Nepal - President's review of Third Arun Hydroelectric Project

 78118 President'sReviewof Arun m Proiect One of Mr. Wolfensohn'sfirst actions on assumingthe presidencyof the World Bank was to commission a comprehensive review of the Arun III hydropowerproject in Nepal. This review,which includedan assessmentof both the initial project proposals and all the developments that have taken place sincethe project was appraisedin 1993-94, was carriedout by seniormanagersof the South Asiaregion and other seniorBank staff. In light of this review and the recommendations received from senior staff, Mr. Wolfensohnhas decided that the Bank should not proceed with supportingthe project. He has however, assured the Nepalese authorities that the Bank attaches the highest priority to supportingNepal in devising and implementingan alternativestrategy for meetingits needs for electricpower. Whilethe Bank's review,as well as the findingsof the InspectionPanel confirmed that the environmental and socialmitigationactions now stipulatedunder the project were satisfactory,the decisionnot to moveaheadwith support for the project is based on three mainconsiderations: - The Bank had alwaysrecognizedthe demandsthat a project of this size and complexity would place on the capacity of a small countrylike Nepal. Since the initial appraisal,the Bank has establishedincreasingly rigorous standards for the implementation of the project,and these have reinforcedinitialconcerns about the burdens being placed on the government. The government recognizes these constraints and has agreed to collaborate with capacity- buildingefforts recommended by the Bank's managementin 1995. However, the limitedcapacityof institutions in Nepal to implement the long list of actions that would have to be taken to ensure successmeans that it could take up to five years longer than originallyanticipatedfor this highlycomplexproject to be completed. Demandingtasks relating to the operations and financial management of Nepal's power utilityand the need to implement effectively the social and environmental actions highlightedby the InspectionPanel, would impose requirementswhich the Bank now judges to be beyond what Nepal can realisticallyachieveat present. * Whilethere is support for Arun III both among allNepal's politicalpartiesand from most of the residentsof the valley,the governmentstillhas to take tough decisions such as adjustingtariffs and prioritizing expendituresand sustain them over the next few years to ensure that the project does not crowd out prioritysocial expenditures.  2 project had always * In addition to the financingfrom the World Bank, the A number of dependedon funds being provided from severalother sources. commit the to cofinancingpartners did not feel they were in a position difficult This extremely necessary funds within the next 12 to 18 months. financingpicturewas further complicated by the fact that the estimatedcost of of delays that have the project has increasedby $30 to $40 millionas a result of firmingup alreadybeen incurred. As a result, there is no realisticprospect the financing plan in the near future. The President'sreviewreaffirmedthe hydropower potentialin the Arunvalleyas a subjectto improvingthe promising option for meetingNepal's long term energyneeds, capacityto addresssocialand environmentalimpactsof the likelyprojects and the creation of a morepro-activecommunity development programin the valley. for the Arun project was The President's decision not to proceed with support by a strong reaffirmationof the Bank's commitment to accelerateits efforts accompanied for meeting its strategy to assist Nepal in devising and implementingan alternative Minister of Nepal to the Prime undisputed power needs. He is in direct contact with underscorethis commitment. as the Government A team of seniorBank staff is ready to visit Nepal as soon this effort top team to give indicates its readiness. The President has instructedthe Bank staff for discussionwith priority. A numberof proposalshave been formulatedby advantage of the altematives the Nepaleseauthorities. These proposals aim to take full availablefor meetingNepal's power needs. August 2, 1995