Nepal - Third Bhairawa Lumbini Groundwater Irrigation Project

Document of The World Bank FOR OFFICIAL USE ONLY CZ~2- Z/ Z- - _ vAf Repot No. P-5274-NEP MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 36.6 MILLION TO THE KINGDOM OF NEPAL FOR A BHAIRAW'A LUMBINI GROUNDWATER IRRIGATION III PROJECT MAY 7, 1990 1 ~ ~ ~ ~ ~ This document bas a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank autborization.  CURREC - EQUIALENT UNITS (Deember 1989) NR 1 US$0.035 US$1 - NRs 28.6 WEIGRTS AND HEASES 1 hectare (ha) - 2.47 acres (ac) 1 metric ton (ton) - 2,205 pounds (lbs) ABBEViEiTIONS DOI - Department of Irrigation OTW - Deep Tubevell EUR - Economic Rate of Return HKGN - His Majesty's Government of Nepal ILC - Irrigation 'Line of Credit' (Pilot Project) H14GN FISCAL YEAR July 16 - July 15  FOR OFFICIAL USE ONLY NEPAL BHAIRAWA LUMBINI GROUNDWATER IRRIGATION III PROJECT Credit and Project Sunmary Borrower: Kingdom of Nepal Amount: SDR36.6 million (US$47.2 million equivalent). Terms: Star.dard 'DA terms, with 40 years maturity. Financing Plan: US$ million IDA 47.2 Government 5.0 Farmers 0.5 Total 52.7 Economic Rate of Return: 24Z Staff Appraisal Report: Report No. 8411-NEP Map- IBRD 22124 This document has a restricted distribution and may be used by recipients only in the performance |of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.|  - 1 - MEMORANDUM AND RECOHMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTCRS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A BHAIRAWA LUMBINI GROUNDWATER IRRIGATION III PROJECT 1. The following memorandum and recommendation on a proposed development credit to the Kingdom of Nepal for SDR 36.6 million (US$47.2 million) is submitted for approval. The proposed credit would be on standard IDA terms, with 40 years maturity, and would hlelp finance the Bhairawa Lumbini Groundwater Irrigation III Project. 2. Background. With farm production and related activities comprising more than 60 percent of GDP and engaging about 90 percent of the labor force, agriculture is the dominant element in Nepal's economic development. Irrigation development is critical to Nepal's future agricultural growth, and both His Majesty's Government of Nepal (HMGN) and IDA place a high priority on expansion and improvement of irrigation. The Government's current irrigation policy emphasizes completion of ongoing schemes and new projects with short gestation periods and high rates of return, such as grcundwater development by tubewells. Recent government policy initiatives, with full IDA support, have added a focus on irrigation sector lending development based on (a) a 'program approach in contrast to the traditional project aprroach, (b) promotion of farmer participation and farmer-managed irrigation schemes, (c) strengthening of WI to prepare for and implement the sector program approach and farmer participation on a nationwide basis, and (d) close Government and donor coordination to assure uniformity of support for the program. 3. IDA has supported nine major irrigation projects in Nepal of which four, including the Bhairawa Lumbini Groundwater Irrigation II Project (Cr. 1316-NEP, closing date October 31, 1990), are ongoing. The latter is among IDA's most successful irrigation projects in the country. A major lesson from past IDA-financeu irrigation projects is the need for more active farmer participation. This was emphasized in the Project Performance Audit Report (Report No. 5261) for the first Bhairawa Lumbini Groundwater Irrigation Project (Cr. 654-NEP), along with the need for proper operation and maintenance of deep tubewells. IDA is also the executing agency for two UNDP- financed projects. Of these, the Irrigation Sector Support Project is designed to develop DOI's capacity to plan and manage the sector program in preparation for a possible IDA-financed Irrigation Sector Project. The recently completed Irrigation Master Plan, also funded by UNDP and executed by the Bank, provides a sectoral investment strategy to implement sectoral policies, including the sector program. The Bank's recent Agricultural Sector Review for Nepal examined the sectoral strategy in the context of the country's overall agricultural program and recommended, inter alia, that groundwater development be given a high priority over the next decade. 4. Rationale for IDA involvement. IDA has been instrumental in increasing government emphasis on quick yielding irrigation investments such as groundwater, promoting technical innovation in groundwater irrigation. and shifting from supply-side to demand-oriented irrigation development based on close involvement of farmers. IDA has also played a primary leadership role  - 2 - in helping design and establish the Government's new irrigation sector program policy and strategy based on direct farmer group participation and responsibility. Although the principle of farmer participation is now stated government policy, many DOI staff have yet to become part of the new institutional consciousness, and continued IDA support will be required to ensure that these changes become irreversible and accepted as part of DOI's institu:tional culture. 5. IDA support is needed specifically to further extend and enhance the technical innovations for deep tubewells developed with IDA assistance under the ongoing Bhairawa Lumbini Groundwater Irrigation Project (Stages I and I), and to assist in privatization of the Bhairawa Lumbini deep tubewell (DTW) technology model. That model, although successful, has been based on extensive public sector involvement. The proposed IDA project would help develop and install a more sustainable model based on increased farmer group participation and responsibility for DTW management, operation, and maintenance. In addition, IDA support is also needed to further develop the sector program model which was initiated as a pilot project component under the ongoing IDA-financed Mahakali Irrigation II Project (Cr. 1924-NEP). 6. Project Objectives. The objectives of the proposed project are: (a) to raise agricultural production and farm incomes through expansion of irrigated area; (b) to promote privatization and farmer participation in irrigation development to reduce Government costs and improve operation and maintenance of irrigation schemes; and (c) to strengthen irrigation institutions, particularly DOI, as needed to implement HHGN's new sector program approach to irrigation. Project Description. The proposed project consists of: (a) Stage III of the ongoing Bhairawa Lumbini Groundwater Project, which would include construction of 73 new DTWs serving some 8,600 ha of net command in the Stage III area, completion works for 16 Stage II DTWs, and modification of 64 Stage I DTWs to accommodate farmer management; (b) expansion of the irrigation line of credit' (ILC) pilot project started under Mahakali II to include additional pilot subprojects in the Western, Mid Western and Far Western Regions; and (c) institutional development support for DOI which would, inter alia, strengthen DOI district and regional offices, support development of DOI's new Planning, Design and Research Division, strengthen DOI internal administration and management functions, and support a farmer participatory joint management pilot program in selected DOI schemes. Under the ILC component, prospective subprojects would be selected and eligible expenditures financed according to agreed criteria and procedures until the IDA funds under the "line of credit' were exhausted. The proposed credit would finance the Government's contribution to subproject costs. 8. The project would be implemented over eight years. Estimated project costs total US$52.7 million equivalent, with a foreign exchange component of US$24.8 million (47 percent). A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement, disbursements and the projected disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank operations in Nepal are shown in Schedules C and D, respectively. A map showing project areas is also attached (IBRD 22124). The Staff Appraisal Report, No. 8411-NEP dated May 7, 1990, is being distributed separately.  - 3 - 9. Agreed Actions. Conditions of credit effectiveness are that the Government would: (a) appoint an international project consultant firm for Bhairawa Lumbini Stage III; (b) establish in the Bhairawa Lumbini Project a suitable Farmer Organization Unit; and (c) establish a suitable ILC Groundwater Unit and prepare its terms of reference satisfactory to IDA. Conditions of disbursement for ILC subprojec;s aret (a) establishment of the concerned Regional Appraisal Committees; and (b) approval by the Ministry of Water Resources for each subproject or cluster of subprojects exceeding NRs 1.0 million in cost, and by the DOI Director General for all other subprojects. In addition, the Government has also agreed tot (a) implement plans to constitute statutory Water User Associations at Bhairawa Lumbini DTWs; (b) achieve full recovery of operation and maintenance costs at Bhairawa Lumbini; (c) select, prepare, approve and implement ILC subprojects according to principles and criteria agreed with IDA; (d) ensure uniformity of approach for all irrigation schemes of the type financed under ILC; (e) ensure that the concerned DOI regional, district and field offices meet agreed prequali- fication criteria; and (f) establish an Irrigation Management Division in DOI. 10. Benefits. The economic rate of return (ERR) for the Bhairawa Lumbini Stage III component of the project is 24 percent. The ILC expansion component was excluded from the project ERR calculation bpcause it is a pilot project and most of the specific subprojects to be financed would be identified and selected only after project implementation begins. However, estimated ERRs for representative ILC subproject models average 24 percent and range from 18-35 percent. The Bhairawa Lumbini Stage III component would generate incremental food production valued at some NRs 280 million (US$9.6 million) annually at full development, and would create about 700,000 person- days of incremental on-farm employment annually. In addition, availability of safe drinking water at project tubewells would improve the health of the population of the project area and would reduce drudgery for women who often have to carry drinking water from long distances. The ILC pilot project expansion would assist farmer-managed schemes that are individually too small for normal project funding by a donor. Benefits of ILC Investments would therefore reach some of the country's poorest areas not normally covered by donor-assisted projects, and would increase agricultural output, food availability, and on-farm employment for the farm families involved. Benefits of the Institutional Development Support component would include improved administrative, management and implementation capacity in DOI, and establishment of an effective farmer organization program within the agency. All components of the project would promote local initiative and participation, and slupport privatization and farmer management of irrigation. 11. Env-ronmental Impact. The project is not expected to have an adverse environmental impact. For the Bhairawa Lumbini component, groundwater recharge appears fully adequate to support the developments proposed, and drainage facilities would be installed simultaneously with the irrigation systems to control potential water logging. Preparation of each Irrigation Line of Credit pilot subproject would include an environmental assessment and recommendations for appropriate environmental protection measures to be carried out during implementation. An ecological benefit of the proposed subprojects is the substitution of permanent headworks for traditional brushwood and cobble structures. Presently, the latter are frequently destroyed in annual floods, and their rebuilding requires brushwood and small trees, often in large quantities, with consequent cutting of secondary forest growth in nearby areas.  -4- 12. Risks. Project risks are moderate. They concern mainly: (a) institutional capacity of the Department of Irrigation to implement Bhairawa Lumbini Stage III following sector program principles, in particular, with regard to farmer participation; and (b) the impact of the trade and transit impasse, mainly with regard to fuel supplies. Item (a) has been dealt with in project design by requiring DOI to form a farmer organization unit in the Bhairawa Lumbini Project Authority, and by making establishment by farmers of a statutory Water User Association a prerequisite for consttzction of each DTW. With regard to item (b), it is understood that steps to resolve the issue are now under way. The net impact of these risks, if unabated, would be mainly to slow implementation. . 13. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber B. Conable President Attachments Washington, D.C. May 7, 1990  -5- Schedule A NEPAL BHAIRAWA LUMBINI GROUNDWATER IRRIGATION III PROJECT ESTIMATED COSTS AND FINANCING PLAN Local Foreign Total