Nepal - Power Development Project

PID THE WORLD BANK GROUP A World Fre' of 'overty InfoShop Report No AB30 Updated Project Information Document (PID) Project Name NEPAL-Nepal Power Development Project Region South Asia Regional Office Sector Power (80%); Other industry (10%), Sub-national goverinment administration (I 0%) Project ID P043311 Supplemental Project Borrower(s) KINGDOM OF NEPAL Implementing Agency M1NISTRY OF WATER RESOURCES Address Address Singh Durbar, Kathmandu Contact Person Secretary Tel 977-1-4228046 Fax 977-1-4227536 Department of Electricity Development (DOED) Address Thapa Gaun, Anamnagar, Kathmandu Contact Person Director General Tel 977-1-4480218 Fax 977-1-4480257 Email Nepal Electricity Authority (NEA) Address Durbar Marg, Kathmandu Contact Person Managing Director Tel 977-1-4227725 Fax 977-1-4227035 Email neamd@mos com np Alternative Energy Promotion Centre (AEPC) Address Krishna Galii, Lalitpur Contact Person Executive Director Tel 977-1-5539237 Fax 977-1-5542397 Email energy@aepc wlink com np Environment Category A Date PID Prepared April 10, 2003 Auth Appr/Negs Date February 14, 1997 Bank Approval Date May 22, 2003 1. Country and Sector Background Nepal has vast hydro resources, whichi represent a source of potential wealth. Commercially exploitable hydropower generating potential is estimated to be about 43,000 MW. However, despite the hydropower generationi potential, only 522 MW has so far been developed with another 119 MW under construction Based on the 2001 census, 40 percent of Nepal's households have access to electricity. Disparity in access is stark withi over 90 percent of the urban population conilected, in contrast to an estimated 30  2 PID percent in rural areas Main Sector Issues: Nepal's power sector performs well in comparison to other public sector institutions operating in power developmenit in South Asia, especially, in terms of cost recovery and finanicial viability However, the sector is beset with a series of institutional problems that constrain its efficient development and mobilization of private capital These problems are identified in the Bank-financed sector work (Nepal Proposed Power Sector Developmenit Strategy Report No. 21912-NP, dated March 19, 2001). The most prominent are the followhig (i) overlaps in the policy, regulatory, and operational functions of public institutions operatimg in the electricity sector; (ii) inadequacies of the existing institutionial structure of the Nepal Electricity Authority (NEA) to meet future needs of the power sector; (tit) insufficient institutional arrangements for the promotioni of power trade, and (iv) weak institutionial support for improving electricity access to rural areas. The consequenices of these constrainits are reflected in poor quanitity and quality of supply, higih systems losses, minimal power exchanges with lndia, and higih cost of power The retail price electricity in Nepal is one of the highest in South Asia and has now reached the limits of affordability for a vast majority of the population. Government Strategy: Recognizinig the need to address these issues and to develop its water resource potential, the Government has made the development of Nepal's hydro-electric potential to serve the energy needs of its people and for export, one of its key developmenital objectives The Governmenlt's Niithi Plan (1998-2002) for the sector called for (i) production of sufficienit and reliable hydroelectricity at cheaper cost to meet domestic demand, and for export; (ii) reductioll of rural-urlban and regional disparities in electricity supply, and (iii) linkage of rural electrification with rural economic activities. Similar goals are envisaged under the Tenthi Plan with the aim of increasinig generation capacity to 800 MW by 2008 This emphasis on power development follows the adoption of the Hydropower Development Policy in the early 1990s which, combined with chanlges in electricity legislation and the opening up of the power sector to local and foreign private investments, was intended to make InstitLItiolIs operating in the power sector efficient and creditworthy, as well as increase the participation of the private sector in the provision of electricity services of the people. While under this policy and regulatory framework KoN has been able to attract some private (foreign) investments in power generationi, there was recognition that more needed to be done to attract private capital in the sector, and to improve the efficiency and creditworthiness of NEA. The revised Flydropower Development Policy, of 200 1, addressed many of the sector's issues. Accordingly, it envisages an increased involvement of private investors in the production, distribution, and management of electricity, while recogniziig the need for institutional and structural changes in the power industry to meet the sector's development objectives The revised Policy calls for the creation of a more coinpetitive environim11enit for private sector participation, includiig introductioln of more transparenit and investnient friendly procedures. Development of small hydro projects as well as of district level projects under decentralized schemes in hilly and remote areas are also highlighited. Finally, special attention is required to be paid to the social and environimenital aspects of hydroelectric development to ensure that adverse effects on the environimiienit and communities are reduced to the minimum. While progress has been made on several fronts, further actions are needed. For example, wlile unbunidling has been done to the extent that there are several private generation facilities in place as well as some interinal uinbulidliig in distribution, additional work may be needed to examine alternative restruicturing options, in the longer term, for NEA and implementation of the most suiitable one in the context of Nepal. While the NEA, the central Governmeit owned grid operator, generator and distributor  3 PID added some 132,000 new conn1ectionis in 2001/2 and various tranismission and distribution links were extended including those in 42 hilly districts, increasinig access to remote areas though decentralized schemes remainis a challenge. The Tariff Fixation Commission has been put in place, but it presently falls short of a fully fledged regulator. Furthiermore, implemenitation of some elements of the hydropower policy, such as private sector participation, are hampered by coulitry economic and security risk, and the lack of adequate domestic capital market, issues which are beyond the control of the power sector 2. Objectives The project objectives are to: (a) develop Nepal's hydropower potential in an environimentally and socially sustainable irnanner so as to help meet electricity demand, (b) improve access of rural areas to electricity services, and (c) promote private participation in the power sector as a way to improve sector efficiency and to mobilize financing for the sector's investmenit requiremcnits The KoN has identified the development of its hydro-recourse potential as a key priority to serve the energy needs of a vast majority of its populationi who have little or no access to electricity, and to reduce poverty. Thle objectives of this project are therefore consistent with the developmental and poverty reduction objectives of the KoN. 3. Rationale for Bank's Involvement By sharing the Bank's global klnowledge, the Bank is able to assist KoN in developing a policy incentive framework for encouraging private investment in the context of sound natural resource management. This includes providing guidance in carrying out the participatory screening and rankinig process for selecting hydropower projects, and formulation of a comprehensive framework on environmental and social policy and procedure. Participation of World Bank Group through PDF and NEA activities, would provide additional comfort to private sector investors at this early stage of the development of private interest in the power sector. Bank presence throughi this investment operation provides a credible platform from which the important dialogue with the Governmenit on power industry reforn and restructurinig can be carried out. Bank participation improves prospects for closer donor coordinationl to ensure sustailnability of external assistance to Nepal's energy sector. The World Bank group is taking the lead in providing investment funding for private development of small- and medium-sized hydros, while technical assistance support is provided by bilateral donors in preparing the investment pipeline. Bank support for commiunity-based village electrification through development of micro-hydro systems ensures that positive demonstration effects of the UNDP Rural Energy Developmenit Program are sustained and scaled up, so that more communiities can avail of the benefits from the program 4. Description The Project consists of three components, namely: (a) establishmenit of a Power Development FuLid (PDF) to finance private developmenit of small and meditim-sized hydro schemes; (b) community-based village electrification through constructioni of micro-lhydro systems (sizes of up to 100 kW); and (c) grid transmissioni and distribution improvemenlts Total project cost including interest during construction (IDC) is estimated at US$ 133.4 million, equivalenit, of whiicih IDA finanicing is US$ 75.6 million comprising an IDA credit of US$50.4 million and an IDA Graiit of US$25.2 millioln. Part A. The PDF Component  4 PID Thle Power Development Funld will be a financing facility to be established by the Government under this project, within the Department for Electricity Development (DOED). The Fund will provide long-term finanicinig for private-sector small and medium-sized hydropower developments in Nepal to overcome. (a) the lack of sufficienit debt finanicing for private-sector hydropower projects, (b) inadequate maturity of available debt financing; aind (c) the need to provide comfort to private investors wishinig to become involved In "first time" projects The fund will be wholly owned and operated by the Government, but with administrative management contracted out to a commercial bank Initial financilng of sub-loans for investment projects through the PDF will be provided by IDA. Over time, it is envisaged that resources from other interniational and domestic financial institutions will be mobilized, which together with reflows of debt service payments from the borrowers, will augment the corpus of investment funds accessible throughi the PDF. Under this credit operation, the PDF will finance small hydro schemes with an aggregate capacity of about 10 MW and one medium-sized schemile of about 30 MW. The US$ 35 million from IDA Credit is expected to leverage financing from other sources, i.e., developers' equlty and coinimercial banks, of about US$ 40 million. There has been significant interest in participation In the fund already expressed by developers and bankers. The PDF will be managed by a Fund Administrator, whichi will be a private commercial bank operating in Nepal and selected by the Govermiienit throughi a competitive bidding process agreed with the Bank Following an evaluation process satisfactory to the Bank the Govermilenit has approved selection of a local well established commercial bank, and the Bank has provided its no-objection to this selection. An PDF Board formied by the Government will be responsible for approving sub-loans in accordance witi the recommendationis of the FuLid Administrator Techinical assistance from IDA grant of about $2 5 millioni (in addition to the credit noted above) will finance the Administrator's fees, as well as the operating expenses associated with the PDF Board durinig initial years of operation of the PDF. Once this capacity is developed the fund is expected to become self-sustaining. In parallel with the PDF project there are several technical assistance activities which were not all designed solely to support the PDF initiative but which will facilitate the impleimientation (a) technilcal assistance is being provided by GTZ, under its Small Hydro Promotion Project to assist local entrepreneurs in ensurinig that their investimienit proposals are bankable; (b) the Government of Norway is extending technical assistance to the Ministry of Population and Environmelit (MOPE) for institutional buildinig, withi special emphasis on strengthieniniig MOPE's functionial capabilities, in the exercise of its regulator-y mandate of monitoring environilimenital conditionalities of the liceise for development of hydiopower schemes to be finaniced under the PDF; (c) technical assistance to the Department of Electricity Development (DOED) is being provided by USAID through consultants linder its Private Sector Hydropower Development Project, to develop DOED's capability in managing the private power solicitation and award processes for medium- and larger-sized hydro schemes; and (d) USAID is also supportinig the strengtheninig of DOED's capacity to review the environmenital and social impact assessments of the investment schemes Technical assistance provided by USAID is in its second phase. It was renewed in 2001, for an additional period of five years to 2006, after which the need for further assistance will be reviewed Part B. Micro-Hydro Village Electrification This component will support the scaling-Lip of community-based micro-hydro village electrification by developing about 2 5 to 3 0 MW of newv micro hydropower systems to serve some 30,000 new consumers. The project will be build on the successes achieved under the UNDP-financed Rural Energy Development Program (REDP) and will extend electrification activities from the 15 districts currenitly served to another ten more districts. Program implemilentationi will be decentralized tlhrougil local  5 PID govermilenit, i.e., District Development Committees (DDC) and the Village Development Committees (VDC), and involves formation of a micro-hydro functional group (MHIFG) at each participatiig community. The Alternative Energy Promotion Centre (AEPC), which is the agency responsible for promotioni and development of alternative and renewable energy techinologies in Nepal, will assume overall managemnent of this project component Furtiler, througIl UNDP co-finanicinig, the existing REDP project support unit wvill be strengthlenied to support the increased level of micro hydro system development envisaged. The total cost of this project componlenit is estimated at US$ 8.9 million. Of this, the Bank would provide IDA grant of about US$ 5 5 millioni to finanice the Governmeit subsidies for the constructioll of micro hydro schelimes, and suppor-t the administrationl of comiiiuLity niobilizationl, trainilng/capacity bulilding, and associated activities. The remainider of the costs will be financed by UNDP (US$ 0 8 million for program support/managemnent), commullity contr-ibutionis (US$ 1 .1 I millionl) DDC/VDC investments (US$ 0 7 million), and the balance from loans to the community from local banks, e.g , the Agricultural Development Bank of Nepal. Part C. NEA Component This componienit involves investimienit support for the constructioll of a 220 kV double circuit transmission line (with one circuit strung initially) from IKhirnti Power station to the existing 132 kV Dhalkebar substation. Further transmission and sub-transmission investments would be selected based on NEA's priority least cost investment plan and the project eligibility criteria set out in Annex 12, part C. T'his may include the finiancing of a 132 kV transmissioni Ine from Dhalkebar substation to Bhittamod on the Nepalese side of the border with India (oininig the Indian grid at Sitamarhii substationi in Bihar about 40 km from the Nepalese border) to facilitate cross border power trade, and the extensioni of 132 kV line bays at the associated substations. But financing of the Dhalkebar to Bittamod transmission line, and the associated sub-station is contingenlt on the appropriate institutional, adimiinistrative, legal, social and environmental arrangements being in place and satisfactory to IDA. The IDA financing will likewise finance supply and installation of equipmenit and materials, and civil works for the extension of NEA's sub-transmission aiid distributioii systems to rural areas and towils not electrified, and rehabilitationi and reinforcemenit of NEA's existing distribution systems in urban and semi-industrial centers The transmission Ihies will enhance grid reliability and stability reduce system losses Sub-transmission and distribution schemes will improve access, quality, reliability and operational efficiency of power supply to consumilers. Acquisitioni of spare parts and protection equipment is also micluded. IDA financing for these investimienits is estimated at US$ 3 1.0 millionl, comprisinlg an IDA credit of US$ 15 4 million and an IDA grant of US$ 15.6 million. Technical assistance (TA) activities will involve several institutionial building initiatives at NEA. These include strenigthieniniig of NEA's finanicial managemenit, audit and accountinig systems The TA will also support the conduct of marketinig studies to review opportuLlities for productive use of surplus ener-gy, extension of service to rural areas, power whieelinig, and associated pricing studies that would enilanice opportunities for private sector participation in the power sector. Also to be finaniced is the engagement of engineerinlg consultanlts to assist NEA in ulidertakinig the 220 kV transmissioni schemile. IDA Grant finanicing for TA is estimated at US$ 1.6 millionl  6 PID Part A l. PDF Investment Funds Part A2. Technical Assistance for PDF Administration Part BI. Micro-hlydro Village Electrification Investimienits Part B2 I UNDP-financed TA Part C I NEA Transmission and Distribution Investments Part C2. TA for NEA institutional strengthening Part C3 NEA Project Adminlistration and Engineerinig 5. Financing Total (US$m) BORROWER $15.10 IBRD IDA $50.40 LOCAL COMMUNITIES $1.10 IDA GRANT FOR POOREST COUNTRY $25.20 LOCAL SOURCES OF BORROWING COUNTRY $2.80 SUB-BORROWER(S) $38 00 UN DEVELOPMENT PROGRAMME $0 80 Total Project Cost $133 40 6. Implementation Implementationi period six years Project Coordination antd oversight PartA: The Power Development Fund (PDF) will be administered on behalf of the Government by a competitively selected commercial bank in Nepal (called the Administrator), pursuant to the terms of a PDF Administrationi Agreement. As the executing agency for the PDF, the PDF Administrator, will (a) review proposals for PDF finanicing according to the criteria laid down in the operations manual and make recommendations to the PDF Board; (b) negotiate the terms of loans approved by the PDF Board and prepare the loan documenitationi, (c) operate the PDF account, (d) monitor borrower performiance ulider loans from the PDF, (e) handle debt service collections; (f) maintaini the books of account of the PDF, whichi will be audited annually by auditors acceptable to IDA; and (g) provide trimestral financial monitoring reports to the Ministry of Finance, Ministry of Water Resources, the PDF Board and IDA on the pipeline of pendinig projects and the status of outstandinig loans. An PDF Board will be established and will be responsible for the overall policy direction and super-vision of the PDF. The functions of the PDF Board will be to: (a) approve proposals for loans in accordance with a recommendation of the PDF Administrator and with the concurrence of IDA, (b) certify finanicial institutions as Participating Credit InstitutiolIs (PCI); (c) provide the Government with advice, as reqLiired, concernin1g the maniagement reports to be provided by the PDF Admilistrator, and (d) moniitor the performance of the PDF Adminiistrator and to make recommendationis to the Governmenlt concernling the termination or renewal of the Administration Agreement. Recomimiendationls for sub-project funding would be proposed by the Administrator to the Committee Fundilig decisions would be based on financial and commercial grounds in accordance witlh the policy and operating guidelines of the PDF. The PDF's lending policies, terms and conditions, sub-project eligibility criteria, and approval process are sun1marized in Anniex 12.  7 PID The Department of Electricity Developmenit (DOED) in the Ministry of Water Resources (MOWR) is responsible for conducting competitive solicitatioiis for development of hydro generation schemes. Technical assistance is being provided by USAID to select qualified private developers for identified medium-sized projects. Prospective private developers for Kabeli-A (30 MW) and Rahughiat (27 MW) have been pre-qualified, and the Request for Proposals (RFP) is expected to be issued as soon as funding is secure. At the same time, DOED, with the assistance of GTZ-financed consultants, will take measures to strengthen the pipeline of hydroelectric schemes sized below 10 MWs. At present, there is an indicative pipeline of small hydro schemes at mature stages of preparation. PartB: The Alternate Energy Promotion Centre (AEPC), will be responsible for implementationi of the community-based micro-hydro development componenit. The AEPC, is an autonomous body ulider the Ministry of Science and Technology (MOST). It was established in late 1996, with the main objective of promoting and developing alternative and renewable energy technologies through local organizations, to raise living standards of rural people. The project will be gulded by the decisions of the Project Management Committee whiichi will have the following membership AEPC's Executive Director as Chairperson, representatives from the National Planning Commission and the Ministry of Local Development (MOLD), a representative of the Association of District Development Committees of Nepal (ADDCN), District Energy Network, Association of Village Development Committees of Nepal, and REDP's Manager. (See Aninex 2). UNDP will provide technical assistance to AEPC for implemenitation of this component Part C: The Nepal Electricity Authority (NEA) will be the executing agenicy for Part C of the project. NEA has the capacity to implemenit these transmission and distribution investments uSing its owin project management resources, as demonstrated in previous credits, but to ensure contilLued capacity building, NEA will contract consultanits for a limited amount of technilcal assistance in the area of project implementationi and for finaicial management improvements. During the course of the project there will be further discussion of the organizational development of NEA, outlined in the Nepal, Power Sector Development Strategy report, on which NEA has already embarked. This support will be aimed at shaping NEA in the appropriate form, in the longer-term, to support the ongoing development of the power sector in Nepal in the future Policy guidlance MOWR is responsible for the overall policy guidance in the power sector. The Ministry is responsible for the licensing of generation, transmission and distribution projects through DOED. DOED also functionis as a one-stop window for private investors in the power sector. MOWR will ensure that close coordination between NEA and DOED would be maintainied, particularly with respect to sub-projects involving private power sales to or throughi NEA-operated facilities. The Ministry of Population and Environment (MOPE) provides overall policy guidance in the context of the 1997 Environmental Protection Act, and is responsible for providing environmiental clearances Policy guidance for the micro-hydro component would be provided by MOST througih AEPC. The project will be pursuied in accordance with the Governmient's policy on Subsidy for Renewable Energy (2000) and Renewable Energy Subsidy Delivery Mechanisimi (2000) On-lendling ternis The IDA credit and IDA grant will be provided to KoN on standard IDA terms, with the applicable service charge in the legal agreements there is also a "comimaitimient chaige" Foreign exchanige risks will be borne by KoN, and to some extent by medium-hlydro developers wlho avail of foreign currenicy loans  8 PID from the PDF There are three on lending streams from KoN for this project For Part A, the PDF would extend finanicing directly to local investment enterprises, or to participating credit institutions (PCIs) for on lending to private companies, promoting projects involving generating stations of I OMWs and below Sub-loanis for these small projects would be in local currenlcy, at prevailiing market interest rates, and at maturities justified by the economic life of the project. For medium-sized hiydro(s), i e, either Kabeli-A or Rahughat, sub-loans from the PDF would be provided in foreign currency at interest rates for foreign currency loans prevailing at time of sub-loani negotiations, with maturities ranging up to twenty-three (23) years and with maximum grace periods, from execution of loan agreement through project commissioninig, of Up to eight (8) years. Loans for medium-sized hydro could also be offered in local currency based on market terms prevailing among the local bankinig communlity For Part B of the project, proceeds from IDA grant will be utilized as grants to be extended to commullities for financing of eligible micro-hydro village electrification schemes. For Part C, under a Subsidiary Loan Agreement to be entered into between KoN and NEA, proceeds from the credit and the grant will be on-lenit by KoN to NEA at an interest rate, acceptable to IDA, and for a twenty-five year term with five year grace period. Funds Flow and Disbursement Arrangements A Special Account will be separately established for each component of the project For Part A, disbursements will be made against sub-loans released by the PDF for investment projects as well as for the service fees payable to the PDF Administrator as specified in the Administration Agreement and the expenses of PDF Board All sub-loan interest, repayments and associated fees will be received by the PDF Administrator on behalf of KoN in an operating accoulit. After the recurrenit cost of operations of the PDF Board and the PDF Administrator are covered, the balance in the operatiig account will then be adminiistered by the PDF Administrator and be available for new sub-projects, in accordance withi the Administrationi Agreemenit. For Part B, fund flow and disbursement arrangemenits will be in Ine with the Government's systems Accordingly, based on budget provisions from the Government, AEPC will extend grants and other project support funds to thc District Energy Fund (DEF) managed by District Developmenit Committees (DDCs) for financing of approved iriicro-lhydro project proposals. Funds are released from the DEF to the Community Energy Fulids (CEF) only after the acquisition of land for the power house, right of way for the canal and distribution lines, and collection of collateral for any required local loan. Investimlenit grants or subsidies, which are currently set at an average of Rs 80,000 per kW capacity, are released based on output verification, while other costs such as for social mobilization, training, etc. are paid on actual cost basis. Expenditure statements on the use of CEF are submiltted through the DDCs to AEPC AEPC will confirm the eligibility of expenditures, consolidate the accounts and draw dowin froim the Special Account for reimbursement of said expenditures. For Part C, disbursemenits will be made against withdrawal claims by NEA for eligible project expenditure based on contracts approved by IDA. Accounting, Financial Reporting andAuditing Arrangements (see Annex 6for details) The DOED (through the PDF Administrator), AEPC and NEA will implement Part A, Part B, and Part C of the IDA financing, respectively. Each implementinig entity will establish and maintain separate project finanicial maniagemenit accounts. Since implementationi of each component under the project is independenit of each other, there will not be a consolidated set of accoulIts for the IDA finanicing as a whole. Once appointed, the PDF Administrator, in accordance to the RFP, has to establish a finanicial  9 PID managemiient system to meet project accouLitiig needs, based on its inter-nal accoulmtillg system. A preliminary assessment has already been carried out by IDA, whiich will have to be finalized and signed off, before any disbursement for Part A can take place, to confirilm that finanicial management arrangements for Part A are satisfactory AEPC will follow the finanicial management system that is already in place, following Kingdom of Nepal's financial maniagemenit framework The use of standard Kingdom of Nepal systems, together with the fact that AEPC has appointed a full-time qualified finance officer to manage the project accounts, is considered satisfactory for the maniagemenit of this componenit. Similarly NEA's financial arrangemenits are deemed satisfactory for the implemenitationl of the project as there is an acceptable financial management system in place, a responsible officer has been deputed as the project finance officer, and NEA have satisfactorily implemenited IDA credits before The Department of Electricity Departnent (DOED) will implement the Power Development Fund componenit of the project througil the assistance of the Power Development Fund Adminiistrator (PDFA), whicih has already been identified througih a process of competitive selection The PDFA will be responsible for technical operation and administration ofthe PDF Kingdom of Nepal will also establish an PDF Board under the chairmanishiip of the Director General of the DOED to oversee and monitor the program ilmplemenltationi. Project accounts (includinig statement of expenditires and special account) of the PDF will be mainitained and will be audited by the Office of the Auditor General of Nepal (OAGN) as required by the Constitutioni of the Kingdom of Nepal, with audit reports due within six months of the end of each fiscal year. OAGN will appoint qualified private auditors acceptable to IDA for the purpose of audit of project finanicial statements of Part A. In addition, IDA will also receive a copy of the PDF Administrator's financial statements within six moniths after the end of the fiscal year for monitoring purposes. The DOED will submit the financial monitorinig reports on a trimester basis. AEPC will follow Kingdom of Nepal's planning and budgeting system. A separate budget head will be assigned in the Government's Budget (Red Book) which will allow reporting of expenditures and accounts under IDA funding under a separate budget head AEPC will be responsible for overall project coordination All accoulitinig records and documentationi of transactionis of release of grants to districts will be maintainied at AEPC to facilitate the auditor's work, allowing for timely visits to only one cost center for audit purpose AEPC will be accouLitable for overall reporting on implemenitation progress with respect to Part B of the project, preparation of a trimesterly financial monitoring reports, and preparation of project accoulIts for Part B AEPC will also submit the audited project accouLits (includinig statement of expenditures and special account) withini six months after the end of the fiscal year. For the purpose of preparilg project financial statemenits, NEA will follow Kingdomli of Nepal procedures A separate budget code will be defined in the Government's Budget whichi will allow reporting of expenditures and accounts Llider IDA funlding. NEA's project accounts (includinlg statement of expenditures and special accoulit) and utility's financial statemenits will be audited on an aniual basis by qualified private auditors appointed by the OAGN, acceptable to IDA. The audit reports will be submitted to IDA within six montils after the end of the Fiscal year. In addition, NEA will also submit finanicial monitoring reports on a trimester basis. NEA have an action plan in place to improve the timeliness of their accounts aiid also bring them furthier into line wvitil acceptable accounting standards. NEA have already made a good progress in remedying some of the deficiencies identified in its system, and have been closely monitoring and followvig up on the qualified observations of the auditors. Through the technical assistance to be provided both under this proejct and ADB's rural energy project, which NEA is implementinig, NEA will contilLue to furthier imiprove the accouliting and interiial auditing system Procurenient Arrangenietits  10 PID The Bank conducted an assessmenit of the institutionial capacity of the various implementing entities to carry out procurement in accordance withi IDA procurement guidelines (see Annex 6) and found the arrangemenlts satisfactory. In particular, DOED wvill continlue to avail of techilical assistance from USAID, while AEPC will be supported by the UNDP-financed Program Support Unit-the Rural Energy Development program NEA has implemented satisfactorily several IDA-financed projects. Monitoring (11d evaliiatiofl arrangernents The PDF Admilistrator and project coordinator in AEPC and NEA, respectively, will be responsible for preparing project progress reports and financial monitoring reports, on a trimester basis, in a formiat agreed with IDA covering both physical and financial progress of the project componenits. Wheniever relevant, specific monitoring of enviroimenital and social aspects of project componenits will be included in the progress report A mid-term review will be held thirty months after credit/grant effectiveness to review all aspects of the project and assess whether modifications should be made in the implemenitation arrangements. Within six montils of the closing of the project, the Borroxver, in collaboration with the executinig agenlcies, will prepare an Implementation Completion Report (ICR). 7. Sustainability The Project wvould support development of small hydropower generation projects vhichi will be selected based on technical, financial, economic as well as environimenital and social impacts A workable regulatory framework for private sector development already exists, and furthier improvements are envisaged during project implementation. Executinig entities will be private sector operators and/or local entreprenieurs with souLid business developmenit track record. To sustain the overall development of Nepal's power sector, KoN and IDA, in coordination withi other donors, have begun the dialogue on sector reforms. While the project supports the reform thrust of promoting private participation in power, a further re-definition of roles between public and private participants is ulider review, including options involving unbunidlling of electricity services and privatization of distribution functions. Sustainability of the micro-lhydro village electrification systems is priiar ily linked to the sustainability of the MHFG, the community mobilizationi process and transparency throughout the life of each sub-project. Previous experience Llider REDP shows that the community mobilization is effective, and that system failures have been few i numiber However, there are a numliber of areas where processes (and therefore sustainability) wVould be fuL-tiler enilaniced, e.g , (i) further strengthien the communiity mobilization process, (in) improve the forimialization of in icro-hydro funictionial groups; (iii) improve procuremelit practices; and (iv) im prove the benefit monitoring and evaluationi process. Moreover, an enhaniced benefit monitoring and evaluationi program will be implemented as part of the program, with thle secondary aim of providing early feedback of system failure and malfuniction. This will be applied at the village level, with supervisioni from the district Rural Energy Development Sections that are established in each district development committee as part of the program. Extensive training for the O&M staff (two operators and one maniager selected from the local comMunity) assigned to each system is provided, in both technical aspects of system operation and in bill collection, disconnection for non-payment, record keeping, accouliting, etc. O&M staff are engaged prior to commencement of constructioni, are required to sign pledges that prevent them from leaving for other opportunities once training is completed, and are required to assist xvitih system constructioll, plant installationi and commissioning.  11 The micro-hydro turbine/generator and control equipmelnt is manufactured in Nepal, and is generally of adequate reliability and durability. However, some maintenanice and repairs are beyond the capacity of the O&M staff Accordingly, the program will support the development of micro-hydro maintenianice support facilities located withilni the district by providing (repayable) financial support to assist an existing, local enginleering workshop(s) to expand and upgrade skills in micro-lhydro system maintenanice and repair. T'he program design recognizes that a small number of the micro-hydro village electrification systems will inevitably fail wvithini the first few years of operation, without adversely affecting the overall economic viability of the program. The project would improve operational efficiency of Nepal's power grid and facilitate delivery of electricity from power plant investments IDA financing of transmission and distribution will ensur-e an appropriate balance of investmenlts required for an efficient power system. KoN's recent adjustment of tariffs would help ensure NEA's fiianicial capacity to support power purchases from private generators, and to upgrade and expand service to its consumers. Consultinig services will be provided under the respective technical assistance components, including through bilateral support to ensure the smooth implementationi of PDF, micro-hydro village electrification, and NEA activities 8. Lessons learned from past operations in the country/sector KoN's past experience of hydro development has led to the design and implementation of a transparenit and participatory process for selection of hydro projects as an integral part of project preparation. Consultation with the stakeholders in Nepal in general, and the project affected people in particular, has been niade an integral part of the preparatory process. There is a need to introduce transparency and competition in the selection of private independent power producers (IPPs) to ensure efficient pricing and raise credibility of the coulitry's privatization program The project supports establishmenit of a transparent process of inviting offers on an internationally competitive basis. Recent experience in Nepal has demonstrated that delivery of infrastructure services to rural commullities are more effective and sustainable whieni beneficiaries are able to actively participate in project planninig and design Accordingly, the village electrification componenit adopts a commun1ity-driven approach, which involves the commuLilty througil every stage of the development process including, inter alia, organizationi development, womani's empower-ment, skills enlhancemeiit, capital formation, technology promotion and environimenital manlagemilent More effective coordiniation among members of the donor comm11ullity is required to enhance the likelihood of successful achievement of project outcomes. In this coniectioni, the Bank has been holdilig regular dialogue with other donors to apprise them of the progress of the project. A Thematic Donor Group on Energy and Power was established in 1999, and the featuires and progress of the project regularly discussed durinig the Group's meetings Further, to foster common understaniding of emergiig sector issues, the preparation of the Nepal, Power Sector Strategy report involved the active participation of ADB and JBIC, and close coordinationi with USAID. Based on experience from past IDA operations with NEA, finanicial accounting issues in NEA need to receive greater attentioni so as to conforimi to internationial accountinig standards. Accordingly, technilcal  12 PID assistance is being provided to NEA Linder the project to finance upgrading of finanicial managemlienit systems complemenlted by on-going TA support from ADB. Further technical assistance will also be provided to consider NEA's pricing policy and future power purchase strategy 9. Environment Aspects (including any public consultation) Issues : Sectoral Environmental Assessment. An analysis of alternative technology options for meeting short and medium term power demands in Nepal was completed in April 1997 A Sectoral Environmenital Assessment (SEA) was performied as a major contributioll to this exercise. The SEA for the power sector was used to examine the cuLImulative impacts of multiple projects planned in the same sector on the medium to long tern The SEA was to be the basis for identification of development options in the power sector of Nepal Accordingly, the SEA identified that a small and medium scale hydropower development strategy was identified as the preferred option. The SEA makes it clear that there is significant scope and potential for renewable sources to play a role in Nepal's future power generation. The SEA emphasizes environimentally and socially sustainable developmenit of hydropower resources in the country and recognizes the need to optimize and prioritize the uses of water resources while minimizing conflict. Thus, the Governm1enit has adopted a strategy of developing small and medium hydropower projects that have minimal negative environmenital and social impacts. A screening and ranking process has been developed as part of the SEA to identify potential environimenital impacts so that projects that should be studied for further development can be identified. Supported by an KoN interagenicy steering group, the SEA involved a two stage review of potential hydropower projects The techilo-economic feasibility analysis was followed by a socio-environmenltal issues analysis of 138 potential hydropower project sites in the 10 - 300 MW capacity range These were subjected to a Screening and Ranking process (S&R) Environmienital, social and techno-ecollomllic screening criteria were developed through stakeholder consensus, commencing in 1996 The process involved an open consultation and information-slharinig process with public, government, NGOs, and professional community stakeholders and resulted in a successfully completed selection of the most acceptable hydro-projects for meeting Nepal's short and medium term power demands. From this list, fine screening identified the 24 most attractive sub-projects and the S&R was completed withi fine ranking and selection of 7 sub-projects considered most viable, for detailed feasibility studies. These sub-projects have since becn considered in the least cost system expansioni planning, and four have been identified as the most preferred options for initial development. Two of these sub-projects, Rahughat Khola and Kabeli A Hydro Power projects have been identified for potential PDF funding Policy Framework for Environmental Impact Assessment of sub-proiects to be financed under the Project: The EIA/SIA Policy Framework agreed betweeni KoN and IDA is based on Nepal's Enviroinenital Protection Act and Environmiental Protection Rules (1997), and also meets relevant World Bank requiremenits includinig those of the safeguard policies. The Policy Framework applies to all sub-projects that fall into the categories identified below (i) generationi projects in the range of 10 - 300 MW identified throughl the screening and rankinig exercise ulider the Medium Hydropower Study or by NEA and/or private developers using screening criteria acceptable to IDA; (ii) generation projects below 10 MW identified by NEA and/or private developers USIng screenin1g criteria acceptable to IDA, (iii) transmission and distribution sub-projects to be finaniced ulider the Project Each sub-project will undergo an Environmenital Impact Assessment (EIA) in complianice withi Nepal's licensinlg requirements in accordance with the prevailing Environment Protection Act 2053 (1996) and Environmental Protection Rules 2054 (1997) and if the sub-projects are to finaniced by IDA resources, it should also meet applicable safegLiard policies of the World Bank ETAs conducted for all sub-projects in accordance with the Policy Framework will include an assessmenit of social impacts as well. The ETA will contain, inter alia, an Environiml1enital Managemenit Plan (EMP), an Acquisition Compensation Rehabilitationi Plan (ACRP), a Resettlement Action Plan (RAP) and a Vulnerable Commllunlity Developmenit Plan (VCDP)  13 PID where applicable Annex I I provides a summary of the operating policies embodied in the framework Operations Manual An Operations Manual has been prepared by DOED whichi details the steps that have to be followed by prospective developers in operationalizing the EIA/SIA Policy Framework as well as outlininig the approval procedure for obtaining environimienltal clearance The OM provides a detailed procedure to be followed for sub-projects that have a capacity betweeni 1-5 MW, above 5 MW and a more simplified procedure for micro-hydro projects that are below I MW. In addition, it specifies the ElA/SIA procedures to be followed for transmission and distribution lines to be financed under the NEA component of the project. In accordance with the EIA framework, the sub-projects identified through the S&R need to be subjected to a full EIA, includinig stakeholder consultations, as part of feasibility and design studies required for licensing Project specific ElAs would include alternatives analysis of project design and project componenlt design for given locations, adequate mitigation, fair compenisation, and plans/rules of operation for environimilental maniagemilenit, whiichi will be embodied in an Environimlenital Managemenit Plan (EMP) for the sub-project. Although feasibility planining and first stage ElAs were finalized in early, 1999 for four hydropower sub-projects selected for current power system expansion, full ElAs will be conducted once the project developers have been selected The selected developers will be responsible for the preparation of comprehenisive project specific ElAs, In accordance with the EIA/SIA Policy Framework and the Operations Manual, for final approval from MOPE and IDA prior to financial support from the project. KoN's Envirolimenital Protection Act and Environimental Protection Rules of 1997 clearly define the procedure to be followed withi regard to environmental assessments for hydropower development, with all projects above 5 MW being subject to the full EIA process, while smaller projects (I - 5 MW) are required to follow the Initial Environimilental Examination (IEE) process. If the IEE identifies significant environmenital and/or social Issues, the legislation states that an EIA is required, regardless of the capacity of the project These procedures and steps in processing as well the institutional requiremilents for obtaining environmenital clearance of sub-projects have been clearly definied in the Environmenital Assessment Flow Diagram contained in the Operations Manual. Environmental Assessment of Projects in the PDF Pipelinie The PDF will finanice one medium hydropower project of approximately 30 MW capacity T'he most likely sub-project to be financed will be either Rahughat Khola or Kabeli-A hydro power projects. Preliminary environimienltal assessments have been conducted as part of the initial feasibility studies for both sub-projects. However, wlile potential project developers have been pre-qualified, RFPs are yet to be announced. Once the developer is selected, an EIA will be conducted in accordance withi the Policy Framework and Operations Manual. The EIA will be reviewed and cleared by both MOPE and IDA prior to any funds being disbursed from the PDF. It is not anticipated that the medium hydro power project will commence implemiientation in 2003. DOED has a list of potential small hydropower projects that have been identified througih a screening process The screeming process has identified the river and the most likely site for the small hydro power plant. However, the exact location along the river and the type of technology, and other alternative options will be determnied through the ETA. AlthougIl five PPA's have been signed, it is uncertaini at this stage wilether any of these sub-projects would seek finanicing from the PDF. In the event that finanicing Is sought, the sub-project developer will have to uLidertake an EIA In accordance with the Policy Framework and Operations Manual and receive MOPE and IDA clearance prior to any disbursement from PDF for that specific sub-project It is not anticipated that any of the small hydro sub-projects will commenice implementation in 2003. Micro-hydro Village Electrification Compoonent KoN's Environniental Protection Act 2053 (1996) and the Environmenital Protection Rules 2054 (1997) exclude electricity generationi projects below I MW from the IEE/EIA process. Therefore, all communiity based micro-hydro projects that will be eligible for fuLiding under this componienit are not required by law to be subjected to an environmenital assessment  14 PID However, bulilding upon the procedure already in place for commllullity based micro-hydro village electrification projects funded under the UNDP sponsored REDP, separate scheme specific impact assessments will be carried out in accordance with the guidelinies for Environmental Assessment of Micro-hydro Schemes developed by REDP for sub-projects funided ulider their existing program These guidelines are based on the Initial Environimiental Examinationi (IEE) requirements under the Environmental Protection Rules 2054 (1997), and will include information on the existing environiment, identificationi of environmental impacts caused by scheme implementation, aiialysis of the extent of the identified impacts and development of appropriate preventive and imlitigation measures. The environmental impacts of micro hydro projects are genierally small, with the main impacts being (i) the partial de-waterinig of a section of riverbed from the intake until water is returned to the river downstream of the powerhouse, and the consequenit effect on aquatic life in the dewatered section; (ii) potential ground / soil erosion caused by flushinig flows discharged from sedimentation basins and by overflows at the forebay, (iii) potential ground instability caused by canal/pipe construction and leakage from canals; (iv) Cuttilng of forest cover to make way for constructioll works, and (v) cutting of trees for use as power poles. Considering the capacity of these sub-projects, it is not anticipated that there will be any road construction as part of developing the micro hydro projects. In the unllikely event there is some unaniticipated impacts, the environmental assessment process developed under the REDP will be able to address it and the EMP prepared for each sub-project will address the problems with suitable mitigatory measures that can be implemented to minimize environmental impacts Appropriate means of mitigating the above impacts are available and will be implemented as part of development of the micro hydro facilities Such mitigation will include (i) maintenance of a residual flow in the de-watered section of the river of not less than 10 percent of the dry season flow to provide for aquatic life, and to prevent the formation of stagnant ponds; (ii) provision of lined chaniels or of pipes, wherever necessary (the choice will depend on the terrain) to convey flushling flows / overflows back to the river; (iii) appropriate sitting of canals, pipelines, etc, to avoid potential areas of grounid instability aiid to avoid cuttling of forest cover, (iv) careful design of cut slopes; and (v) Ining of canals to prevent leakage, wherever necessary. Also as part of the community mobilizationi program, appropriate watershed management practices will be promoted amongst the community through forestation, micro-watershied maniagemenit, envirolimental education and healthi and sanitation education. Details of the procedure to be followed in environmental analysis of micro hydro village electrification projects is contained in the Operations Manual. Water use for each of the micro-hydro projects will be registered at the District Water Resources Committee (headed by the Chief District Officer) to avoid conflicts and to provide legal status for the water use This registrationi process is provided for under the Water Resources Rules 2050 (1993) framed as part of the Water Resources Act 2049 (1992) The village community (via the MHFG) is responsible for acquiring all land for the canal, penstock, powerhouse, distribution system poles, etc. The MHFG is required to obtain written consent from all landowners so that conflicts do not arise at a later date. Small ulisubsidized loans wvill be provided under the micro-hydro component by the community energy fund to help finanice the conversioni of some local businesses to electricity. These end use activities will be restricted to agro processing ( cereal milling, rice husking and oil processing) where electrical power will replace the current use of manual or wvater power as well as small scale carpentry workshops These micro enterprises cater to local community needs. The agro processing schemiles to be financed will largely reduce the drudgery by replacing manual milling by machine grindinig, reduce cereal losses and increase yield in the case of oil expellers. These plants will be small with plant capacities in the range of 8 kW. With regard to the small scale carpentry workshops, the project will result in replacement of manual implements that are being presently used in existing carpentry workshops by electrical machlines  15 PID or tools. The source of timber will be from communi.ty forests. The timber required for the carpentry workshops will be brought by prospective clients, whio are members of community forestry user groups. These groups provide each member with a specified timber allocation based on domestic needs such as buliding/repairinig houses and personal furniture requiremenits The comm11ullity forestry user groups closely monitor the use of thimber by its membership. This monitoring mechanism, whichi is currently in existence, has proved to be very effective in ensurinig sustainable timber use. The enforcement of the "timber quotas" by the commurnity forestry user group will be used under this sub-componenlt to ensure sustainable use of forestry resources. Nevertheless, in order to ensure that excess quanitities of timber will not be used, it has been agreed with AEPC that the carpentry workshops will use only the authiorized allocation of wood provided to the commuLity by the respective community forest user group It has also been agreed that their project finances cannot be used for fuLiding saw mills Durinig sub-project approval and supeivisioni, AEPC will ensure that carpentry workshiops will use timber only from entitled quotas from the respective community user groups Transmission and Distributioll Componenit. ElAs have comimleniced for the 220 kV scheme and for the 132 kV bay extension for the Dhalkebar substation and the Dhalkebar - Bhittamod 132 kV transmission lines, in accordance witil the Policy Framework and Operations Manual It is expected that the EIA will be completed by July 2004. While the EIAs would be ready In July 2004, completion of the detailed engineeriiig designs and procurement of contractors to implement the sub-project wvill result in implementation beginninig in 2005. MOPE and IDA environimenltal clearance is a pre-requisite for disbursement of ftiiids from IDA for these works. Institutional Capacity for Implementing the Environimental Assessment Process: With the immi-nent hydropower expansion plans for Nepal's power system, the requisite institutional capacity to deal with the environimental, social and techno-econiomic aspects of projects is essential Key authorities in the licensing process are the Department of Electricity Development (DOED) under the Milistry of Water Resources (MOWR), and the Ministry of Population and Environimenit (MOPE) DOED is receiving long-tenn technical assistance (TA) from USAID, through consultants, including in upgrading staff skills in environmental managemilent review. The second phase of the long-terill USAID TA to DOED commenced in 2002. Under the project, several documelits have been prepared to assist the developers, DOED, MOWR and MOPE In streamlining the EIA process. These documents include. (i) Manual for Preparing Scoping Document for EIA of Hydropowver Projects, (ii) Manual for Preparing Terms of Reference for EIA of Hydropower Projects, wvith Notes on EIA preparation; (ni) Manual for Preparing Environimlenital Managemilenit Plan (EMP) for Hydropower Projects, (iv) Manual for Reviewinig Scoping Documenit, TOR and EIA reports for I-Iydropower Projects, (v) Manual for Preparing Initial Environmental Examination Report for Flydropower Projects; (vi) Manual for Public Involvement in the EIA Process for Hydropower Projects, (vii) Manual for Developing and Reviewing Water Quality Monitoring Plans and Results for Hydropower Project; and (viii) Manual for Prediction, Rating, Ranking and Determinationi of Significant Impacts in EIAs of Hydropower Projects In addition to preparation of the above docuLImenIts, the USAID technical assistance involves training of relevant staff In KoN agencies in preparation, review and evaluation of environimenital impact assessmenits as well as the placement of a full tine national and internationial environimenital specialist at DOED for long term institutional strengtheninig. During the mid term review of the project, IDA wvill assess the impacts of the USAID TA on DOED's ability to address environmenital Issues pertaining to hydropower development. If additional TA is needed and if the USAID TA is coming to an end, the requisite TA will be provided to DOED Linder the Project. MOPE is receiving TA througIl NORAD, specifically related to its clearing autilority with regard to hydropower-licenses and environimenital impact assessments, focusinIg on the hydropower sector.  16 PID NORAD has earlier assisted KoN in developing Nepal's power and water resources legislation The technical assistance provided throughi NORAD is coordinated with USAID and ADB, wvith the aim of promotinig a project licensinig process that is efficient and credible to both investors, othier stakeholders, and KoN regulator-autlhor ities The TA package n1cludes the placement of an interinational advisor at MOPE as well as training for MOPE staff At this point, consideriig the absorptive capacity at MOPE, additional TA is not needed. Howvever, during the mid term review of the Project, the institutional capacity with regard to implementing the environmenital assessment process, includinig environimlental clearances will be reviewed and depending on the need, additional TA will be provided tlhroughi the project at that time, if the NORAD TA is not extended 10. List of factual technical documents: I1. Contact Point: Task Manager Mudassar lmran The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone 202-458-1466 Fax: 202-522-2427 12 For information on other project related documents contact The InfoShop The World Bank 1818 H Street, NW Washington, D C 20433 Telephone (202) 458-5454 Fax (202) 522-1500 Web http 11 www worldbank org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. Tables, Charts, Graphs: Processed by the InfoShop week ending 04/19/2000 For a list of World Bank news releases on projects and reports, click here 5EARCH FEEDBACK - SITE MAP _ V rOASE ,