Nepal - Second Mahakali Irrigation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 18396 IMPLEMENTATION COMPLETION REPORT NEPAL MAHAKALI IRRIGATION II PROJECT (CREDIT NUMBER 1924-NEP) September 8, 1998 Rural Development Sector Unit South Asia Region 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.  CURRENCY EQUIVALENTS US$ 1.0: NRs 25.2 in 1988 (at appraisal), NRs 28.3 in 1989, NRs 33.3 in 1990, NRs 39.9 in 1991, NRs 45.7 in 1992, NRs 49.3 in 1993, NRs 49.9 in 1994, NRs 55.2 in 1995,. NRs 55.5 in 1996, NRs 60.2 in 1997, NRs 62.0 in 1998 (at ICR) WEIGHTS AND MEASURES I meter (m) = 3.28 feet I kilometer (km) = 0.62 miles I hectare (ha) = 2.47 acres =1.50 bighas I million cubic meter (Mm3) = 810 acre-feet or 35.3 Mft3 I cubic meter per second (m3/s) = 35.31 cubic foot per second (cfs) 1 metric ton = 2,205 pounds FISCAL YEAR OF BORROWER July 16 - July 15 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank ADBN Agricultural Development Bank of Nepal BLGWP Bhairawa Lumbini Groundwater Project DADO District Agricultural Development Officer DCA Development Credit Agreement DOA Department of Agriculture DIO District Irrigation Office DOI Department of Irrigation DTW Deep tubewells ERR Economic Rate of Return FIA Farmers Irrigation Associations FMIS Farmer-Managed Irrigation Systems HMGN His Majesty's Government of Nepal ICB International Competitive Bidding ICR Implementation Completion Report IDA International Development Association IDS Institutional Development Support ILC Irrigation Line of Credit LCB Local Competitive Bidding M & E Monitoring & Evaluation MIP Mahakali Irrigation Project NPV Net Present Value NISP Nepal Irrigation Sector Project O&M Operation and Maintenance PCR Project Completion Report POP Project Operation Plan RAD Regional Agricultural Directorate SAR Staff Appraisal Report SOE Statement of Expenditure UNDP United Nations Development Program WUA Water Users' Association WUGs Water Users' Groups GLOSSARY cumec cubic meter per second kharif Wet Season (June to October) rabi Dry Season (November to February) Vice President - Mieko Nishimizu Country Director - Hans Rothenbuhler Sector Managers - Michael Baxter and Ridwan Ali Task Team Leader - Ohn Myint  FOR OFFICIAL USE ONLY NEPAL MAHAKALI IRRIGATION II PROJECT (Credit 1924-IN) Table of Contents PREFACE ...........................................................i EVALUATION SUMMARY .......................................................... ii PART I: PROJECT IMPLEMENTATION ASSESSMENT ...........................................................1 A. Project Objectives ....................................................1 B. Achievement of Objectives ....................................................2 C. Major Factors Affecting the Project ....................................................5 D. Project Sustainability ....................................................6 E. Bank Perfornance ....................................................7 F. Borrower Performance ....................................................8 G. Assessment of Outcome ....................................................8 H. Future Operation ....................................................9 1. Key Lessons Learned ....................................................9 PART II: STATISTICAL TABLES Table 1. Summary of Assessments .................................................... 1 1 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 ................................................... 16 Table 6. Key Indicators for Project Operation ................................................... 17 Table 7. Studies Included in the Project .................................................... 18 Table 8A. Project Costs .................................................... 19 Table 8B. Project Financing ................................................... 20 Table 9. Economic Costs and Benefits ................................................... 21 Table 10. Status of Legal Covenants ................................................... 22 Table 11. Compliance with Operational Manual Statements .............................................. 28 Table 12. Bank Resources: Staff Inputs .................................................... 29 Table 13. Bank Resources: Missions .................................................... 30 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.  APPENDICES I Mission's Aide-Memoire ............................. 32 2 Financial and Economic Re-evaluation .............................. 46 3 Borrower's Evaluation .............................. (55 MAPS IBRD Map No. 19998 IBRD Map No. 20715  i IMPLEMENTATION COMPLETION REPORT NEPAL MAHAKALI IRRIGATION II PROJECT (Credit 1924-NEP) Preface This is the Implementation Completion Report (ICR) for the Mahakali Irrigation II Project in Nepal for which Credit 1924-NEP in the amount of SDR 29.9 million was approved on 15 June 1988 and made effective on 18 November 1988. The Credit was closed on 31 March 1998, one year later than originally planned. Final disbursement took place on May 7, 1998 and the Credit was fully disbursed. The ICR was prepared by a Bank mission' led by Ohn Myint,Task Team Leader, SASRD, and reviewed by Michael Baxter, Manager, SMU, SASRD. The Borrower's evaluation is appended to the ICR. Preparation of this ICR was begun during the Bank's final supervision mission in February/March 1998. The report is based on material in the project file, interviews with HMGN officials and project staff, farmer beneficiaries, and Bank staff involved with the project. The Borrower contributed to the preparation of the ICR by preparing his own project completion report and project operation plan and contributing views and comments reflected in both the mission's aide memoire and the ICR. Messrs./Mme. Ohn Myint (Mission Leader), T. Estoque (Operations Analyst), S. Ranjitkar (Irrigation Specialist), R.C. Mishra (Agriculturist), Benson Ateng (Economist), Kiran Gautam (Team Assistant) and Robert Paterson (Irrigation Engineer, FAO/CP).  IMPLEMENTATION COMPLETION REPORT NEPAL MAHAKALI IRRIGATION II PROJECT (Credit Number 1924-NEP) Evaluation Summary Introduction 1. The Mahakali Irrigation II Project (MIP-II) consisted of four components: (a) a second phase of IDA support for construction of irrigation and drainage facilities to serve an additional 6,800 ha under the extended Mahakali Irrigation Project area; (b) an Irrigation Line of Credit (ILC) pilot project to test the Government's new participatory Irrigation Policy (IP) in construction of new and rehabilitation of existing small and medium farmer-managed irrigation schemes (FMIS) using surface and groundwater on about 9,000 ha in total; (c) emergency Flood Rehabilitation (FR) works to repair flood-damaged irrigation and river control facilities in 17 districts in the Eastern, Central and Western regions; and (d) Institutional Development Support to help Department of Irrigation (DOI) strengthen its capacity for development and implementation of the Irrigation Sector. Project Objectives and Works 2. The project objectives were to: (a) raise agricultural production and farm incomes through expansion of irrigation areas and improved management of a public irrigation system, construction and rehabilitation of private farmer-managed irrigation schemes, and restoration of irrigation schemes and river protection works damaged by August 1987 flooding; (b) improve O&M and cost recovery in the irrigation systems through, inter alia, increased farmer participation in project cycle; and (c) strengthen the irrigation subsector to implement HMGN's new sector program approach to irrigation management. 3. The project was to finance the following works: Mahakali Stage II Main component, which includes upgrading and extension of the irrigation and drainage and flood protection facilities to a new irrigation area of 6,800 ha, and strengthening of agricultural extension services, training for farmers, staff, and Water Users' Associations (WUAs). Irrigation Line of Credit component was a pilot on 9000 ha FMIS to establish methods to be adopted in a future irrigation sector project in which farmer beneficiaries were to contribute to capital costs and operate and manage sub-projects after completion. The Flood Rehabilitation component was for the repair and replacement of canal embankments and related structures and associated protective and remedial river works damaged by the 1987 monsoon floods. The Institutional Development Support to DOI component was to assist in developing the institutional capability to support a long-term irrigation sector program.  iii Implementation Experience and Results 4. Implementation of the Mahakali Project Stage II component suffered a series of delays. The start of construction was delayed by about one and a half years due to the trade and transit disagreement between India and Nepal in 1989-90. Another delay was cause by HMGN's termination of the ICB 2 contract in 1993 due to contractor's delinquency in the third year of the project. A new contract (ICB 3) was concluded to complete the unfinished works only after one year due to a court case filed by the ICB 2 contractor against HMGN objecting to the termination. Even then, the ICB 3 contract did not include construction of tertiaries, which, by a change in the Government irrigation policy introduced in 1992, required farmer participation in the construction works of tertiary canals by LCB contractors. The award of LCB contracts for construction of tertiary canals was delayed due to tardiness in reaching an agreement between the Mahakali Irrigation Development Board and the farmer beneficiaries on the extent of beneficiary contribution in the construction of tertiaries. Despite these delays, construction was substantially completed within the one-year extension of the credit. 5. The original scope of the Irrigation Line of Credit component (ILC) was changed in 1991 from implementation of all types of sub-projects to implementation of only new surface schemes. Other types of ILC sub-projects were to be financed under the Bhairawa-Lumbini Groundwater Irrigation III Project (BLGWP) (Credit 2144-NEP). Thus, the initial target of developing sub-projects on over 9,000 ha in total to be operated and managed by farmers groups was reduced to some 7,900 ha. Not all the ILC sub-projects were completed on time. Most of the new schemes in the hills operated by Central DOI management had cost and time over-runs. This is reflected in the wide range of ERRs in the evaluated completed .sub-projects. Frequent changes of project managers adversely affected project implementation. 6. The Flood Rehabilitation Component was successfully completed on time. In all 17 districts, flood damages were repaired on about 100,000 ha of irrigated and flood protection land which are now providing normal services. 7. The Institutional Development Support Component (IDS) provided technical assistance to the development and testing of the principles and criteria of the Irrigation Policy of 1992. Mobilization of the technical assistance team for ILC implementation was delayed for about two years beyond 1992-93, during the transition period from UNDP to IDA support. The computerized Management Information System (MIS) at both the Central and the Western Regional Directorate offices has not become fully functional. A number of DOI district irrigation office buildings including the Central DOI building were completed. 8. Project Cost. The project cost in Nepali Rupees NRs 2025.3 million is about 83% greater than estimated at appraisal (NRs 1106.7 million). But in US dollars, the estimated project cost (US$ 46.4 million) is about 99% of the appraisal estimate. In terms of components, the costs of the Mahakali Stage II works have decreased by 13% in dollars but the ILC works have increased by 38% in dollars over the SAR estimate. The cost of IDS of NRs 107.0 million are 37% less in  iv dollars than estimated and the flood rehabilitation works are 35% less in dollars than estimates. The Nepali Rupee parity to US Dollar changed from 25.4 to 62.0 during the course of the project. The IDA Credit of SDR 29.9 million was fully disbursed on May 7, 1998. 9. The main project's partial impact is apparent from the increase in irrigable area and cropping intensity in the developed area, objectives achieved even prior to credit closure. The project was supplying irrigation to new 2,000 ha in Stage II in its last year. Results of the 1977 agricultural baseline survey showed that an increase in cropping intensity of 51% over the rainfed conditions (to 171%) had been achieved in the project area due to partial irrigation by shallow tubewells. Farrners' participation in tertiary construction, though slow at the start, has increased to cover about 70 tertiary canals completed, out of 250. As regards water charges in Stage I area, collection has always been satisfactory at, 80% of the amount due with a rate of Rs. 200/ha An increase in yields and production of main crops (paddy and wheat) was also observed in the partially irrigated areas. Based on the satisfactory achievements of the Stage I and a number of Stage II areas, further yield increases are expected when the project becomes fully operational by year 2000. 10. Economic Rate of Return. (ERR). The ERR for Stage II as a stand-alone project based on actual project expenditure and re-estimated benefits at full development in the year 2000 shows an ERR of 11.5% as compared with the SAR estimate of 16%. Thus, at an opportunity cost of capital of about 12% the project just about breaks even in terms of economic viability. Underestimation of incremental future cropping intensity for yields, and changes in cropping patterns in the "without project" situation, and a longer construction period, account for the lower re-estimated ERR. In the case of the ILC sub-projects, cropping intensity and crop yields have increased in all cases, but again due to prolonged period of construction, ERR for a number of new schemes ranged from 0- 9%, and rehabilitation sub-projects ranged from 9-22%, as compared with the SAR estimate of 19- 73%. In the case of ILC groundwater cluster sub-projects, the ERR varied from 16-18% compared to SAR estimate of 18-23%. Farmers' contribution in general varied from 1-19% with an average of about 8% in all the ILC sub-projects. The benefits of emergency flood rehabilitation were noted but not estimated. Because of its institutional nature, the benefits derived from the IDS component were not estimated. Project Sustainability and Key Factors to Achieve Objectives 11. Mahakali Irrigation Project, Stage II. In general, the construction quality is satisfactory and no particular problems with maintenance are anticipated in near future. It is expected that the existing O&M organization will be expanded to take over the O&M of combined Stages I and II. Adequate budget has been provided for O&M of Stage I works. The policy of HMGN is that the budget for O&M should be NRs 500/ha/year plus establishment costs after turn-over of tertiaries and this is considered to be satisfactory for a mature project. Project staff would maintain the main system as well as secondary canals down to the turnouts to tertiary canals. Maintenance below this level is the responsibility of the WUGs. Although the current proportion of turn-over of tertiary canals to WUGs is only about 20% in Stage II, it is  v anticipated that all the tertiary canals will be fully turned-over by the year 2000. Overall, MIP II is likely to be sustainable, provided all management transfer program are completed in time. 12. Water charges collection have been initiated in about 20% of the Stage II area which have been turnedover to WUGs. The results shows that 81% of the amount assessed (at a rate of NRs 200/ha/year) has been collected. The rate for 1997/98 onwards has been doubled to NRs 400/ha/year and the result has yet to be known. 13. Environmental Protection. As provided for under the project, two guard-posts in the Suklaphanta Forest Reserve were completed. Ramped animal crossings in the main canal banks have been provided. Impact of construction on the Reserved Forest has been monitored. 14. Irrigation Line of Credit. The sustainability of FMIS developed under the project depends on DIOs providing timely assistance with those aspects of maintenance and repairs with which the WUAs cannot cope due to the complexity and magnitude of repair works. However, in accordance with the guidelines provided under the Irrigation Policy, DOI will have to differentiate between genuine need and WUAs'undue dependence on DOI. More training will be required for both DOI staff and the farmers in the case of hill irrigation where landslides frequently occur. 15. Institutional Development Support (IDS). The sustainability of the computerized management information system (MIS) at the central and regional offices, buildings, and other infrastructure depend upon sufficient O&M funding and capacity to support the systems. Within the available scarce resources, HMGN should prioritize O&M expenditure to cover expenditure of existing investments. The adequacy of the current level of O&M funding and the need for a revision of water charges necessary to cover full O&M would be studied under the newly- approved Nepal Irrigation Sector Project (Credit 3009-NEP). Summary of Findings and Future Operations 16. Findings. The outcome of the project can be rated as satisfactory and the project is likely to be sustainable. The overall conclusion of the project experience is that due to the introduction of the new Irrigation Policy, physical and institutional development aspects of the project had been tested on a trial-and-error basis in the course of implementation. The replication of formation of WUAs, legalization and turning-over of completed tertiary units to beneficiaries can be regarded as a good start for the project sustainability at the tailend and a notable achievement. 17. Farmers understanding of the new rotation irrigation system is still limited. During the dry season when the system is supplied with a limited amount of water the project area needs to be divided into 2 to 3 zones of rotational operations. The improvement activities introduced in the system in relation to operation, training of staff and farmers to understand the new mode of operation, proper maintenance of the system, turnover of part of the system to farmers, and collection of water charges to maintain the system properly, are all inter-linked and need continued support by the Government.  vi 18. Irrigation Line of Credit. Future operation will be entirely the responsibility of the WUAs. Improvements to the systems made during the project will have made operation in many ways easier: less repair works in wet season for previously temporary weirs which have been replaced by more permanent structures; less interruption to supply due to damage of canals by cross drainage where new aqueducts have been built. More reliable water supplies will enable planned operation to be effectively implemented. Nevertheless, the involvement of DOI is still likely to be needed for repairs by major land slides if the systems are to be sustained. Key Lessons Learned 19. Lessons for Future Projects. The main lessons learnt from the project are: * Participation of beneficiaries in the design, construction and implementation, and O&M from the outset is very important, especially in large public irrigation system, where available water resources have to be shared among many beneficiaries in an organized manner; c The success of operation and sustainability of infrastructure depend not only on physical quality of the structures but also on beneficiaries' understanding of the system's operation, contribution to investment and commitment to O&M. The design adopted for a public irrigation systems must be flexible, simple and acceptable by small farmer communities; - Service charges to cover full O&M costs of public utilities after improvement must be imposed and must be considered as a national policy in any investment project; * Adopting prequalification procedures in accordance with Bank guidelines does not necessarily ensure the selection of a satisfactory contractor in Nepal; * Economic analysis before implementation of FMIS sub-projects was often inadequate and HMGN must take steps to ensure rigorous appraisal of future schemes' viability; $ Setting a ceiling for cost per hectare may result in spending up to this limit without regard to economic viability; . It is not reasonable to expect increased agricultural extension input from the DADO if additional resources are not allocated to DADO for this purpose; . Responsibility for maintenance during construction of FMIS rehabilitation sub-projects should be clearly defined and left, as far as practicable, with the WUGs; * WUAs responsibility for O&M of new schemes must be carefully and clearly defined at the outset. In both pumped irrigation and groundwater irrigation schemes, farmers' contribution should include cost of electrification. In FMIS, DOI should provide assistance in O&M only in cases of force majeure.  Nepal Mahakali Irrigation II Project (Cr. 1924-NEP) Implementation Completion Report PART I: PROJECT IMPLEMENTATION ASSESSMENT A. PROJECT OBJECTIVES 1. The project objectives were to: (a) raise agricultural production and farm incomes through expansion and improved management of a public irrigation system, through construction and rehabilitation of private farmer-managed irrigation sub-projects, and through restoration of irrigation sub-projects and river protection works damaged by August 1987 flooding; (b) improve O&M and cost recovery in irrigation systems in the project areas through, inter alia, increased farmer participation; (c) strengthen the irrigation subsector to implement HMGN's new sector program approach to irrigation management. The appraised project comprised the following four components. 2. Mahakali Irrigation Project, Stage II (MIP-11). Irrigation and drainage system for a new irrigable area of 6,800 ha would include: (a) upgrading and extension of the Mahakali main canal, construction of about 125 km of unlined branch and secondary canals, 300 km of unlined tertiary canals and the required drainage network; (b) flood protection works to protect the Stage II area; and (c) installation of about 12 tubewells to augment canal flows. The component also included: continuing support to the existing pilot farm-cum-training center; strengthening of agricultural extension to promote agricultural intensification, irrigated agriculture and efficient water management practices in the Stage I and II areas; training for farmers, engineering and agricultural staff, in design, supervision, operation, maintenance and management of irrigation sub-projects; and strengthening of existing Water Users' Associations (WUAs) and Water Users' Groups (WUGs) in the Stage I area and establishment of similar additional organization in both the Stage I and II areas. Buildings, vehicles, equipment and environmental protection in the Royal Suklaphanta Wildlife Reserve would be provided. 3. Irrigation Line of Credit (ILC). This component, which was a pilot project to test a new Irrigation Policy introduced in 1988 and to establish methods to be adopted in a proposed irrigation sector project, included three types of sub-project, mostly Farmer Managed Irrigation Schemes (FMIS) in which farmer beneficiaries were to contribute to capital costs and manage the completed sub-projects: Construction of new surface schemes Rehabilitation of existing surface schemes Construction of new groundwater schemes  2 The sub-projects covering about 9,000 ha were to be selected in four hill districts and one terai district of the Western Development Region, all within the Narayani River basin catchment area. The Western Regional Agricultural Directorate (RAD) was to provide adequate agricultural extension staff and services to the ILC sub-project areas. An amount of US$ 1.2 million was proposed for a subsidiary loan to the Agricultural Development Bank of Nepal (ADBN) for providing credit to farmers groups in the selected ILC sub-projects. 4. Flood Rehabilitation of projects damaged by the 1987 monsoon was to comprise replacement of canal embankments, replacement of damaged/destroyed structures, clearing and repair of cross-drainage, clearing of slides, reconstruction of canals and associated protective and remedial river works in 17 districts in Eastern, Central and Western regions. 5. Institutional Development Support (IDS) component to assist DOI in developing its institutional capability to support a long-term irrigation sector program was to include provision of buildings, equipment and vehicles to DOI Regional and District Offices and provision of funding for computerized management information system, staffing, training, equipment and operation of mobile irrigation teams in the regions. The project component would include: renovation and construction of a headquarters building; human resources development, including a detailed manpower assessment of the DOI and its capacities, resources and training requirements, and development of a comprehensive human resources and corporate plan. The project component was also to fund consultant services for ILC, training, studies and applied research as needed to support DOI institutional strengthening, including workshops, in-service, local and foreign training. 6. Although containing several completely separate components, which were implemented largely independently of one another, the project was not unduly complex or demanding for the borrower or implementing agencies. The objectives were clear, straightforward, realistic and important for the sector strategies of HMGN and the Bank. The MIP II component was largely a repeat of the MIP Stage I project. The ILC component was to develop and improve on principles established in the Irrigation Policy and Asian Development Bank's supported Irrigation Sector. Proj ect. B. ACHIEVEMENT OF OBJECTIVES 7. The project has satisfactorily achieved or is expected to achieve its main objectives. The construction of Stage II of the Mahakali Irrigation Project (MIP II) was substantially completed on the new irrigable area of 6,800 ha (see table 5). Out of that some 2,000 ha of the new areas had been irrigated partially even before the Credit closing. In the case of ILC, the original scope of the Credit was changed in 1991 from implementation of all types of FMIS sub-projects to implementation of only new surface schemes. Other types of ILC sub-projects were financed by the Bhairawa-Lumbini Groundwater Irrigation III Project (Credit 2144-NEP). Thus, the initial target of developing over 9,000 ha in total to be operated and managed by farmers groups was reduced to some 7,900 ha of FMIS, which have been constructed or rehabilitated. Agricultural production and farm incomes have increased reasonably and are expected to further increase  3 once the MIP II is fully developed under the attention of HMGN. O&M and farmer participation in Stage I have improved and cost recovery in the Stage I area of MIP has increased from less than 30% of the amount assessed before the project to 87% though the assessed rate was low. The successful experience in the ILC component has enabled the Nepal Irrigation Sector Project to go ahead. 8. Mahakali Stage II. Subject to the sufficient attention and follow-up by the DOI/DOA project personnel after the closure of the Credit, the objective of raising agricultural production and farm incomes is likely to be achieved through higher cropping intensity, higher crop yields, and adoption of higher yielding crops. Overall cropping intensity was 120% at the time of project appraisal. A 1997 baseline survey in the project area reported an average cropping intensity of 171% in the Stage II area before the project became operational (an increase of 51% over the rainfed condition). The increase is due to use of irrigation from farmers' shallow tubewells (which has eventually made the proposed augmentation wells unnecessary), adoption of improved varieties and increase in the use of fertilizers. Farmers are willing to switch over to the surface water irrigation to be supplied by MIP-II once it is available as it is cheaper for them in O&M costs compared to the shallow tubewell irrigation. 9. Most of the nine project years were consumed by the construction activities. At the time of the Credit closing, only about 20% of the new tertiary canal box-cutting, which is the contribution of farmers, had been completed. The project's Association Organizers (AO) and extension staff (JT, JTA) along with overseers were instrumental in organizing WUGs, and mobilizing farmers for contributing their shares in box-cutting of tertiaries and construction of field channels. After the Credit closure the Project must have sufficient staff and resources with same motivation and incentives to organize the farmers to complete the remaining 80% for effective supply of rotational irrigation in dry season. Firm commitment of HMGN on the provision of staff and resources are important till the farmers in the Stage II area understand the system operation like farmers in Stage I area. 10. Assuming that the success achieved in the Stage I can be replicated in the Stage II, the project's overall cropping intensity at full operation is now projected at 196%. Thus the project is now expected to account for a 25% increase over 171% in cropping intensity compared to the SAR estimate of 76% over 120%. Based on achievements of Stage I and results of the pilot farm, average paddy and wheat yields are now projected to increase to 4.0 tons/ha and 3.0 tons/ha, respectively, at full development. All this is expected to lead to incremental agricultural production, employment, and farm incomes in the project area. Preliminary analysis shows an economic rate of return of 12% and a net present value (NPV) of about NRs. 230 million for Stage II compared to an economic rate of return (ERR) of 16% and NPV of NRs. 138 million estimated at appraisal. Reasons for the lower than estimated ERR include delay in achieving benefits and lower incremental cropping intensity. 11. ILC Component. Fourteen new surface irrigation sub-projects (4730 ha) and seven rehabilitation sub-projects (110 ha), all in Western hill districts, were completed. There was a change in policy in 1991 such that from 1991/92 onwards only new surface water sub-projects were constructed under this Credit, (1924-NEP). The other types of ILC sub-projects were  4 financed by the Bhairawa Lumbini Groundwater Irrigation III Project (BLGW-III) (Cr. 2144- NEP). This included 36 rehabilitation sub-projects (2137 ha) in Western hill districts and 67 tubewells (959 ha) in Western terai districts. ADBN did not require the proposed subsidiary loan and the money was transferred to the construction component. A preliminary economic analysis on eight sample sub-projects, found that cropping intensity and crop yields had increased in all cases. ERRs for three new sub-projects range from -1.6% to 9% (compared to an estimated rate of 16% at appraisal), from about 9% to 22% for four rehabilitation sub-projects (19% to 73% at appraisal) and are about 16% for medium tubewells and 18% for deep tubewells (from 18% to 23% at appraisal). Reasons for the lower than estimated ERRs include higher construction costs and time overrun for new surface sub-projects, selection of less suitable sub-projects in the hill and slow implementation of new surface schemes. Some of the new surface hill irrigation sub- projects, which were directly managed by the Central DOI took more than 5 years to complete the sub-project instead of originally stipulated as 3 years. Farmers' contributions varied from 0.5% to 19% of the investment costs with an average of about 8%. In only 17 out of 124 sub- projects was the contribution 10% or more. Contributions are less than envisaged at appraisal and less than HMGN policy. This is partly due to underestimation and incomplete design of sub- project costing at the time of fixing the farmers' contribution. 12. Institutional Development Support (IDS) to DOI. Thirteen new district office buildings were constructed and 12 existing offices were renovated. A new DOI central building was completed in January 1997. The component also provided technical assistance to the development and testing of the principles and criteria of the Irrigation Policy of 1992. However, mobilization of the technical assistance team for ILC implementation and testing of the Irrigation Policy was delayed for about two years in 1992-93 during the transition period from UNDP support to IDA support. Computerized management information system (MIS) and a library were established in DOI HQ and Western Regional Directorate. Training of staff for implementation of ILC process and procedure was conducted through workshop and seminars. HMGN has, as required by the DCA, issued regulations and implemented plans for establishing WUAs, WUGs, and Farmer Irrigation Associations (FIAs) as legal bodies. Staff training, operation of a fully effective mobile irrigation team in the Regional Directorates, and provision of association organizers in the districts and their supervision were only partially realized due to lack of commitment from DOI. A number of feasibility studies of medium and large FMIS including updating of country's Irrigation Data base were conducted using IDS funds. The detailed assessment of DOI manpower, resources and training and the institutional development from follow-up activities was restricted due to transfer of funds to other project components. Joint Management schemes were tested using the principles of the Irrigation Policy under IDS but there was no successful achievement obtained. 13. Flood Rehabilitation. Rehabilitation of 15 projects in the Eastern, Central and Western Regions affected by the 1987 flood was completed on about 100,000 ha of land in 1992 and the projects have resumed normal operation. The component was stopped after completion in 1992.  .5 C. MAJOR FACTORS AFFECTING THE PROJECT 14 Factors not generally subject to Government control. The start of construction of the main civil works was delayed by the trade and transit disagreement between India and Nepal from March 1989 to mid-1990 and the consequent shortage of diesel fuel. Construction was further delayed by the failure of the first ICB contractor (for Contract ICB 2) to perform. Contract ICB 2 for the main component of MIP-II, started in March 1990 and was scheduled to be completed in April 1994. However, the contract was terminated in 1993 due to the slow progress of construction which, up to then, was only 27% complete against 72% target. A case was then filed in the Supreme Court by the ICB 2 contractor. Further delay was caused by the Court's interim order placing a stay notice on proceedings for about one year. The construction was resumed in later part of 1994 by a new ICB 3 contractor. 15. Factors generally subject to Government control. Construction of tertiary canals was originally stipulated under ICB contract. But it was later put under participatory construction component by a change of Government's Irrigation Policy, introduced in 1992, which required farmer participation in the construction works of tertiary canals. The ICB 3 contract did not include construction of tertiaries like in the case of ICB 2 and the construction of tertiaries were arranged for joint LCB-farmer construction. The award of LCB contracts for construction of tertiary canals was delayed for more than one year due to delay in reaching a consensus between the Mahakali Irrigation Development Board and the farmer beneficiaries on the extent of beneficiary contribution in the construction. 16. Factors generally subject to implementing agency control. The quality of ILC sub- projects at entry for implementation was not always satisfactory. Some sub-projects were selected under local political pressure even though technical viability was doubtful and feasibility costs were underestimated. Feasibility studies and appraisals that did not distinguish between irrigated and unirrigated crops, particularly without the project, where the production from a rainfed area, which was to be irrigated by the subproject, was not included in the without-project production. Assumed future yields with the project are often over-optimistic. The PCR reports that much work that is unnecessary (because it could be done by the WUG without assistance) has been included in subprojects, sometimes to enable contracts to be awarded to the WUG for doiiiu the work. IDA supervision repeatedly drew attention to the less than rigorous appraisal and the challenge of sustaining and institutionalizing acceptable standards of planning, design and construction. Supervision reports stated that some schemes were selected on social and political considerations, rather than on their technical and economic merits. This is reflected in the long construction period of centrally operated new surface sub-projects, and the wide range of ERRs in the evaluated completed sub-projects. Frequent changes of project managers in all major project components also adversely affected project implementation. In particular, the last transfer of Project Manager at the time of the Credit closing of the project, in spite of IDA mission's protest, had created undesirable problems, especially the financial compilation of the project closing account.  6 17. Project Cost. The project cost in NRs 2025.3 million is about 83% greater than estimated costs at appraisal (NRs 1106.7 million). But in US dollars, the estimated project cost (US$ 46.4 million) is about 99% of the appraisal estimate. The costs of the Mahakali Stage II works of NRs 1,220.0 million have increased by 87% in rupees (but decreased by 13% in dollars) and the ILC works of NRs 549.9 million by 166% in rupees (38% in dollars) over SAR estimate. The costs of IDS of NRs 107.0 million are 37% more in rupees (37% less in dollars) than estimated but the flood rehabilitation works cost of NRs 148.2 million are 12% less than estimated in rupees (35% less in dollars). The Nepali Rupee parity to US Dollar changed from 25.4 to 62.0 in the course of time. The IDA Credit of SDR 29.9 million was fully disbursed on May 7, 1998. D. PROJECT SUSTAINABILITY 18. Mahakali Irrigation Project, Stage II. The quality of construction is in general satisfactory and, provided necessary additional cross-drainage works are constructed in the near future, no particular problems with maintenance are anticipated. There is an existing organization for the operation and maintenance of Stage I of the Mahakali Project, which is effective and would benefit from training in improved O&M procedures. It is expected that the existing organization will be expanded to take over the O&M of Stage II. Adequate budget has been provided for O&M of Stage I works. The policy of HMGN is that the budget for O&M should be NRs 500/ha/year plus establishmnent costs and this is considered to be satisfactory for a mature project after farmers took over the O&M of tertiary canals. The cost of O&M of completed major irrigation projects is estimated to be about NRs 1000/ha/year (at least NRs 500 direct expenditure plus about NRs 500 establishment costs). Water charges are now NRs 400/ha/year. Even if 100% of the assessed amount is collected, the subsidy by HMGN would be about 60% of the cost of O&M. If the subsidy is to be reduced water charges must be further increased. A study to be funded under NISP, which will review HMGN's O&M policy and water charges, will also indicate whether the proposed level of funding will be adequate for sustaining the project. Project staff would maintain the main system and secondary canals down to the turnout to tertiary canals. Below this level is the responsibility of the WUGs. Project staff would initially operate the system down to and including the secondary canals; in due course operation of secondary canals would be taken over by the WUAs, as has already happened in Stage I. Overall, although there must be some uncertainty about how the Government would support further O&M organization and funding, MIP II is likely to be sustainable. 19. A Project Operation Plan has been prepared by consultants in March 1998 for DOI but requires some more revision and augmentation, particularly with regard to the costs of O&M and water management. There has been only limited attempt to collect water charges in Daiji Area (about 285 ha) in the Stage II area because reliable water supply has not yet been fully introduced. In the Stage I area, 87% of the amount assessed (at a rate of NRs 200/ha/year) has been collected in the last ten years. The rate for 1997/98 onwards has been doubled to NRs 400/ha/year but the result has to be seen on ground. Of the amount collected, 15% is returned to WUGs and WUAs from the DOI O&M budget. Transfer of collected water charges directly for use in O&M of the project has to be considered rather than remitting to the central treasury.  7 20. Environmental Protection. Two guard-posts in the Suklaphanta Forest Reserve. were completed. Ramped animal crossings in the canal banks have been provided. Vehicles, equipment, two fellowships and training of Department of Wildlife and Nature Conservation staff have been provided. The impact of construction on the Reserve has been monitored. 21. Irrigation Line of Credit. Sustainability depends on District Irrigation Offices (DIO) providing timely assistance with those aspects of maintenance and repair with which WUG cannot cope. Technical assistance by DIO to WUA seems to be readily available, but funds for repairs are usually scarce in some cases. DOI's PCR reports that sustainability of some sub- projects is in doubt: farmers have not been trained sufficiently to operate and maintain new types of structures with concrete, masonry and steel gates; canals and distribution systems planned and built without users' active participation are damaged; and WUGs often do not mobilize resources for maintenance and repair but carry out repairs on an ad hoc basis when and where it arises. There are cases where even for a few bags of cement WIG approached DIO with full dependency syndrome. The Government and DOI should instruct DIOs to strictly abide its Irrigation Policy which stated that no sub-project would be allowed to tap HMGN's resources within 5 years after rehabilitation. E. BANK PERFORMANCE 22. The project concept, which was based on the technical advice and suggestions of IDA at the time of project preparation, were sound. The main MIP II component was not innovative, which contributed to its success. The ILC component, although innovative for IDA had the experience of ADB's Irrigation Sector Project to guide it. IDA contributed to the preparation of the ILC component by its involvement as the executing agency for the UNDP-financed Irrigation Sector Support Project, which identified and prepared sub-projects for inclusion in the ILC component and formulated criteria and methods of implementation. IDA overestimated ADBN's need for additional resources in the rural credit system without really analyzing the terms and conditions of ADBN credit. 23. During implementation, IDA provided frequent and effective supervision by both engineers and agriculturists as well as other specialists as required. IDA adopted a flexible approach to the project, allowing reallocation of Credit categories and extension of the closing date. IDA must share responsibility with DOI in being slow to deal with unsatisfactory performance of the ICB 2 contractor and tardiness in taking prompt decision for effective actions. 24. Covenants requiring HMGN to increase water charges to cover the full costs of O&M were ignored by supervision missions and it was only by making it a condition of credit extension for one year that IDA was able to make HMGN increase water charges in the MIP project areas. Charges are still not at a level to cover the full cost of O&M. IDA had little success in achieving its often-stressed objective of stage-wise completion of canal construction in order to obtain early agricultural benefits. IDA's supervision of the ILC and IDS account compilation in the early stages of the project was not effective until a system of project  8 supervision by specialized SOE and account review missions was introduced due to inadequate time and capacity of supervision missions to review such account details. F. BORROWER PERFORMANCE 25. The Borrower made considerable efforts to implement the project with diligence and efficiency. The attention paid by HMGN to irrigation is shown by the several revisions (in 1992 and in 1997) to Irrigation Policy 1988 as it evolved during the project. The project management cooperated well with supervision missions and showed strong commitment to effectively complete the project. The project was delayed by Government's and farmers' slowness in reaching agreements on tertiary construction following changes to HMGN's Irrigation Policy. It took nearly 18 months to get the agreement, due to which the Credit had to be extended by a year to complete the tertiary canals The Borrower's consultant provided satisfactory supervision and quality control during construction but seems to be short of staff at the closing phase of the project. There were frequent changes of the project manager of the main component and project coordinators of the ILC and IDS components in the course of implementation, resulting in unnecessary tardiness in decision making and delays in account compilation. Regional Directorates could be more effective to overcome the problem if concerted efforts were made timely. 26. The Borrower generally complied, although sometimes late, with the many covenants in the DCA except with regard to relending to ADBN (Sections 3.03 and 3.04 of the DCA: ADBN did not want the loan) and increasing water charges to cover the full cost of O&M (DCA Schedule 4 (r): see para 28). Not all ILC sub-projects were selected in accordance with Schedule 6 and this is a major lesson learnt in the development of Irrigation Sector. 27. There was initially a lack of coordination between DOI and DOA at district and regional levels but this was satisfactorily resolved in 1996. Compilation of ILC accounts and submissions of applications for withdrawals from the Credit were often and substantially delayed due, in part, to lack of coordination between central, regional and district irrigation offices. Audit reports for the main component and mostly for the ILC and IDS components were often late. DOI has been advised to take some drastic actions on the officers concerned for failure of timely account compilation. 28. A detailed Project Completion Report (PCR) and Project Operation Plan (POP) were prepared and made available to the mission in advance of the review. The cost compilation on the project particularly on ILC and IDS component has to be updated. DOI has been asked to revise the PCR and the POP taking account of comments made by IDA mission. G. ASSESSMENT OF OUTCOME 29. Based on the assumptions described above, the NPV of the two main components are estimated to be positive when cash flows are discounted at 10%. The main objectives of the  9 project have been met and the works completed satisfactorily. It is reasonable to assume that the benefits will be generally sustainable. The outcome can therefore be rated as satisfactory and the project is likely to be sustainable. H. FUTURE OPERATION 30. Mahakali Stage II. During the wet season (15 May to 15 October) ample water is available in the Mahakali river and the main system and secondary canals will be kept full continuously when needed for irrigation. Closures for maintenance will, as far as practicable, be at times when irrigation is not required. During the dry season (15 October to 15 May) the supply at the headworks is currently limited to 4.25 m3/s for the total area of about 11,600 ha (Stage I- 4,800 ha and Stage II- 6,800 ha). The project area will be divided into possibly two or probably three zones for dry season operation; each zone will receive water for one week in rotation with the other zones. During its turn, all canals in the zone will be full; there are no gates at the heads of tertiary canals; it will be up to the WUG group to allocate water and farmers to irrigate the area they chose with the water available. When another zone is receiving water the gates at the heads of secondary canals in the dry zones will be closed and secondary and tertiary canals will be dry. Performance indicators for future operation include area irrigated, cropping intensity and agricultural production. The introduction of monitoring and evaluation would help to ensure sustainability. 31. Irrigation Line of Credit. Future operation of all ILC sub-projects, as in the past, will be entirely the responsibility of the concerned water users. Improvements to the systems made during the project will have made operation in many ways easier: less repair work in wet season for previously temporary weirs where these have been replaced by more permanent structures; less interruption to supply due to damage of canals by cross drainage where new aqueducts have been built. More reliable water supplies will enable planned operation to be effectively implemented. Nevertheless, the involvement of DIO and in some cases, the Mobile Irrigation Team, is still likely to be needed for major repairs if the systems are to be sustained. I. KEY LESSONS LEARNED 32. Lessons for Future Projects. The main lessons learnt from the project are: * Participation of beneficiaries in the design, construction and implementation, and O&M from the outset is very important, especially in large public irrigation system, where available water resources have to be shared among many beneficiaries in an organized manner; * The success of operation and sustainability of infrastructure depend not only on physical quality of the structures but also on beneficiaries' understanding of the system's operation, contribution to investment and commitment to O&M. The design adopted for a public irrigation systems must be flexible, simple and acceptable by small farmer communities;  lo * Service charges to cover full O&M costs of public utilities after improvement must be imposed and must be considered as a national policy in any investment project; * Adopting prequalification procedures in accordance with Bank guidelines does not necessarily ensure the selection of a satisfactory contractor in Nepal; * Economic analysis before implementation of FMIS sub-projects was often inadequate and HMGN must take steps to ensure rigorous appraisal of future schemes' viability; * Setting a ceiling for cost per hectare may result in spending up to this limit without regard to economic viability; . It is not reasonable to expect increased agricultural extension input from the DADO if additional resources are not allocated to DADO for this purpose; * Responsibility for maintenance during construction of FMIS rehabilitation sub-projects should be clearly defined and left, as far as practicable, with the WlUGs; D WUAs responsibility for O&M of new schemes must be carefully and clearly defined at the outset. In both pumped irrigation and groundwater irrigation schemes, farmers' contribution should include cost of electrification. In FMIS, DOI should provide assistance in O&M only in cases of force majeure.  11 PART II. STATISTICAL ANNEXES Table 1: Summary of Assessments A. Achievement of objectives Substantial Partial Negligible Not Applicable Macro policies Li E IL/ Sector policies E LI El Financial objectives [I L LI Institutional development L L LI Physical objectives LE L LI Poverty reduction L L LI Gender issues L L LI Other social objectives L L L L Environmental objectives FI L El Public sector management LI ] LI Private sector development i LI L Other (Technical Issues) L LI LI B. Project sustainability Likely Unlikely Uncertain Highlv C. Bank performance satisfactory Satisfactory Deficient Identification L 11 Preparation assistance E l] Appraisal F7 [ Supervision K K]  12 Highly D. Borrower performance satisfactory Satisfactory Deficient (VI ~ (/ Preparation i dJ K Implementation E7 E Covenant compliance K 7 ] Operation (if applicable) K] E] Highly Highly E. Assessment of outcome satisfactory Satisfactory Unsatisfactorv unsatisfactory (/)(/)(1  13 Table 2: Related Bank Loans/Credits Loan/credit title Purpose Year Status Preceding operations 1. Birganj Irrigation Project Complete & upgrade irrigation & drainage for 1973 Completed in (Narayani Zone) Cr. 373-NEP 16,300 ha of the Narayani Irrigation System and to 1981. PPAR provide groundwater irrigation to 2,700 ha No. 4267 1982 2. First Rural Development To improve small-scale irrigation schemes in the 1976 Completed in Project Cr. 617-NEP hills and develop a high lift scheme on about 1900 ha December 1983 in Nuwakot 3. Bhairawa-Lumbini GW I To provide 64 deep tubewell systems serving 7,600 1976 Completed in Project Cr. 654-NEP ha March 1983. 4. Narayani Zone Irrigation Complete & upgrade irrigation & drainage for 1978 Completed in Development Stage II Project 12,800 ha of the Narayani Irrigation System and to March 1987 Cr. 856-NEP provide groundwater irrigation to 800 ha north of the system 5. Sunsari Morang Irrigation I To complete and upgrade the first 12,000 ha of the 1978 Completed in Project Cr. 812-NEP Sunsari Morang Irrigation System June 1987 6. Second Rural Development To improve small-scale irrigation schemes in the 1979 Completed in Project Cr. 939-NEP Mahakali Zone 1987 7. Mahakali Irrigation Project To rehabilitate and upgrade existing irrigation system 1981 Completed in Stage I Cr. 1055-NEP for 3,400 ha and extend irrigation to 3,200 December 1988 8. Bhairawa-Lumbini GW To complete unfinished Stage I wells and construct 1983 Completed in Irrigat. Stage II Cr.1316-NEP new wells for 7,000 ha October 1990 9. Narayani Irrigation III To complete and upgrade another 8,700 ha of the 1986 Completed in Project Cr. 1715-NEP Narayani Irrigation System June 1995 10. Third Rural Development Construction of 28 small irrigation schemes and 1986 Completed in Project Cr. 1727-NEP rehabilitation of 18 schemes in Rasuwa and Nuwakot August 1994 11. Sunsari Morang Irrigation To improve the design and operation of the Sunsari 1987 Completed in 11 Project Cr. 1814-NEP Morang Irrigation System (Phase II), including May 1994 provision of desilting facilities & imrpoved O&M. 12. Bhairawa-Lumbini GW To raise agri. production and farm incomes, improve 1990 On-going Irrigation III Project Cr.2144- O&M and cost recovery of the public irrigation NEP systems and strengthen the Irrigation sub-sector 13. Sunsari Moirang Headorks To eliminate siltation in the Sunsari Morang 1993 Completed in Project Cr 2430-NEP Irrigation System December 1997 14. Irrigation Sector Project To finance farmer-managed irrigation schemes in 1998 Yet to be hills and terai and management transfer of public effective irrigation in Sunsari Morang Irrigation System Phase III & water resources strategy formulation Following Operations: 1. Terai Groundwater Project To develop groundwater irrigation in the Terai 1999  14 Table 3: Project Timetable Steps in Project Cycle Date Planned Date Actual/ Latest Estimate Identification (Executive Project Summary) February 5, 1986 Preparation January26, 1987 Appraisal February 10, 1988 Negotiations May 2, 1988 Letter of Development Policy (if applicable) Not applicable Board Presentation June 15, 1988 Signing September 21, 1988 Effectiveness November 18, 1988 First Tranche Release (if applicable) Not Applicable Midterm review (if applicable) Not Applicable Second (and Third) Tranche Release (if Not Applicable applicable) Project Completion September 30, 1996 March 31, 1998 Credit Closing March 31, 1997 March 31, 1998  15 Table 4: Loan/Credit Disbursements Cumulative Estimated and Actual (US$ Millions) FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 Appraisal Estimate 3.80 11.80 27.20 27.20 32.40 37.20 40.20 41.20 41.30 41.30 Actual 0.73 8.19 11.86 16.38 22.89 25.56 29.79 35.87 40.81 41.88 Actual as % of Estimate 19% 69% 44% 60% 71% 69% 74% 87% 99% 101% Date of Final Disbursement May 7,1998  16 Table 5: Key Indicators for Project Implementstion Key Implementation Appraisal Revised Actual Percentage Indicators in SARI Estimate Estimate Completed Completion Presidenfs Report Units (Quantity) (Quantity) (Quantity) (%) A. Mahakrali Stage 11 Component Main Camrl Earthn,orbk to Beldani Modification to Stage I Canal km 14.00 14.28 14.28 100 Extension Stage 11 Canal km 20.96 20.96 20.96 100 Access Road to Stage 11 km 20.96 19.96 19.96 100 Main Canal Structures ChaudharCrossing no. 1.00 1.00 1.00 100 Syphons no. 2.00 3.00 3.00 t00 Others no. 42.00 42.00 42.00 t00 Main 3 Branch Camal Earthw-rkb km 15.48 16. 17 16.1 7 100 Main 3 Branch Canal Stnrchires Syphons no. 1.00 1.00 t.00 t00 Others no. 29.00 34.00 34.00 100 .Vhiv,agar C-na Earl/hmvrkx km 21.14 21.14 21.14 100 Shivnagar C ana/tnrctres no. 43.00 50.00 50.00 100 Chaalhar Diser,sirn Earthworks km 3.95 5.75 5.75 100 Gabion Protection m3 15,650.00 20,024.00 20,024.00 100 Block 5 Cana/ lSy.nemn Secondary Earthworks km 5.20 5.20 5.20 100 Secondary Stuctures no. 1I.00 21.00 21.00 100 Tertiary Development km 92.00 93.67 93.67 100 Bitck 6 Canayl S,tem Secondary Earthworks km 19.31 19.31 19.31 100 Secondary Strutures no. 56.00 51.00 51.00 100 Tertiary Development km 97.00 93.67 93.67 100 Bl-k 7 Canal System Secondary Earthworks km 15.71 14.44 14.44 100 Secondary Structures no. 57.00 44.00 44.00 100 Tertiary Development km 03.00 102.43 92.19 90 Block 8 Canal rysterer Secondary Eanthorks km 16.77 16.77 16.77 tOO Secondary Structures no. 5S.00 56.00 56.00 100 Tertiary Development km 77.00 60.00 60.00 100 Main D)rainage Earthworks km 19.81 40.20 40.20 100 Stmctures no. 5.00 11.00 11.00 100 1l16orl,Srnds km 1.98 1.15 1.15 100 Qff-Canal Roads km 6.76 18.48 18.48 100 BrIldings Farmers Center no. 1100 I0.00 10.00 100 Guard Posts no. 2.00 2.00 2.00 100 No of legalized Water Utsers Ginrrqes (W IG.r)fircrred no. 262.00 262.00 250.00 95.42 Ao of WlO rrnemhers trahine in tcriary O&M no. 1,864.00 262.00 49.00 18.70 No,. ofcornpleed tertiaries trracd-o<vcrtr, WIIO.s no. 262.00 262.00 36.00 13.74 B. Irrigation rine of Crdit Area of FMNS schemem completed ha 9,000.00 7,936.00 7,936.00 100.00 No. of WUA members trained in WUA no, administration and financial manter C. Flood Rehabilitation Completion of repairs to 19S7 flood danage Iha 100,00o.00 100,000.00 100,000.00 100.00 D. Institutional Development Support Constnuction of new HQ for DOI no. 1.00 1.00 1.00 100.00 Improvement of DOI efficiency thmn nea MIS for works monitoring and evaluation  17 Table 6: Indicators for Project Operation ICR Estimate Actual or at full Key Operating Indicators in SAR Unit SAR Estimate ICR Estimate development A. Mahakali Stage II Component Input Input: - Timely delivery of irrigation water to newly-developed irrigated areas ha 6,800 2,000 6800 - No. of tertiary schemes no. 227 262 262 - legally turned over to WUAs no. 227 12 262 - Annual rate of water charges collection % 100 82 100 Output: - Cropping intensity % 120 171 196 - Crop Yield - Paddy tons/ha 3.5 2.8 4 - Crop Yield - Wheat tons/ha 2.6 1.8 3 - Farm Incomes Rs./ha 58,160 28,543 56504 B. Irrigation Line of Credit * Agricultural development measured in terms of production: - Cropping Intensity-MIPII % 190-240 140-224 180-250 - Cropping Intensity-BLGWP % 190 180 190 - Crop Yield - Paddy-MIPII tons/ha 3.3 2.8 3.0 - Crop Yield - Paddy-BLGWP tons/ha 3.75 2.8 3.2 - Crop Yield - Wheat-MIPII tons/ha 2.6 1.1 2.2 - Crop Yield - Wheat-BLGWP tons/ha 2.7 1.4 2.0 - Farm Incomes-MIPII Rs./ha 14,000 23,470 23470 - Farm Incomes-BLGWP Rs./ha 13,500 21,000 22000 - Farmers contribution to capital costs-MIPII % 10 8 8 - Farmers contribution to capital costs-BLGWP % 7-40 12 12 C. Flood Rehabilitation - Improved system performance on flood- affected command area of 100,000 ha measured in terms of agricultural production % 100 100 100 D. Institutional Development Support - MIS system now functional % 100 70 100 - No. of DIOs now preparing full-scale % 100 90 100 irrigation projects *ILC pilot project under MIPII Credit dealt with only new surface irrigation sub-projects. All rehabilitation and groundwater sub-projects were transferred to Bhairawa Lumbini Groundwater Irrigation II Project (Cr.2144-N EP).  18 Table 7: Studies Included in Project Feasibility and other Purpose as Defined Status Impact of Study specialized studies at Appraisal/Redefined 1. Rani Jamra To determine suitability Complete Technical complexity of Kulariya Kulo System for investment headworks was identified 2. Proganna Kulo To determine suitability Complete Found feasible System for investment 3. Low Flow To determine dry season Complete Dry season flows of Terai measurements flow of Terai rivers rivers determined updating 4. Master Plan Data To update irrigation data Complete Data base updated Base on Irrigation base prepared in 1992 update 5. Social Assessment To complete social Complete NISP preparation study of NISP Model studies of NISP model Project project 6. Irrigation Policy To update Irrigation Complete Policy updated 2049 Update Policy 2049 7. Social Economic To update project's Complete Updated data used for Baseline Survey 1997 socio-economic data economic analysis  19 Table 8A: Project Costs Appraisal Estimate Actual/Latest Estimate US$ million US$ million Local Foreign Total Local Foreign Total Costs Costs Costs Costs Costs Costs A. Mahakali Stage II Component Stage ! Main Canal Improvements 0.20 0.30 0.50 0.34 0.78 1.12 Stage 11 Main Canal 1.30 2.10 3.40 1.52 2.47 3.99 Stage 11 Distribution Canal 4.10 5.70 9.80 4.19 5.12 9.31 Flood Protection and Drainage 1.10 1.50 2.60 1.64 1.49 3.13 Project Administration 1.30 2.70 4.00 1.42 3.08 4.50 Farmer Organization 0.20 0.00 0.20 0.10 0.00 0.10 Agricultural Development 0.40 0.10 0.50 0.49 0.00 0.49 Operation & Maintenance 0.10 0.30 0.40 1.20 0.00 1.20 Land Acquisition 0.70 0.00 0.70 Sub-Total-Mahakali Stage-II 8.70 12.70 21.40 11.60 12.94 24.54 B. Irrigation Line of Credit 5.50 2.50 8.00 7.07 3.17 10.24 C. Flood Rehabilitation 2.20 3.70 5.90 1.68 2.85 4.53 D. Institutional Development 1.20 1.70 2.90 0.73 1.04 1.77 Total Baseline Costs 17.60 20.60 38.20 21.08 20.00 41.08 Physical Contingencies 1.50 2.40 3.90 Price Contingencies 2.20 2.40 4.60 Total Project Costs 21.30 25.40 46.70  20 Table 8B: Project Financing Appraisal Estimate Actual/Lat I Estimate US$ million US$ million Local Foreign Total Local Foreign Total Costs Costs Costs Costs Costs Costs His Majesty's Government of Nepal 3.90 0.40 4.30 4.50 0.00 4.50 Farmers 1.10 0.00 1.10 0.80 0.00 0.80 IDA 16.40 24.90 41.30 21.96 19.92 41.88 Total 21.40 25.30 46.70 27.26 19.92 47.18  21 Table 9: Economic Costs and Benefits Appraisal Estimate ICR Estimate Economic Rates of Return (ERRs) (%): Stage 11 16.00 11.46 Irrigation Line of Credit New Surface Sub-projects 16.00 -1.61-8.76 Surface Rehabilitation Sub-projects 19.00-73.00 9.07-21.94 Groundwater Cluster 18.00-23.00 16.28-17.95 Net Present Values (NPVs) (NRs. million) Stage Il 138.00 -27.73 Underlying Assumptions Project Life 30 years 30 years Standard Conversion Factor 0.90 0.90 Unskilled Labor Value-Shadow Wage Rate 0.75 0.70 Financial Wage Rate (NRs.) 22.50 50.00 Opportunity Cost of Capital (%) 12.00 12.00  Legal Covenant Report: Latest status of Covenant Compliance OD 13.05 - ANNEX DS SAR - South Asia Regional Office Page: I SASRD - Rural Development Sector Unit Run Date: 07/30/98 at 10.59.05 Form 590 Date: 0323/1998 Project ID: NP-PE-10310 - MAHAKALI IRRIG. 11 original Revised Covenant Fulfill Fulfill Class(s) Status Date Date Description of Covenant CommentS Agrtement: CREDIT Credit Number: IDA -19240 Text Reference: Sec.3.01 05,04 C 09/21/1988 Carry out project with due diligence in In compliance. conformitywith appropriate standards, and provide the funds,facilities, services and other resources required. Text Reference: Sec. 4.01 (a) 01 HMGN shall cause DOA, ADBN, DOI and MIDB to maintain separate records and accounts for all project expenditures. Text Reference: Sec. 4.01(b) 01 CD 07/15/1994 Furnish annual audit reports not later than 12 In compliance with delay. months after the end of each fiscal year. Text Reference: Sec. 4.01 (c) 01 CD 01/15/1995 Furnish unaudited Project Accounts and financial In compliance with delay. statements for each fiscal year not later than sixmonths after the end of each such year. Text Reference: Sch 3, Sec.2 05 C Bmploy project consultants. Appointed Sir William Halcrows a Partners as project consultant. Text Reference: Sch. 4 (a) 05 C 09/21/1988 Appoint a project Director to carry out overall Ini compliance initially. Later it was revised to monitoring and coordination of various activities replace with the three project managers for each under the project. component (main, ILC, IDS). Status: C - Complied with CD - Compliance after Delay NC - Not Complied with SOON - Compliance Expected in Reasonably Short Time CP - Complied with Partially NYD - Not Yet Due  Legal Covenant Report: Latest status of Covenant Compliance OD 13.05 - ANNEX DS SAR - South Asia Regional Office Page; 2 SASRD - Rural Development Sector Urnit Run Date: 07130198 at 10.59.05 Form 590 Date: 03/23/1998 Project ID: NP-PE-10310 - MAHAI(ALI IRRIG. 11 Original Revisead Covenant Fulfill Fulfill Class(s) Status Date Date Description of Covenant Comments Text Reference. Sc/iL 4 (b) 05 C Appoint project managers for MIP II, Irrigation All Project Managers were appointed since 08/88. Line of Credit (ILC) Pilot Project, Flood Rehabi- litation (FR) and Institutional Development Support (IDS) Text Reference: Sch. 4 (c) 05,06 CD Provide D0I with an adequaate headquarters The new D01 Headquarters Building, started in buildingand facilities in Kathmandu, and provide 11/94, Depart- ment of National Parks and Wildlife was complete in 2/97. Suklaphanta guard posts Conservation with guard posts at Royal Suklaphanta were constructed. Wildlife Reserve b'orest. Text Reference: &ch. 4 (d) 02 CD Establish & maintain the Task Force for Borrower issued Government's Order to increase the recommend-ing (i) water charge assessment water charges to NRs400/ha starting from FY1997/98 procedures; (ii) target to cover full DaN costs; (July 15, 1997) in MIP area. It was learnt that (itiia policyfor phasing it; (iv) water the farmers are dissatisfied with the steep rise wholesaling; (v) proce,dures to assess farmers' of charges and reluctant to comply with. repayment capacity; and (vi) procedures for review. IA Text Reference: Sc/i 4 (e) 02 CD 12/31/1988 Furnish a Cost Recovery Task Force Action Plan. See above comments. Text Reference: Sc/I. 4 (I) 05 C Establish the Approval and Coordination Committee ACC had been established, and functioned (ACC) to review and approve the subprojects under satisfactorily throughout ILC implementation. ILC component. Status: C - Com4plied with CD - Comnpliance after Delay NC - Not Complied with SOON - Compliance Expected In Reasonably Short Time CP - Complied with Partially NYD - Not rat Due  Legal Covenant Report: Latest status of Covenant Compliance 0OD 13.05 - ANNEX D)5 SAR - South Asia Regional OMfce Page: 3 SASRD - Rural Development Sector Unit Run Date; 0713019 at 10.59.05 Form 590 Date: 0312311998 Project ID: NP-PE-10310 - MAHAKALI IRRIC.11I Original Revised Covenant fulfill Wulfill clausCs) Status Date Date Description of Covenant Comments Text Reference: Sch. 4 (g) 05 C Establish Regional Appraisal committee (RAC) for RACs for all three western development regions had purpose of appraising each subproject and been established and functioned satisfactorily recommending to ACC the course of action, during ILC implementation. Text Reference: Sch. 4 (h) 10 C ILC subprojects selected and implemtented Implemenited satisfactorily. accordingto principles end criteria of DCA, Schedule 6. Texa Reference: Sc/i 4 (i) 06 C Actions to minimize risk of malaria and water- Pilot project on participatory approach to related diseases and adverse environmental Environmental Protection Program was completed and- impact.environmental assessment and measures to be on-going ILC subprojects were using its results included in ILC subproject preparation. with the assistance of NGOs/1NGOs. Text Reference: Sch. 406) es C 12/31/1988 Furnish an overall OeM plan for the irrigation KIP-11 construction was lust completed. All of schemes In MIP I and 11 areas. HIP-I was turned over to beneficiaries. POPprepared by November 1997 covered O&M plan for the whole area. The POP was commented and asked for finalization and resubmit to IDA in April 1998. T'ext Reference: Sc/I. 4 (k) 04 C 03/31/1989 Furnish estimated budgetary allocations for OeM FY 1998 Budget was found sufficient. for MIP I and HIP II areas for forthcoming FY together with actual budget allocations made. Text Reference: Sc/I. 4 (1) 04 C 12/31/1991 Commencing on January 1, 1989, and thereafter on a Received HIP Semi-annual and Quarterly Progress semi-annual basis, furnish project progress Reports covering up to 12/31/97. ILC/lDS closed by report. 07/15/97. status: C - Complied with CD - compliance after Delay NC - Not Compiled with SOON - Compliance Expect:ed in Reasonably Short: Time CP - Complied witlh Partilully NYD - Not: Yet: Due  LIga CovenaUt Report: LAtest status of Covenant Compliance OD 13.05 - ANNEX D5 SAR - South Asia Regional omce Page: 4 SASRD - Rural Development Sector Unit Run Date: 07/30/98 at 10.59.05 Form 590 Date: 03/2311998 Project ID: NP-PE-10310 - MAHAKALI IRRIG. 11 Original Revised Covenant Fulfill Fulfill Claes a) Status Date Date Description of Covenant Comments Text Reference: Sch. 4 (m) 09 C 06/30/1989 Furnish a draft Action Plan and timetable for D0I reorganized by HMGN in 1993. ILC TA had been strengthening DOI to carry out ILC component, and working on strengthening since June 1994. thereafter implement. Text Reference: SchL 4 (n) 09 C 06/30/1989 Furnish an action plan and timetable for develop- MIS had been established at D00 HQ supported by ment of M6E and management information system the project consultants and has been used since (MIS) within DOI, and, thereafter implement. then. Text Reference: Sch. 4 (o) 12 C 12/31/1988 Furnish IDA proposed regulations and plans for Existing Irrigation Policy 1992was revised establishing Water User Asvsociations (WUAs) and recently in 1997. WUA and WUG have been legalized Water User Groups (WUGs) as legal bodies; issue in all MIP and ILCsubprojects since last 6 years. regulations and implement. Text Reference: SchL 4 (p) 12 C 12/31/1988 Furnish proposed regulations and plans for the FIAs have been established as legal bodies under establishment of Farmer Irrigation Associations Registration of Associations Act 2034 and (FIAs) as legal bodies; issue such regulations and Irrigation Regulation 2045. tn take suitable action to implement such plan. Text Reference: Scha 4 (q) 12 C 06/30/1990 Take actions to establish WUG in each tertiary WUGs in MIP stage I area have been formed, cultivable command area (CCA) (of HIP) already legalized and were given full ownership and receiving water, and in all other tertiaries CCA management of tertiary canals. HIP-II is being is to be bought under irrigation, not later than 6 replicated the MIP-I model after completion. months before the tertiary canal is scheduled todeliver irrigation water. Status: C - Cosplied with CD - Compliance after Delay NC - Not Complied with SOON - Compliance Expected in Reasonably Short Time CP - Complied with Parti.-lly NYD Not Yet Due  Legal Covenant Report: Latest status of Covenant Compliance OD 13.05 - ANNEX DS SAR - Soutb Asis Regional Office Page: S SASRD - Rural Developmeut Sector Unit Run Date: 07/30/98 at 10.59.05 Form S90 Date: 0313311398 Project ID: NP-PE-10310 - MAHAKALI IRRIG. 11 Original Revised Covenant telfill Fulfill Claaa(s) Status Date Date Description of Covenant Comeats Text Reference: Sch. 4 (r) 02 CD 06/30/1989 In MIP I and II areas: - evaluate water charge Action taken yearly by WUA in Stage I area. Water arrears,and take actions for collection or write charges collected 87% of targeted amount in last off of such arrears; 12 years. The rate has been increased by 100% starting from this year and the outcome has yet to be observed. Text Reference: Sck 4 (r) 02 CP 06/30/1991 In MIP I and II areas: achieve collection See above on water charges recovery. efficiencies for current water charges plus rescheduled arreara. Text Reference: Sch 4 (r) 02 C 07/15/1992 In MIP I and II areas: by July 15, 1992 and Agreed and action taken by the Borrower that Stage thereafter revise, if required, the level of water I area water charges be increased to NRs400 charges. starting FY1998 and similarly to Stage II area after turnover. Status: C - Complied with CD - Compliance after Delay NC - Not Complied with SOON - Compliance Expected in Reasonably Short Time CP - Complied with Partially NYD - Not Yet Due  Legal Covenant Report: Latest status of Govenant Compliance OD 13.05 - ANNEIX DS Full Text of General Covenant Classification Run Date: 07130198 at 10.59.05 Covenant Class I Accounts/audit 2 Financial performance/generate revenue from beneficiaries 3 Flow and utilization of Project funds 4 Counterpart funding 5 Management aspects of the Project or of its executing agency 6 Environmental covenants 7 Involuntary resettlement 8 indigenous people 9 Monitoring, review and reporting 10 Implementation 11 Sectoral or cross-sectoral budgetary or other resource allocation 12 Sectoral or cross-3ectoral regulatory/institutional action 13 Other  28 Table 11: Compliance with Operational Manual Statements Statement Number and Title Describe and comment on lack of compliance 1. OMS2.25 Cost Recovery Policy Pricing policy does not achieve full cost recovery for O&M but has been revised upward by 100% in 1997/98. 2. OP4.07 Water Resources Management No comprehensive framework for integrated water resources management as the project is a stand-alone irrigation project  29 Table 12: Bank Resources: Staff Inputs Stage of Planned Revised Actual Project Cycle l Weeks US$(000) Weeks US$(000) Weeks US$(000) Preparation to Appraisal* 68.4 119.0 Appraisal-Negotiations* 21.0 42.2 Negotiations through Board 8.0 16.7 Approval* Supervision** 41.7 66.8 37.3 53.6 246.0 437.1 Completion** 24.0 57.5 14.0 33.6 8.2 24.4 TOTAL 65.7 124.3 51.3 87.2 351.6 639.4 (*) Planned and Revised figures were not available for these stages of the project cycle. (**) Planned and Revised figures prior to FY96 were not available for these stages of the project cycle.  30 Table 13: Bank Resources: Missions Performance Rating Number Specialized Implemen- Develop- Stage of Month/ of Days in Staff Skills tation ment Types of Project Cycle Year Persons Field Representedl/ Status Objectives Problems2/ Preparation 1/87 4 5 Eng(2),Eco,Agr - - - Preparation 4/87 4 7 Eng(2),Eco,Agr - - - Preappraisal 11/87 5 22 Eng(2),Eco,Hydr - - - -Geol,Agr Appraisal 2/88 6 14 Eng(3),Hydr- - - - Geol,Ag,Eco Supervision 1 11/88 2 6 Agr,Eng 1 I F Supervision 2 4/89 3 3 Eng,Eco,Agr I I P Supervision 33/ 7-8/89 3 23 Eng,Eco,Agr Supervision 4 3/90 1 4 Ag 2 1 C Supervision 53/ 6-7/90 3 23 Eng,Ag,lnst Supervision 6 10/90 2 7 HydroGeo,Agr, 2 I F,M,T Econ Supervision 7 2/91 2 12 Ag,HydroGeo 2 1 T Supervision 8 34/91 2 21 AgEcon,Anth 2 1 Pr,T,M Supervision 9 7/91 1 21 AgEcon 2 2 T,M Supervision 10 10-11/91 4 6.5 Eng,Ag,AgEcon, 2 1 Pr,C,F HydroGeo Supervision 11 34/92 3 7 Ag,Econ 2 1 Pr,T,M Supervision 12 11/92 5 8.8 Eng(2),Soc,Ag, 2 2 T,M HydroGeo Supervision 133/ 3/93 2 3.5 Fin(2) Supervision 14 34/93 4 2 Ag,Eng 4 4 T Supervision 15 9/93 3 8 Ag,Eng,Hydro- 4 4 T geo Supervision 163/ 4/94 2 7 lEng,Ag 3 3 Supervision 17 5-6/94 4 11 Eng(2),Ag,Inst 2 2 Supervision 183/ 11/94 1 3 Eng Supervision 19 4/95 4 5 Eng(2),Ag(2) S S Supervision 20 11-12/95 2 16 Eng(2) S U T Supervision 21 3/96 2 7 Eng(2) U U T,C Supervision 22 9/96 2 4 Eng(2) S S C Completion 1/98 4 7 Eng(2),Eco,Fin  31 I/ Eng=lrrigation Engineer; Eco=Economist; Ag=Agriculturist; HydroGeo=Hydrogeologist; Inst=lnstitutional Development Specialist; Anth=Anthropologist; AgEcon=Agricultural Economist; Soc=Sociologist; 2/ T=Technical; F=Funds Availability; C=Covenant Compliance; M=Management; Pr=Procurement; P=Political 3/ No report on file for this mission.  32 Appendix I Nepal Mahakali Irrigation II Project (Cr. 1 924-NEP) Implementation Completion Report Mission January-March 1998 Aide-Memoire Introduction 1. An IDA mission comprising Messrs./Mme. 0. Myint, T. Estoque, S. Ranjitkar, R.C. Mishra, and K. Gautam (Bank) visited the project from January 30 to February 13, 1998 to supervise and prepare an implementation completion report (ICR) on the above project. The mission was later joined by Benson Ateng (Bank, 12 to 14 February) and Robert Paterson (FAO/CP, 12 to 26 February). During its visit the mission held discussions with staff from the Department of Irrigation (DOI) and the Mahakali Irrigation Project (MIP), project consultants, farmers and other agencies and individuals concerned with the project. The mission reviewed project documentation and other relevant studies and reports; the draft Project Completion Report (PCR) dated December 1997 prepared by the consultants for MIP II and the draft Project Operation Plan (POP) dated December 1997 are major sources of information for the ICR. The mission's preliminary findings were discussed with the Secretary, Ministry of Water Resources (MOWR). 2. This Aide Memoire is based on the findings of the mission and records the views of the Bank, Borrower and implementing agencies on project implementation and operation. It will be discussed at a wrap-up meeting at DOI on 1 March, 1998, attended by representatives from the National Planning Commission, the Ministry of Finance (MOF), DOI and the Project Manager and staff. Amendments agreed at the meeting will be duly incorporated. The findings of the mission are subject to the approval of the Bank management. The mission wishes to thank the Director-General, DOI, the Project Manager (PM) and staff of MIP and other concerned agencies, for their cooperation and assistance. The Proiect 3. The Mahakali Irrigation II Project was financed under IDA Credit No. 1924-NEP of SDR 29.9 million. The credit was signed on September 21, 1988 and became effective on November 18, 1988. The project comprised four components: (a) construction of irrigation and drainage facilities to serve an additional area of 6,800 ha of the Mahakali Irrigation Project; (b) an Irrigation Line of Credit for farmer-managed irrigation schemes; (c) emergency flood rehabilitation works to repair flood-damaged irrigation and river control facilities; and (d) institutional development support to the Department of Irrigation.  33 4. The Project Objectives were to: (a) raise agricultural production and farm incomes through expansion and management improvement of a public irrigation system, through construction and rehabilitation of private farmer-managed irrigation schemes, and through restoration of irrigation schemes and river protection works darnaged by August 1987 flooding; (b) improve O&M and cost recovery in irrigation systems in the project areas through, inter alia, increased farmer participation; (c) strengthen the irrigation subsector to implement HMGN's new sector program approach to irrigation management. Details of the project components are as follows: Mahakali Irrigation Project, Stage II 5. This main component was to comprise: Irrigation and Drainage: (a) upgrading and extension of the Mahakali Main Canal, construction of about 125 km of unlined branch and secondary canals, 300 km of unlined tertiary canals and the required drainage network; (b) flood protection works needed to protect the Stage II area from recurrent floods, including realignment of the Chaudhar River to its pre-1979 course, (c) installation of about 12 augmentation tubewells to be located on the eastern side of the Shivnagar Branch Canal. Agricultural Intensification Suport: (a) continuing support to the existing pilot farm-cum- training center and (b) strengthening of agricultural extension support to promote agricultural intensification, irrigated agriculture and efficient water management practices in the Stage I and II areas. Training: Provision of training for farmers and engineering and agricultural staff, in design, supervision, operation, maintenance and management of irrigation schemes. Farmers Organization Support: (a) strengthening of existing Water User Associations and Water User Groups in the Stage I area; and (b) establishment of similar additional organization in both the Stage I and II areas. Provision of Buildings. vehicles and equipment Environmental protection in the Royal Suklaphanta Wildlife Reserve. Irrigation Line of Credit 6. This component was a pilot project to establish methods to be adopted in a proposed irrigation sector project. The component was to comprise: Irrigation Subprojects: This activity included three types of subproject, in which farmer beneficiaries were to contribute to capital costs and manage the completed subprojects: - Construction of new surface schemes  34 Rehabilitation of existing surface schemes Construction of new groundwater schemes The subprojects were to be selected in four hill districts and one terai district of the Western Development Region, all within the Narayani River basin catchment area. Agricultural Extension Support: The Western Regional Agricultural Directorate (RAD) of DOA was to provide adequate agricultural extension staff and services to the ILC subproject areas under the framework of its ongoing programs, and participate in other ILC activities as needed. To support these collaborative activities, the project was to finance incremental costs of DOA, specialized technical assistance and training in irrigation for extension staff. Subproject Credit Support: An amount of US$ 1.2 million was set aside in the Project cost estimate and financing arrangement for a subsidiary loan to ADB/N for providing credit to the farmers of the selected ILC subprojects in accordance with agreed procedures. Flood Rehabilitation 7. Flood Rehabilitation to projects in the Eastern, Central and Western Regions damaged by the 1987 monsoon was to comprise: replacement of canal embankments, replacement of damaged or destroyed structures, clearing and repair of cross-drainages, clearing of slides, reconstruction of distribution canals, and associated protective works; and remedial river works included replacement of original protective works, replacement of damaged structures, repair of river embankments and works necessary to protect replacement works. Institutional Development Support (IDS) to DOI 8. The assistance to be given to the DOI in developing the institutional capability to support a long-term irrigation sector program was to comprise: Strengthening of DOI Regional and District Offices by providing buildings, equipment and vehicles and providing funding for staffing, training, equipment and operation of mobile irrigation teams. DOI Headquarters Renovation and Strengthening: Renovation and construction of a headquarters building. Human Resources Development, including the financing of a detailed manpower assessment of the DOI and its capacities, resources and, training requirements and developing a comprehensive human resources and corporate plan. Monitoring. Evaluation and Management and Studies. The project was to fund consultant services, training, studies and applied research as needed to support DOI institutional strengthening, including workshops, in-service, local and foreign training.  35 9. The total project cost of US$46.7 million was to be financed with the help of an IDA credit of US$41.3 million (SDR29.9 million). Stage II design works were undertaken from mid-1987 to mid-1989 Mission's Findings Project Implementation 10. Mahakali Stage II. Construction of the project has been satisfactorily completed. Implementation took longer than expected at appraisal due to (a) delay in award of the main construction contract due to the trade and transit disagreement with India, (b) failure of the first ICB contractor (for Contact ICB 2) to perform and (c) delay due to change of Government policy concerning construction of tertiary canals. ICB 2 for the main component of MIP-I1, started in March 1990, was scheduled to be completed by April 1994. However, the contract was terminated in 1993 due to the slow progress of construction which, up to then, was only 27% complete. A case was then filed in the Supreme Court by the ICB 2 contractor. Further delay was caused by the Court's interim order placing a stay notice on proceedings. A new ICB 3 contract was let in July 1994 to be completed in 30 months by December 1996. The works were satisfactorily completed in June 1997, six months later than planned. Despite the delays in project implementation, the Daiji area (285 ha) was put into partial operation in November 1996 using the completed portion of the Stage II main canal and, in 1997, irrigation was extended to parts of Blocks 5 and 6. 11. Due to new Irrigation Policy of HMGN introduced in 1992, which required farmer participation in the construction works of tertiary canals, the ICB 3 contract did not include construction of tertiaries. The award of LCB contracts for construction of tertiary canals was delayed due to delay in reaching a consensus between the Mahakali Irrigation Development Board and the farmer beneficiaries on the extent of beneficiary contribution in the construction of tertiary canals. This was finally settled and four LCB contracts for the construction of tertiary canals in the four blocks in the Stage II area were awarded in June 1996 to complete the structures and embankments, in which farners would excavate the tertiary canals, in 12 months. The Credit, which would have closed by March 1997, was extended by one year to 31 March 1998. The construction of tertiary canal structures and embankments started in November 1996 and was substantially completed in February 1998. So far, farmers have excavated the tertiary canals in only 30 out of the 262 embankments constructed. It is expected that when farmers see water in the secondary canals they will be eager to organize themselves to carry out the comparatively small amount of excavation needed to complete the tertiary canals to supply water to their fields. 12. The following works envisaged in the Staff Appraisal Report (SAR) for MIP II main component have been completed satisfactorily before the Credit closing date of March 31, 1998. The quality of works and the ICB 3 contractor's performance are, in general, satisfactory.  36 13. Irrigation and Drainage. Modification of the 14-km Mahakali main canal, extension of the main canal by about 21 km, and construction of about 38 km of branch canals, 56 km of secondary canals, 45 km of drain and flood bunds, 343 canal-related structures and about 20 km of off-canal roads were completed. Further enlargement of the Stage I canal to take the additional water resulting from the 1996 Mahakali Treaty with India is expected to be completed by the end of March 1998. The total tertiary canal length of 317 km with 3,962 structures is being constructed and is expected to be complete before March 31, 1998, leaving the farmers to excavate the canal cross-section. 14. Agricultural Intensification Support. The pilot farm continues with agricultural activities and has trained about 9,700 farmers and staff. More than 8,000 minikits have been distributed and 10 farmer centers have been constructed. 15. Farmers' Organization Support. In the Stage II area, 1757 outlet groups and 250 tertiary committees were formed; 49 members of water users' organizations were trained in tertiary O&M. 1,959 farmers in the Stage I area were trained, and 1,313 outlet groups, 176 tertiary committees and 4 WUAs were formed. 16 Environmental Protection. Two guard-posts in the Suklaphanta Forest Reserve were completed. Ramped animal crossings in the canal banks have been provided. Vehicles, equipment, two fellowships and training of NPWC staff have been provided. The impact of construction on the Reserve has been monitored. 17. Works proposed in the SAR that have not been constructed or completed include silt control facilities near the headworks, 12 augmentation tubewells (not considered necessary at this stage; many STW have been installed by farmers) and completion of the tertiary canals as described above. Some further cross-drainage works are needed. Although proposed in the SAR, rotational water supply has not been introduced (because it is not needed, see para 35) and a Project Coordination Committee has not been established. There has been no appreciable strengthening of the Stage I O&M division; it is, however, recognized that training in improved procedures is needed. A unit for monitoring and evaluating project performance has not been established 18. Irrigation Line of Credit (ILC). The SAR envisaged that about 9,000 ha of new and rehabilitated farmer-managed irrigation systems would be built under the project. Fourteen new surface irrigation subprojects (4730 ha) and seven rehabilitation subprojects (110 ha) were completed all in Western hill districts. There was a change in policy in 1991 such that from 1991/92 onwards only new surface water subprojects were constructed under this Credit, 1924-NEP, and other types of ILC subprojects were transferred to the Bhairawa Lumbini GW Irrigation III Project (BLGW-III) (Cr. 2144-NEP). This included 36 rehabilitation subprojects (2137 ha) in Western hill districts and 67 tubewells (959 ha) in Western terai districts. In addition, under BLGW-III 186 rehabilitation subprojects (11,480 ha) in 20 hill districts in the West, Mid-West and Far-West Regions, 36 rehabilitation subprojects (12,419 ha) in 6 terai districts, 25 turnover projects (3109 ha) in 10 districts and 42 tubewells (9170 ha) in 7 terai districts were completed. Furthermore, 57 hill rehabilitation subprojects (8049 ha) in 23  37 districts, 12 rehabilitation subprojects (13,365 ha) in 6 terai districts and 43 tubewells (851 ha) in 7 terai districts (total 21,459 ha) will be carried over to the Nepal Irrigation Sector Project (NISP). Similar transfer arrangements to BLGW III were made for the Institutioral Development Support (IDS) component. The provision in the IDA Credit 1924-NEP for funds for ADBN was not required. The proposed Subsidiary Loan Agreement was never signed because ADB/N did not need it. 19. The ILC component can be considered to have been successfully concluded and has enabled NISP to be designed using lessons learned from the ILC pilot project. 20. Institutional Development Support (IDS) to DOI. Thirteen new district office buildings were constructed and 12 existing offices were renovated. A new DOI central building was completed in January 1997. Computerized management information system (MIS) and a library were established. The detailed assessment of DOI manpower, resources and training and the institutional development from follow-up activities was restricted due to transfer of funds to other project components. Training of staff for implementation of ILC process and procedure was conducted. HMGN has, as required by the DCA, issued regulations and implemented plans for establishing WUAs, WUGs and FIAs as legal bodies. Staff training, operation of a fully effective mobile irrigation team in the Western Regional Directorate and provision of association organizers in the districts and their supervision were only partially realized due to lack of commitment from DOI. A number of feasibility studies of medium and large FMIS were conducted using IDS funds. 21. Flood Rehabilitation. Rehabilitation of 15 projects in the Eastern, Central and Western Regions affected by the 1987 flood was completed in 1992 and the projects have resumed operation. 22 Technical Inputs. Technical support and training in design, construction, supervision and water management for the main MIP-II component of the project used 225 months of international consultants and 467 months of national consultants hired under an international consulting firm throughout the implementation period for design and construction supervision. The costs of technical assistance for implementation support for the ILC and IDS components were shared with BLGW III (US$ 0.31 million from MIP credit out of the total of US$0.81 million), for 22 months of international consultants and 187 months of national consultants hired under an international consulting firm. Project Cost 23. The estimated total cost of the project at appraisal was about US$46.7 million (NRs. 1,107 million). The actual expenditure for the project at the time of credit closing on March 31, 1998 is estimated to be about US$46.4 million or about 99% of the SAR estimate in US dollars. (See Table 1). When expressed in current Nepalese Rupees it is about NRs.2015 million or about 182% of the SAR estimate) due to the devaluation of the Nepalese Rupee with respect to the US dollar in the course of project implementation (US$1= NRs.21.90 at appraisal to about NRs.60.0 in 1997/98). As of end of 22 February 1998, SDR 29.78 million  38 (US$41.73 million equivalent) have been disbursed. It is expected that by the closing date of March 31, 1998, the SDR 29.90 million Credit (US$49.9 million equivalent) will be fully disbursed. Project Benefits 24. Mahakali Stage II. The SAR objective of raising agricultural production and farm incomes is likely to be achieved through higher cropping intensity, higher crop yields, and adoption of higher yielding crops. Overall cropping intensity was 120% at the time of project appraisal. The SAR projected a cropping intensity of 186% with the project, a 66% increase. Results of an agricultural baseline survey conducted in 1997 showed that an average cropping intensity of 171% had been achieved in the Stage II area even before the project became operational (an increase of 51%). The increase is accounted for by increased use of irrigation from shallow tubewells, adoption of improved varieties, and increase in the use of fertilizers. Demonstration effect of the Stage I area has also played a role. The first irrigation by the project was for 285 ha in the Daiji area during 1996 rabi. In kharif 1997 a firther 300 ha was irrigated in the Stage II area. Assuming that the success achieved in Stage I can be replicated in Stage II, the overall cropping intensity when the project is fully operational is now projected at 196%. Thus the project is now expected to account for a 25% increase in cropping intensity compared to the SAR estimate of 66%. 25. Crop yields were also expected to increase as a result of the project. For example, paddy and wheat yields were projected to increase from 1.6 tons/ha and 0.4 ton/ha in future without the project to 3.5 tons/ha and 2.6 tons/ha, respectively, in future with the project. The baseline survey found that average paddy and wheat yields had risen to 1.85 tons/ha and 1.80 tons/ha, respectively, due to the same reasons given above. Based on achievements of Stage I and results of the pilot farm, average paddy and wheat yields are now projected to increase to 4.0 tons/ha and 3.0 tons/ha, respectively, at full development. All this is expected to lead to incremental agricultural production, employment, and farm incomes in the project area. Preliminary analysis, based on actual project expenditures and re-estimated benefits at full development in 1999/2000, shows an economic rate of return of 12% and a net present value of NRs. 229.5 million for Stage II compared to an ERR of 16% and NPV of NRs. 138 million estimated at appraisal. 26 ILC Component. Because ILC subprojects are spread over a wide geographical area covering a number of new and rehabilitation schemes, preliminary economic analysis has been carried out on sample basis covering three new subprojects, four rehabilitation subprojects and one groundwater cluster. Cropping intensity and crop yields have increased in all cases. ERRs for the three new schemes range from -1.6% to 9% (compared to an estimated rate of 16% at the time of appraisal). For the four rehabilitation subprojects, the ERRs range from about 9 to 22% (compared to a range of 19 to 73% estimated at appraisal). In the case of the one groundwater cluster, the ERR is about 16% for MTW and 18% for DTW (compared to estimated rates that ranged from 18 to 23% at appraisal). Farmers' contributions in the completed schemes were, in general, less than the appraisal estimates and less than required by HMGN's irrigation policy prevailing at the time. The farmers'  39 contribution varied from 0.5% to 19% of the investment costs, with an average of about 4%. In only 17 out of 124 subprojects was the farmers' contribution 10% or more. The low levels of contributions can be explained in some cases by underestimation of total project costs when fixing farmers' contributions.. Borrower Performance 27. The Borrower made considerable efforts to implement the project with diligence and efficiency and the project management cooperated well with supervision missions and showed strong commitment to effectively complete the project. However, the project suffered setbacks due to Indo-Nepal Trade and Transit Crisis in the early 1990s followed by diesel shortages. These factors delayed mobilization of ICB 2 contractor by at least 18 months. In the course of implementation, the performance of civil works contractor was unsatisfactory and the progress achieved after 2 1/2 years was only 27% against the target 70%. The contract was terminated in the project's fifth year. Mobilization of the new contract was again delayed by another year due to the ICB 2 contractor filing a protest in the Supreme Court and the Court's interim order placing a stay notice on construction. The ICB 3 contract performance was satisfactory. There were also delays due to Government's and farmers' tardiness in reaching agreements on tertiary construction following changes to HMGN's Irrigation Policy. It took nearly 18 months to get the agreement due to which the Credit had to be extended by a year The Borrower's consultant closely estimated the cost of the ICB contracts and provided satisfactory supervision and quality control during construction. There were frequent changes of the project manager of the main component and project coordinators of the ILC and IDS components in the course of implementation, resulting in unnecessary tardiness in decision making. Nevertheless, with the concerted effort of the Borrower, the consultants, and the ICB 3 contractor, the project was completed within the extended time and partial operation of the MIP Stage II started one year ahead of the credit closure. 28. The Borrower generally complied, although sometimes late, with the many covenants in the DCA except with regard to relending to ADBN (Sections 3.03 and 3.04 of the DCA: ADBN did not want the loan) and increasing water charges to cover the full cost of O&M (DCA Schedule 4 (r): see para 28). Not all ILC subprojects were selected in accordance with Schedule 6. 29. There was initially a lack of coordination between DOI and DOA at district and regional levels but this was satisfactorily resolved in 1996. Compilation of ILC accounts and submissions of applications for withdrawals from the Credit were often and substantially delayed due, in part, to lack of coordination between central, regional and district irrigation offices. Audit reports for the main component and mostly for the ILC and IDS components were often late but not to the stage of credit suspension. 30. A detailed Project Completion Report and Project Operation Plan (POP) were prepared and made available to the mission in advance for review. The cost compilation on the project particularly on ILC and IDS component is incomplete. DOI has been asked to revise the PCR and the POP taking account of comments made by IDA.  40 Bank Performance 31. The project concept, which was based on the technical advice and suggestions of IDA at the time of project preparation, was sound. During implementation, IDA provided frequent and effective supervision and adopted a flexible approach to the project, allowing reallocation of Credit categories (see Table 2) and extension of the closing date. However, IDA must share responsibility with DOI in being slow to deal with unsatisfactory performance of the ICB 2 contractor. By making it a condition for credit extension, IDA encouraged HMGN to increase water charges in the project areas. IDA had little success in achieving its often-stressed objective of stage-wise completion of canal construction in order to obtain early agricultural benefits. IDA's supervision of the ILC and IDS account compilation in the early stages of the project was not effective until specialized SOE and account review missions were fielded. Project Sustainability 32. Mahakali Irrigation Project, Stage II. There is an existing organization for the operation and maintenance of Stage I of the Mahakali Project, which is effective. It is expected that this will be expanded to take over the O&M of Stage II. Adequate budget has been provided for O&M of Stage I works: NRs 5 million (plus about NRs 2.4 million/year for establishment costs; i.e. NRs 1042 + 500= 1542/ha/year) in 1996/97 and NRs 3.5 million in 1997/8. (NRs 729 + 500 = 1229/ha/year). This is said to have been adequate for O&M and final commissioning works with WUGs taking responsibility for tertiary canals. The policy of HMGN is that the budget for O&M should be NRs 500/ha/year plus establishment costs and this is considered to be satisfactory for a mature project. A study to be funded under NISP, which will review HMGN's O&M policy and water charges, will also indicate whether the proposed level of funding will be adequate for sustaining the project. Project staff would maintain the main system and secondary canals down to the turnout to tertiary canals. Below this level is the responsibility of the WUGs. Project staff would initially operate the system down to and including the secondary canals; in due course operation of secondary canals would be taken over by the WUAs, as has already happened in Stage I. 33. A draft Project Operation Plan has been prepared by consultants for DOI but requires some revision and augmentation, particularly with regard to the costs of O&M and water management. The recommendations of this plan are not all being implemented, particularly those concerning monitoring of water flows. There has been no attempt yet to collect water charges in the Stage II area because reliable water supply has not yet been fully introduced. In the Stage I area, 87% of the amount assessed (at a rate of NRs 200/ha/year) in 1996/97 was collected. The rate for 1997/98 onwards has been doubled to NRs 400/ha/year. 15% of the amount collected is returned to WJUGs and WUAs from the DOI O&M budget to cover the costs of O&M of tertiary canals and other expenses. 34. Irrigation Line of Credit. Sustainability depends on DIO providing timely assistance with those aspects of maintenance and repair with which WUG cannot cope. Technical assistance by DIO to WUJG seems to be readily available, but funds for repairs are usually scarce. DOI's PCR reports (Part IV, page 52) that sustainability of some subprojects is in  41 doubt: fanners have not been trained to operate and maintain new types of structures with concrete, masonry and steel gates; canals and distribution systems planned and built without users' active participation are damaged; WUGs often do not mobilize resources for maintenance and repair but carry out repairs on an ad hoc basis. There are cases where even for a few bags of cement WUG approached DIO. Future Operation 35. Mahakali Irrigation Project. During the wet season (15 May to 15 October) ample water is available and the main system and secondary canals will be kept full continuously when needed for irrigation but with closures for maintenance as far as practicable at times when irrigation is not required. During the dry season (15 October to 15 May) the supply at the headworks is limited to 4.25 m3/s. The project area will be divided into possibly two or probably three zones for dry season operation; each zone will receive water for one week in rotation with the other zones. During its turn, all canals in the zone will be full; there are no gates at the heads of tertiary canals; it will be up to the WUG group to allocate water and farmers to irrigate the area they chose with the water available. When another zone is receiving water the gates at the heads of secondary canals in the dry zones will be closed and secondary and tertiary canals will be dry. 36. Irrigation Line of Credit. Future operation, as in the past, will be entirely the responsibility of the water users. Improvements to the systems made during the project will have made operation in many ways easier: less repair work in wet season for previously temporary weirs where these have been replaced by more permanent structures; less interruption to supply due to damage of canals by cross drainage where new aqueducts have been built. More reliable water supplies will enable planned operation to be effectively implemented. Nevertheless, the involvement of DOI is still likely to be needed for major repairs if the systems are to be sustained. Issues and Lessons Learned 37. The cost of O&M of completed major irrigation projects is estimated to be about NRs 1000/ha/year (at least NRs 500 direct expenditure plus about NRs 500 establishment costs). Water charges are now NRs 400/ha/year. Even if 100% of the assessed amount is collected, the subsidy by HMGN would be about 60% of the cost of O&M. If the subsidy is to be reduced water charges must be further increased. The study proposed in NISP will help to establish the level of charges. 38. Adopting prequalification procedures in accordance with Bank guidelines does not necessarily ensure a satisfactory contractor. 39. Introduction of irrigation should be accompanied by assistance to farmers with land leveling.  42 40. Economic analysis of ILC subprojects is often inadequate. The mission noted feasibility studies and appraisals that did not distinguish between irrigated and unirrigated crops, particularly without the project, where the production from a rainfed area, which was to be irrigated by the subproject, was not included in the without-project production. Assumed future yields with the project are often overoptimistic. The PCR reports that work that is unnecessary (because it could be done by the WUG without assistance) has been included in subprojects, sometimes to enable contracts to be awarded to the WUG for doing the work. IDA supervision reports repeatedly drew attention to the less than rigorous appraisal and the challenge of sustaining and institutionalizing acceptable standards of planning, design and construction. Supervision reports stated that some schemes were selected on social and political considerations, rather on their technical and economic merits. HMGN must institute adequate controls to ensure that subprojects to be implemented have been shown by rigorous appraisal to be viable. 41. Lessons, which have been learned from ILC and have been incorporated into NISP, are described below. 42. Setting annual area or budget targets in advance causes implementation to be supply led rather than demand led, which is the intention. 43. Setting a limit on the cost per hectare can result in a temptation to spend up to the limit ignoring the economic viability of such expense. 44. It is not reasonable to expect increased input by DADO for agricultural extension if additional resources are not allocated to DADO. 45. Responsibility for maintenance during construction of ILC rehabilitation subprojects should be clearly defined and left, as far as practicable, with the WUG. construction contracts should make clear that damage caused by contractor's negligence should be his responsibility. Damage caused by DOI design should be repaired by the contractor at DOI's expense. 46. For new ILC subprojects the time at which responsibility for O&M is to be assumed by WUG must be carefully and clearly defined to avoid continuing the responsibility of DOI indefinitely due to minor omissions or imperfections in their work. In the case of groundwater and other subprojects for which WUG has arranged a loan from ADBN, there is strong incentive to delay taking over the subproject because this triggers the onset of the loan and accrual of interest. 47. Farmer managed irrigation schemes are still likely to turn to DOI in the future for assistance with major problems. Some ask for assistance with even minor problems within their own capabilities; such requests should be resisted. 48. In calculating the farmers' contribution for groundwater projects the cost of electrification is ignored. This is not the case in pumped surface irrigation schemes  43 49. Ownership of DTW and pumping equipment for new surface water schemes needs to be clarified. Next Steps in ICR Preparation. 50. HMGN will revise their PCR and POP to take account of the comments of the Bank and submit the revised PCR to the Bank by 15 April 1998. The evaluation summary of the PCR will be revised to include some missing items that the Bank considers important. The summary, to be attached unedited to the Bank's ICR, should also include: (a) an assessment of project design and operation experience; (b) an evaluation of HMGN's own performance during the evolution and implementation of the project, with special emphasis on lessons learned that may be relevant in the future; and (c) an evaluation of the performance of the Bank during the evolution and implementation of the project, including effectiveness of the relationship between HMGN and the Bank, with special emphasis on lessons learned. When approved by HMGN, the Bank will treat this report as HMGN's own evaluation report of the project and plan for the operation phase of the project. 51. The Bank will prepare and submit to HMGN by 1 May 1998 a draft ICR for comment. The mission recommends that HMGN's comments on the Bank's draft ICR be sent to the Bank within one month of receiving the report. The Bank will incorporate the comments before the final ICR is issued. mipicra2.doc  Mahakali Irrigation 1t Project Table I tmplementation Completion Repont Project Costs Mahaalia It ICR Table - - Project Costs (NRs'000) 12-3 4--Aug-98 _____SAR p48 _______ ___Actual MAahakall Stage If __________ 198819 1989190 1199011 1991/2 199213 1934 1994/5 1995/6 1996/7 199718 199819 _Total Actuat/SAR Sources 5 1IC82 PaidinUS$ __ __ __ __ __ 6 Equivalent ir, NRs 7 Paid iii NRs 8 ICB 2 totlt ii. NRs 5.000 35,000 50,000 25,000 30.669 145,669 ___ __PCR Fig 2.2 & 13.5 9 __C103 Paid inUS$ __ ___- 10 _ Equivalert ir. NRs _ _ _ _ _ .. __.. . - ~ . .- 1 __Paid in NRS . 100100 04 ~504 12 IC6 3to3latir.00N_ 17Rs05 ___0___4 7 15s Total Civi Works _ _ _ __ 508,463 __ _ __ _ _ _ _ __785,710 1.55 CR _1___ -16 an ultlr ___ ____ 870 . 190 2,720 3,000 250.Ldacuson4,490 250 2,990 _13,510 9,4-60 -2-50 496_ CR3,Svc3Ap670 - 17 josPaidminUS$ .18 - quivaient w NRs 1-9 .Paid in PDS' )00 ___ 2.001 PCR T 3.7 20 ____Equivatentir NRs ---. 21 ____PritNa____ ______32.120 _ PCR T3.7 22 Total Consul ants ___ __ _ _-11 23 project atinr~~~ittioaIn ____ 2.430 2,560 5,0 ,2 _437 ..1,8 .17.S/vOct93A4pl 24 TotatProjeadmrinu. trtion 112.947 25 fat1rrms2raaazatio, i upr 5,476___-- __-.- - . .- 26 Agricuhural developr. iunt support 13,821 __ 27 Oper~ation & m-iten ince support 11,870 - _ - _ _ - - =- 28 I I ota Maak iiStagetl1 652,577 35,880 60,090 83,700 113,650 67,950 27,580 -126,840 277,250 319,070. 85,970. 22,240' 1,220,220 _.___,_l187 SItI197tu91f92sh.nPCRApr$5ex.escii.e, 29 IrrigatIon Lineaof CredIt 4 30 -irida LandacquisitianI ___________ _ ______ ...I- 498.2,135 .- .. . -I ~, - I --.-.- - -__- - 31 CrvIt works and buiti -igs ____ 49,221 39,901 95,131 92.6-46 64,865 42,345 39,162 23,000 444,136 __ 32 -ProjectadmiinLsrato i 2,388 3,824 1,710 2,151 1.834 1.485 __1,267 1.6 ___15,804 33 Farmers organiza!ip, support__ __ 34 -.Consultant, training. tudies ___- - - 5499 820 ,4 -1.3 35 - TotaILCby 4MON_ - 6-1,672 43,726 90,842 986 7298 5,0 4,72 4663 -4856PRll2+N abla 36 _ FarMers Contribiuttoi,________ 7,699 6,515 14,430 14,1i35 10,758 7.766 J6,329 3,675 71,308 C aIculFa t e-d: Q63-6 -Q3]4 37 7T"talL-c.. _____ 207,018 59,371 50,241 111,272 108,998 82.956 59,886 481,801 28,338 --549,864- 2.66 _Total PCR IiIIp13_-1_9;anatpora 38,Flood rehabllllation ____________ 39 ILand acquisitio ---__-_--- 40 -CivIl works East DevIopment Region 83,420 25,330 _ _ _ 108.750 41 Civil works Centrall>vekipment Region -18,940 _11,940 _ -- -30,880 -- 42 Civi works West De% dtopten"t Region 8,660 ___ ,6 43 -Project Administratio _____ __ 44 Totat~~~~fllood I ehabitiation 169.214 11,2 720- - - - - -148,290 088 45Inslltutional developmren_____ _______ 48 iFreign consuktantssiidIn PO-S 47 - Equivalent ii. NRs 48 Paid inNRts 479 -Totalforeign ons in NRs - 590 0wexpenditure in :4Rs ___ __ 51 - Totatt~~~~-nstuitutnratdeveloprn 77,8-67 - - - 20,751,__2.969_ 17,944 54.955" 10.341. 106,960 71 i P CR -1 11/2-8 - 52 GRANOTOTAL(NR4.0006) 1,100.,675' M88 20481 17121 245,673 179,917 128.480 241,681 336,392 347,408 85.970 22.240 2,025,334 1.833 53 NtRa/US$ (Note 1) ______25,241 28.28 33.32 39.99 45,67 49.26 49 5.2 55.5 60.24 62 _ 505.-- 54 --GRN TOTAL (US .000o) 49 1421.5531 8149.981 5139.17 6143.363 3939.505 26082-07 893 0401 6259603 1427.125 358,7097 46,361 --Note I.Sources: FY) Ito FY93 Report 17034 - NEP._FY94 onwards. Ofrice Memorandum dated.Feb 6 1998 from Hans Rothrerbulter. SAR quoted Rs 2I.90US$1 l- -- .- For Consultnt u-s: I NRs. ____PSl=NRs For 0C82 US$1=NRs FrICB 3 US$1 NR A B C _______ ~~~~~~~~~~~E IF__ MN P RS-V IG, H 11 0 v~~~~~~~~~rprip~u l  45 Mahakali Irrigation II Project Table 2 Implementation Completion Report Reallocation of Credit Reallocation of Credit 22-Feb-98 Allocation SDR US$ US$ US$ US$ US$ Category Description Original Latest Latest MIP ILC FR IDS IA Civil works MIP II 13,010 14,433 20,326 20,326 1B Civil works: Flood rehabilitation 4,770 3,357 4,418 4,418 iC Civil works: Institutional development 940 914 1,369 1,369 2A Equipment MIP II 650 135 192 192 2B Equipment: Flood rehabilitation 180 89 116 116 2C Equipment: Institutional development 180 119 166 166 3Ai ILC New Subloans 400 - 3Aii ILC New Construction 1,900 6,055 8,610 8,610 3Bi ILC Other Subloans 480 - 3Bii ILC Other constuction 2,000 613 872 872 4A,B,C,D Salaries, O&M for MIP 730 640 890 890 5, Salaries ILC, IDS 150 311 445 445 6A Consultants MIP il 1,560 2,743 3,823 3,823 6B Consultants Flood rehabilitation 180 211 316 316 6C Consultants IDS 650 130 179 179 SA Special Account 31 6 7, Unallocated 2,120 - .Total 29,900 29,781 41,728 25,231 9,927 4,850 1 1,714  46 NEPAL MAHAKALI IRRIGATION II PROJECT (Credit No. 1924-NEP) IMPLEMENTATION COMPLETION REPORT Appendix 2 Financial and Economic Re-evaluation I. Stage II Component 1. Financial and economic re-evaluation of Mahakali Irrigation Project Stage II is based on data collected during a 1997 agricultural baseline survey conducted to update the findings of a socio-economic survey of the project undertaken in 1988 and on the findings of the ICR mission during field visits. A. Agricultural Production 2. The Project was expected to raise agricultural production and farm incomes through: (a) expansion and management improvement of a public irrigation system, (b) construction and rehabilitation of private farmer-managed irrigation schemes on a cost sharing basis in conformity with the country's Irrigation Policy, and (c) restoration of irrigation schemes and river protection works damaged by August 1987 flooding. Irrigation water was expected to be available, chronic flooding would be diminished, water management at the field level would improve, and farmers would be trained on improved irrigation management practices. All this was expected to lead to higher cropping intensity and crop yields and changes in cropping patterns. 3. Overall cropping intensity at the time of project appraisal was about 120%. The Staff Appraisal Report (SAR) projected cropping intensity to increase to 186% with the project, an increase of 66%. Results of an agricultural baseline survey conducted in 1997 showed that an average cropping intensity of 171%, an increase of 51%, had been achieved in the project area even before the project became operational (Table 1). Increased use of irrigation from shallow tubewells, adoption of improved seed varieties, increased use of fertilizers, and demonstration and favorable effects from Stage I area account for the increase in cropping intensity. The impact of these factors was not foreseen at the time of appraisal. Based on the assumption that the success achieved in Mahakali Irrigation (Stage I) Project can be replicated in Stage II area, cropping intensity when the project is fully operational is now projected at 196% (Table 2). Due to the impact of the factors that were not foreseen at appraisal and the possibility that the farmers are likely to switch to surface irrigation at the project's full development, the  47 project is now expected to account for about a 25% increase in cropping intensity compared to a 66% increase estimated at appraisal. 4. Increased use of irrigation from shallow tubewells, adoption of improved seed varieties, increased use of fertilizers, and demonstration effect from Stage I area have contributed to higher increases in the productivity of paddy and wheat in the without project situation than was anticipated at appraisal. Average paddy yields have risen by about 20% while wheat yields have more than doubled. There have also been increases in the yields of maize. oilseeds. and pulses since 1988. Based on the achievements of Stage I area. further yields are expected when the project becomes fully operational. For example, paddy yield is expected to double and wheat yield is anticipated to increase by almost 67% over current levels. More modest yield increases are projected for maize, oilseeds and pulses. Details are given in Table 3. 5. At appraisal. it was expected that the project would lead to increase in area of wet season paddy cultivation. use of high yielding crop varieties (HYVs), introduction of some spring paddy. increased area in wheat. oilseeds and pulses in the dry season, introduction of new crops including groundnut and cotton in the wet season, potato in the drv season. and pulses in the hot season, and reduction in the maize area in the wet season. No significant changes in cropping patterns were expected to occur without the project. There have been a number of changes in the cropping patterns in the area since 1988. For example. the areas under paddy, wheat. and pulses have increased while those under maize and oilseeds have declined. Further expansion in area under paddy and wheat is expected following project completion. This is expected to be offset by a decline in the area under maize and oilseeds. The area under lentils/chickpeas is expected to remain about the same, and some farmers are likely to introduce a spring crop (possibly pulses). Farmers have shown a keen interest in growing sugar cane, but they are constrained by inadequate processing capacity within reasonable proximity to the project area. Thus expansion in sugar cane area is unlikely. Similarly, cotton has been grown in the project area in recent years but the crop proved unprofitable and production has now been discontinued. Stage I farmers have been reluctant to introduce groundnuts and soybeans. Thus. Stage II farmers are unlikely to introduce these crops. The area under potatoes and vegetables is likely to expand in response to market demand when the project is fully operational. Details are presented in Table 3. 6. A large increase in both area and production of basic foodgrains (rice and wheat) is anticipated (Table 3). Area under rice and wheat is projected to increase by about 2,530 ha. Incremental foodgrain production is projected at about 19,370 ton/year compared to 13.635 ton/year envisaged in the SAR. Output of pulses and vegetables will also increase while that of maize, oilseeds, and sugar cane is expected to fall. A comparison of annual incremental crop production at full development calculated from the projected cropping patterns. intensity, and yields at appraisal and ICR is summarized below. While the project is expected to lead toincremental crop production. re-estimated incremental production is only 63% of that projected at appraisal due to the  48 underestimation of incremental production in the without project scenario at the time of appraisal. Estimated Incremental Crop Production (Mt/Year) Ve.g .~~~~ ..~~ 8,650 Sug b1N/A 1 ., ~~~27,275 ~ ;::::~:z'~$ B. Farm Incomes and Impact on Poverty 7. At appraisal the financial impact of the project on the beneficiaries was analyzed using three farm models characterized by differences in farm size and cropping patterns. Annual net incremental farm incomes' of small (1.2 ha), medium (3.3 ha), and large (7.1 ha) farms were estimated to increase by about 415, 435, and 420 percent, respectively, over the future without project levels. For this ICR, based on revised cropping patterns, yields and intensity and per hectare financial crop budgets in Tables 4, 5, and 6, annual net incremental farm incomes of small (1.0 ha), medium (3.0 ha), and large (7.0 ha) farms are re-estimated to increase by about 85, 102, and 127 percent, respectively, over the future without project levels. Overall, farm incomes are expected to increase by an average of 98 percent over the without project scenario. Even though these are large increments, they are substantially lower than those estimated at appraisal. Re-estimated incremental net farm incomes are summarized below. Many farm families in the project area would remain below the average national per capita income of around US$ 200 (NRs 11,406) in spite of substantial increases in income unless they can supplement their income from non-farm sources. Details on incremental farm incomes are given in Table 7. Annual Incremental Net Farm Incomes by Farm Size (NRs) SAR C ..~~,.~~... 24,770 Med3tfiif.i'. 64,989 t7;.|69 ~~~.~~~~~ ~121,156 ~ 'Net return to family labor and farm capital investment before tax and water charge payments, assuming that farm implements are fully owned by the farm family. Depreciation is excluded from the input cost.  49 C. Employment Impact 8. The Mahakali stage II component was expected to generate employment through construction, expansion and intensification of agricultural production, and agribusiness activities such as marketing, transport, and processing. It is estimated that the construction of civil works will have employed a total of 3.31 million man-days of labor by the time that the tertiary network and field channels are completed (compared to 2.88 million man-days anticipated at appraisal). Furthermore, future operation and maintenance of Stage II is expected to require 88,000 man-days per annum. Expansion of cropped area and increases in crop yields are projected to lead to significant expansion in agricultural employment -- both family and hired labor. Agricultural employment is expected to increase by about 0.37 million man-days per year at full development. On the basis of 240 man-days per annum, this is equivalent to 1,540 full-time farm jobs (compared to 2,800 jobs projected at appraisal). Details are given in Table 8. D. Economic Re-evaluation 9. At appraisal, the economic evaluation was based entirely on quantifiable agricultural benefits. Emergency flood rehabilitation benefits were noted but not estimated due to lack of sufficient data because of the widely spread geographic nature of this component. The economic rate of return (ERR) and net present value -- NPV -- (at a 12% discount rate) for Mahakali Stage II were estimated at 16% and NRs 138 million, respectively. 10. Economic re-evaluation is carried out using similar methodology as the one used at appraisal. However, adjustments are made with regard to prices and conversion factors, "with" and "without" project situation, benefit build-up rates, and project cost in light of actual outcome or revised expectation. Farm benefits and costs at full development are calculated on the basis of farm budgets prepared from the 1997 Agricultural Baseline Survey data for Stage II area and compared to the without project situation. Financial output values, production costs, and gross margins per hectare are presented in Table 5. Financial and economic prices of farm inputs and outputs are presented in Table 9. Conversion indices for local and foreign costs are given in Table 10. Economic re-evaluation results are presented in Table 11. The ERR for the component is re-estimated at 11.5% (compared to 16% in the SAR). A 12% discount rate gives a negative NPV of NRs 27.7 million. Thus, at an opportunity cost of capital of about 12% the project just about breaks even in terms of economic viability. Underestimation of incremental cropping intensity and yields and changes in cropping patterns in the without project situation and a longer implementation period account for the lower re-estimated ERR.  50 II. Irrigation Line of Credit Component2 11. A sample of eight completed Irrigation Line of Credit (ILC) sub-projects are re- evaluated to assess the economic impact of the component. The sample consists of three new surface sub-projects, four rehabilitation surface sub-projects, and one groundwater cluster. The results are presented in Table 12. Cropping intensity and yields have increased in all the sub-projects in the sample. Yields have improved even in cases where irrigation has ceased or irrigated area has not increased.3 Cropping intensities and yields in parenthesis (Table 12) refer to the future potential situation expected at end of the development period assuming the same rate of increase. These are used to estimate the ERRs shown in the table. 12. Increases in cropping intensity, irrigated area, and crop yields vary with sub- project type (Table 12). For example, cropping intensity in the three new sub-projects has increased by 9-71% (compared to 80% in SAR). It is estimated that at the end of the development period, the range will vary from 81-115%. The four rehabilitation sub- projects have achieved increases in cropping intensity that range from 0-62% (compared to 60-80% in SAR). The range is projected to vary from 28-68% at full development. An increase of 16-69% in cropping intensity has been achieved in the one groundwater cluster. The range is projected to vary from 78-82% at full development. 13. Re-estimated ERRs range from -1.61 to 8.76% (compared to 16% in SAR) for the three new sub-projects, 9.07-21.94% (compared to 19-73% in SAR) for the four rehabilitation sub-projects, and 16.28-17.95% (compared to 18-23% in SAR) for the one groundwater cluster. The ERRs for the new surface sub-projects are all below the estimated opportunity cost of capital (12%) in Nepal, suggesting non-economic viability of developing this type of hill irrigation in the countrv. Rehabilitation of surface and construction of groundwater clusters appear economically profitable provided a two- season cropping pattern is adopted. 14. Key economic impact indicators of the ILC component are summarized in Table I 3. Appraisal and present estimates are compared in the table. Reasons for the lower re- estimated ERRs include lower cropping intensities than anticipated due to the reduction in winter wheat and spring paddy cropped areas from that expected at appraisal. lower crop yields than projected (60. 20, and 35% lower than expected for paddv, wheat. and maize. respectively), higher construction costs. longer sub-project implementation periods. and selection of less suitable sub-projects. - Th is section is based on a report prepared by ILC TA Team, Project Completion Report for Irrigation Line of Credit Pilot Project and Institutional Development Support Components, June 1997 and information collected by the ICR mission during field visits. This could be attributed to inaccuracy of the databaseebtained on existing crop yields at the time of sub- project study.  TABLE 1 Nepal Mahakali Irrigation II Project Implementation Completion Report Cropping Intensity by Irrigation Status and Farm Size Irrigated Condition Rianfed Condition Overall Cropped Irppntestgra(A Cropped Cropping Cropped Cropping Farm Size |Area (HA)|ACrre