Nepal - Arun III Hydroelectric Project : Request for Inspection

ARUN CONCERNED GROUPOCT31 RECEIVED Secretariat: c/o INHURED Internationd94 P.O. Box 2125 ptf 5:22 Tel: (977- 419610 Fax:(977- 412538 Kathmandu, Nepal1) 1) October24, 1994 The Inspection Panel The World Bank 1818H Street, N W Washington, DC 20433 United States REQUEST FOR INSPECTION We, as the Arun Concerned Group, the local residents of the Sankhuwa-Sava District, and the which is to be partly financed by the World Bank: citizens of Nepal, claim the following against the proposed controversialArun I11 HydroelectricProject 1. INTRODUCTIONOFTHEPROJECT The World Bank, with other lending agencies (Asian Development Bank, KfW, France, Finland, Sweden),is planning to finance the proposed Arun I11 Hydroelectric Project in the Sankhuwa-Sava District of Nepal with the total cost of US $1082.3 million for the first 201 MW stage of 402 MW. The Bank is proposing to lend US $175.0 millions in International DevelopmentAssociation (IDA)funds. The Nepal Electricity Authority (NEA)is to invest US $290.7 million from its internal sources. The major project component includes a 122 km access road, a 68 m dam and power intake, desanding cavem to house three 67 MW turbogenerators, a downstream surge tank and tailrace tunnel, and basins and appurtenant structures, an 11.4 km headrace tunnel, a surge tank leading to a power kV/ 132kV sub-station at Duhabi. Because of its size and complexity,the project has implicationsfor outlet structures. Transmission equipment includes a 120km,220 kV double-circuit line to a 220 the entire country, including significant risksrelating to crowding out of high-priority investments in other sectors due to cost overruns, "worse-than-expected' management of the Governmentbudget, or failure of the NEA to meet its share of investment, unforeseen delays in implementation, unsatisfactory design and implementation of Environmental Management Plan, including the RegionalAction Plan, and others. 2. RELEVANTPOLICIESAND PROCEDURESOFTHEWORLDBANK WHICH HAVE BEENVIOLATED 2.A. Economic Evaluation of Investment Operations o OP 10.04 2.B Policies on World Bank Role in the Electric Power Sector and EnerB Efficiency and Conservation in the Developing World 2.c The World Bank Policy on Disclosure of Information. March 1994 o BP 17.50, page 1,para. 4, updating Project InformationDocument: o World Bank Folicy on Disclosure of Information, March 1994, page 5, para. 10, content of PIDs (seealso OD 10.00AnnexA, page 11; o BP 17.50, page 1,para. 5, releasing Factual TechnicalInformation: o World Bank Policy on Disclosure of Information, March 1994, Section I1 Policy, page 2: BP 17.50, page 3, para. 12,availabilityof environmentalassessment: importance of accountability, dissemination of information in order to facilitate participation, and presumption in favor of disclosure. o BP 17.50 Disclosure <ifOperational Information 2.D Environmental Assessment o OD 4.01, AnnexB, para. 2/f):analysis of alternatives (seealso para. 3 in 4.01) o OD 4.01, para. 13: engagingadvisory panels forhighlyrisky and contentious projects 1  L o OD 4.01. para. 5: regional environmental assessments o OD 4.01, para. 19 and 20: involvementof affectedgroups and non-governmentalorganizations o OD 4.01: disclosure of information 2.E Involuntary Resettlement: Land Acquisition, Compensationand Rehabilitation 0 OD 4.30, para. 3(a) o OD 4.30, para. 3ib) o OD 4.30, general violations o OD 4.30, para. 14 o OD 4.30, para. 11 2.F Indigenous Peoples o OD 4.20, general violations o OD 4.20, para. 3 o OD 4.20, para. 1Md) o OD 4.20, para. 11 2.c Wildlands Policy: In addiiion to the policies listed above arid discussed herein, the claimants request the Inspection Panel to investigate whether there are violations of the Bank's Wildlands Policy OP 4.04 and the Bank Operational Policies on Investment Lending OP 10.00 in connection with the Arun I11Project. 3. OURFUGHTS/INTERESTS A. Effectiveparticipation in policy-making and decision-makingprocesses; B. 'rimely access to information: C. Balanced development; D. Adequate analysis of alternatives: E. Adequate compensation and rehabilitation; F. G. Freedom from debt; Fairaccessto electricitysupply at affordableprices.; H. Freedomfrom inappropriate lending conditionalities; J. I. Right to development; Maintenance of adequate living standards: and K. Healthy environment and sustainable development. 4. VIOLATIONSOF ITSOWN POLICIESAND PROCEDURESBYTHE BANK 4.A. Violations of Operational Policies: Economic Evaluation of Investment Operations 4.A. 1 Criterion for Acceptability: The Bank has violated its operational policies regarding Economic Evaluation of Investment Operation, as a basic criterion for acceptability. For the project to be acceptable on economicgrounds, "the expected present value of the project's net benefits must be higher than or equal to the expected net present value of mutually exclusive project alternative". By not undertaking the relevant studies of the alternatives such as those listed in Plan B, the World Bank has not fulfilledthis very basic criteria for acceptabiiityof the project. 4.A.2 Alternatives: The Least Cost generation and Expansion plan (LCGEP)of 1987and 1990failed to take into account that the same amount of power generated fromArun I11 could also be generated from a series of smaller alternatives in the 1MW to 100 MW range. It was only in the 1993/94 Argonnt: National Laboratories (ANL)study (Analysesof Options For the Nepal Electrical Generating System, May 1994)that such an alternative sequence was even considered. However, the ANL study was clearly incomplete as the comparison was made with very preliminary costs for the alternative schemes. Even though there was an arbitrary addition of 20% to the cost of the alternatives on the grounds that 'costs always go up with more detailed studies', the study concluded that the cost difference between the sequence of doing Arun immediately versus doing it in 10 years was only percent Thus without undertaking relevant studies of the smd!er alternatives to get more accurate costs, and depending solely on "costs always go up with more detailed studies"ground, the criteria for acceptability of the project cannot be concluded to have been fulfilled. Over 30 schemes in the 10 MW to 60 MW range have been identified that can produce in total over 1,000 MW of power in studies conducted by the His Majesty's Government of Nepal (HMG/N!. Zecently constructed or ready for construction schemes such as Jhimruk (12MW), Khimti (60MW), Modi (14 2  MW) for which accurate costs are now known have per unit installation and energyproduction costs that are significantlylowerthan that ofArun III. There isevery reason to believe that once the detailed studies are completed, the smaller alternatives can be built at prices lower than or competitive with &n 111. Feasibility studies of the alternatives must be completed for the Bank to have fulfilled its policy requirement to compute the LCGEP for additional power generation for Nepal. (Forviolationsof other World Bank least cost energy requirements see also IDA 10 Agreement, Additions to IDA Resources:Tenth Replenishment, March 1. 1993;and World Bank Energy Policies). 4.A.3 Wsks: The weak Nepali economy facesnumerous risks in taking on a project of the size of b n 111. Due weightage has not been given to these risks in preparing the project for and steps that could be taken to reduce the risks have not been taken. The following issues are of particular importance: i. Fxparian Issue with China: Over 80%of the catchment of theArun river lies in the Tibetan Autonomous Region of the Peoples' Republic China. The HMG/N does not yet have a guarantee from China to maintain the present dry season flow over the lifetime of the project. The letter of "no objectiori"which China has reportedly sent to the HMG/N does not constitute a guarantee of Arun's water flow.The fact thal a proposal is pending in China for the Changsuo Basin Irrigation Project on the m r i (Punggu)river with a proposed command area of 9.OOO hectares that could withdraw up to half the dry season flow of Arun presents a serious risk to the projected economic returns of the project.'This risk has not been taken into account in the sensitivityanalysis. ii. Lack of Power Sales Agreement with India: Since Phase I1 of the Arun 111 project and future developmentin the Valley have been predicated on the sale of power to India, the project must not be approved until a bi-lateral agreement has been reached. iu. Ail Eggs in One Basket: By the time they are completed, Phase I and I1 of the Arun 111wiil constitute 50%of the total power supplied to the national grid under the present investment plan of the HMG/N agreed to by the Bank. A natural catastrophe such as a very large flood caused by a landslide. or a Glacial Lake Outburst Flood (GLOF),or an earthquake that might affect this one project would virtually ruin the Nepali economy.This risk of "puttingall the eggsin one basket" to the national economy needs to be taken into account in performingthe economicanalysis of this project. 4.B Policies on World Bank Role in the Electric Power Sector and Energy Efficiency and Conservation in the DevelopingWorld The World Banks Energy Policies require the Bank in the enera sector to be based on the development of integrated sustainable strategies which include demand side management components such as energy conservation or efficiency (see also policy requirement under IDA 10 Agreement, Additions to IDA Resources: Tenth Replenishment, March 1, 1993.)Attention has not been paid to end-use efficiencyin the formulation of the Arun 111. 4.C Violation of Information Policy including a study on alternatives known as "Plan B . However, by then it was too late for the Late in the project preparation process, the Bank released some factual technical information, claimants to influence the design and planning of the project as the appraisal had been completed and loan negotiations between the Bank and the HMG/N had been completed. The issue of timeliness of information release in a meaningful way cannot be overstated. This really goes to heart of the issue of who participates and who benefits in a project. The design and planning for this project were not participatory at the national or locallevel. 4.C.1 Aun I11 Project Information Document (PID):In the early stage of the project, the PID is the marn public document available on a project in addition to the environmental assessment. According to the Bank Policy, when it is first created, a PID should contain information on the main elements of the project, includingthe project's objectives,expected or probable components, costs and financing, environmental issues, status of procurement and consulting services, studies to be undertaken, implementing agencies and relevant contact points. (Seealso Attachment - I). In addition to these points, OD 10.00 Annex A: Outline for an Investment Project Information Document requires that PIDs contain country and sector background, project sustainability, lessons learned from the past operations in the country/sector. Updated PIDs should include project benefits and project risks. Despite a high level of interest by Nepali NGOs in the project, the Arun IiI PID does not contain many of the components required by the Bank policy, for example, it does not contain any of the following critical information: 3  i. background description of the country, region or the Arun Valley or exact location of the project: ii. justification for Bank involvement; iii. background on the sector and sector strategy and how this project fits into the overall planning for the energysector in Nepal; iv. information on project sustainability or lessons from previous experience of large scale d a projects in Nepal; V. information on the ArunValley and its unique ecosystems: vi. information on the 450,000 people, including the indigenousgroups livingin the Valley; vii. information on project benefits or risks; viii. project alternatives which were considered: i3 discussion of issues and actions; x. ix. mformation on a cost-benefit analysis: and k. irelevantcontact person in the World Bank and in the regional office in Nepal. Accordingto Bank Procedures BP 17.50,P