Nepal - Kathmandu Tourism Project

CIRCULATING COPY RESTRICTED Report No. P-1026 TO BE RETURNED TO REPORTS DESK FILE COPY This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR THE KATHMANDU TOURISM PROJECT February 16, 1972 INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTOS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR THE KATHMANDU TOURISM PROJECT 1. I submit the following report and recommendation on a proposed development credit to Nepal for the equivalent of US$ 4.2 million on standard IDA terms to help finance a project for the expansion of hotel accommodation in Kathmandu. PART I - INTRODUCTION 2. The Association has made two credits to Nepal totalling US$ 4.2 million. The first credit, for US$ 1.7 million, was signed in November, 1969, for a telecommunications project; the second, for US$ 2.5 million, was signed in December, 1970, and provided financing for highway maintenance, bridge reconstruction and the installation of porter-trail bridges. Both projects are expected to be completed before the closing dates. A summary statement of the two credits as of January 31, 1972, is attached as Annex I. 3. In addition to the tourism project now proposed, two more projects are in an advanced stage of preparation. The first is a combined surface and groundwater irrigation project, in the vicinity of Birganj which would benefit at least 20,000 farmers by irrigating 28,700 ha., permitting increased production of rice and wheat and the improvement of sugar cane cultivation. The second is a plywood or veneer factory project at Hetaura, 77 miles south of Kathmandu, which would also include modernization of an existing sawmill. A project for forestry settlement in Western Terai and one for telecommunications are also being prepared. The telecommunications project would be a continuation of the program financed by the 1969 credit. 4. No Bank loans or IFC investments have been made in Nepal. PART II - THE ECONOMY 5. The most recent economic report entitled "Current Economic Position and Prospects of Nepal" (SA-7a) dated June 26, 1969, was distributed on July 8, 1969. A memorandum summarizing recent economic developments including country data is attached as Annex II. - 2 - 6. The economic report referred to above underlined the need for administrative and technical skills, and better roads. Given the rapid expansion in infrastructure, particularly roads in the last two years, and the gratifying improvement in administration, the emphasis should now shift towards making greater use of that infrastructure. 7. Tourism represents Nepal's most promising avenue for increasing its earnings of convertible foreign exchange. Nepal is a culturally unique and scenically most beautiful country. The Kathmandu valley, with its many pagodas and temples, colorful festivals, curios, bazaars, and hill people provides a fascinating centre for the tourist. To this must be added an almost ideal climate for 9 months of the year, and above all the Himalayas, which form a beautiful background. 8. In view of these attractions, it is hardly surprising that the number of foreign arrivals has grown at some 37 percent a year since 1965, reaching 46,000 in 1970. The recent upheavals in the sub-continent mean a temporary hiatus in growth and arrivals have been much the same in 1971 as in 1970. However, more visitors are expected this year. Transportation and accommodation during much of the period of rapid growth have not been adequate to meet the demand. The completion of an Asian Development Bank project to modernize the equipment and extend the runway of the Kathmandu airport, along with other improvements financed by the Canadian Government, will make it easier for tourists to get to Nepal but severely test the already overstrained facilities for accommodating, feeding and entertaining the tourists on arrival. 9. Direct foreign exchange earnings from tourism are difficult to estimate, as many tourist transactions are made through the free market. The official estimate of gross direct foreign exchange earnings was US$ 1.3 million equivalent in 1969/70, but actual earnings may well have been almost double this, and probably accounted for over 10% of convertible foreign exchange earnings. Direct full-time employment in tourism throughout the country probably does not exceed 1,500 but substantial numbers of porters are employed seasonally and tourists also constitute an important market for handicraft products. 10. The difficulties and constraints which the growth of tourism has faced in the past are now gradually being overcome. In addition to the improvement of the Kathmandu airport referred to above, and the present project to expand hotel accommodation, there are a number of other foreign-aided activities. Royal Nepal Airlines Corporation has a technical assistance agreement with Air France. UNDP and ILO plan to help set up a hotel training school in Kathmandu and the Goverment has also received assistance in developing tourism from the German and Swiss governments. UNESCO is working on the identification, protection and restoration of antiquities. - 3 - PART III - THE PROJECT 11. An Appraisal Report entitled "Appraisal of the Kathmandu Tourism Project, Nepal" (PT-h) is being distributed separately. A Credit and Project Summary is attached as Annex III. The project was appraised in July 1971, and negotiations for the proposed credit were completed in January 1972. The Borrower was represented by Messrs. R.P. Sharma, Acting Joint Secretary, Ministry of Finance, and B.P. Rimal, First Secretary, Royal Embassy of Nepal in Washington; Mr. R.N. Rimal represented the Nepal Industrial Development Corporation (NIDC); Mr. Om Rana represented Hotel de l'Annapurna Pvt. Ltd. (Annapurna); and Mr. Boris Lissanevitch, Yak and Yeti Hotel Pvt. Ltd. (Yak and Yeti). 12. Kathmandu is the main center for foreign tourists and the only place where hotels are up to international standards. Of the 558 hotel rooms which meet the Department of Tourism's standards, 500 are in Kathmandu. The proposed project would add 271 rooms, which it is estimated would provide accommodation for some 34,000 additional tourists per year. The project is made up of two sub-projects, the extension and refurbishing of the existing Hotel de l'Annapurna; and the construction of a new hotel, to be called the Yak and Yeti Hotel. The project is expected to be completed by the end of 1974. The credit would cover 64 percent of the total financing. 13. The proposed credit would be made to the Government of Nepal and onlent to the sponsors through the NIDC. Each sub-loan would bear interest at 71 percent per annum plus 2 percent commitment charge and would be for a term of 24 years including 4 years of grace. The sub-borrowers would bear the exchange risk. NIDC would act on behalf of the Government, in return for a service charge, in channelling the proceeds of the credit to the sponsors and in providing administrative and technical supervision of the sub-projects. NIDC has agreed, subject to confirmation by the Government, that the service charge in Nepalese rupees should be the equivalent of US$ 20,000 annually for the first four years, and US$ 4,000 equivalent annually thereafter until the sub-loans are repaid. The completion of the arrangements between the Government and NIDC is a condition of effectiveness of the Credit Agreement. 14. NIDC is a wholly Government-owned institution established in 1959 to finance industry and tourism. Most of its funds are provided by the Government and the balance by loans from USAID, the Goverment of India, Kreditanstalt fur Wiederaufbau, and the Export-Import Bank of Japan. NIDC is a reasonably well-run institution with qualified staff and considerable experience in hotel projects in Nepal. However, arrears have accummulated on some of its loans. NIDC is currently taking steps to improve its debt collection record. NIDC's role in this project would be limited to channelling Government lending to the sub-borrowers and supervising the administration of the sub-loans and NIDC itself would not be at risk. 15. On behalf of the Government, NIDC will enter into agreements with Annapurna and Yak and Yeti for the financing of the respective sub-projects, such agreements to be satisfactory to the Association and to incorporate provisions substantially similar to those set forth in Schedule 5 to the draft Development Credit Agreement. NIDC will hold mortgages on behalf of the Government on the fixed assets of the sub-borrowers to secure their respective loans. The interest rate charged on the sub- loans would be the same as that charged by NIDC to other borrowers (currently 7½ percent). The completion of the Annapurna Agreement and the Yak and Yeti Agreement is a condition of effectiveness of the respective parts of the credit. 16. Hotel de l'Annapurna: The total cost of the sub-project is US$ 4.08 million equivalent and would be financed by: (a) IDA (Part A of the proposed credit): US$ 2.88 million equivalent, representing estimated foreign exchange costs; (b) Sponsors: US$ 1.20 million equivalent, as equity, representing local costs. In addition, NIDC would lend on behalf of the Government US$ 0.4 million equivalent in local currency, representing estimated interest and other charges during construction. 17. The existing hotel is located in central Kathmandu, within walking distance of many tourist attractions. The project would create around this nucleus new accommodation of first-class international standard, while keeping the present hotel open. 159 new rooms would be built and 82 of the present rooms would be refurbished to provide a total of 2k1 double rooms. Eight of the existing rooms would be eliminated to make space for enlarged public areas. Central air-conditioning and a central hot water system would be installed. A coffee shop, a main dining room and a speciality restaurant would be provided, a lounge and bar space expanded. A swimming pool with a patio bar would be built, and the tennis courts relocated and improved. The hotel would have its own laundry and dry cleaning plant. Exterior design and interior decoration would be to a high standard, and care would be paid to landscaping. 18. The present Hotel de 1'Annapurna was opened in 1965 as a private partnership which in March 1971, was converted into a company with limited liability. The Company has an authorized dapital of NRs. 20 million (approximately US$ 2.0 million equivalent) of which NRs. 6.4 million is paid up. This includes the conversion into equity of a NRs. 5.1 million loan by the shareholders, that was completed last autumn, and evidence of which is a condition of effectiveness of Annapurna's part of the credit. The Company owns the existing Hotel de l'Annapurna and is financially sound. Its three shareholders are members of the Royal family. 19. Few Nepalese have had experience in operating hotels of the size and class proposed. The success of the proposed project will depend on competent management and adequate staffing of the new hotels. The existing Hotel de l'Annapurna had an interim management agreement with Hilton International Company (Hilton). Hilton had to withdraw in view of the small size of the operation, but the basic management agreement providing for Hilton management of the new hotel on completion, together with technical assistance, training and marketing services remains in force. With assistance from Hilton, training schemes for the staff have been arranged and are to be expanded, including some training in Hilton hotels abroad. 20. The Yak and Yeti Hotel: The total cost of the sub-project is US$ 1.92 million equivalent and would be financed by: (a) IDA (Part B of the proposed credit): US$ 1.32 million equivalent, representing the estimated foreign exchange costs; (b) Sponsors: US$ 0.60 million equivalent, as equity, representing local costs. In addition, NIDC would lend on behalf of the Government US$ 0.18 million equivalent in local currency, representing estimated interest and other charges during construction. 21. The site for this hotel is in the grounds of an old palace, which houses the present successful Yak and Yeti Restaurant. The palace grounds include a small lake, and the site lends itself to attractive landscaping. The project provides for a new access road directly from one of Kathmandu's main thoroughfares. The proposed hotel would include 24 single rooms, 84 double rooms each with a balcony and 6 suites. Provision would be made for a coffee shop, a bar and access to the existing restaurant. It would have a swimming pool, tennis courts, a sauna and a roof garden. The preliminary drawings by a Nepalese architect suggest that the exterior of the hotel would be simple and attractive. Maximum use would be made throughout of local wood carvings and other handicrafts, and the high standard of interior design evident in the Yak and Yeti Restaurant would be maintained. - 6 - 22. Yak and Yeti would acquire an access road for the new hotel across land owned by NIDC. During negotiations representatives of NIDC and of Yak and Yeti confirmed that they had reached preliminary agreement on the acquisition and that the agreement was being considered by the NIDC Board. Acquisition of the access road is a condition of effectiveness of Yak and Yeti's part of the credit. 23. Yak and Yeti's shareholders are a British businessman, Mr. Lissanevitch, with long association with the hotel trade in Nepal, and an Indian businessman, Mr. Radesham Saraf, with substantial trading and industrial interests in India and Nepal, and members of his family. The Company has an authorized capital of NRs. 5 million of which NRs. 1.0 million is paid up. The Company owns the existing Yak and Yeti Restaurant and is financially sound. 24. Yak and Yeti intends to employ qualified expatriate personnel in the key positions in the management of the new hotel. Mr. Lissanevitch managed a hotel in Kathmandu successfully for 12 years, after many years hotel experience in India and Europe. His three sons are to be trained in leading hotels in Europe. 25. Procurement, carried out by sub-borrowers under NIDC's supervision, would be on the basis Of international competitive bidding. Bidders for civil works would be prequalified. In evaluating bids, a preference of 15 percent, or the existing rate of duty (whichever is lower), would be allowed for domestic manufacturers of equipment and furniture. Whether domestic or foreign contractorsshould win the bids, the foreign exchange component in total project costs would vary little as both domestic and foreign contractors need to import most materials, equipment and specialized labor. 26. Disbursements from the credit 'account would be made on the following basis: (i) 70 percent of expenditures for civil works contracts, being the estimated foreign exchange costs; (ii) 100 percent of expenditures for equipment and furniture; and (iii) 100 percent of foreign exchange expenditures for professional services, technical assistance and pre-opening expenses. Provision is made in the draft Credit Agreement for the reimbursement for expenses paid for professional services in preparing the sub-projects between January 1, 1972, and the date of signing the Credit Agreement. These expenses are expected to amount to $45,OO0. - 7 - 27. The term of the sub-loans, 24 years including four years of grace, is justified on project grounds and takes into account the life of the assets financed. If dividends exceeding 20 percent of the par value of the share capital are paid in any financial year, repayment of the sub-loan will be accelerated by the amount of the excess. 28. The estimated financial returns on total investment range from about 9 percent to about 11 percent for Annapurnaand from about 7 percent to about 9 percent for Yak and Yeti, depending on the assumptions made with regard to occupancy rates and opening date. The best estimate of the economic rate of return is about 20 percent for each sub-project. Additional direct employment created by the project is estimated at 500 jobs, and net direct foreign exchange earnings are expected to be of the order of US$ 2.8 million per annum at full operation thus more than doubling Nepal's net earning from tourism. Non-quantifiable indirect benefits would include increased employment from tourist expenditures and increased revenues from taxation. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 29. The draft Development Credit Agreement between Nepal and the Association, the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement, and the text of a resolution approving the proposed credit are being distributed to the Executive Directors separately. Schedule 4 to the draft Development Credit Agreement sets out the provisions to be included in the arrangements between the Nepalese Government and NIDC. Schedule 5 contains provisions for the loan agreements between NIDC and Annapurna and Yak and Yeti for the relending of the Credit proceeds. Article VII if the draft Development Credit Agreement permits the Credit to become effective separately with respect to each hotel, in case the conditions of effectiveness relating to one of the hotels are fulfilled before those relating to the other. 30. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART V - RECOMMENDATION 31. I recommend that the Executive Directors approve the proposed credit. Attachments Robert S. McNamara President February 16, 1972 ANNEX I NEPAL Statement of IDA credits at January 31, 1972. Credit No. Year Borrower Purpose Amount (US $ Million) IDA Undisbursed 166 NEP 1969 Kingdom of Nepal Telecommu- nications 1.7 1.4 223 NEP 1970 Kingdom of Nepal Highways 2.5 2.5 Totals 4.2 3.9 Kc��or�z,4�J Г ANNEX II Page 1 REVIEW OF THE ECONOMC SITUATION OF NEPAL 1. The conventional indicators of economic progress are of little utility in a country like Nepal. In the first place there are few reliable etatistics on output.and fewer still which are available on a sufficiently current basis to permit assessment of short-term progress. Secondly, even if they were available they would not give an indication of qualitative changes, which in a country like Nepal, which is at the very first stages of the development process, are of critical importance. The first road connecting Kathmandu., the capital, to the outside world was only completed in 1956, and some 90 percent of the population is still engaged in agriculture. These are the facts against which the progress made since the date of the last Bank Economic Report on Nepal (June., 1969) must still be viewed. 2. Nepal is a land-locked country forming a rectangle between India and China. The northern border is formed by the Himalayas., the central area consists of hills and valleys and the southern area., the Terai, is a natural continuation of the Indo-Gangetic plain, with a virtually open border between Nepal and India. These geographic and topographical factors have been the primary determinants both of the past economic structure and the one which is developing. Some 90 percent of Nepal's trade is with India. India is also the major foreign donor, contributing some 50 percent of total aid. Even the balance of Nepal's trade which is not directly with India must go through Calcutta port. Given the open border on the one hand and Nepal's strategic importance as a buffer state between India and China on the other,, it is apparent that there are a great many potential sources of tension inherent in the relationship between Nepal and India. 3. In view of this, perhaps the most satisfying and important achievement for Nepal in the past year has been the successful renegotia- tion of the Treaty of Trade and Transit with India. This Treaty, originally concluded in 1960 for ten years, was a device for giving special facilities to Nepalese manufacturers ixk the Indian market and also ensuring Nepal's transit rights. In the middle years of the decade, however, Nepal., seeking to diversify its exports to countries other than India, introduced an import entitlement scheme which permitted exporters to use a certain percentage of their receipts both for free imports from third countries and for a specified list of development goods. At the time this seemed a reasonable step for Nepal to take given the budgetary burden which direct export subsidies would have constituted. 4. Unfortunately,, the import entitlement scheme did not serve only to stimulate Nepalese exports to third countries. It also provided a means ANNEX II Page 2 of exploiting certain general provisions in the Treaty of Trade and Transit to secure high profits through importing goods which were subject to import bans in India - such as stainless steel and synthetic textiles - and after minimal processing exporting these to India as Nepalese manufactures. The open border also made it difficult to prevent the smuggling of imported consumer goods into India and even of Indian export products, such as Jute, into Nepal for re-export as Nepalese exports. Since the import entitlements were only a percentage (varying as to commodity) of total export receipts, Nepal has been able to build up its exchange reserves during the past three years to around $100 million in hard currencies, or over a year's imports from all sources including India, and something like 10 years' imports from countries other than India. 5. From Nepal's point of view, however, the trade has also had a number of drawbacks. It was largely organized by Indian merchants and the large profits were therefore not re-invested. The transit situation already difficult through the inadequacies of Calcutta port became still more difficult as customs officials applied rigorous checks, understandably, to both legitimate and other items. Perhaps most significantly, nothing was done in the late sixties about the urgent task of diversifying and promoting industries with high value-added in Nepal. The consequence has been that even the simplest consumer goods continue to be imported from India rather than being made locally. In addition, Nepal has not developed production in a number of areas where it apparently has a comparative advantage such as wood products, animal and vegetable oils and fats, and hydro-power. 6. In 1968 the Government of India began taking unilateral action to limit the export of stainless steel and synthetic textiles. The Nepalese goverment closed a loophole in their regulations which had permitted the duty-free import of 'gift parcels' containing goods which were subsequently smuggled into India. Protracted negotiation to find a solution acceptable to both parties continued through 1970, but afteroneextension the Treaty was permitted to lapse at the end of the year. The consequence of this was the application to Nepal of the same trade restrictions as applied to India's trade with third countries with the exception of a limited list of necessary items. India unilaterally limited Nepalese jute exports to an estimate of local production and relations between the two countries entered a difficult phase. 7. The conclusion of a new Treaty of Trade and Transit in June of this year is an important step in creating a sound basis for economic relations between the two countries which will permit Nepal's legitimate industries to develop along sound lines. The basis of the Treaty is a value-added formula which gives preference to items manufactured in Nepal which have high local value-added. The provisions of the Treaty are broad, however, and, while the spirit is fairly clear, India has at least ANNEK II Page 3 potentially the right to limit the export to India of a very wide range of Nepalese manufactures which might compete with Indian industry including some in which Nepalese production would have comparative advantages. Fortunately there is every indication that the spirit of the Treaty recognizes that Nepal's infant industrial sector will need access to the Indian market if it is ever to develop significantly. On the transit front too, India has made a number of concessions which should make this less of a bottleneck than it has proved at times in the past. 8. All this would be of somewhat academic interest were it not that there is reason to think that Nepal is better placed than ever before to make a real effort at increasing both agricultural and industrial output and significantly increasing the very low level of per capita income of its population. In a strikingly short period the length of motorable roads in Nepal has been increased and continues to be increased. Journeys that took weeks by porter now take hours by truck. The East/West trunk network linking all parts of the Terai and obviating the former necessity of going via India from one part of Nepal to another, is almost half (the Eastern part) complete, thanks to Indian, Russian, U.S. and U.K. assistance. The Indian road to Kathmandu now goes through to the Tibetan border. This was extended by Mainland China which is also completing a road along the hills, westward to Pokhara. The thrust is now towards North/South roads which will link the hilly areas to the Terai plain. Two are being completed and others are being studied. 9. Aside from the impact these new roads will have on the administration of the country, they also represent the basic infrastructure for development, around which agricultural production can be increased through easier supply of inputs and a market for output. Industrial production can now be geared to a much larger market than just the Kathmandu valley. Economic exchange of complementary products between the hills and the Teral will also be possible, in particular the transfer of grain from the Terai to meet the food deficit in the hills. Nor are the roads the only available infrastructure. With Indian and Chinese assistance, power generating capacity has been expanded considerably in excess of present demand. The telecommunications system has been expanded with Indian and World Bank assistance. A number of major irrigation canals, adjuncts of Indian works along the southern border have been built. 10. This rapid expansion in infrastructure, provides the motivation for a shift in emphasis towards productive sectors in the new Plan. This is, of course, always more easily written than achieved. The proposals to raise agricultural production, set up new industries and exploit Nepal's rich potential in forestry and as a tourist venue, remain to be satisfactorily implemented. In this connection it is noteworthy that the ANNEX II Page 4 three projects the Bank is presently at the most advanced stage of considering all come into this category of making use of the infrastructure already developed. In the past, efforts have been much too scattered. Horticultural research, for example, has been carried out in areas remote from any road and the results of its application could not be marketed. There is a realization of the need to concentrate efforts in areas where the transport system has been developed and as a corollary to develop the transport system in areas with the greatest economic potential. 11. Nepal is going, for a very long time, to be essentially dependent on agricultural production for the major expansion in its GDP. At present Nepal is a surplus foodgrain producer exporting around 300,000 tons of foodgrains a year to India. Production is estimated to have increased by about 2 percent per annum in the past few years or roughly the same rate as population growth. The exportable surplus has remained much the same. In the short run there is little doubt that very high returns should be available from increased foodgrain production. Yields are low and the irrigation capacity that has been created lies almost totally unutilized. The major task will be to make proper use of this capacity, through management, supply of inputs and extension services. In the last two years there has at least developed an awareness of the critical nature of these problems, though with insufficient supporting finance and facilities, and too little delegated authority. The links between research and extension remain weak. In the longer run, Nepal will need to diversify its agriculture to provide the cash crops for its industrial sector and to mitigate the expected decline in terms of trade for foodgrain exports to India. The first tentative steps in this direction are being taken at present. 12. The industrial sector in Nepal is tiny - some 2 percent of GDP. There are a number of Chinese and Russian aided factories in the public sector, few of them adequately managed. The lack of trained management personnel and skilled labor is a serious constraint on the progress of the sector, but there are a number of other difficulties as well. In the past the size of the market and competition from Indian producers have been sizeable problems, but these will be alleviated by the new roads and the successful conclusion of the Treaty. There are plans for a fairly rapid expansion of the industrial sector in the short run. There are obvious possibilities, in import substitution, particularly, e.g. food processing, textiles, etc. A great deal will depend on the appropriate- ness of government policy which has been as much of a hindrance as a help to industrial growth in the past. 13. In the long run, forestry and tourism offer Nepal- 's most promising hopes for earning convertible foreign exchange. Little use has been made of forest resources, but the stage is now set with the initiation of land-use planning and proposed plywood and pulp and paper factories. Nepal's forests are being depleted due to the ANNEX II Page 5 pressue on land in the hill areas. Migrants from the hills are moving down into the Terai, and particularly into regions from which malaria has only recently been eradicated or control begun. These squatters burn down forest areas indiscriminately and cultivate the land. This movement cannot be stopped in the short run, but it can be controlled. The government is taking steps to identify the most promising stands of timber and restrict settlement to other areas. Resettlement schemes are being organized for this group but cannot at present keep pace with the influx. In the longer run, economic opportunities other than subsistence farming will have to be developed in the hill areas to meet their needs. 14. The potential which exists for increased production and the availability of infrastructure will not in themselves be sufficient unless there is evidence of the organizational and administrative capacity which can make this a reality. In the past, public investment in Nepal has not been constrained by lack of resources, either external or internal. The limits of trained manpower and organizational efficiency have been reached well before those of various donors. This is no longer true. It appears that in the next few years Nepal will face severe internal resource constraints. In addition there is some anticipation that the volume of foreign assistance (about $25 million per annum), may level off rather than expand, relative to the Plan forecasts. The proportion of tax revenue to GDP in Nepal is very low indeed. This is understandable given the very high proportion of subsistence agriculture in total income and the sheer inaccessibility of much of the country for tax purposes. The government is heavily dependent on trade for its revenues and the recent trade difficulties led to a revenue shortfall in the region of 25 percent as compared to the budget estimates. While this is only temporary, some basic restructuring of the tax system will probably be necessary if the kind of resources which will be needed to match foreign aid and compensate for its failure to increase, are to be generated. 15. Perhaps the most striking and promising development in the Nepalese economy, indeed in the society as a whole, has been the increase in administrative capacity at all levels during the past few years. This has taken some time to show itself, and it would be idle to pretend that there is not still a long way to go, but overall the achievements go far beyond what one would have predicted only a short while ago. At that stage the administration seemed to depend on a limited number of very able Secretaries who received little support. The planning process was weak, and implementation weaker still. There was no co-ordination, and departments often seemed far more interested in stopping others from doing anything than doing anything themselves. This is changing. Planning cells have been set up in most of the operating ministries which have provided a broader focus to the work of the departments. A large number of younger people with local or foreign training have come into the ministries and departments with new ideas and a receptivity to change. A surprisingly ANNEX II Page 6 effective administrative training centre has been set up in a very short time. The need for co-ordination has been realized and if it still remains largely informal there is evidence that a sense of priorities is beginning to pervade the government. The projects are being concentrated around the roads, and major emphasis is on utilizing the capacity which has been created. 16. One of the most important areas of change is the education sector. Nepal has only about 10 percent of its population literate. It is difficult to see development in the long run without a major improvement in education. On the other hand, it is already beginning to show signs of all the problems of an education system which is geared to producing university degrees for white-collar workers -- usually in government. A firm stand is being taken with the introduction of a new education plan which aims at a considerable expansion of education but along vocational lines with major emphasis on agriculture. In addition, the plan will also aim at remedying the serious deficiencies in middle-level manage- ment. The three elements in this, firstly the education system, secondly the manpower needs of the country, and thirdly the whole structure of expectations and incentives, particularly in the public service, remain, however, to be tied together. It is hoped that this will be done and the plan effectively implemented. 17. All this should serve to illustrate that Nepal's economy has reached a critical stage at which the capacity to do things, both physical and administrative, has begun to measure up to the economic potential. That developments will now take place is far from being a foregone conclusion. A number of difficult steps will need to be taken and the quality and confidence which the administration has built up in the past few years will need to be maintained and improved. Nevertheless, given this, there is room for guarded optimism about the economic outlook. ANNEX II Page 7 NEPAL COUNTRY DATA Total Cultivated as Area: (in square km.) % of Total 14o,790 12.0 Population: (1969/70 mid-year estimate) Total Density per Square km. 11.0 million (approx.) 80 Rate of Growth, current estimate: 2 percent (approx.) Political Status: Kingdam, member of U.N. Gross Domestic Product at Current Market Prices: (1968/69 estimate US$750 - 850 million Rate of Growth: 2 percent (approx.) Gross Domestic Product per Capita: (1968/69) US$70 - 75 Gross Domestic Product by Branch: Agriculture (including forestry) about 75% (average of 1965/66 - 1968/69) Money and Credit: (NRs. Million) Fiscal Year 1970/71 % Change Ended Mid-July July 1970 - July 1971 Total Money Supply 864 + 12.6 ANNEX II Page 8 Government Budgetary Positions: (NRs. Million) 1965/66 1970/71 % Change Total Revenues 217 452 +108.3 Total Expenditure 428 819 + 91.4 Deficit -211 -377 + 73.9 Foreign Grant Aid by Donor Countries: (NRs. Million) 1965/66 1969/70 % Chane 178.5 251.2 + 40.7 Of which: India 93.0 139.5 + 50.0 U.S.A. 57.9 43.7 - 24.5 China (People's Republic) 16.2 48.5 + 199.4 U.S.S.R. 5.0 4.5 - 10.0 Others 6.5 15.0 + 137.6 External Public Debt: (US$ Million) As of January 1971 Total external public debt repayable in foreign currency (including undisbursed) 15.00 Total annual debt service (repayable in foreign currency) - 1971 0.23 Of which: Amortization 0.18 Interest 0.05 Debt service as % of export earnings (in convertible currency) - 1968/69 2.1 Balance of Payments: (US$ Million) (Transactions in convertible , Change foreign currency) 1965/66 1969/70 1965/66 - 1969/70 Exports 4.2 10.8 + 157.1 Other receipts 8.8. 17.0 + 93.2 Imports 2.4 12.9 + 437.5 Other payments 3.1 5.8 + 61.3 Current account surplus +7.5 + 9.1 + 21.3 ANNEX II Page 9 Commodity concentration of exports to third 1962/63 - 1968/69 countries (Raw jute and jute goods as % Annual Average of total exports) 63.2% Gold and foreign exchange reserves (mid March 1971) US$93.8 Million Of which: Indian Rupees $20.3 Million Currency Equivalents: 1 Nepalese Rupee = US$0.099 1 US Dollar = NRs. 10.125 January 24, 1972 ANNEX III Page 1 PROJECT AND CREDIT SUIMARY Borrower: The Kingdom of Nepal. Beneficiaries: The Hotel de 1'Annapurna Pvt. Ltd. and the Yak and Yeti Hotel Pvt. Ltd. Amount: Various currencies equivalent to US$64.2 million. Purpose: To cover the foreign exchange costs of (a) extending, modernizing, and refurbishing the 90 room Hotel de l'Annapurna into a hotel having 241 rooms, and (b) building a new hotel of 120 rooms, to be called the Yak & Yeti Hotel. Amortization: In 50 years, including a 10 year grace period, through semi-annual installments of ½ of 1% from August 1, 1982 through February 1, 1992, and of 139 from August 1, 1992 through February 1, 2022. Service charge: 3/4 of 1% per annum. Relending terms: The Nepal Industrial Development Corporation, acting on behalf of the Borrower, will make the proceeds of the credit available to the sponsors at 7 per annum for 24 years including 4 years grace period; a commitment charge of ¼ of 1% being levied on the undisbursed balance. A provision for the acceleration of repayments of the sub-loans requires that dividends in excess of 20% of the par value of the shares in any year be matched by an equal and simultaneous payment towards prepayment of the loan. SUB-PROJECT SUMMARIES (a) Hotel de l'Annapurna Economic Rate of Return: 19.9% Cost of project: US$ million Local Foreign Total 1. Construction: Siteworks 0.02 0.06 0.08 Building 0.70 1.62 2.32 Professional services 0.07 0.09 0.16 2. Equipment 0.16 0.49 0.65 3. Project management 0.03 - 0.03 ANNEX III Page 2 US$ million Local Foreign Total 4. Technical assistance 0.04 0.04 5. Pre-opening expenses 0.01 0.01 Total before contingencies 0.98 2.31 3.29 6. Contingencies Price 0.12 0.31 0.43 Physical 0.10 0.26 0.36 Total 1.20 2.88 4.08 Interest during construction 0.40 - 0.40 Financing: US$ milion IDA credit 2.88 NIDC 0.40 Sponsor's equity 1.20 Financial rate of return: 10.6% Procurement arrangements: International competitive bidding for construc- tion, furniture, and equipment. Construction period: October 1972 to September 1974. Estimated disbursements: (US$ million) FYI 1972 FY 1973 FY 1974 FY 1975 0.05 1.08 1.40 0.35 Consultants, technical Consultant architect and engineers for design assistance and supervision: and supervision of construction; technical assistance during construction under terms of a management agreement with Hilton International. Supervision on behalf of the Borrower by tech- nical staff of the Nepal Industrial Development Corporation. ANNEX IIT Page73 (b) Yak and Yeti Hotel Economic rate of return: 20.8% Cost of project: US$ million Local Foreign Total 1. Construction: Siteworks 0.02 0.06 0.08 Building 0.34 0.74 1.08 Professional services 0.03 0.04 0.07 2. Equipment 0.05 0.20 0.25 3. Land for access oad 0.03 - 0.03 4. Project management 0.01 - 0.01 5. Pre-opening expenses 0.03 0.03 0.48 1.07 1.55 6. Contingencies Price 0.07 0.14 0.21 Physical 0.05 0.11 0.16 Total 0.60 1.32 1.92 Interest during construction 0.18 - 0.18 Financing: US$ million IDA credit 1.32 NIDC 0.18 Sponsor's equity 0.60 Financial rate of return: 9.6% Procurement arrangements: International competitive bidding for construction, furniture, and equipment. ANNEX III Pag e 4 Construction period: October 1972 to April 1974 Estimated disbursements: (US$ million) FY 1972 FY 1973 FY 1974 FY 1975 0.06 0.66 0.48 0.12 Consultants and Supervision: Consultant architect and engineers for design and construction. Supervision on behalf of the Borrower by technical staff of the Nepal Industrial Development Corporation. MAP 1 NEPAL POTENTIAL FOR TOURISM SOURCE OR H B GURUNG - Air route £ - Surface route existing -S 30 -o- - fce route proposed 30-. -- B idge A rfield STOL field existing *T | B E T STOL field proposed T IlB E T i-tle, C Guest house Toirist service Archeological site Tempe Mountain cilmbed S Mountan incLimbed CID Viewsite Wild life Ionga ni.. International boundary L * £0 L0 00 no0 ANAPRA ...KILOMETERS S0 25 50 75 |Do MILES <Pokharä* E A Dong -o Ne e8 C EVEREST or &EE MAP Ti tt mn 80 0 n.. aSIKKIPM C~ H~- I 14 T i b e CIN iN D l A Si 5 r RaYu lIN DlADk r S 'BURMA0 anåapur¯ - El r 6 c] hadruour Bay nr &engal -\aoa CEYLCN 82° 84 8se MA9CH 197. 꺼2 MAP 3 NE PAL I L T K _ý_T H l E.,kJ C. i T y' ige (,nder c-sfruction) 9 E-f,ýg -dý ]G T,ibh...n Uni-sity R.,e,ý W.tý, lesello'r 0 Kfl-l- BALAJIU 112 1 [NDUSTRIAL l \,ESTATES mil, 7 - - - - - - - - - - - 6 y IJ D', TRIBHUBAN AIRP ORT 0 10 c. 4V OF _z 4ý. - - - - - - J L U OCTOBýR1971 IBRD-3648