Nepal - Highway Project

RESTRICTED FILE COPY Report No. P-87 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PR ESID ENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE KINGDOM OF NEPAL FOR A HIGHWAY PROJECT October 23, 1970  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND REC(fMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE KINGDOM OF NEPAL FOR A HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed credit in an amount in various currencies equivalent to US$2.5 million to the Kingdom of Nepal for a highway project. PART I - HISTORICAL 2. The project was appraised in November/December 1969. Credit negotiations were completed on October 1, 1970. The Borrower was repre- sented by Mr. B.B. Pradhan, Secretary, Ministry of Works, Transport and Communications; and Mr. B. Pradhan, First Secretary of the Embassy of Nepal in Washington. 3. In November 1969, IDA made a credit of $1.7 million equivalent for a telecommunications project. If approved, this credit would be the second project in Nepal financed by the Bank Group and the first lending operation for the country's transportation sector. In 1964 the Bank made a grant of $100,000 equivalent to the Government of Nepal for a transpor- tation survey which was completed in 1965. Some of the recommendations have been implemnented with assistance from bilateral and multilateral aid agencies. 4. The following is a summary statement of the first IDA credit to VPepal as of September 30, 1970: Amount US$ Million Credit No. Year Borrower Purpose IDA Undisbursed 1 6~6-N!P 1969 Govt. of Nepal Telecommunications 1.7 1.6 5. The telecommunications project is progressing satisfactorily, although some delays have resulted from the death of the Chief Executive of the Telecommunications Board at the end of last year. A successor has been selected. 6. A project is presently under preparation for irrigation and the possibilities of assisting tourism are under consideration. In addition, highway and water supply feasibility studies, currently underway with finan- cial assistance from the UNDP, are expected to lead to projects which may be cuitable for IDA financing.  - 2 - 7. PART II - DESCRIPTION OF PROPOSED CREDIT Borrower: Kingdom of Nepal Amount: Various currencies equivalent to US$2.5 million Purpose: To assist in financing the replacement of highway bridges, the supply and erection of suspension bridges, and the improvement of road maintenance as part of the Borrower's highway improvement program. Amortization: In 50 years including a 10-year period of grace, through semi-annual installments of of 1% from March 15, 1981 through September 15, 1990 and of 1lit from March 15, 1991 through September 15, 2020. Service Charges: 3/4 of 1% per annum Estimated Economic Return on the Project: 20% PART III - THE PROJECT 8. An appraisal report entitled "A Highway Project - Nepal" (PTR-54a) on the proposed project is attached. 9. Nepal has within its boundaries some of the highest mountains in the world, making penetration into the hill areas from the Terai Plain as well as lateral communication extremely difficult. Up to 1953, there were no motorable roads outside the Kathmandu Valley. Although considerable foreign assistance has been provided in recent years for highways, the network of roads, now totalling about 1,300 Km., is still among the smallest in the world, whether in relation to area or to population. Recognizing the limitations imposed by the inadequacy of transportation, the Government has accorded high priority to highway development in its five-year plan, which includes, among other things, the completion of the eastern section and commencing work on the western sec- ticn of the East-West Highway running the entire length of the southern part of the country, and north-south feeder roads. The proposed project is part of this plan. 10. One of the main objectives of the proposed credit would be to improve highway maintenance. This is important in reducing transport costs on existing roads and maintaining standards of roads to be taken over from bilateral aid agencies which are financing and constructing major portions of the highway network. A substantially increased allocation of funds by the Government will be required. The project also provides for the replacement of five narrow 'and unsafe road bridges on existing roads and the supply and erection of five suspension bridges for porter traffic in the hills, to facilitate communications in remote parts of the country.  - 3 - 11. Another important objective of the project would be to strengthen and improve the organization of the Roads Department, which would be respon- sible for the execution of the project. For this purpose, a team of technical experts would be provided by the UNDP. Of the six experts to be retained, two, including the Project Manager, are already in Nepal. The remaining four are expected to be recruited shortly. 12. The estimated total cost of the project is US.$3.4 million equivalent, of which US$2.7 million represents the foreign exchange compo- nent. The proposed credit would cover US$2.5 million of the foreign exchange costs. The remaining foreign exchange costs would be financed by the UNDP. Expenditures incurred since April 1, 1970 on consulting services to complete detailed engineering and prepare bidding documents, amounting to US$30,000, would be eligible for reimbursement under the proposed credit. The local costs, US$0.7 million equivalent, would be met by the Government. Contracts would be awarded on the basis of international competitive bidding, except for items such as the erection of suspension bridges and workshop construc- tion which would be carried out by the Roads Department or by local contrac- tors after competitive bidding. 13. The project is expected to reduce transportation costs substantially. The rate of economic return on its different elements is estimated to range from 14% to over 30%, with an average of about 20%. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 14. The draft Development Credit Agreement between the Association and the Kingdom of Nepal, the Recommendation of the Committee provided under Article V, Section I (d) of the Articles of Agreement, and the text of Resolution approving the proposed credit are being distributed 'to the Executive Directors separately. The draft Development Credit Agreement conforms generally to the pattern of Agreements for other highway projects. PART V - THE ECONaIY 15. An economic report entitled "Current Economic Position and Pros- pects Cf Nepal" (SA-7a) was distributed to the Executive Directors on June 26, 1969. A basic data sheet is attached. 16. The economic report describes the difficulties facing the economy. Three-quarters of the land is hilly and mountainous, and most of the people live there, largely in isolated communities. As a result, economic growth has been highly localized, mainly in the Kathmandu Valley and parts of the lowlying Terai Plain (adjacent to India). This geographical factor, combined with the country's late start in development from an isolated feudal kingdom less than twenty years ago, has caused Nepal to remain one of the least de- veloped countries in the world, with one of the lowest per capita incomes  ($45_- j65). The population of about 11 million is growing at about 2 percent per year, and gross national product is probably not increasing any faster. 17. Nepal has few natural resources, and those which exist (water power, forestry) will take a long time to develop. Agriculture, including forestry, is the largest sector in the economy, accounting for about 75 percent of the gross domestic product, and provides employment for over 90 percent of the total labor force. Rice, hardwood and jute from the Terai, ghee and potatoes from the hills are the most important export items. An adequate road system is needed to lower the cost of bringing agricultural and forestry products to market centers, and of distributing inputs such as fertilizer. Creation of infrastructure, in roads, telecommunications, aviation, water supply and sewerage, is also necessary for the rapidly growing tourist indus- try, which is Nepal's principal source of convertible foreign exchange, apart from jute exports and Gurkha remittances. 18. The Government has recently brought out its Fourth Five-Year Plan. At the request of the Government, a draft of this Plan was reviewed by a Bank mission which visited Nepal in May. Main emphasis in the Plan is given to the improvement of agriculture and transportation. 19. Nepal's very low per capita income severely limits the government's ability to raise revenue, which for most of the past years has covered only 50 to 60 percent of total government expenditure. Most of the deficit, which has in the past been about equal to development expenditure, is covered oy foreign aid. Nepal has been quite successful in obtaining aid, and most of it has been in the form of grants. Since the devaluation of the Nepalese rupee in December 1967, the balance of payments position has continued to improve; gold and convertible currency reserves increased by 60 percent to about $68 million (as of mid-April 1970) mainly due to rising jute exports. Holdings of Indian currency have doubled to about $21 million equivalent. However, the longer- term prospects for the leading export, rice to India, are not promising. Nepal is poor, has very limited natural resources and is almost completely dependent on outside aid for its development capital needs. In these circumstances, the provision of aid on concessional terms is fully justified. PART VI - CCMPLIANCE WITH ARTICLES OF AGREEMENT 20. T am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association. PART VII - RECCMENDATION 21. I recommend that the Executive Directors approve the proposed development Credit. Robert S. McNamara President Attachment October 23, 1970  ANNEX NEPAL BASIC DATA Total Cultivated as Area: (in square miles) % of Total 54,360 12.0 Density per Population: (1968/69 estimate) Total Square Mile 11.0 million (approx.) 202 Rate of Growth, current estimate: 2.0 percent (approx.) Political Status: Kingdom, member of U.N. Gross National Product at Current Market Prices: (average of 1965/66 - 1967/68) US$500 - 600 million. Rate of Growth: 2.0 percent (approx.) Gross Domestic Product per Capita: US$45 - 65 Gross Domestic Product by Branch: Agriculture (including forestry) about 75% (average of 1965/66 - 1967/68) Money and Credit: (NRs. Million) Fiscal Year 1968/69 % Change Ended Mid-July July 1968 - July 1969 Total money supply 710 +14.9 Government Budgetary Position: (NRs. Million) 1965/66 1969/70 % Change Total Revenues 217 442 +103.7 Total Expenditure 428 756 + 76.6 Deficit - 1 + 48.8  - 2 - Foreign Grant Aid by Donor Countries: (NRs. Million) 1965/66 1968/69 % Change 178.5 214.2 + 20.0 Of which: India 93.0 126.2 + 35.7 U.S.A. 57.9 36.9 - 36.3 China (People's Republic) 16.2 46.9 +189.5 U.S.S.R. 5.0 3.8 - 24.0 Others 6.5 0.4 - 93.8 External Public Debt: (US$ Million) As of January 1970 Total external public debt in convertible currency (including undisbursed) 13.6 Total annual debt service (repayable in foreign currency) - 1968/69 0.9 Of which: Amortization 0.8 Interest 0.1 Debt service as % of export earnings (in con- vertible currency) - 1968/69 6.8 % Change Balance of Payments: (US$ Million) 1965/66 1968/69 1965/66 - 1968/69 (Transactions in convertible foreign currency) Exports 4.2 13.6 +223.8. Other receipts 8.8 12.5 + 42.0 Imports 2.4 7.4 +208.3 Other payments 3.1 4.2 + 35.5 Current account surplus +7.5 +14.5 + 93.3 Commodity concentration of exports to third 1962/63 - 1967/68 countries (Raw jute and jute goods as % of Annual Average total exports) b7.6% Gold and foreign exchange reserves (mid-April 1970) US$89.0 Million Of which: Indian rupees $20.6 Million Currency Equivalents: 1 Nepalese Rupee = US $0.099 1 US Dollar NRs. 10.125 October 23, 1970