Nepal - Arun Access Road Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16037 STATUS OF IMPLEMENTATION AT CREDIT CANCELLATION NOTE (IN LIEU PROJECT COMPLETION NOTE) NEPAL ARUN ACCESS ROAD PROJECT (CREDIT 2029-NEP) September 27, 1996 Energy and Infrastructure Operations Division South Asia Country Department II This document has a restricted distribution and may be used by recipients only in the perfornance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY AND EQUIVALENTS 1 Nepalese Rupee (NR) 100 Nepalese Paise Fiscal Year Averages: US$ 1.00 (FY84) 15.6 NRs US$ 1.00 (FY86) = 19.9 NRs US$ 1.00 (FY88) = 22.8 NRs US$ 1.00 (FY90) = 28.4 NRs US$ 1.00 (FY92) = 40.2 NRs US$ 1.00 (FY94) 47.9 NRs MEASURES 1 kilovolt (kV) = 1,000 volts 1 kilowatt (kW) = 1,000 watts 1 megawatt (MW) = 1,000 kilowatts 1 gigawatt-hour = 1,000,000 kilowatt-hours ABBREVIATIONS ADB - Asian Development Bank DCA - Development Credit Agreement DoR - Department of Roads EdF - Electricit6 de France International HEP - Hydro Electric Project 1HMG - His Majesty's Government KfW - Kreditanstalt fiur Wiederaufbau LI - Lahmeyer International LCGEP- Least-Cost Generation Expansion Plan LRMC - Long Run Marginal Cost MWR - Ministry of Water Resources NEA - Nepal Electricity Authority NEC - Nepal Electricity Corporation PAF - Project Affected Family PoE - Panel of Experts T&T - Trade and Transit FISCAL YEAR Ending July 15  FOR OFFICIAL USE ONLY NEPAL ARUN ACCESS ROAD PROJECT (CREDIT 2029-NEP) STATUS OF IMPLEMENTATION AT CREDIT CANCELLATION NOTE (IN LIEU OF PROJECT COMPLETION NOTE) Table of Contents PREFACE..i EVALUATION SUMMARY..ii The Project and its Objectives ...........................................................iii Project Outcome and Sustainability of Benefits ................................................... Findings and Lessons ............................................................i I: PROJECT ASSESSMENT A. Evaluation of Project Objectives ...........................................................1 I B. Achievement of Objectives ..................... ......................................3 C. Major Factors Affecting the Project ........................................................... 3 D. Project Sustainability ...........................................................7 E. IDA Performance ............................................................7 F. Borrower Performance .... ............ ... .............. ............ ............ 19 G. Cofinanciers Performance .......................................................... 10 H. Assessment of Outcome . ........................................ 10 I. Lessons . 10 II. STATISTICAL TABLES Table 1: Summary of Assessments ......................................... ................. 12 Table 2: Related Bank Loans/Credits .......................................................... 13 Table 3: Project Timetable .......................................................... 14 Table 4: Loan/Credit Disbursements; Cumulative (Estimated and Actual) .......... 15 Table 5: Key Indicators for Project Implementation ........................................... 15 Table 6: Key Indicators for Project Operation ..... ........................................... 15 Table 7A: Project Costs .......................................................... 16 Table 7B: Project Financing .................... ...................................... 16 Table 8: Economic Costs and Benefits .......................................................... 17 Table 9: Status of Legal Covenants ........................................................... 18 Table 10: Compliance with Operational Manual Statements ............. ................. 20 Table I 1: Bank Resources; Staff Inputs ........................................................... 20 Table 12: Bank Resources; Missions .......................................................... 21 Appendix A: Review of the Arun III Hydroelectric Package by the Inspection Panel .......................................................... 22 Appendix B: Excerpts from the News release dated August 3, 1995 ............. ................. 23 IThis 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 wihout World Bank authorization.  I  NEPAL ARUN ACCESS ROAD PROJECT (CREDIT 2029-NEP) STATUS OF IMPLEMENTATION AT CREDIT CANCELLATION NOTE (IN LIEU OF PROJECT COMPLETION NOTE) Preface This is the Status of Implementation at Credit Cancellation Note for the Arun Access Road Project (The Project) in Nepal for which Credit 2029-NEP in the amount of SDR 24.4 million was approved on May 30, 1989 and made effective on November 1, 1989. The Borrower was the Kingdom of Nepal and the Beneficiaries were the Nepal Electricity Authority (NEA), Ministry of Water Resources, and the Department of Roads (DOR), Ministry of Works and Transport. This Note was prepared in lieu of the Project Completion Note to inform the Executive Directors of IDA, of the status of the project at the time Credit 2029-NEP was canceled. The Project was not implemented. Because bid prices were about double the appraisal estimates, the bidding process in 1989-90 was not completed and implementation of the project was delayed. During the 1990-94 period, His Majesty's Government (HMG) and IDA agreed to combine this Project with the then proposed Arun III Hydroelectric Project (Arun III HEP). Amendments to the Development Credit Agreement (DCA) which would have restructured the Project were negotiated in June 1994, and included as part of the Arun III HEP Package' circulated to the Executive Directors of IDA on August 31, 1994.2 On November 2, 1994, four persons claiming to be affected by the Project included in the Arun III HEP Package filed with the Inspection Panel (IP) a Request for Inspection for the Arun III HEP Package. With its decision of February 2, 1995, the Executive Directors authorized the Inspection Panel to investigate the allegations that the Arun III HEP Package was not in compliance with the Operational Directives OD 4.01 (Environmental Assessment), OD 4.20 (Indigenous People), and OD 4.30 (Involuntary Settlement).3 I The Arun m HEP Package includes the draft Development Credit Agreement and Project Agreement for the Arun III HEP and amendments to the DCA of August 8, 1989 for the Arun Access Road Project (Cr.2029-NEP), negotiated between HMG and IDA in June 1994. 2 The project documents were distributed to the Executive Directors with the Memorandum dated August 31, 1994, of the Vice President and Secretary, well in advance so that the Executive Directors and their authorities would have adequate time for their review of this complex project package. The Board consideration of the project package was to be held on a date to be determined later, after all the statutory requirements and Board Presentation conditions were fulfilled. 3 The policy context for resettlement in this project was OMS 2.33, Social Issues Associated with Involuntary Resettlement in Bank-Financed Projects, since the succeeding OD 4.30 on Involuntary Resettlement was not issued until June 29, 1990.  - 11 - Following the Panel's findings given in their report dated June 21, 1995, and following further review, on August 1, 1995, IDA's Management decided not to proceed with plans to support the Arun III HEP Package. The credit was closed on October 25, 1995, (effective as of July 31, 1995) compared to the original closing date of July 31, 1994. No disbursement was made from the proceeds of the Credit. Therefore, the whole amount of the credit was canceled as of July 31, 1995. None of the objectives of the project was achieved. At the time IDA's Management canceled the Credit, an outstanding issue concerned the return of the unused land along the "hill alignment" to its original owners. In its letter dated June 18, 1996, IDA requested HMG to inform IDA of the actions taken or to be taken: (i) on the manner in which the unused land would be returned and (ii) for an equitable rehabilitation of the PAFs whose land had been (in Tumlingtar and Basantapur) and would be possessed. This Note was prepared by Mr. Argun Ceyhan (Task Manager from December 1, 1994, until cancellation of the Credit on October 25, 1995) of the Energy and Infrastructure Operations Division of Country Department II, South Asia Regional Office (SA2EI). It was reviewed by Mr. Jean-Francois Bauer, Division Chief, SA2EI and Mrs. Kazuko Uchimura, Project Adviser, SA2. It is based on material in the project file and the Inspection Panel's report, dated June 21, 1995.  - ill - NEPAL ARUN ACCESS ROAD PROJECT (CREDIT 2029-NEP) STATUS OF IMPLEMENTATION AT CREDIT CANCELLATION NOTE (IN LIEU OF PROJECT COMPLETION NOTE) Evaluation Summary The Project and its Objectives i. The Arun Access Road Project (the Project) consisted mainly of the access road to the dam and power station sites of the future Arun III Hydroelectric Project (Arun III HEP). Although it was an integral part of the hydroelectric scheme on which its justification depended, it was proposed and approved as a separate project to allow the construction of works of the Arun III HEP to begin in early 1992. ii. The main objectives of the Project were to provide access for personnel, materials and equipment to the Arun III HEP construction site by the provision of an all-weather road for vehicles; strengthen the capabilities of HMG to administer rehabilitation of families affected by the project and manage environmental protection and conservation measures; and reduce the cost of transporting goods between the agricultural but food deficient areas of the Koshi Hills and the more industrialized and productive Terai. Project Outcome and Sustainability of Benefits iii. The Project was not proceeded with. The Credit was kept in abeyance and later canceled. Thus none of the Project's objectives were achieved. Findings and Lessons iv. The basic findings and lessons for future projects are: a) IDA should avoid self-imposed pressure to accelerate project processing when preparation is not complete, with justifications such as: 'the borrower needs this project as soon as possible" or 'We should not miss the next construction season" (para. 21); b) IDA should not ignore the dynamics of the political and economic environment in the country and the region where it is located --- the excessively long project preparation time for the Arun III HEP (preparations began in the mid-1980s and the Staff Appraisal Report - SAR - for this Project was not completed until August 29, 1994) assumed a static world. Political and economic changes in Nepal and relations between Nepal and India were almost ignored over a period of about ten years, as if everything was static. While the Credit was kept in abeyance a lot of changes occurred, including IDA's requirements in  - v - assessing environmental and social impacts of a project and implementation of mitigatory measures. Furthermore, at approval the Trade and Transit Treaty between Nepal and India had expired and had not been renewed. Despite this, IDA approved the Project, let the procurement go ahead and used the trade and transit issue as an incomplete explanation for the financial gap which appeared due to bid prices which were considerably higher than the estimate (para. 9); c) IDA's appraisal of the access road as a 'toad" project and not as a component of the Arun hydroelectric project, led to incomplete decisions regarding the alignment route. Early recognition and evaluation by IDA of the Arun Access Road Project as a component within a larger hydroelectric project might have avoided later changes in the Project's objectives and the alignment change (paras. 2-5, 11); and d) IDA should insist on compliance with its policies and operational directives, where these are applicable, even in the case of a Project for which implementation of the investment component never began and the Credit is kept in abeyance --- IDA failed to observe in substance its own policy requirements for appraisal (the project was submitted to the Board without an adequate plan to deal with indirect effects on the people), and for supervision and consequently failed to enforce the covenants of the Development Credit Agreement (para. 21). v. Other important findings and lessons for future projects are summarized as follows: d) for this kind of project which is based on one large contract, the project should be presented to the Board only after the bids have been received (para. 9); e) IDA should ensure the ownership by the borrower of any project it approves -- the Borrower owned very strongly the larger project (in this case the Arun III dam and hydroelectric project and its access road, as a whole) but did not hesitate to change the access road alignment (that was the Project for which IDA approved Cr. 2029-NEP) in the expectation of completing the larger project one year earlier (paras. 10 and 22); f) focusing on a larger project (as in (e) above) IDA should not neglect the impact on the people affected by a smaller project (in this case the access road), neither should it neglect to properly monitor the actions by the borrower and implementing agency (land acquisition along the 'hill alignment" while the borrower intended to change the road to the "valley alignment") -- (para. 14); g) IDA should make sure that the borrower establishes procedures to ensure that it does not proceed with land acquisition without pre-emptive and mitigative  v_ measures in hand and should seek to ensure that the fate of project affected families does not remain uncertain for a long time (paras. 14 and 21); and h) to enable implementation of pre-emptive environmental and social measures, IDA should require that institutional capacity needs are strengthened at the initiation of the project and are not left to the future and, ensure that responsibility for the implementation of a project itself and of the associated environment and social mitigation measures is not fragmented (para. 21).   NEPAL ARUN ACCESS ROAD PROJECT (CREDIT 2029-NEP) STATUS OF IMPLEMENTATION AT CREDIT CANCELLATION NOTE (IN LIEU OF PROJECT COMPLETION NOTE) I. Project Assessment A. Evaluation of Project Objectives I. Background. The Arun Access Road Project (the Project) consisted mainly of the access road to the dam and power station sites of the future Arun III Hydroelectric Project (HEP). Although it was an integral part of the hydroelectric scheme on which its justification depended,' it was proposed and approved as a separate project to allow the construction works of the Arun III HEP to begin in early 1992. The Arun III HEP was first identified, as a 402 MW project, with six units of 67 MW each, under the Master Plan Study of the Development of the Kosi River Basin which was carried out in 1983-1985, under the aegis of the Japanese International Cooperation Agency (JICA). This study planned for the access road to begin from the nearest road terminal at the town of Hile in the hills, go down to the Arun River valley and then follow the valley all the way to the powerhouse and dam sites This route was later designated as the 'Valley alignment." Pre-feasibility and feasibility studies for Arun III HEP were conducted in 1985 and 1987. In 1987, His Majesty's Government (HMG) had its consultants undertake the Least Cost Generation Expansion Plan (LCGEP) with the objective to determine the least cost generation option for the integrated power system of Nepal and the benchmark dates for implementation decisions. The study concluded that Arun III HEP, to be built in two phases of 201 MW each, was the least cost addition to Nepal's power system after the Marsyangdi Hydroelectric Project then under construction.2 If arrangements with India could be concluded within about 3 years, it was recommended to proceed to implement the Arun III HEP as a single stage 402 MW scheme. HMG presented a 402 MW project for donors' assistance in the Nepal Power Subsector Meeting in May 1988 in Paris, and the proposal was endorsed by the donors. In 1989, in view of the India-Nepal trade and transit situation, the HMG initiated the concept of developing the project in two stages of four units (total: 268 MW) and two units (total: 134 MW), respectively. 2. Road Alignment. The selection of the alignment of the road was a difficult issue to resolve in the history of the project. There is no 'hatural" route for a road in a watershed with such steep hills and unstable topography. When the Project was presented to the Board of Executive Directors of IDA, the 'hill alignment" chosen represented a shift from the plan laid out by the above JICA study. The change was based on a study for which the terms of reference (TOR), prepared by the Department of Roads (DOR) of HMG, included, inter alia, non-power Although the Project consisted of the construction of a road, its justification was based on an economic analysis carried out on the entire NEA power investment program (Part II; Table 8). 2 This project of 69 MW was being constructed under IDA Cr. 1478-NEP, with cofinancing from Kreditanstalt fur Wiederaufbau (KfW) of Germany, Asian Development Bank, Saudi Fund for Development and Kuwait Fund for Arab Economic Development. The previous largest project was the Kulekhani Hydroelectric Project (60 MW) constructed under IDA Cr. 600-NEP and 600-1-NEP.  - 2 - based development in the Arun Valley.3 Access to the hydropower sites was put in third priority, although the road was justified due to the hydro development. 3. The 'hill alignment" and the reasons for its selection were described in the Staff Appraisal Report4 (SAR) as follow: 'The route selected is passing through mountainous terrain and follows the ridges wherever possible, descending only for crossings of the Piluwa Khola near Chainpur, the Sabhaya Khola at Tumlingtar and at the sites of the powerhouse, adit and dam. The streams and rivers of this area are unpredictable and can be very violent and destructive. They cause excessive steeping of the valley sides and consequently instability of the slopes. The route has therefore been chosen to avoid rivers as far as possible, and to follow the contours closely in order to minimize the quantities of cut and fill, and to reduce negative environmental impact." (para. 3.08 of SAR). 4. HMG's Strategy for the Construction of Arun III HEP. At the time, HMG was following a two-pronged approach. While upon approval of the IDA credit the road would be built by the DOR, NEA would have their consultants complete the detailed design of the hydroelectric project. It was expected that the Arun III HEP would be presented for Board approval a few years later, when the access road was nearing completion. 5. Project Objectives. The main objectives of the Project were to provide access for personnel, materials and equipment to the Arun III hydroelectric construction site by the provision of an all-weather road for vehicles; strengthen the capabilities of HMG to administer rehabilitation of families affected by the project and manage environmental protection and conservation measures;5 and reduce the cost of transporting goods between the agricultural but food deficient areas of the Koshi Hills and the more industrialized and productive Terai. However, the economic evaluation of the Project did not include any reference to the last objective, i.e., lower transport costs to the Koshi Hills. 6. Project Description. To achieve these objectives, the Project comprised: (a) the construction of a gravel-surfaced road, 192 km long, from near the end of the existing Dharan-Basantapur road to the Arun III hydroelectric construction site, following an alignment beginning at Basantapur, and following the ridges wherever possible, through Mamling - Kharang - Tumlingtar - Khandbari and Chyanguti to the sites of the powerhouse, adit and intake works at the dam located near Num. This route was later designated as the 'hill alignment" The project would also 3 The TOR stated that the construction of the road would be expected to: (a) facilitate the modernization of the agricultural and mining sectors; (b) break down the isolation of the area so that health, education and social interaction might be improved; and, (c) provide access to sites along the Arun River which have potential for hydroelectric development. 4 Staff Appraisal Report, dated May 12, 1989 (Report No. 7461-NEP). 5 The policy context for resettlement in this project was OMS 2.33, Social Issues associated with Involuntary Resettlement in Bank-Financed Projects, since the succeeding OD 4.30 on Involuntary Resettlement was not issued until June 29, 1990. The initial environmental studies for the "hill alignment" were carried out by the Department of Roads (DOR) of HMG in 1987, before either OD 4.00 Annex A: Enviromnental Assessment (October 31, 1989) or OD 4.01: Environmental Assessment (October 3, 1991) were in effect.  include a 6 km spur road from Kharang to the commercial and administrative center of Chainpur.6 (b) the construction of a road maintenance depot at Tumlingtar to support maintenance of the project road and monitor maintenance operations carried out by contractors; (c) rehabilitation of the families adversely affected by the construction of the access road through implementation of a Land Acquisition, Compensation, and Rehabilitation Plan (ACRP); and, (d) consultancy services for: (i) construction supervision; (ii) the training of DOR maintenance personnel; and (iii) the preparation and implementation supervision of ACRP.7 B. Achievement of Objectives 7. As described in the following paragraphs, the project was not implemented, and the Credit was kept in abeyance. Thus none of the above objectives was achieved. C. Major Factors Affecting the Project 8. The major factors which affected the outcome of the project were: (i) decision by IDA to present the Project to the Board before receiving the bids and while a trade and transit dispute between Nepal and India had arisen (para. 9); (ii) decisions by HMG and IDA's and other donors' agreements on: (1) changing the alignment of the road from the 'hill alignment" to the 'Valley alignment" and (2) merging the road project with the hydroelectric project (paras. 10 and 11); and (iii) the fate of the project affected families (PAFs) along the 'hill alignment" and investigations by the Inspection Panel (IP - paras. 12-15). 9. Trade and Transit Difficulties and Bids. The Trade and Transit (T&T) Treaty between Nepal and India had expired in March 1989 and difficulties had arisen in its renewal. Cr. 2029- NEP was approved on May 30, 1989, while difficulties between the two countries had not been resolved. In addition, the bids for the construction of the road had not been received. Bids were received on June 13, 1989, just two weeks after approval of the Project. Out of the eight prospective contractors who had bought the bid documents, only two submitted bids. These bids were respectively almost the double and triple of the estimates.8 The documents in the Project 6 Even the "hill aligmnent" given in para. 3.08 of the SAR, was realigned to pass through Chainpur. Hence the access road was to pass through Mamling-Piluwa-Chainpur-Kharang-Tumlingtar-Khandbari and Chyanguti. 7 The ACRP given in Annex 8 of the SAR covered only the first year of construction (approximately 70 km) and was subject to revision, as may be required, to respond to the needs of the remaining families according to the principles of the Guidelines upon which the ACRP was based. Consultants services for the preparation of ACRP for the following years was included in the Project. 8 Estimates for the construction of the road, given in the SAR (Report No.7461-NEP, dated May 12, 1989), were US$33.2 million (including physical and price escalation). The lowest bid was approximately US$60 million and the other bid was  - 4 - files do not show how much was due to the T&T dispute and how much to poor cost estimates or small number of bids or limited history of contract construction in Nepal or perceived risks. The cost estimates were based on those prepared by Consultants in 1987. The SAR stated that the estimates were adjusted for mid-1989 prices. HrMG and IDA concluded that the procurement process had been substantially affected by the above T&T dispute, and agreed that the bids were non-responsive. Both of the bids were rejected. IDA informed HMG that its procurement procedures required rebidding, but HMG's view was that rebidding could not take place until the economic situation disrupted by the trade and transit dispute was clarified.9 In addition, the unexpectedly high prices had created a financing problem, since Cr. 2029-NEP was too small to finance all the required road works. 10. Change in HMG's Strategy for the Construction of Arun III HEP. While HMG and IDA discussed the fate of the bids and possible financing sources, IDA required that the Arun III HEP be revalidated in LCGEP. The latter was done under the 1990 Update of LCGEP. During all this, the time advantage of building the access road separately was lost. Then HMG decided to combine the access road with the hydroelectric component. The Government assessed the advantages of such a merger, as shorter construction period, easier and less costlier management and less contractual complications. This decision was later endorsed by the Panel of Experts (POE) for the hydroelectric project established under OMS 3.80 for the Safety of Dams.'0 IDA and other major donors" subsequently agreed. It was also agreed that the most economic approach was to construct the access road and the major civil works of the hydroelectric scheme in one contract."2 Amendments to the Development Credit Agreement for Cr. 2029-NEP would be negotiated with the Arun III HEP and would be presented to IDA's Board of Executive Directors as one package (the Arun III HEP Package). In the meantime, proceeds of Cr. 2029- NEP would be kept in abeyance. Funds of the Credit were expected to be used to fund the advance payment for the contractor of the above mentioned main civil works. 11. Changes in Development Phases of Arun III HEP and in the Access Road Alignment. Since its inclusion into NEA's investment program, the construction of a large hydro project such as Arun III HEP caused concerns with regard to its impact on Nepal's macroeconomy, especially with regard to its crowding out social sector projects. In 1992, in response to such concerns, the LCGEP was once more updated. Within this study, HMG decided to restudy the 1989 project concept of building the Arun III HEP in phases of 268 MW and 134 MW (para. 1). HMG also approximately US$90 million. A detailed review of the bids carried out by representatives of 1MG (including staff from the DOR and NEA), IDA and the consultants, concluded that the higher bid corresponded to the most realistic price for undertaking the road project. A third bid was not accepted because it was not delivered in a sealed condition and was submitted two minutes after the latest time for submission. 9 The Trade and Transit Treaty between Nepal and India was put into operation in July 1990. 10 OMS 3.80 - Safety of Dams; dated June 1977. 11 Including representatives of the Asian Development Bank (ADB), the Governments of Germany and Japan, and Kf1W. 12 The combined civil works lot would include the construction of the access road (122 km along the "valley alignment"), NEA camp facilities, the dam (68 m high, 155 m long concrete gravity dam with a three-gate overflow spillway); power intake (with four openings and three integrated sluiceways), two descending basins (17 m wide, 28 m high and 110 m long, each), a flushing tunnel, a headrace tunnel of about 12 km long (500 m long with 7.5 m concrete finished diameter, and about 11.4 km long with 5.6 m concrete finished diameter), and a surge tank (95 m high, with 15.9 diameter). Another major part of the decision was to replace, for cost reasons, the two headrace tunnels of 4.6 m diameter, by one headrace tunnel of approximately 7.5 m diameter. The construction of a tunnel of such a large diameter in the Himalayas would cause big concerns in later years.  decided to have NEA's consultants check whether building the access road through the 'valley alignment," which was initially proposed under the JICA study (para. 1), would save time for the construction of the hydroelectric project. This time, TOR for the review, which were prepared by NEA, considered speedy access to the hydro site as first priority. The study, which included an environmental assessment of the valley access road, concluded that the Arun III HEP be developed in two phases of 201 MW each (back to the original 1987 concept - para 1). With regard to the access road, it concluded that a road following the 'Valley alignment" would enable the hydroelectric project to be commissioned one year earlier than the 'hill alignment." The results were endorsed by HMG and later by the POE. Specifically in comparing the two road alignments, the POE endorsed the choice of the 122 km "valley alignment" for both technical and environmental reasons. IDA and the major donors, meeting in Kathmandu in October 1992, agreed with the HMG's decision and POE's endorsement. The most important reason for the shift of access road alignment from valley to hill and back to valley route was the change in the priority of the objectives of the road construction. In the TOR of the DOR upon which Cr. 2029- NEP was based (para. 2), the access to the hydropower sites was put in third priority (footnote 3), while in the TOR of NEA the first priority was to open the access to the hydropower sites as soon as possible. In the SAR for the Arun III HEP (dated August 29, 1994), there was no mention how the disadvantages of the 'valley alignment" given in the 1989 SAR were going to be addressed and resolved (para. 3). 12. Appraisal of the Arun III HEP. The appraisal of the Arun III HEP was carried out in September-October 1993, by a joint IDA/ADB/KfW mission. Negotiations between HMG/NEA and IDA were held in June 1994, and the SAR and other project documents'3 were distributed to the Executive Directors with the Memorandum dated August 31, 1994, of the Vice President and Secretary, well in advance so that the Executive Directors and their authorities would have adequate time for their review of this complex project package. The Board consideration of the project package was to be held on a date to be determined later, after all the statutory requirements and Board Presentation conditions were fulfilled. 13. Acquisition of Land Along the 'Hill Alignment" - Resettlement Issues. By the time the decision to change the alignment was finalized in October 1992, DOR had already acquired the land upon which the road (along the 'hill alignment') and the maintenance depot were going to be built. The total land involved was 310 ha, owned by 1,635 families - the number of Project Affected Families (PAFs). The amount of compensation for each family was determined in accordance with the ACRP (para 6.d). Compensations were paid to 1,352 PAFs. Despite advance notification to the villagers to collect the compensation amount, as required by the approved guidelines for acquisition of land and distribution of compensation, 283 families did not claim the compensation money. HMG stated that the compensation amount was deposited in an escrow account. When it was decided that the 'hill" road was not going to be built, HMG stopped the legal transfer of the titles to the Government. At that time, transfers for about 15-20 percent of the plots were already completed. In Tumlingtar, only 4.77 ha of land, owned by 14 PAFs was physically possessed. Since Cr. 2029-NEP was kept in abeyance and the construction of the access road had not actually begun, a large majority of PAFs neither vacated their property 13 The package included amnendments to the DCA, negotiated in June 1994, which would have restructured the Project.  - 6 - nor received compensation for trees, crops or hardship, nor rehabilitation grants.14 But they had lost the title to their land.5 14. In summary, HMG had acquired along the 'hill alignment," 310 ha of land from 1,635 PAFs of which only 4.77 ha was physically possessed from 14 PAFs. Now that the road was going to be built along the 'Valley alignment," the issue of how HMG was going to use the acquired land or how it was going to return it to the original owners arose. HMG's commitment was to build two limited spur roads on part of the hill alignment, but at some distant time in the future. 16 At the time the Arun III HEP package was circulated to the Executive Directors of IDA on August 3 1, 1994, the issue was still unresolved (para. 12). 15. Investigations by the Inspection Panel. On November 2, 1994, four persons claiming to be affected"7 by the Project included in the Arun III HEP Package filed with the Inspection Panel (IP) a Request for Inspection for the said Package. The chronology of the various actions during IP's investigations is given in Appendix A. Upon receiving the Management's Response dated November 22, 1994, IP conducted its preliminary review and recommended on December 16, 1994, to IDA's Executive Directors, 'that apparent violations of policy do exist that require further investigation." On February 2, 1995, the Executive Directors authorized IP to conduct its investigations. IP's final report was issued to the President of IDA on June 21, 1995. In its final report, IP summarized the impact of HMG's decision, and IDA's and other donors' agreement, to shift the alignment to the river valley, as follows: 'The impact [of this decision] on the former property owners was catastrophic in a number of ways: (1) they had lost title to their land to the Government; (2) the cash compensation they had received for title had been largely spent in non-productive purposes; (3) if the Government were to attempt to follow the letter of the law, by offering the land to original owners at the price they were paid, they would not have the cash to regain the land, and it would be auctioned to others; and (4) the road would not go through their communities, thereby depriving them of immediate alternative income opportunities." (IP Report - Annex 1; para 53). The Panel also stated that the Requesters had been adversely affected by uncertainties over the last half decade as the result of the change in access road alignment and their future was still uncertain, and approximately 1,400 other families were in a similar situation. 16. HMG's Position for Returning the Land Acquired. The position outlined in HMG's letter dated April 5, 1995, addressed to IDA, about how the land acquired along the 'hill alignment" would be used or returned to their original owners, was not satisfactory to IDA. There may have been lack of communication in conveying IDA's conclusion to HMG. The IDA mission in April 14 It is noted that the ACRP guideline, approved by HMG and agreed with IDA, did not require to give rehabilitation grants unless the property was physically possessed. Later HMG began the construction of a road portion from Basantapur towards Chainpur. The area actually possessed there and the number of PAFs upon whose land this portion of road is built, is not known to IDA. 16 From Tumlingtar to Chaipur and Khandbari. 17 It is understood from the Inspection Panel's Report that their land had been acquired but not physically possessed.  - 7 - 1995, made it clear that a time-bound plan for those farmers and landowners had to be developed as part of the Arun III HEP Package. In early July 1995, HMG requested IDA to send a task force to develop the said plan by the end of July 1995. HMG viewed this proposal as part of its position in its letter of April 5, 1995. The request was received while the Management was preparing the Management Response to IP's final report, as required by IP's Operating Procedures of August 1994. 17. IDA's Decision to Withdraw from the Arun III HEP Package. Upon receipt of IP's above mentioned final report, IDA's Management carried out another review and decided not to proceed with plans to support the Arun III HEP Package. Instead, HMG and IDA's Management agreed to work to develop alternative approaches to meeting Nepal's needs for electric power. The reason for IDA's decision was that IDA's Management had concluded that it was not possible to complete the Arun III HiEP by the very tight commissioning date which 11MG had posed and IDA had appraised. The requirement to implement the Arun III HEP and in particular the Arun Valley access road in a socially and environmentally sustainable manner, the need for strengthening of Nepalese implementation capacity, as well as the issues which had arisen in securing the necessary co-financing were the main reasons for concluding that the Arun III HEP could not realistically come on stream at least two or three -- and more likely -- four to five years later than was projected in the appraisal report. Excerpts from the News Release dated August 3, 1995, are given in Appendix B. Cr. 2029-NEP was closed on October 25, 1995 (effective as of July 31, 1995) and the whole amount was canceled. At the time IDA's Management canceled the Credit, how the unused land along the 'hill alignment" was going to be returned had not been resolved (paras. 13, 14 and 16). 18. Obligation of Nepal under the Development Credit Agreement. Because no disbursement was made under the Credit and there are no outstanding service charges or commitment charges, the Legal Department determined that the obligations of Nepal under the Development Credit Agreement dated August 8, 1989, for Cr. 2029-NEP for the Arun Access Road have terminated. The above outstanding issue about how the unused land along the 'hill alignment" is going to be returned to the original owners remains to be addressed by Nepal. In its letter dated June 18, 1996, IDA requested HMG to inform IDA of the actions taken or to be taken: (i) on the manner in which the unused land would be returned; and, (ii) for an equitable rehabilitation of the PAFs whose land had been (in Tumlingtar and Basantapur) and would be possessed. D. Project Sustainability 19. The project was not proceeded with. The Credit was kept in abeyance and later canceled. This section is not relevant. E. IDA Performance 20. The performance of IDA from project identification through preparation assistance to the borrower, and appraisal and supervision was deficient. Identification. The access road was an integral part of Arun III HEP and its justification was based on an economic analysis carried out on the entire power investment program of NEA. Therefore, the project which was really identified was the Arun III HEP. In view of the  reasons for IDA's decision in August 1995 (para. 17 and Appendix B), one cannot conclude that the identification was satisfactory. * Preparation Assistance. IDA did not assist HMG in preparing a project in line with the basic objective upon which the Project (the access road) was economically justified; that is access to the hydropower sites. IDA agreed with the TOR for the study of alternative alignments prepared by DOR, which put access to hydropower sites in third (lowest) priority. Thus, IDA's performance in assisting the Borrower prepare the Project was far less than satisfactory. * Appraisal. IDA's appraisal cost estimates proved to be unrealistic. Against an appraisal estimate of US$33.2 million, the bid which was about US$90 million was found by HMG, IDA and HMG' s consultants to be the most realistic price for undertaking the Project (para. 9 and footnote 8). * At the time IDA approved the Credit, the Trade and Transit Treaty between Nepal and India had expired and had not been renewed. If IDA had waited only two weeks before approving the Credit, it would have known that its appraised cost estimates were not realistic. * On May 30, 1989, IDA approved the Access Road Project. However, in a letter to HMG dated June 27, 1989, i.e., 28 days after it had approved the Project, IDA informed the Government of the uncertainties regarding the Arun III HEP on the grounds of insufficient information of the project's access road costs and construction schedule. * The IP commented that the Project was submitted to the Board without an adequate plan to deal with indirect effects of the Project (para. 21). * IDA did not ensure borrower ownership of the project it approved. The Project IDA approved was the 'hill alignment" of the access road. The Borrower owned very strongly the hydroelectric project and did not hesitate to change the access road alignment in the expectation that the new road along the valley alignment would allow the construction of the hydroelectric project one year earlier. * Therefore, IDA's performance during appraisal was deficient. * Supervision. The IP commented that after the decision to merge the road project with the hydroelectric project, Cr. 2029-NEP was essentially forgotten and IDA failed to observe in substance the policy requirements for supervision of resettlement components and consequently failed to enforce covenants in the DCA (para. 21). * IDA failed to note, through its supervision of the Project, problems relating to land acquisition along the hill route. If IDA had addressed the repercussions of the alignment change earlier, it could have taken actions to improve the situation. Overall supervision was deficient. * Overall Performance. Looking back to IDA's performance in its agreement in the change of the 'hill alignment" for which Cr. 2029-NEP was approved to the 'valley alignment" one cannot conclude that IDA was committed to the Project it had approved.  -9 - 21. The comments of the Inspection Panel about IDA's actions and performance are summarized as follows: - 'The project went to vote in the Board without an adequate plan to deal with indirect effects of the project,"8 (IP Report - Annex 1; para. 44). - In the rush to obtain funds from a particular fiscal year, the SAR and related documents had to be circulated to the Board with approval from the borrowing government still pending (IP Report - Annex 1; para. 42). - Staff interviews have made it clear that [after the decision to merge the road project with the hydroelectric project], the Credit 2029-NEP was essentially forgotten, other than the legaVfinancial questions of how to restructure it so the money never disbursed could be devoted to the new, much larger Arun III project ([P Report - Annex 1; para. 50). - The attention of IDA shifted to the valley route, leaving [the people along the hill alignment, affected by the Project] forgotten in an outlying area ([P Report - Annex 1; para. 53). - IDA failed to observe in substance the policy requirements for supervision of resettlement components and consequently failed to enforce covenants in the [Development] Credit Agreement (IP Report; para. 14). - IDA let the borrower proceed to land acquisition without pre-emptive and mitigative measures in hand (IP Report - Annex 1; para. 44). - To implement pre-emptive environmental and social measures institutional capacity needs to be strengthened now (IP Report; para. 25). - Responsibility for implementation appears to be fragmented. Direct mitigation measures are to be taken by one executing agency while indirect and induced ones are to be taken by another. The design does not yet provide for a single chain of command or integrated organizational structure in the Arun Valley to oversee implementation (IP Report; para 25)." F. Borrower Performance 22. The borrower did not own the Project, i.e., the 'hill alignment." While it was discussing the change in the alignment with IDA and the other donors, DOR acquired land and paid compensation - but did not complete the transfer of the titles to HMG (para. 12). Therefore, results lead to the conclusion that a close cooperation between DOR and NEA did not exist. The 18 The policy context for resettlement in this project was OMS 2.33, Social Issues Associated with Involuntary Resettlement in Bank-Financed Projects, since the succeeding OD 4.30 on Involuntary Resettlement was not issued until June 29, 1990. The Panel noted that in the substantial core of the new OD, there was in fact little change from OMS 2.33. In spirit and major substance, the OD and the OMS were close to each other. The Inspection Panel stated: "the provisions of OMS 2.33 are quite explicit about the need for extensive early planning for resettlement issues. Whenever people are to be displaced, the borrowing government must have a resettlement plan, however brief or extended. The plan must be completed before negotiations can take place." (IP Report - Annex l; paras. 30 and 31).  - 10- borrower did not pay timely attention to resolving the uncertainty of PAFs. It is noted once again, that the borrower's ownership was for the hydroelectric project, not for the access road ("hill alignment") for which the Borrower had signed with IDA a Development Credit Agreement. G. Cofinanciers' Performance 23. There was no cofinancier under the Project. Prospective cofinanciers for the Arun III HEP19 followed the status of implementation/non-implementation of the project during many donors meetings held between 1990-1994. H. Assessment of Outcome 24. The outcome is that this project was not properly prepared, appraised, negotiated and supervised. Review of the documents in the Project Files, reveal a syndrome which could be called as 'Nepal needs this project as soon as possible" or 'We should not miss the next construction season" Despite many uncertainties (bids not received by Board approval, uncertainties about the borrower's ownership, uncertainties about the definition of the Project - hill or valley alignment), HMG and IDA went ahead with credit approval and effectiveness. IDA left the project in its project portfolio although it was known that for a few years at least, the Project, as approved by the Board, was not going to be implemented. 1. Findings and Lessons 25. The basic findings and lessons for future projects are: a) IDA should avoid self-imposed pressure to accelerate project processing when preparation is not complete, with justifications such as: 'the borrower needs this project as soon as possible" or 'We should not miss the next construction season" (para. 21); b) IDA should not ignore the dynamics of the political and economic environment in the country and the region where it is located --- the excessively long project preparation time for the Arun III HEP (preparations began in the mid-1980s and the Staff Appraisal Report - SAR - for this project was not completed until August 29, 1994) assumed a static world. Political and economic changes in Nepal and relations between Nepal and India were almost ignored over a period of about ten years, as if everything was static. While the Project was kept in abeyance a lot of changes occurred, including IDA's requirements in assessing environmental and social impacts of a project and implementation of mitigatory measures. Furthermore, at approval the Trade and Transit Treaty between Nepal and India had expired and had not been renewed. Despite this, IDA approved the Project, let the procurement go ahead and used the trade and transit issue as an incomplete explanation for financial gap which appeared due to bid prices which were considerably higher than the estimate (para. 9); c) IDA's appraisal of the access road as a 'toad" project and not as a component of the Arun hydroelectric project, led to incomplete decisions regarding the alignment route. Early recognition and evaluation by IDA of the Arun Access Road Project as a 19 Governments of Japan, France, Sweden and Finland, KfW and UNDP.  - 11 - component within a larger hydroelectric project might have avoided later changes in the Project's objectives and the alignment change (paras. 2-5, 11); and d) IDA should insist on compliance with its policies and operational directives, where these are applicable, even in the case of a project for which implementation of the investment component never began and the credit is kept in abeyance --- IDA failed to observe in substance its own policy requirements for appraisal (the project was submitted to the Board without an adequate plan to deal with indirect effects on the people), and for supervision and, consequently failed to enforce the covenants of the Development Credit Agreement (para. 21). 26. Other important findings and lessons for future projects are summarized as follows: d) for this kind of project which is based on one large contract, the project should be presented to the Board only after the bids have been received (para. 9); e) IDA should ensure the ownership by the borrower of any project it approves -- the Borrower owned very strongly the larger project (in this case the Arun III dam and hydroelectric project and its access road, as a whole) but did not hesitate to change the access road alignment (that was the Project for which IDA approved Cr. 2029-NEP) in the expectation of completing the larger project one year earlier (paras. 10 and 22); f) focusing on a larger project (as in (e) above) IDA should not neglect the impact on the people affected by a smaller project (in this case the access road), neither should it neglect to properly monitor the actions by the borrower and implementing agency (land acquisition along the 'hill alignment" while the borrower intended to change the road to the "valley alignment") -- (para. 14); g) IDA should make sure that the borrower establishes procedures to ensure that it does not proceed with land acquisition without pre-emptive and mitigative measures in hand and should seek to ensure that the fate of project affected families does not remain uncertain for a long time (paras. 14 and 21); and h) to enable implementation of pre-emptive environmental and social measures, IDA should require that institutional capacity needs are strengthened at the initiation of the project and are not left to the future and, ensure that responsibility for the implementation of a project itself and of the associated environment and social mitigation measures is not fragmented (para. 21).  - 12 - II. Statistical Tables Table 1: Summary of Assessments A Achievement of Obiectives Substantial Partial Neeligible Deficient Not Applicable Macroeconomic policies