Nepal - Third Arun Hydroelectric Project

Document of The World Bank Reporl No. 12643-NEP STAFF APPRAISAL REPORT NEPAL ARUN III HYDROELECTRIC PROJECT AUGUST 29, 1994 aergy and Infrastructure Division vuntry Department I ,uth Asia Region  CURRENCY AND EQUIVALENTS 1 Nepalese Rupee (NRs) 100 Nepalese Paise US$1.00 (June 1994) = NRs 49.48 (Official 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) 5 1,000 watt - hours (Wh) 1 Megawatt - hour (MWh) - 1,000 kilowatt - hours (kWh) 1 Gigawatt - hour (GWh) = 1,000,000 kilowatt - hours (kWh) ABBREVIATIONS AND ACRONYMS ACRP - Land Acquisition, Compensation and Rehabilitation Plan ADB - Asian Development Bank AHP - Arun III Hydroelectric Project ANL - Argonne National Laboratory BITS - Swedish Agency for International Technical and Economic Cooperation CIDA - Canadian International Development Agency EA - Environmental Assessment EAP - Environmental Action Plan EDC - Electricity Development Center EdF - Electricit6 de France International EIRR - Economic Internal Rate of Return FINNIDA - Finnish International Development Agency GIS - Geographical Information System GLOF - Glacier Lake Outburst Flood GTZ - German Agency for Technical Cooperation HMG - His Majesty's Government of Nepal ICB - International Competitive Bidding JICA - Japanese International Cooperation Agency KfW - Kreditanstalt fur Wiederaufbau LCB - Local Competitive Bidding LCGEP - Least Cost Generation Expansion Program LRMC - Long Run Marginal Cost MHPP - Marsyangdi Hydroelectric Power Project MOI - Ministry of Industry MOWR - Ministry of Water Resources NEA - Nepal Electricity Authority NIEMP - National Industrial Energy Management Plan NPC - National Planning Commission ODA - Overseas Development Association OECF - Overseas Economic Cooperation Fund (Japan) PAF - Project Affected Family PA - Performance Agreement POE - Panel of Experts PSEP - Power Sector Efficiency Project RAP - Regional Action Program RAPCS - Regional Action Program Consultancy Support SLA - Subsidiary Loan Agreement SOE - Statement of Expenditures SPAF - Severely Project Affected Family T&D - Transmission and Distribution TFC - Tariff Fixation Commission TOE - Tonnes of Oil Equivalent TS/DCS - Technical Services Department, Distribution and Customer Services Directorate (NEA) UNDP - United Nations Development Programme Fiscal Year July 16 to July 15 All years refer to the Gregorian Calendar  NEPAL ARUN III HYDROELECTRIC PROJECT Credit and Profect Summary Borrower: Kingdom of Nepal (HMG) Beneficiarv: Nepal Electricity Authority (NEA) Amount: SDR 99.5 million (US$140.7 million equivalent) Terms: Standard, with 40 years' maturity OnlendinQ Terms: The Borrower would onlend to NEA US$136.1 million, plus US$34.3 million available under the existing Arun III Access Road Project (Cr. 2029-NEP), at a rate of 10.25% for a period of 30 years, including a grace period of nine years. The Borrower would bear the foreign exchange risk. The remaining US$4.6 million, covering the Regional Action Program, would be passed on as a grant to the Ministry of Water Resources (MOWR). Profect Description: The project is the first 201 MW stage of a 402 MW run-of- the-river hydroelectric power scheme, located on the Arun river. Major project components include a 122 km access road, a 68 m dam and power intake, desanding basins and appurtenant structures, an 11.4 km headrace tunnel, a surge tank leading to a power cavern to house three 67 MW turbo- generators, a downstream surge tank and tailrace tunnel, and outlet structures. Electro-mechanical equipment includes hydraulic steel structures, turbo-generators and construction power supply. Transmission equipment includes a 120 km, 220 kV double-circuit line to a 220 kV/132 kV substation at Duhabi. The project also provides for implementation of an Environmental Management Plan, comprised of a Land Acquisition, Compensation and Rehabilitation Plan, an Environmental Mitigation Plan to address the project's direct impacts and a Regional Action Program (RAP), the bulk of which was identified by the King Mahendra Trust for Nature Conservation, in the areas of conservation, income generation, institutional strengthening, extension and training, and energy and infrastructure development in the Arun Valley. In addition, the project provides for engineering consultancy services, technical assistance and training. Finally, the project includes a facility to promote private sector involvement in power development. Benefits: The project benefits, only partly reflected in its 15.4% economic rate of return, would include meeting forecast electricity demand at least cost; enhancing resource mobilization and the operational autonomy and accountability of NEA; strengthening the capabilities of government institutions and NEA to prepare, design and supervise the construction of environmentally sustainable hydropower projects; and facilitating an appropriate regulatory framework for the power sector and an active role for the private sector. In addition, the project would provide benefits to the 450,000 inhabitants of the Arun Valley, enabling them to benefit from the project (primarily the access road) through implementation of the RAP. Risks: Because of its size and complexity, the Arun III project entails significant risks relating to (a) crowding out of high-priority investments in other sectors, due to cost  - ii. - overruns, worse-than-expected management of the Government budget, or failure of NEA to meet its projected share of expenses; (b) unforeseen delays in project implementation; and (c) unsatisfactory implementation of the Environmental Management Plan, including the RAP, and of the Land Acquisition, Compensation and Rehabilitation Plan (ACRP). The crowding out issue would be addressed through the adoption of a macro-fiscal reform program, under which the Government will (i) increase revenues through fiscal measures; (ii) adopt a three-year rolling investment program starting in FY95, with a core investment program to protect investments in other high-priority sectors, particularly in the social sectors; and (iii) adopt institutional reforms in the Ministry of Finance and the National Planning Commission to promote better expenditure management. Appointment of a Panel of Experts to review project design and construction, adequate provision for supervision in close cooperation with the consulting engineer responsible for the detailed engineering studies, and the signature of the major civil works contract prior to project effectiveness would mitigate the risks of cost overruns and implementation delays. The risk of revenue shortfalls on the part of NKA would be reduced by implementing measures to enhance NEA's cost recovery, including reducing system losses and improving the handling of consumer accounts and collection performance. The Government's preparedness to adjust tariffs was indicated by the 38% tariff increase that took effect in March 1994. The risk of unsatisfactory implementation of the Environmental Management Plan or the ACRP would be addressed by close monitoring of NEA's and MOWR's performance in this regard through: (a) reconstituting the Panel of Experts and expanding it to include adequate environmental expertise, (b) regular on-site supervision, and (c) a detailed annual review during project implementation.  - iii - Estimated Cost l/ Local Foreign Total ---------US$ Million---------- A. Hydroelectric Power Plant - Physical Works 73.3 272.8 346.1 B. Hydroelectric Power Plant - Electro-mechanical Equipment 16.2 124.3 140.5 C. Transmission Line to Grid 9.1 47.1 56.2 D. Environmental Mitigation/ Area Development 10.3 5.9 16.2 E. Technical Assistance 2.9 50.4 53.3 F. Hydro Facility 0.0 5.0 5.0 Base Cost 111.9 505.5 617.4 Physical Contingencies 14.5 58.8 73.3 Price Contingencies 22.9 83.7 106.6 Total Project Cost 9149.3 648.0 ?7.3 Interest During Construction 285.0 0.0 285.0 Total Financing Required 434.3 648.0 1082.3 !/ Total project cost net of taxes and duties (US$37.0 million) is US$760.1 million. Financing Plan Local Foreian Total --------US$ Million---------- IDA Credit 2029-NEP - 34.3 34.3 Proposed Credit - 140.7 140.7 Total IDA - 175.0 175.0 ADB - 127.6 127.6 KfW - 124.4 124.4 To be determined' - 163.3 163.3 OTHERS (France, Swedenk', Finland) - 46.3 46.3 Government 143.6 11.4 155.0 NEAE/ 290.7 - 290.7 Total 434.3 648.0 1082.3 )J Japan is sending its own appraisal mission to make its assessment of the project. b/ Sweden has stated that it is willing to allocate up to US$30 million to the project, of which about US$17 million has been committed so far. This may result in a reduction in project financing by HMG and for NEA.