: SDR 48.1 million (US$65.0 million equivalent) Terms: Standard, with 40 years maturity. OnlendinR Terms: Out of US$65 million, the Government would onlend US$ 60.8 million to NEA at a rate of 10.25Z for a period of 20 years, including a grace period of 5 years; the remaining US$4.2 million covering energy conservation and catchment management would be passed on as grants to the Ministries of Industry and Works and Transport. HMGlN would bear the foreign exchange risk. Project Description: The project would include: (a) rehabilitation of the 35 MW Trisuli and Devighat hydroelectric plants; (b) reirnforcement/ upgrading of the existing transmission and distribution system in the Kathmandu valley including provisions for spares, equipment and tools, and construction of a 132 kV interconnection with India to upgrade power exchange capabilities; (c) provision of equipment for NEA's headquarter offices, a training centre and centrally located worksAops; (d) provision of technical assistance to the Ministry of Industry to assist local industries in identifying energy conservation measures; and (e) implementation of the Marsyangdi Catchment Management Pilot Plan, including: (i) soil conservation and sediment control; (ii) upgrading of the Dumre-Besisahar road; and (iii) rural electrification in the Marsyangdi valley. Technical assistance in the form of consulting services to assist HMG/N and NEA in implementation and training of Nepalese technical staff would be provided with each project component as well as to improve the effectiveness of NEA's management, train higher level and support staff and improve billing. Benefits: Benefits would include meeting forecast electricity demand at least cost, resource savings from increased operating efficiencies, restoration/enhancement of lost capacity and reduced system losses, deferral of investments due to extension of power plant life and rei.iforcement of existing substations, improved reliability and quality of electricity supply, and NEA's institutional strengthening, particularly in finance, manpower planning and training. In addition, the Marsyangdi catchment management component would 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. ii extend the useful life of the hydroelectric project investment through developing sustainable approaches to catchment soil conservation and cediment erosion which could eventually be expanded to other catchments upstream of other existing and planned hydropower projects. Risks: No unusual technical risks are foreseen for the project's power components. The main risks concern project implementation delays and NEA's continut.d weak financial performance. These risks have been mitigated by requiring appointment of supervisory consultants and signature of the Performance Contract between HMG/N and NEA prior to credit effectiveness; providing for effective project management by NEA and consultants, and continued close attention to implementing measures to enhance NEA's cost recovery. With respect to the remaining components, the major issue concerns the Marsyangdi catchment management soil conservation and sediment reduction program. The approach used depends on the willingness of farmers to adopt new land management systems for marginal forest grazing land. Given the pilot nature of the project, its very modest scale and the fact that other approaches to soil conservation in Nepal have proved ineffective, the risk is acceptable. iii Estimated Cost: P/ Local Foreign Total ------(US$ million)- A. Generatic.a Rehabilitation 3.4 20.? 23.6 B. HV Reinforcement 2.2 12.9 15.1 C. NEA Infrastructure/Buildings 2.1 5.5 7.6 D. Marsyangdi Catchment Management Plan 2.4 6.6 9.0 E. Industrial Energy Audits 0.2 2.4 2.6 F. Technical Assistance 0.7 11.8 12.5 Base Cost 11.0 59.4 70.4 Physical Contingencies 2.1 6.8 8.9 Price Contingencies 3.4 5.9 9.3 Total Project Cost a/ 16.5 72.1 88.6 Interest during Construction 11.5 11.5 Total Finances Required 28.0 72.1 100.1 Financing Plan: Local Foreign Total ------(USS million)- IDA 6.3 58.7 65.0 Cofinancing 1.3 13.4 14.7 HMG/N 1.6 1.6 NEA 18.8 18.8 Total 28.0 72.1 100.1 _=== ==_== 5==~== Estimated IDA Disbursements: -----------------US$ Million--------------- IDA FY 92 93 94 95 96 97 Annual 7.8 20.7 17.0 14.3 3.2 2.0 Cumulative 7.8 28.5 45.5 59.8 63.0 65.0 Economic Rate of Return: 18Z. Maps: IBRD 22331 IBRD 22780 a/ The total cost net of taxes and duties (US$4.0 million) is US$84.6 million. iv NEPAL POWER SECTOR EFFICIENCY PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. Credit and Project Summary . . . . . . . . . . . . . . . . . i I. ENERGY SECTOR AND POWER SUBSECTOR . . . . . . . . . . . . . 1 A. Sectoral Importance . . . . . . . . . . . . . . . . . . 1 B. Energy Resources and Supply . . . . . . . . . . . . . . I C. Energy Consumption . . . . . . . . . . . . . . . . . . . 2 D. Organization of the Energy Sector . . . . . . . . . . . 3 E. Energy Pricing . . . . . . . . . . . . . . . . . . . . . 4 F. HMG/N's Energy Sector Strategy . . . . . . . . . . . . . 5 G. Bank Group Involvement in the Power Subsector . . . . . 5 H. Cofinancing and Donor Coordination . . . . . . . . . . . 7 II. THE BENEFICIARY . . . . . . . . . . . . . . . . . . . . . . 8 A. Organization, Management and Staffing . . . . . . . . . 8 B. Upgrading NEA's Operational Efficiency . . . . . . . . . 8 C. Financial Organizati-n, Accounts and Audit . . . . . . . 10 D. Training .......... 12 E. Existing Facilities .13 F. Power System Planning . . . . . . . . . . . . . . . . . 14 G. System Losses .15 III. THE PROJECT .16 A. Background .16 B. Project Objectives 16 C. Project Description . . . . . . . . . . . . . . . . . . 16 D. Project Cost .18 E. Project Financing . . . . . . . . . . . . . . . . . . . 18 F. Project Engineering and Status of Preparation . . . . . 19 G. Project Implementation ... . . . . . . . . . . . . . . 20 This report is based on the findings of an appraisal mission to Nepal in July 1990. Mission members included Messrs. Donal O'Leary (Mission Leader), Werner Dobisch (Hydropower Engineer), Somin Mukherji (Financial Analyst), Salem Ouahes (Sr. Power Engineer), Agustin Alberti (Training Consultant), B. N. Acharya (Consultant Institutional Analyst), Brian Carson (Consultant on Soil Conservation), John Davis (Consultant Financial Analyst), Lionel Maistre (Consultant, Energy Economist), Frank Peacock (Consultant Agricultural Economist) and Tod Ragsdale (Consultant on Environment/Resettlement). Production of the Report was supervised by Bruce Mitchell. The Peer Reviewers were Joseph Gilling (Sr. Economist), Etienne Linard (Sr. Power Engineer) and Alfonso Mejia (Principal Financial Analyst). v Page No. H. Procurement . . . . . . . . . . . . . . . . . . . . . . 21 T,- Disbursement . . . . . . . . . . . . . . . . . . . . . . 23 J. Development Impact . . . . . . . . . . . . . . . . . . . 23 K. Project Monitoring . . . . . . . . . . . . . . . . . . . 24 L. Risks . . . . . . . . . . . . . . . . . . . . . . . . . 25 IV. FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 25 A. NEA's Financial Data Base . . . . . . . . . . . . . . . 26 B. NEA's Past Performance and Present Position . . . . . . 28 C. Tariffs .... . . . . . . . . . . . . . . . . . . . . 31 D. F4-nancial Recovery. . . . . . . . . . . . . . 32 E. NEA's Future Financial Performance . . . . . . . . . . . 34 F. Rural Electrification . . . . . . . . . . . . . . . . . 36 G. Evaluation Committee .36 V. PROJECT JUSTIFICATION .36 A, Electricity Demand Forecasts . . . . . . . . . . . . . . 36 B. Least Cost Alternative ... . . . . . . . . . . . . . . 37 C. Economic Rate of Return ... . . . . . . . . . . . . . 38 D. Sensitivity Analysis ... . . . . . . . . . . . . . . . 39 E. Justification for Bank Group Involvement . . . . . . . . 39 VI. AGREEMENTS AND RECOMMENDATION . . . . . . . . . . . . . . . 39 vi ANNEXES 1.1 NEPAL: Energy Balance for FY 1987/1988 . . . . . . . . . . . . 1.2 NEPAL: Fuel Prices: 1975-1990 . . . . . . . . . . . . . . . . 1.3 NEPAL: Past & Present NEA Tariffs . . . . . . . . . . . . . . 2.1 NEA Organization Chart . . . . . . . . . . . . . . . . . . . . 2.2 Action Plan for Upgrading NEA's Operational Efficiency . . . . 2.3 NEA Interconnected System - Existing Generating Plants . . . . 2.4 NEA Transmission System .................... 2.5 NEA's System Loss Reduction Action Plan . . . . . . . . . . . . 2.6 Typical Daily Load Curve for the Nepal Interconnected System . 3.1 Details of Power Sector Efficiency Component . . . . . . . . . 3.2 Description of the Marsyangdi Catchment Management Plan . . . . 3.3 Description of the Energy Audit Program . . . . . . . . . . . . 3.4 Detailed Cost Estimate . . . . . . . . . . . . . . . . . . . . 3.5 Project Implementation Organizational Chart . . . . . . . . . . 3.6 Implementation Schedules . . . . . . . . . . . . . . . . . . . 3.7 Disbursement Schedule . . . . . . . . . . . . . . . . . . . . . 3.8 Financing Plan by Project Component . . . . . . . . . . . . . . 4.1 Assumptions for Financial Projections . . . . . . . . . . . . . 4.2 Summary Investmrent Plan . . . . . . . . . . . . . . . . . . . . 4.3 NEA Actual and Forecast Income Statements . . . . . . . . . . . 4.4 NEA Actual and Forecast Sources and Applications of Funds Statements . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 NEA A_tual and Forecast Balance Sheets . . . . . . . . . . . . 4.6 NEA Monitoring Indicators . . . . . . . . . . . . . . . . . . . 5.1 Historical Growth in Demand, Energy Generation and Energy Sales 5.2 Number of Consumers Categorywise . . . . . . . . . . . . . . . 5.3 Detailed Demand Forecast . . . . . . . . . . . . . . . . . . . 5.4 NEA Interconnected System - Generation Capacity and Energy Forecast Categorywise .................... 5.5 NEA Interconnected System - Generation Capacity and Maximum Demand Forecast . . . . . . . . . . . . . . . . . . . . . . . 5.6 Project Economic Analysis Procedure . . . . . . . . . . . . . . 5.7 Time Slice EIRR for the NEA Investment Program . . . . . . . . 5.8 Rehabilitation/Upgrading o, the Trisuli-Devighat Plants; Estimation of EIRR . . . . . . . . . . . . . . . . . . . . . 6.1 Data and Documents in the Project File . . . . . . . . . . . . IBRD MAPS: Nos. 22331 and 22780 NEPhL POWER SECTOR EFFICIENCY PROJECT STAFF APPRAISAL REPORT I. ENEflGY SECTOR AND POWER SUBSECTOR A. Sectoral Importance 1.01 The development of Nepal's abundant hydroelectric resources (estimated at 83,000 MW) is a key component of the country's development strategy particularly in view of the rapid depletion of its forests, its only other indigenous fuel source. The efficient development of Nepal's hydroelectric resources can contribute not only to meeting its internal power needs but through developing a surplus trade balance in conventional energy (fossil fuels and electricity) and mobilizing resources to address Nepal's development needs. However, local resource shortages, caused by underpricing of electricity, coupled with weak institutional capacity, have frustrated the achievement of power subsector performance targets. Further, in the past, unreliable power supply constrained economic growth, and only 9? of the population has access to electricity. In spite of these shortcomings, His Majesty's Government of Nepal (HMG/N) has accorded high priority to the power subsector's development, allocating approximately 312 of all external assistance for power since FY83. Given the power sector's importance to the economy, this high level of allocation is expected to continue through FY2000. B. Energy Resources and Supply 1.02 Nepal's main energy resources are fuelwood and hydropower. Agricultural residues are widely used for cooking and heating. Biogas potential is high because of the large livestock population. The solar energy potential also seems technically promising, and there may be some scope for utilizing wind energy, although data are lacking. There are no known oil or coal commercial deposits; thus all fossil fuels are imported. About 6Z of total energy supply is from commercial resources (hydroelectricity, petroleum and coal). In FY88 domestic hydroelectricity accounted for about 2.2Z of total energy supplies and imported sources (including hydroelectricity) for about 4.2?. 1.03 Fuelwood accounts for approximately 712 of total energy supplies. It is the basic energy source for cooking and heating in rural areas, where the vast majority of the population lives. Forests cover some 382 of the total land area and are fairly evenly distributed. Fuelwood consumption, currently over four million tonnes of oil equivalent (TOE) a year, exceeds the forests' sustainable annual yield. If present trends continue, the forests will be largely exhausted by the year 2000; this is leading to growing fuelwood shortages and hardship in rural areas. Government fuelwood policy is to reverse deforestation by taking action on both supply and demand, including energy conservation (para. 1.09). This would be achieved through an afforestation program, improved watershed management and utilization of alter-native energy technologies (biogas, mini/micro hydro schemes, solar energy devices and improved woodstoves). 1.04 Other Renewable Energy Sources. Dung production by livestock is estimated at about 24.5 million tons per year, of which approximately 1? is used directly as a fuel by rural households, accounting for about 72 of the total energy supplies. Dung cot.verted into methane in biogas digesters could provide for the cooking and lighting needs of an estimated 402 of the population. However, only about 4,000 have been developed so far which would generate an insignificant methane yield. Agricultural waste (straw, husks, etc.) is wi!ely used and accounts for approximately 162 of total energy supplies. Solar energy applications, so far, have been limited primarily to demonstration/pilot projects (solar water heaters, solar driers, and photovoltaic and wind-power generating units). Solar energy applications' economic viability still has to be justified. 1.05 Hydropower. The Ministry of Water Resources (MOWR) has estimated (1985) Nepal's economically exploitable hydropower potential to be around 25,000 MW, of which about 20,000 MW have been investigated. Only 241 MW of the potential have been developed (236 MW in the interconnected network and 5 MW at isolated centers), and a further 12 MW are under construction. The MOWR sponsored resource surveys of Nepal's three major river basins (Kosi, Gandak and Karnali), producing an inventory of hydroelectric sites. The Nepal Electricity Authority (NEA) is following these up with various prefeasibility and feasibility studies of the promising hydroelectric sites. Hydropower development is hindered by relatively low levels of domestic demand which do not justify projects that could take full advantage of economies of scale. There are technical impediments: lack of access roadsz difficult geological conditions; extreme variation in river flows; a relatively weak hydrological data base; and heavy silt loads. Some potential projects (Chisapani, Pancheswar) are also very large (3,000 MW or above) and would have to be developed as export projects to India requiring special institutional and financial arrangements. 1.06 The large number (about 30,000) of traditional water mills for grinding corn indicates that there is considerable scope for developing micro- hydropower schemes through individual or community effort. If all these mills were replaced by dual-purpose mills (grinding corn and generating electricity), they could be uced to operate small power generators with an average capacity of about 10 kW, giving a total potAntial of 300 MW. Recognizing that dual-purpose micro hydro units could form part of the least cost solution for meeting rural energy needs and also provide high returns for relatively modest investments, HMGIN's policy is to use tariff deregulation and make credit available through the Agricultural Development Bank (ADB/N) to encourage private sector entrepreneurs to develop micro-hydro schemes of up to 100 kW capacity. C. Energy Consumption 1.07 Nepal's per capita consu,.otion of commercial enurgy (18 kilograms of oil equivalent) is the lowest recorded for any developing country. In FY88, gross energy consumption amounted tc 5,800 million TOE of which commercial energy accounted for 341 million TOE (5.9? of total energy consumption) distributed amongst petroleum (3.12), coal (0.9Z) and hydroelectricity (1.9?). During 1980/81-1987/88 commercial energy consumption grew 8Z per annum compared with an annual real GDP growth rate of 4.72. The resulting energy elasticity (1.70) was high compared with 1.1 f3r all developing countries. This is partly due to considerable inefficiency in commercial energy use in the industry and transport sectors and in electricity generation, transmission and distribution. This is being addressed in various donor supported projects, including the Marsyangdi Hydroelectric Power Project (MHPP) (Cr. 1478-NEP) and the proposed Project as well as the Interfuel Substitution and Energy Efficiency Study (para. 1.09). The -3- )ulk of commercial energy consumption in FY88 was in the residential (27,6Z), industrial (32.8Z) and transport (25.1Z) sectors (see Annex 1.1). 1.08 Energy Trade. All imported energy supplies are purchased from India (coal and electricity) or have to be routed through India (petroleum products). Until 1973 Nepal's petroleum product imports were all ftom India, but since then Nepal has bought on the international market at international prices. Nepal does not have a refinery. Under a 5-year agreement signed in June 1990, petroleum imports are delivered to India, which supplies Nepal's required mix of products from the most convenient Indian refineries under a product exchange agreement. Nepal Oil Corporation (NOC) maintains minimum stocks equivalent to 35 days' supply. Coal is imported from India by Nepal Coal Limited (NCL) which negotiates supply contracts with the Indian authorities including provision of rail wagons for transporting the coal to Nepal's border. Electricity trade has fluctuated with net imports accounting for 4Z of net commercial energy supply in FY88. Altogether, commercial energy imports accounted for about 22Z of Nepal's limited foreign exchange earnings in FY88. In the future, the trend points to continued increases in commercial energy imports and the necessity of developing indigenous hydroelectric resources to minimize the impact of energy imports on Nepal's balance of payments (para. 1.14). 1.09 Interfuel Substitution and Energy Efficiency. In view of the need to develop an action program to reverse deforestation and maximize energy utilization efficiency, HMG/N requested the joint United Nations Development Program (UNDP)/World Bank Energy Sector Management Assistance Programme to cor.duct an Interfuel Substitution and Energy Efficiency Study which is expected to begin in aarly 1992 This Finnish International Development Agency (FINNIDA) funded study will identify sectoral investment programs to support energy efficiency and interfuel substitution in a framework of policy actions (including energy pricing - see para. 1.14), institutional development and financing arrangements to ensure their implementation. D. Organization of the Energy Sector 1.10 Institutional responsibility for the energy sector is spread over many organizations including core and line ministries and several entities. The Ministry of Finance is responsible for coordinating and securing external financial assistance in the energy and other sectors: it also has an interest in the financial implications of energy investments and pricing and energy agencies' financial operations. The National Planning Commission, which is responsible for national economic planning, reviews energy sector programs and projects, particularly in connection with the preparation of the national five-year development plans. The Public Service Commission provides guidelines governing conditions of service (recruitment, promotion, discipline, etc.) in government departments and public enterprises. 1.11 The line ministries with specific energy responsibilities are the MOWR (electricity supply); the Ministry of Forests and Environment (MFE) (fuelwood); the Ministry of Agriculture (through its jurisdiction over ADB/N); the Ministry of Industry (MOI) (which has jurisdiction over NCL) and whose Department of Mines and Geology is responsible for oil and gas exploration; and the Ministry of Supply (which has jurisdiction over the NOC and the Timber Corporation of Nepal (TCN)). Apart from NEA, the other public energy sector enterprises are the TCN (fuelwood supp7y). the NOC and NCL (import and distribution of coad). 1.12 Within the power subsector, MOWR has general responsibility for all public activities related to electricity supply, including jurisdiction over NEA which is char-ged with the planning, construction and operation of all public power facilities in Nepal. The Minister of MOWR in also Chairman of NEA and of the Water and Energy Commission (WEC), which includes representatives of all the main ministries. WEC's responsibilities, carried out through its technical arm, the Water and Energy Commission Secretariat (WECS), include investigation of national water and energy resources, studies of natioral water and energy requirements, conservation, development and utilization of water and energy resources, and preparation and coordinationi of short- and long-term plans for water and energy development. WECS is supported by technical assistance provided by the Canadian International Development Agency (CIDA) through the WECS/NEA Institutional Support Program (WISP), staffed by Canadian International Water and Energy Consultants (CIWEC). It liaises with NEA, which also benefits from the assistance of WISP staff in load forecasting, system planning, tariff design, hydroelectric project preparation and engineering of distribution systems. E. Energy Pricing 1.13 Most energy (approximately 88Z) in Nepal is not traded, and hence market clearing is not via the price mechanism. Pricing of commercial energy ia generally administered by HMG/N; however, for a proportion of commercial fuelwood sales, which account for only a small percentRge of fuelwood consumption. prices are set in the market place. Pricing schedules of the principal comme.c..al energy sources (petroleum products and electricity) dre prepared by NOC and NEA, respectively; these must then be approved by the Cabinet. Coal prices are set by the Government of India (GI). The pricing of commercial fuelwood sold by TCN is based on proposals prepared by TCN and approved by the Cabinet. 1.14 Prices for all forms of energy have risen substantially in real terms since 1975, but much more so for indigenous sources (fuelwood and electricity) than for imported energy (petroleum and coal) (Annex 1.2). Until recently, the policy for petroleum products had been to adjust domestic prices to reflect the trend of international prices. In addition, taxes on petroleum products were a major source of Government revenue. The current price structure for petroleum fuels sets prices for kerosene and diesel below their border prices and for gasoline and aviation fuel above border prices. Because the weighted average price of petroleum products in Nepal is less than the prevailing border prices of mid-July 1991, NOC's projected annual losses for FY92 were estimated to be NRs 1,796 million. 1.15 Coal prices reflect its border price of supply plus distribution and storage costs; they are exempt from taxes mnd duties. Since 1975, fuelwood prices charged by the TCN (and its predecessor thp Fuelwood Corporation) have risen much more rapidly than electricity prices, but rather more slowly than kerosene prices. Despite these increases, TCN's prices remain well below the free market level set by private suppliers, which much more closely reflect the economic cost of supply. 1.16 Electricity prices have always been below the long-run marginal costs of supply; the present estimated average price of about NRs 2.22/kWh on total NEA sales is well below the estimated long run marginal cost (LRMC) of NRs 6.44/kWh (see Annex 1.3). This reflects a 61Z tariff increase as of November 17, 1991 which also introduced time of day pricing for high and medium voltage consumers. The new tariff level and structure reflect in part the recommendations of a LRMC and Tariff Study that was supported by Cr. 1902-NEP. The NEA study is being complemented by a study on equitable and efficient energy pricing policies being conducted by WECS under Asian Development Bank (ADB) sponsorship. This study will provide recommendations to achieve the financial viability of NOC (para. 1.14) and other energy corporations and a framework for the Interfuel Substitution and Energy Efficiency study implementation (para. 1.09) through promoting the substitution of fuelwood by commercial energy sources and efficient energy use. F. HMG/N's Energy Sector Strategy 1.17 Recognizing the key role of increasing energy supplies in the nation's economic development and in meeting its Basic Needs Program targets formulated in 1985, HMG/N has given high priority to energy sector investments, especially power projects (para. 1.01), in its investment program. The principal objectives of HMG/N's energy policy are to: (i) reverse the deforestation trend; (ii) develop a surplus trade balance in conventional energy (fossil fuels and electricity) by developing indigenous hydropower resources; (iii) meet the forecast demand for energy within Nepal at least cost to the economy; (iv) increase the reliability and quality of electricity supply through upgrading the distribution system and reducing systems losses; (v) adjust energy prices to promote efficient use while meeting the Government's social objectives; and (vi) improve operational and financial performance and resource mobilization from energy sector entities. 1.18 HMG/N has made some progress in meeting these objectives through: (i) implementing a fuelwood management policy (para. 1.03); (ii) addressing interfuel substitution and energy efficiency issues (para. 1.09); (iii) collaborating with the GOI in conducting preparatory studies for the Chisapani and Pancheswar hydroprojects (para. 1.05); (iv) allocating responsibilities to the public and private sectors for the development of the energy sector (paras. 1.06; 1.10-1.12); and (v) developing an efficient energy pricing policy (paras. 1.13-1.16). The strategy's impact is particularly evident in the power subsector in system planning and institutional consolidation. Of most note is the creation of NEA in August 1985 by amalgamating a number of diff-rent public entities (para. 2.01). This has led to more focussed decision- making and increased sectoral coordination. However, urgent action is needed in energy pricing particularly for fuelwood and petroleum p:oducts. G. Bank Group Involvement in the Power Subsector 1.19 IDA's objectives for the power subsector consist of assisting HMG/N to: (a) develop efficiently its enormous hydroelectric potential with minimal adverse envirormental impacts to (i) reduce the cost and improve the availability of power to the domestic market and (ii) export power to India; (b) upgrade the corporate performance of the principal subsectoral institution (NEA); (c) formulate a comprehensive and balanced investment program to meet projected demand at least cost; (d) set tariffs for export to India and for internal supply in Nepal that reflect the economic cost of supply; and (e) meet the demand for -6- energy (particularly rural energy) at least cost while developing and sustaining Nepal's indigenous resources. To date, IDA has supported HMG/N's strategy by financing ten projects in the energy sector including six projects aimed at the development of grid hydroelectric schemes, three forestry projects and a petroleum exploration promotion project which attracted one joint venture but has not led to any petroleum discoveries. The credits have totalled US$281 million equivalent, representing about 27? of total IDA commitments to Nepal; lending for power projects, primarily through MOWR, amounted to US$206 million. The lessons learned from supporting HMG/N's energy sector strategy and in the joint IDA/ADB power subsector study (para. 1.23) have been useful in developing a coordinated donor lending strategy for supporting the Nepal power subsector in line with HMG/N's sectoral objectives (para. 1.17). 1 20 Of the six IDA credits devoted to supporting hydropower development, four supported project implementation and two supported project preparation, including the feasibility study of the Karnali (Chisapani) Multipurpose Project (ultimate capacity in excess of 10,000 MW) (Cr. 1452-NEP), site investigations of the 3,000-6,000 MW Pancheswar project and the detailed engineering for the Arun Project (Cr. 1902-NEP). While progress on the preparatory studies has generally been satisfactory, experience with the two completed hydroelectric projects (Kulekhani and Marsyangdi) has been mixed. Physical implementation of projects has improved markedly but weaknesses in institutional/financial performance still persist. 1.21 The credits for Kulekhani (Cr. 600-NEP & Cr. 601-1-NEP) were closed on June 30, 1984. The Project Performance Audit Report'/ stated that a 21 month delay in project commissioning and an 80Z cost overrun were caused by lack of experience of the implementing agency (the Kulekhani Hydroelectric Development Board) in managing projects of this scope (at the time it was the largest in the country) in the Nepal Himalayas; the parties did not fully anticipate the risks involved and, therefore, did not take sufficient corrective measures. In particular, the project suffered from the lack of a Panel of Experts (POE) to review the project feasibility study, site investigations, and a detailed engineering cost estimate. In addition, the need to develop a comprehensive watershed management plan to control erosion in the catchment upstream of the Kulekhani reservoir was not identified (although watershed management programs are now in place with the support of other donors). Compliance with the major financial covenant of setting tariffs to meet rate of return targets was deficient because of Government reluctance to make timely tariff adjustments. 1.22 Implementation performance improved considerably for the Marsyangdi Project (Cr. 1478-NEP), primarily due to HMG/N and IDA applying lessons learned from the Kulekhani project. A POE was involved from the beginning, and bids were based on a detailed engineering study. The project also included preparation of a catchment management plan in the Marsyangdi area. However, HMG/N had instvfficient resources to implement the recommended plan. The proposed Project would provide funds to implement the first five years of the catchment management plan. The Marsyangdi Project was commissioned in January 1990, within six months of its scheduled date, and within budget. Compliance with project covenants was mixed primarily because HMG/N was unwilling to make timely tariff increases. 1/ NEPAL: Kulekhani Hydroelectric Project (Cr. 600-NEP and 600-1-NEP), Project Performance Audit Report (t 6177), May 8, 1986. - 7 - 1.23 At the request of HMG/N, during 1987 ADB and IDA conducted a diagnostic study of Nepal's Power Subsector; as a result, HMG/N, NEA, ADB and IDA agreed that further attention needed to be paid to improving institutional performace, energy pricing and resource mobilization, investment planning and bulk electricity exports. In addition to identifying the proposed Project, the Power Subsector Review (PSR), January 15, 1988 - Report No. 6879a-NEP, identified the Arun Project as the next generation project to be added to Nepal's grid as well as the first project to enable Nepal to develop bulk power exports to India. As a result of a joint review of the PSR by HMG/N and IDA, IDA prepared the Third Technical Assistance (Pancheswar) Project (Cr. 1902-NEP) to help NEA implement the PSR's recommendations relating to investment preparation in generation, transmission and distribution (pars. 2.20-z4), upgrading of existing generation facilities (para. 2.19), electricity tariffs (para. 1.16) and improving NEA's operational efficiency (para. 2.04-2.14). 1.24 The Arun Project's preparation is now at an advanced stage: the detailed engineering cost estimate was finalized in November 1990, and prequalification of civil works contractors has been completed. However, because of design changes and delays caused by the Trade and Transit (T&T) dispute and political transition, the project's estimated costs have increased appreciably. Given the scale and current costs of the proposed Arun project (402 MW, for which the first phase of 268 MW would cost about US$1 billion) in comparison to Nepal's economy, IDA is currently reviewing its affordability and the operational sequencing of Arun and alternative generation investments in an effort to arrive at a balanced investment program on which both the Government and the donors can agree. In the meantime, the proposed Power Sector Efficiency Project would reduce system and financial losses and would, inter alia, help to strengthen the capacity of the electricity authority to carry out the power investment program and operate and maintain the system. H. Cofinancing and Donor Coordination 1.25 Under Cr. 600-NEP, 1478-NEP, 1902-NEP there has been significant cofinancing involving IDA, CIDA, the European Commission, Kuwait Fund for Arab Economic Development, Kreditanstalt fuer Wiederaufbau, Overseas Economic Cooperation Fund (OECF) of Japan, Saudi Fund for Development, and UNDP in supporting the development of hydroelectric schemes; other donors including ADB, FINNIDA, Government of France and the Japanese International Cooperation Agency (JICA) have largely supported investments in transmission and distribution (T&D). ADB and IDA collaborated in the preparation of the Nepal Power Subsector Review (para. 1.23) that has guided both institutions' strategy for power development in Nepal. The strategy proposed in the review was endorsed by the donor community at a Donors Meeting on the Nepal Power Subsector chaired by the Bank in Paris in May 1988 when ten donors made preliminary commitments to support the Arun Project. - 8 - II. THE BENEFICIARY A. Organization, Management and Staffing Organization 2.01 NEA, the beneficiary, is a relatively new organization. Following studies financed by ADB, it was created in August 1985 through the amalgamation of a number of public sector organizations, principally the Nepal Electricity Corporation, the Electricity Department, and Small Hydro Development Board. Under the NEA Act, NEA is required to supply electricity to all, regardless of ability to pay, as well as to operate on commercial principles. Although the NEA Act states that NEA is to be autonomous, in practice it has limited autonomy. The Act spells out the Government's powers over Nepal's power subsector including appointment of NEA's Board and requirements for NEA to submit regular reports and obtain Governmental approval for foreign loans, power exports and changes in electricity prices. Further, HMG/N is very involved in NEA's day-to-day functioning, including staff appointments. Management 2.02 As specified in its Act, NEA's Board consists of Government employees (Secretaries of the MOE, MOWR, Law and Justice and MOI; a Member of the Planning Commission; an official designated by HMG/N; and the Deputy Chairman of the Rastra Bank) and two private sector representatives nominated by the Government, together with NEA's Managing Director. The Board is chaired by the Minister, MOWR. The Board has played a very limited role in facilitating NEA's institutional development. Few of its members have expertise in the power sector, there have been periods when it has met infrequently, and, in general, it has not consistently functioned in ways which have supported efficient, commercially oriented operations. NEA's organization chart is given in Annex 2.1. Staffing 2.03 NEA had about 9,398 employees in December 1991, including 441 technical and about 143 non-technical officers. Approximately 52Z of NEA's staff are permanent, 12X temporary, and 36? are monthly and daily wage earners. Although NEA is seriously overstaffed, it is deficient in key personnel in nearly every functional area. NEA has the lowest annual sales and generation per employee of any Asian country for which data are available: 60 MWh (net generation) and 81 MWh (gross generation) per employee, respectively, compared to 184 MWh and 263 MWh for Bangladesh, the next lowest. NEA's management is conscious of the overstaffing problem and, in conjunction with the IDA-financed training program (para. 2.14), has commissioned the preparation of a manpower and training master plan. Recommendations agreed with IDA will be implemented under a Performance Contract (PC) between NEA and HMG/N (para. 2.06). B. Upgrading NEA's Operational Efficiency 2.04 In 1988, the Power Subsector Review identified a number of major impediments to NEA's efficient operation including: (a) a lack of coherent corporate goals; (b) insufficient autonomy (as evidenced in its Board composition and increasing Government interference in its day-to-day affairs); -9- (c) unfamiliarity amongst NEA management with the application of modern utility management techniques, including insufficient delegation of responsibility (and accountability) to middle management staff; and (d) inadequate conditions of service. These have led to low staff morale and productivity, inadequate financial and accounting management, a poorly maintained and operated system, unreliable electricity supply and high system losses. The Power Subsector Review proposed, and NEA accepted, that a major step could be taken in addressing these issues through NEA entering into a "twinning" arrangement with a mature utility. 2.05 With the assistance of IDA (Cr. 1902-NEP), NEA entered into a two year 'twinning" agreement with Electricite de France International (EdF) in October 1989 (subsequently, the contract was extended by six months). The agreement provides expertise in all aspects of modern power utili..y practices, with special emphasis on assisting NEA to develop a corporate plan and improve operations management. In close collaboration with NEA management, an EdF team reviewed NEA's main functions and issued a diagnostic report. Based on discussions between NEA, EdF and IDA, the following priority areas were selected for NEA's Performance Improvement Plan (PIP): financial management; manpower planning/training; design standards; corporate planning; loss reduction/- computerized billing; load management; procurement and materials management; oper:ations and maintenance of power facilities; generation expansion planning; and studies to develop an inventory of potential hydroelectric projects (para. 1.05). Following these discussions, the consultants prepared a comprehensive program defining long-term and short-term action plans to address the priority areas (Annex 2.2). These action plans were then converted into a master schedule to be attached to a Performance Contract (PC) between HMG/N and NEA (para. 2.06). 2.06 Key elements of the action program will include: (a) streamlining NEA's organization through creating a separate Rural Electrification (RE) Directorate (para. 2.24) and a separate Human Resources Department (HRD), reporting directly to the Managing Director, responsible for manpower planning and corporate-wide training programs (para. 2.16); (b) introducing an incentive scheme based on actual performance in NEA's compensation system; and (c) introducing a staff career development process that allows for merit promotion and training. To provide a framework for implementing NEA's PIP, a three year rolling Performance Contract (PC) will be agreed between HMG/N and NEA which will be updated annually and be subject to modifications, if necessary, by HMG/N and NEA. The contract will focus primarily on NEA's major objectives and outline the respective rights and obligations of HMG/N and NEA. Implementation of the PC is expected to reduce government interference and build up NEA's autonomy. The following major issues are expected to be covered in the first contract: (a) NEA objectives in the specific areas of supply to consumers, consumer relations, finance, accounting and auditing, technical operations and tariff policies; (b) the respective rights and obligations of NEA and HMG/N, including specific agreements on implementation of tariff policies, financing of investment, settlement of arrears between HMG/N and NEA and legal and regulatory aspects, including disconnection of supply; (c) management of the PC; and (d) agreed details of investment plan and its financing, performance indicators and financial projections. A draft PC between HMG/N and NEA was discussed and agreed with IDA during negotiations; conclusion of a PC between HMG/N and NEA with terms and conditions satisfactory to IDA will be a condition of credit effectiveness (para. 6.04(a)). - 10 - 2.07 The dispersal of NEA's headquarters (HQ) in Kathmandu in several buildings disrupts management and Qrganizational integration. NEA is establishing central office facilities to improve its corporate effectiveness, computerizing some of its activities and rationalizing its working environment. Also, the increasing demands for maintenance repair services from the various hydro plants could be met at least cost by establishing a central, fully equipped mechanical and electrical workshop with specialized and well trained maintenance teams. The proposed Project includes equipment for NEA's new headquarters offices and workshop facilities. In addition, NEA plans to set up a trainir.g facility (para. 2.16). C. Financial Organization, Accounts and Audit 2.08 Although NEA was only incorporated in August 1985, on completion of the proposed FY92-97 expansion program, it will be responsible for assets worth US$1.1 billion. It is therefore essential for NEA to have an efficient Finance Department, supported by an effective internal audit system. Unfortunately, NEA's present financial administration, accounting, and internal audit are unsatisfactory. In recent years donors, particularly ADB and IDA, have provided NEA with considerable technical assistance in these areas; the results, however, have proved to be unsatisfactory mainly because of insufficient local initiative and direction in the implementation and operation phases of the new systems and procedures. NEA's financial staff lack the qualifications, experience and initiative necessary to carry out their duties and responsibilities. This situation has been further exacerbated by staffing policies and staff transfers inappropriate for a power utility. 2.09 Overall accounting and financial management are deficient. General accounting, which suffers from poor primary documentation, is inaccurate and follows principles which deviate from accepted international standards. Poor coordination between regional units and HQ and weak accounting at HQ have resulted in significant delays in the preparation of the final accounts. Debt and debt service records are incomplete (para. 4.03). Accounting manuals need to be reviewed and updated to provide staff with clear direction on correct accounting principles. Cost accounting needs to be improved and put to useful purpose. Cash management and cash control appear to be almost non-existent; cash collection, as evidenced by high receivables (para 4.13), is unsatisfactory, and there appears to be little control on cash in transit. Budgeting suffers from approval delays and lack of monitoring during implementation. Present procurement procedures lead to excessive ordering, high prices and lack of standardization. Accommodation for physical stores, in general, needs improvement. Thus, even if NEA had fully competent staff, the present systems would not provide the information required for effective financial management. 2.10 NEA is taking steps to correct this situation. In accord with an IDA recommendation, made during preparation of the proposed Project, in December 1991 NEA appointed a professionally qualified Finance Director on contract for three years. The necessary funding required would be met from Cr. 1902-NEP. Also, to further strengthen NEA's Finance Department, in accord with an understanding reached during negotiations, NEA has also appointed two well qualified Nepali professionals to act as assistants to the new Finance Director. Further, NEA will be required to employ consultants to review NEA's accounting system and practices, make appropriate recommendations and implement the accepted changes. During the implementation phase, the consultants will provide "on-the-job" - 11 training to NEA's accounting staff. The consultants will also make recommendations and assist management in deciding on the Accounting Department's staffing needs. 2.11 The preliminary long form auditor's report for FY89 clearly demonstrates the deficiencies in NEA's financial administration, many of which had been commented upon in previous reports. Many matters raised in this report are serious and point to unsatisfactory internal control as well as poor accounting, e.g. failure to account for cash in transit over several years; poor bank reconciliation; large advances to staff without proper justification, including advances to staff who have now left NEA; large sums paid through letters of credit which have been outstanding for years; charges to bank accounts which have not been recorded in NEA's accounts; failure to reconcile branch accounts; and charging out stores at 'nil' value. These and other matters reflect unfavorably on NEA's internal audit and control. Accordingly, as recommended by IDA, in order to strengthen its Internal Audit Unit, NEA has employed consultants under Cr. 1902-NEP to review the unit's organization, staffing and program needs and make appropriate recommendations. Subsequently, this would be followed by the updating of existing and, when necessary, development of new audit programs and the training of staff in their use. Independent Audit 2.12 In accordance with the NEA Act, the Auditor-General (AG) is officially responsible for auditing NEA's annual accounts. However, although the AG certifies the reports, because of manpower constraints the actual work is contracted out, generally for three years, to independent firms of Chartered Accountants. The audited financial statements for FY86 and FY87 were unsatisfactory. The reports have omissions, and numerous items lack adequate explanation; furthermore, the report and statements do not conform with recognized international accounting and auditing standards. However, a different firm was contracted to audit NEA's FY88 accounts, and based on satisfactory performance, its contract was extended for FY89 and FY90. More recently, constitutional amendments have authorized NEA to appoint its own auditors although this would also require amendment of the NEA Act. To facilitate achieving this objective in accord with an understanding reached during negotiations, HMG/N is preparing a proposal for appropriate amendments to the NEA Act. 2.13 Credit 1478-NEP requires NEA to furrLish certified financial statements and a signed copy of the audit report to IDA within twelve months of the end of the fiscal year. Inordinate delays in finalizing the annual accounts have resulted in non-compliance with the covenant. However, with the appointment of the new auditor since FY88, NEA's audits for FY88 were completed within a reasonable time, and those for FY89 were finalized in January 1992. The delay in submittal of the FY89 accounts was mainly due to NEA's inability to expedite revaluation of assets in its accounts, as covenanted under Cr. 1478-NEP. Audited FY90 accounts are expected to be approved by NEA's Board by the end of March 1992. The technical assistance program envisaged for NEA's Finance Department (para. 2.10), commercial operations (para. 2.24) and internal audit (para. 2.12) is expected to enable NEA to complete its future audits within the schedule outlined below. To ensure better monitoring, during negotiations NEA agreed that unaudited annual financial statements with all supporting schedules would be prepared within six months of the close of each fiscal year and that annual audited financial statements and reports would be certified by the auditor and - 12 - approved by NEA's Board within nine months of year end (para. 6.03(a)). The auditors would, in their report, provide a separate opinion on expenditures made through special accounts and on IDA reimbursements made through statements of expenditures (SOE) and certify that they are fully supported by the underlying data (para. 6.03(a)). In addition, during negotiations, HMG/N and NEA assured IDA that annual audited financial statements certified by the AG would be forwarded to IDA within twelve months of year end (para. 6.02(a)). Insurance 2.14 As agreed under Cr. 1478-NEP, NEA has carried out a Risk and Insurance Management Development Study with J. M. Gordon and Associates Consultants Ltd, insurance consultants of Calgary, Canada. The study concluded that insuring all exposures and risks would be extremely expensive for NEA and therefore insurance should only be purchased for catastrophic risks for large facilities. Small or more frequent losses would be more cost effectively "self- insured" (i.e. no insurance purchased). Based on an evaluation of NEA's ability to fund losses internally, the study concluded that NEA should self-insure any loss exposure or location where its maximum foreseeable loss would be less than NRs 20 million. It also concluded that NEA should bear the first NRs 10 million of any loss. The first NRs 2 million of any loss should be charged to operating expenses, and any loss exceeding NRs 2 million per accident would be paid out of a contingency reserve fund. Since NEA is currently accruing losses the establishment of such a reserve fund would be difficult. During negotiations, it was agreed that NEA would, by June 30, 1992 prepare and furnish to IDA for its review and comments, a proposal for an insurance program consistent with sound public utility practice to be undertaken by NEA. Starting in FY93, NEA will implement the insurance program taking account of IDA's comments (para. 6.03(b)). D. Training 2.15 NEA's management regards training as a critical component of its institutional development and a means to enable it to meet its obligations under the PC to be signed with HMG/N (para. 2.06). Initially, NEA had no formalized training program; training was ad-hoc, as a result of counterpart staff being attached to consultants and contractors working on projects. The first systematic training program was established for eighty-three technicians and operative financial and accounting staff in bookkeeping, budgeting, stores control and cost accounting with the assistance of Coopers and Lybrand Deloitte (C&LD) under ADB's Fifth Power Project. 2.16 Under Cr. 1478-NEP, with EdF's assistance, NEA has initiated a corporate approach to training. The training program is focussed on technical areas identified in a training diagnosis and the establishment of a training center using existing facilities at Marsyangdi. The program trained seven trainers and 132 NEA staff for a total of approximately 2,300 staff-days in FY90. This was increased to cover about 244 technical personnel for about 5,700 staff- days in FY91. During FY92 the plans are to train up to 500 staff for a total of about 11,500 staff-days, pending completion of the Marsyangdi Training Center and the training of additional instructors. While progress has been made in training in NEA, it has been hampered by lack of clear policies, high-level involvement and appropriate institutional organization as well as delays in purchasing equipment, appointing instructors and the training center's establishment. The proposed Project provides for continuation of the training program and its - 13 - broadening to include training in management and finance. To provide an appropriate framework for institutionalizing training and manpower planning during negotiations NEA agreed that by March 31, 1992, it will implement an action program, including the establishment within NEA of a Human Resources Department (HRD) responsible for training programs and manpower planning and development and the employment of a HRD Director with qualifications satisfactory to IDA (para. 6.03(c)). E. Existing Facilities 2.17 NEA is Nepal's principal power supplier; electricity is also supplied by some industrial captive generation plants (nominal capacity of 17.5 MW) and a number of privately owned hydroelectric plants (each of less than 100 kW capacity) with estimated cumulative capacity of 0.6 MW. Generation Capacity 2.18 Nepal's interconnected system has an installed generating capacity of 291 MW (see Annex 2.3) of which 236 MW (81Z) is hydroelectric plant and 55 MW (19Z) is diesel plant; NEA's rated generating capacity is 257 MW. Since 1981, 180 MW of new hydroelectric plant has been installed, increasing the hydro proportion of generating plant from 67Z to 81Z. All hydroelectric plants are run-of-river except for the 60 MW Kulekhani I which has seasonal storage. The 12 MW Jhimruk grid hydroelectric project (to be commissioned in 1995) is under construction by the Butwal Power Company (a non-governmental organization) with Norwegian assistance; this company also constructed the 5.1 MW Andhi Khola project which was commissioned in 1991. On commissioning, the Jhimruk project will be handed over to NEA. With FINNIDA's assistance, NEA commissioned a 26 MW multifuel thermal plant in 1991. Outside the interconnected system, NEA operates a number of isolated hydroelectric plants with total installed capacity of 3.9 MW and small diesel plants with total installed sapacity of 1.0 MW. Transmission 2.19 Nepal's transmission system (Map IBRD 22331) developed through the gradual interconnection of isolated networks built to serve regional centers. In the central region a 66 kV network was developed to bring power into the Kathmandu valley from outlying hydroelectric plants: Kulekhani I (60 MW), Sunkosi (10 MW), Devighat (14 MW) and Trisuli (21 MW). A 66 kV double circuit line also links Kulekhani I with Hetauda and Birganj. To allow electricity to be transmitted to the Eastern, Western, Mid-Western and Far-Western regions, a 132 kV transmission line is being superimposed on the 66 kV system from Anarmani in the Mechi Zone to Manendranagar in the Mahakali Zone; in addition, the Kulekhani II and Marsyangdi hydroelectric plants are linked to the 132 kV system. A single line diagram of the existing transmission system is shown in Annex 2.4 together with a schedule of facilities. Interconnection with India takes place at Ramnagar at 132 kV and at fourteen other isolated points along the border at the distribution voltage level (33 kV or 11 kV). The NEA system is not synchronized with the two border Indian State Electricity Boards (Bihar and Uttar Pradesh). Power exchange, currently limited to 50 MW equivalent, occurs in an ad hoc manner, depending upon the availability of supply. Most of the 66 kV/11 kV substations in the Kathmandu Valley are overloaded to the point that NEA is forced to shed load to avoid overload on the main substation transformers. Further, system supply capability under fault conditions is limited because there - 14 - is no direct intertie at 132 kV between the Marsyangdi and Kulekhani plants. The proposed Project would address these problems. Distribution 2.20 Available data indicate that the distribution system consists of 351 km of 33 kV lines, approximately 900 kms of 11 kV (and 2.3 kV lines) and approximately 2,500 km of low voltage (LV) lines. Overloading of the existing 33/11 kV and 11/0.4 kV substations, particularly in the Kathmandu valley, is leading to overloading of their outgoing feeders, causing excessive voltage drops and high technical losses (para. 2.25). Maintenance 2.21 Until the recent commissioning of the 69 MW Marsyangdi Project, NEA had been postponing major repairs and maintenance of its hydropower stations. This is particularly the case of the 35 MW Trisuli-Devighat complex, which can hardly deliver 21 MW at present. Each of the seven existing generating units of the Trisuli plant, commissioned between 1962 and 1970, have accumulated over 110,000 hours in operation and urgently need repair. Progressive siitation of waterways and excessive use of plant over 20 years without maintenance have reduced output from 18 MW to about 12 MW. Downstream, the Devighat plant is reusing water discharged from Trisuli and is, therefore, directly affected by the reduced and silty water supply. Although the Devighat units, commissioned in 1984, are in better condition than Trisuli, the highly sedimented inflows and operational constraints have reduced power output from the design capacity of 14 MW to 9.4 MW. Likewise, the Sunkosi, Gandak and Kulekhani hydroelectric plants need complete overhauls and repairs as soon as possible to avoid major breakdowns. Currently NEA is undertaking overdue maintenance of the 92 MW Kulekhani I and II complex. Under Cr. 1902-NEP, NEA carried out a feasibility study with assistance from consultants, which confirmed the attractiveness of upgrading and refurbishing the Trisuli-Devighat complex. The proposed Project would facilitate implementation of the study's recommendations. It would also provide spares, tools and equipment for Nepal's transmission system. Spares for three other hydroelectric schemes and two diesel plants are being financed under Cr. 1478-NEP. F. Power System Planning Generation 2.22 NEA's Planning Directorate's System Planning Department, with the assistance of the Engineering Directorate's Project Preparation Department, is responsible for system planning in generation and transmission. Distribution planning is carried out in the Technical Services Department of the Distribution and Customer Services Directorate (TS/DCS). In 1987, in conjunction with the Power Subsector Review, under technical assistance funded by CIDA and IDA, NEA prepared a Least Cost Generation Expansion Plan (LCGEP) through the year 2005 with CIWEC's assistance. This study identified the components of the proposed Project. In 1990 NEA, with EdF's support under Cr. 1902-NEP, updated the LCGEP to take into account the changes in Nepal's economic environment since 1987, including the impact of the recently resolved T&T impasse. The proposed Project was reconfirmed as a priority investment. Although NEA continues to rely upon assistance from consultants to prepare its generation expansion plans, it has - 15 - developed in-house capabilities for conducting computerized system-planning studies as well as cost estimating for hydroelectric projects. Transmission & Distribution Planning 2.23 Planning in T&D is hampered by the multiplicity of planning criteria and standards from various consultants and the inexperience of NEA staff to impose a uniform approach. Also, NEA's work is constrained by a lack of basic system data and maps of existing distribution networks. Recognizing this, NEA has completed a Ten Year T&D Master Plan for the Nepal interconnected system with technical assistance provided under Cr. 1902-NEP. This activity has been complemented by technical assistance provided by ADB aimed at institutionalizing distribution planning at the regional/zonal levels as well as assisting TS/DCS in establishing drawing office facilities and a central registry for system plant and configuration data. Rural Electrification (RE) 2.24 RE is an important component of a strategy to meet rural energy needs at least cost and potentially an important element of a comprehensive rural development strategy because it delivers high quality, highly productive energy. At present, approximately 942 of Nepal's population live in rural areas, of which an estimated 2Z has access to electricity. There are many reasons why RE has not yet taken root in Nepal: (i) absence of an RE master plan; (ii) lack of coordination of the various parties involved; and (iii) economical and financial non-viability of most existing RE schemes (especially those operated by NEA) because of design and management weaknesses. Further, NEA has been unwilling to increase its RE activities because the Government does not reimburse NEA for them. To address these and related issues, NEA has prepared a Ten Year RE Master Plan with assistance provided by the National Rural Electric Cooperative Association (USA) uneer Cr. 1902-NEP. In addition to identifying the components of the RE master plan, the study has recommended that NEA set up a separate Directorate to provide a focus for RE programs (paras. 2.06 and 4.25). Further, under the pr_posed Project an RE scheme would be carried out in the Marsyangdi catchment which would provide a test case for the development of user organizations for the management of RE schemes. G. System Losses 2.25 System losses have been a critical problem affecting NEA's operational and financial performance throughout its existence, with yearly losses averaging 24-30? of gross generation during FY86-90. Technical and non- technical losses have each contributed about half of the system losses. The technical losses are caused primarily by improperly planned and inadequately designed distribution systems, while improper billing, illegal connections and incorrect metering are the primary causes of non-technical losses. These high system losses cause NEA to lose substantial revenues and require larger tariff increases to achieve agreed financial targets. Further, high technical losses require NEA to either incur increased capital expenditure and attendant debt service or operate inefficient, unreliable systems prone to load shedding. 2.26 Since its inception, NEA has taken numerous steps, assisted by ADB and IDA, to reduce system losses through organizational changes, procurement of meters, metering and reactive compensation equipment, and reinforcement of the - 16 - distribution system. Under Cr. 1478-NEP, with the assistance of British Electricity International (BEI), NEA developed a 5-year, two phase system Loss Reduction Program (LRP) to meet time-bound targets for the Kathmandu Valley, which accounts for more than half of NEA's billings. Technical losses would be reduced through a program of transformer relocation, reconductoring, phase balancing and reactive power compensation. Non-technical losses, such as pilferage, would be addressed through meter resealing coupled with rehabilitation of inadequate service connections. Metering errors would be addressed through testing and recalibration of three-phase and single phase meters, while billing errors would be handled by improved procedures for meter reading and accounting. The LRP is being implemented by CD/DCS's Loss Reduction Division which was set up in 1990 to provide a focal point for all NEA commercial and loss reduction activities. The first two years (Phase II) of the LRP is being implemented under Cr. 1478-NEP and provides for: (a) resealing of 1002 of customer installations and rehabilitating 40? of the electrical services; (b) phase balancing 60? of the electrical services; (c) trial installation of 55 km of Aerial Bundled Conductors (ABC); (d) equipping a meter test station in Kathmandu; and (e) upgrading statistical metering at generation, import and export points. Although initial progress was slow due to protracted delays in appointing consultants and procuring equipment, implementation progress is now satisfactory. Phase III of the LRP, to be also implemented under Cr. 1478-NEP, would continue Phase II in the Kathmandu Valley and extend the successful elements to the rest of the country. To complement the above effort, under technical assistance provided by ADB, NEA has developed of an action plan to computerize its billing system which would be implemented under ADB's Seventh Power Project. Further details on NEA's Loss Reduction Action Plan are provided in Annex 2.5. III. THE PROJECT A. Background 3.01 Due to the problems discussed previously the Project was formulated as an outcome of dialogue between HMG/N and IDA to address power rehabilitation investment needs and NEA's institutional development as well as to support actions in energy conservation and assist in the implementation of the Marsyangdi Catchment Management Pilot Project (MCMPP). B. Project Objectives 3.02 The Project's primary objective would be to: (a) increase NEA's effective supply capacity by improving technical and operational efficiency, upgrading existing generation capacity and imi.roving the system load factor; (b) restore NEA's financial viability and strengthen its institutional performance; and (c) enhance energy conservation measures. l- ,ddition. the project would address remaining environmental concerns arisi..g from the Marsyangdi Hydroelectric Power Project (MHPP) (Cr. 1476-NEP) by supporting an innovative approach to catchment management on a pilot ba-is. - 17 - C. Project Description 3.03 The proposed Project is summarized below. Details of components (a), (b), (d) and (e) are in Annex 3.1, component (g) in Annex 3.3 and component (f) in Annex 3.2. The TORs for consultant services are in the project files. The geographic locations of the Project's physical components are shown in Maps IBRD 22331 and 22780. (a) Generation Rehabilitation. This includes the upgrading of the civil works of the Trisuli and Devighat hydroelectric plants and the retro- fitting of the Trisuli electro-mechanical equipment. (b) HV Reinforcement. This includes investments to: (i) increase the 66kV circuit capacity to improve voltage regulation and reliability: (ii) upgrade the 66/llkV transformer capacity at existing substations and construct two substations nearer the load centers in Kathmandu (Teku and Bhaktapur); (iii) construct a 5 km 132 kV intertie between the Marsyangdi and Kulekhani systems (see attached Map IBRD 22331) and a 132 kV line from Bhaktapur to New Chabel (initially operated at 66kV); (iv) provide equipment, spare parts and tools for the Western, Eastern and Bagmati transmission sections; and (v) construct a 132 kV interconnection line between Duhabi and Kataiya to upgrade power exchange capability with India. (c) NEA Infrastructure/Buildings. This includes: (i) NEA HQs. The provision of imported equipment such as electrical/mechanical building services, communications equipment, computers, filing and drafting systems and other appropriate furnishings. (ii) Workshops. The provision of spare parts, tools, cranes and vehicles for NEA's mechanical and electrical workshops. (iii) Training Center. The provision of pedagogical training equipment together with consultant services to extend the current training program. (d) Marsyangdi Catchment Management Plan. The Project would finance consultant services, materials and equipment necessary to implement a pilot project in the Marsyangdi catchment. This program includes: (i) a soil conservation and sediment reduction program; (ii) institutional support to the Local Development Office (Lamjung District) of the Ministry of Local Development and Department of Soil Conservation and Watershed Management of the MFE; (iii) upgrading of the Dumre- Besisahar road; ana (iv) electrification of the Besisahar area and vicinity. (e) Industrial Energy Audits. The proposed Project would finance consultant services and equipment needed for the establishment of an Energy Audit Unit within the Ministry of Industry which would provide technical advisory services to assist local industries in implementing energy conservation measures. It would also support NEA's efforts to improve the system load factor by providing services and equipment to upgrade NEA's load dispatch center and install low frequency relays, - 18 - load monitoring equipment, time of day metering and communications equipment to be used for the load management program. (f) Technical Assistance. In addition to physical works and equipment, the proposed Project includes technical assistance in the form of: (i) consultant services to assist NEA in the implementation of project components (a), (b), (c) and (d(iv)) as well as feasibility and/or detailed engineering studies for priority hydroelectric projects and (ii) extension of NEA's ongoing training program and continuation of the "twinning" support to NEA. D. Pro3ect Cost 3.04 The Project's total cost, including physical and price contingencies, duties and taxes is estimated at US$88.6 million, based on mid-1990 prices. It comprises US$72.1 million in foreign exchange and US$16.5 million in local costs, including US$4.0 million in taxes and duties. The unit costs are based on recently signed contracts for comparable civil works and T&D projects, recent quotations for spare parts and consultant estimates for the Trisuli-Devighat electro-mechanical equipment. Physical contingencies are included at 152 of the base cost for the civil works of Trisuli-Devighat and 10X for the other components. Price contingencies for foreign costs are assumed et 3.42 for FY91 and 3.42 per year thereafter. Price contingencies for local costs are assumed at 112 for FY91, 11Z for FY92, 82 for FY93 and 6.52 per year in FY94 and FY95 and 6.OZ a year thereafter. The cost estimates are summarized below and detailed in Annex 3.4. Table 3.1: PROJECT COST ESTIMATE For-eign Local Foreign Total Local Foreign Total Exchange ---- (Rupeo million)--- ----(USS million)---- % A. Generation Rehabilitation 147.0 862.3 1009.3 3.4 20.2 28.6 86.4 B. HV Reinforcemnt 92.1 651.9 644.0 2.2 12.9 16.1 86.7 C. NEA Infrastructure/Buildings 88.4 234.1 322.6 2.1 5.6 7.6 72.6 0. Marsyangdi Catchment Plan 106.7 260.0 886.7 2.6 6.8 9.0 72.6 E. Industrial Energy Audits 7.8 103.0 110.8 0.2 2.4 2.6 92.8 F. Technical Assistance 28.4 606.3 631.7 0.6 11.8 12.6 96.0 TOTAL BASE COST 467.4 2536.6 3004.0 10.9 69.4 70.4 84.4 Physical Contingencies 91.4 288.7 880.1 2.1 6.8 8.9 76.0 Prico Contingencies 146.3 263.6 S99.8 8.4 6.9 9.4 63.4 TOTAL PRO.ECT COSTS 705.1 3078.8 8378.9 16.5 72.1 88.6 81.4 Interest During Construction 490.7 .0 490.7 11.6 .0 11.5 .0 TOTAL FINANCING REQUIRED 1196.8 3078.8 4274.8 28.0 72.1 100.1 72.0 NOTES: 1. Total physical contingencies are about 12X of base cost; local price contingencies are about 26X and foreign price contingencies are about 9X of the rospective base cost plus physical contingencios. 2. Identifiable taxes and duties are about NRs 172.0 million (US84.0 million) and the total Project cost, net of taxes is NRc 3611.9 million (US184.6 million equivalent). - 19 - E. Project Financing 3.05 The financing requirements, including interest during construction (IDC) at an annual rate of 10.25Z, are USD$100.1 million, including US$28.0 million in local costs and US$72.1 million in foreign costs. A proposed IDA credit of US$65 million would finance 81% of the Project's foreign cost and 38Z of its local cost, equivalent to 77% of the total cost net of duties and taxes. HMG/N has requested the Government of France (GOF) to provide US$5.1 million equivalent for the NEA training component. The GOF has agreed to fund the first tranche (US$0.,t. million equivalent); it is anticipated that further financing will be discussed in future annual discussions between HMG/N and GOF. The Nordic Development Fund (NDF) has agreed to provide SDR 4 million (US$5.4 million equivalent) to finance spares and equipment for transmission and the rural electrification component of the Marsyangdi Catchment Management Pilot Project (MCMPP). The Government of the Federal Republic of Germany has agreed to finance the components related to soil conservation, watershed management and institutional support of the MCMPP. During negotiations, agreement was reached with HMG/N on the cofinancing arrangements (para. 6.01(a)). The effectiveness of the cofinancing agreement with the NDF is a condition of credit effectiveness (para. 6.04(b)). NEA's accounting policy provides for capitalization of IDC which is estimated to be US$11.5 million. NEA would finance US$18.8 million (19Z of total financing). HMG/N would finance US$1.6 million representing part of the local cost for the MCMPP (including the RE component) and for the industrial energy audit component. HMG/N and NEA would bear the cost overrun risks. The proposed financing plan is in Table 3.2. A more detailed plan is included in Annex 3.8. Table 3.2: PROJECT FINANCING PLAN (US$ million equivalent) Local Foreign Total Z IDA 6.3 58.7 65.0 65 Cof>.\ancing 1.3 13.4 14.7 15 HMG/i; 1.6 1.6 2 NEA 18.8 18.8 18 TOTAL 28.0 72.1 100.1 100 3.06 Tht Government would onlend US$60.8 million equivalent out of proceeds of the proposed Credit to NEA at an interest rate of 10.25% repayable over a period of 25 years, including a grace period of 5 years. The onlending rate is expected to be positive in real terms (3.25Z-3.65Z) over the Project life and includes a premium to reflect that HMG/N is bearing the foreign exchange risk. The balance would be passed on as grants to the Ministries of Industry and Local Development. F. Project Engineering and Status of Preparation 3.07 NEA has prepared the following documentation with assistance from consultants (funded tuder Cr. 1478-NEP and Cr. 1902-NEP) and agreed to undertake several actions to expedite procurement of the Project physical items: (a) Rehabilitation of the Trisuli/Devighat Complex. NEA/CIWEC have completed a feasibility report on the options for rehabilitation of - 20 - the Trisuli/Devighat schemes and an economic study to determine the recommended options for further development. During appraisal IDA reviewee the feasibility report and agreed with NEA regarding the works to be undertaken. The detailed engineering has been completed, bids have been received for the civil works and electro-mechanical components and are under evaluation. (b) HV Transmission Reinforcement. NEA has prepared a proposal for urgent reinforcements in the HV system with a detailed project description and cost estimate. NEA has appointed EdF International (France) to carry out project preparation and draft bidding documents. Construction work of the HV transmission reinforcement needs to be carefully planned and properly scheduled to minimize disturbance of NEA operations. The bidding for the HV component is underway. (c) Load Management. A draft report on load management options prepared by the NEA/EdF was reviewed during appraisal. Subsequently, NEA with assistance from EdF prepared an action plan with detailed cost estimates for the implementation of load management measures over 1992/1996. (d) Industrial Energy Audit. In November 1990 HMG/N submitted to IDA a proposal to undertake an Energy Management Program for the Industry Sector in Nepal. This included the creation of an Energy Audit Unit within the Ministry of Industry. This unit will provide, over a five year period, a range of technical support including audits and training services towards the development of private sector expertise in the local consulting and industry communities. G. Project Implementation 3.08 NEA will be responsible for implementing the proposed Project with the organization shown in Annex 3.5, except for the Energy Audic Program under the responsibility of the MOI and the MCMPP for which primary responsibility would lie with the Ministry of Local Development (para. 3.10). A Project Coordinator with the rank of Director will coordinate the work with three Project Managers and support staff as follows: (a) a Project Manager and two supervisory staff from the Construction Directorate for the Trisuli/Devighat plants; (b) a Project Manager and two supervising engineers from the Construction Directorate for the Kathmandu transmission reinforcement project; and (c) the Director, Commercial Department, for the load management component. All Project Managers would report to the Project Coordinator who would also liaise with the Project Managers appointed by the MOI for the energy audit program and by HMG/N for the MCMPP. During negotiations NEA agreed on a schedule for contract signature for the hydro rehabilitation works, the transmission reinforcement component and the MCMPP RE component as well as recruitment of consultants for all project supervisory tasks. The appointment of supervisory consultants as well as invitation of bids for these components (paras. 6.04(c) and 6.04(d)) would be a condition of credit effectiveness. A Project Coordinator has been appointed, and the final Project implementation organization chart was agreed during negotiations (para. 6.03(d)). 3.09 With the exception of the hydro rehabilitation and HV transmission reinforcement components, most of the other power work is relatively straightforward and should be handled using NEA's own resources with some _ 21 - assistance from contractors (e.g. transportation to site, foundation works). The power station rehabilitation work of the electrical/mechanical plant would be handled on a turnkey basis by an equipment manufacturer who would be responsible for installation and commissioning to ensure satisfactory performance during the warranty period. Civil works rehabilitation would be handled by a contractor engaged under international competitive bidding (ICB) procedures. The HV transmission reinforcement component would be handled under one (or possibly two) single responsibility contract, including the lines and the substations. 3.10 Responsibility for implementation of the Marsyangdi catchment management has been assigned as follows: (a) the soil conservation and sediment control component would be implemented by the Local Development Office (Lamjung) of the Ministry of Local Development assisted by consultants with technical inputs from the Department of Soil Conservation and Watershed Management (DSCWM) of the MFE; (b) the upgrading of the Dumre-Besisahar road would be implemented by DOR; and (c) the RE component would be implemented by NEA. To coordinate these activities a Marsyangdi Catchment Development Committee (to be designated as a subcommittee of the District Development Committee once it is established) would be formed and chaired by the Lamjung District Local Development Officer (where most activities would be concentrated) with members comprising local representatives of MFE/DSCWM, NEA, DOR, other relevant ministries and local user groups. To facilitate implementation of the MCMPP, HMG/N agreed during negotiations that DOR would establish a project office and employ a Project Manager for the Dumre-Besisahar road by August 31, 1992 (para. 6.01(b)). 3.11 With respect to the energy audit program, HMG/N agreed during negotiations to establish a project office in the Ministry of Industry and appoint a project manager by August 31, 1992 (para. 6.01(c)). H. Procurement 3.12 Procurement arrangements for the project are shown in Table 3.3. IDA fi..anced goods, works and services required under the proposed Project would be procured in accord with IDA guidelines; goods and works financed by other donors will be procured in accord with their respective guidelines. There would be two turnkey contracts (approximately US$10 million and US$2 million) for the supply and erection of the HV lines and substations and two contracts for the Trisuli- Devighat complex rehabilitation, one for electro-mechanical equipment of US$12.5 million and one for civil works of approximately US$15 million. Contractors for the Trisuli-Devighat civil works have been prequalified in accord with IDA guidelines. Procurement of materials and equipment and of the turnkey contracts would be on the basis of ICB, except for: (a) materials, tools, equipment and spare parts (which are of a proprietary nature and can only be manufactured by the original suppliers or their licensees) which would be procured under direct contracting to the limit of US$5.0 million (of which IDA would finance US$2.6 million, about 4Z of the proposed Credit); (b) transport of - 22 - materials, erection and commissioning of lines and distribution works, and a small amount of materials, totalling US$2.5 million, which would be procured under local competitive bidding (LCB); and (c) items available off-the-shelf, which could be procured under local or international shopping procedures. Except for the Trisuli-Devighat civil works, which would be procured under ICB, other civil works are of a size that do not justify ICB and would be procured under LCB procedures acceptable to IDA. International and local shopping would be allowed up to US$75,000 per contract and US$600,000 in aggregate. For goods procured under ICB, local manufacturers would be given a 152 price preference on CIF prices or prevailing duties, whichever is lower. Consultants financed by IDA would be appointed in accord with the IDA guidelines for use of consultants. IDA's prior review of contracts would apply to: (i) all consultants services, studies and training; (ii) all civil works above US$200,000 equivalent; and (iii) materials and equipment above US$75,000 equivalent. This would cover over 802 of the procurement to be financed under the proposed Credit. Other contracts would be subject to ex-post review by IDA. Table 3.3: PROCUREMENT ARRANGEMENTS (US3 million) Procurement Method Total Project Component ICB LCB Other NA Cost A. Generation Rehabilitation - Civil Works 14.2 2.9 17.2 (12.7) (2.5) (15.3) - Equipment 13.3 18.8 (12.0) (12.0) B. HV Reinforcement - 132 and 88 kV lines and 16.4 18.4 substation (Turnkey) (14.8) (14.8) - Spares, Tools, Vehicles and Equipment 3.6 I/ 3.6 C. NEA Infrastructure/Buildings - Civil Works 2.1 1.0 V/ 3.2 (1. 9) (1. 9) - Equipment, Vehicles, 3.6 3.0 2/ 6.6 Tools (3.2) (3.2) D. Marsyangdi Catchment Plan - Soil Conservation ) - Institutional Support ) 4.9 S/ 4.9 - Rural Electrification 3.0 / 3.0 - Dumre-Sesisahar Road 3.6 3.6 (3. 3) (3.3) E. Industrial Energy Audits 3.3 3.3 (2.9) (2.9) F. Technical Assistance 13.6 13.6 (ll.S) (11.e) 47.T 6 r 8
World Bank Group · Staff Appraisal Report
Nepal - Power Sector Efficiency Project
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World Bank Group
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Staff Appraisal Report
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Nepal
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World Bank