Nepal - Cottage and Small Industries Project

FILE COPY Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-3145-NEP REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A COTTAGE AND SMALL INDUSTRIES PROJECT November 5, 1981 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 Currency Unit - Nepalese Rupee (NR) Since September 19, 1981 US$1.00 = NRs 13.2 NRs 100 = US$7.58 FINANCIAL YEAR July 16 - July 15 ABBREVIATIONS AND ACRONYMS ADBN - Agricultural Development Bank of Nepal CC - Cottage and Small Industry Coordinating Committee CIDB - Cottage Industries Development Board CSI - Cottage and Small Industries CIED - Cottage Industries Export Development Division, TPC CIEPD - Cottage Industries Export and Product Development Fund, TPC DCA - Development Credit Agreement DCVI - Department of Cottage and Village Industries ISC - Industrial Services Center M - Million MOI - Ministry of Industry NTL - National Trading Limited NRB - Nepal Rastra Bank PA - Project Agreement TPC - Trade Promotion Centre UNDP - United Nations Development Programme  NEPAL FOR OFFICIAL USE ONLY COTTAGE AND SMALL INDUSTRIES PROJECT Credit and Project Summary Borrower: Kingdom of Nepal Beneficiaries: Nepal Rastra Bank (NRB) - Cottage and Small Industries (CSI) Fund; Agricultural Development Bank of Nepal (ADBN), Nepal Bank Limited, and Rastriya Banijya Bank; and cottage and small industries receiving credit through the above credit institutions. Amount: Special Drawing Rights 5.7 million (US$6.5 M equivalent as of date of negotiations). Terms: Standard Relending The Government would relend about US$4. 5 M equivalent to Terms: the NRB for the account of the CSI Refinance Fund on the following terms: (i) two percent and four percent in- terest per annum for subloans refinanced by the NRB-CSI Refinance Fund of up to NRs 20,000 and over NRs 20,000, respectively; (ii) repayment on the basis of a fixed amortization schedule over 14 years, including a three years grace period; and (iii) Government to bear the foreign exchange risk. The CSI Refinance Fund would provide refinance to credit institutions for CSI subloans on the following terms: (i) refinancing up to 80 percent of subloan amount; (ii) interest per annum of five percent and seven percent for loans up to NRs 20,000 and over NRs 20,000, respectively; and (iii) term would be parallel to the term of the individual subloans. The credit institu- tions would provide term credit to CSI borrowers on the following terms: (i) 11 percent interest per annum; (ii) term ranging from 18 months to seven years, including a maximum of one year grace period; and (iii) minimum of 20 percent equity contribution for subprojects over NRs 5,000 and ten percent for Performance Contractors. These initial rates and terms are subject to at least annual review and revision to ensure that the final on-lending rate is positive in real terms and consistent with the interest rates applicable to term loans for industry. Project The project aims to generate employment, raise incomes Description: and increase foreign exchange earnings through expanded production and exports of cottage and small industry products. The project would upgrade private and public sector technical, marketing, and credit services and redirect Government incentives affecting the cottage and small industry sector. As a first phase program, the project would focus on the Kathmandu Valley and the Gandaki Zone, testing, developing and improving the various institutions and services. By clarifying the 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  - ii - responsibilities of the various agencies, including an expanded role for the private sector, and providing sig- nificant technical assistance and training, the project would reduce the risks associated with undertaking such multi-component ventures. Each component includes a strong monitoring and evaluation system, which should facilitate response and corrective action in the face of unforeseen difficulties. Estimated Cost of Project: US$ Million Equivalent Component Local Foreign Total I. Credit Term Credit for CSI & Agents 4.92 2.11 7.03 NRB - Revolving Fund 0.42 - 0.42 Subtotal 5.34 2.11 7.45 II. Commercial and Technical Services Trade Promotion Centre 0.44 0.78 1.22 Cottage Industries Develop- ment Board 0.77 0.25 1.02 Emporium 0.02 0.09 0.11 Industrial Services Center 0.04 0.05 0.09 Subtotal 1. 27 1.17 2.44 III. Technical Assistance & Training 0.19 1.71 1.90 Base Cost 6.80 4.99 11.79 IV. Contingencies 0.05 0.16 0.21 TOTAL PROJECT COST 6.85 5.15 12.00 Financing Plan: US$ Million Equivalent Local Foreign Total IDA 3.17 3.33 6.50 Government/NRB 1.43 - 1.43 UNDP 0.20 1.82 2.02 Credit Institutions/Beneficiaries 2.05 - 2.05 6.85 5.15 12.00 Estimated US$ Million Equivalent Disbursements: IDA FY 1982 1983 1984 1985 Annual 0.41 1.78 3.52 0.79 Cumulative 0.41 2.19 5.71 6.50 Staff Appraisal Report: No. 3172-NEP, dated October 29, 1981  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A COTTAGE AND SMALL INDUSTRIES PROJECT 1. I submit the following report and recommendation on a proposed devel- opment credit to the Kingdom of Nepal for Special Drawing Rights (SDR) 5.7 million (US$6.5 million equivalent) on standard IDA terms to help finance a Cottage and Small Industries Project. Of the proceeds of the credit, about US$4.5 million would be onlent to the Nepal Rastra Bank (NRB) for the account of the Cottage and Small Industries (CSI) Refinance Fund. The United Nations Development Programme (UNDP) is expected to provide a grant of US$2.0 million equivalent for technical assistance and training (para 53). PART I - THE ECONOMY 2. The most recent economic report, "Nepal - Policies and Prospects for Accelerated Growth" (Report No. 3577-NEP) was distributed to the Execu- tive Directors on October 15, 1981. The principal findings of the report and recent developments are described below. Country data are shown in Annex I. 3. By almost any standard, Nepal is one of the least developed coun- tries in the world. Per capita income is estimated at $140 (1980) and health and education standards are well below the average for South Asia: life expectancy at birth is about 44 years, infant mortality is 150 per thousand, and adult liberacy is only about 20 percent. The population, estimated to be 14.3 million (1980), is growing at a rate in excess of two percent per year. About 95 percent of the population live in rural areas. 4. Population density with respect to arable land has reached alarming levels and is threatening to overwhelm the resource base of the economy. Cultivation has been extended beyond economically feasible and ecologically safe limits in the Hills, and together with denudation of forests to meet housing and fuel needs, soil erosion has become a critical problem. Firewood and water have become more difficult to obtain as the forests are reduced and springs and streams dry up. This degradation of the agricultural base has made even the present low level of living standards difficult to maintain, and instances of food shortages and malnutrition have become commonplace. 5. Agriculture accounts for nearly 60 percent of Nepal's GDP and 75 percent of merchandise exports, and provides the main source of livelihood to over 90 percent of the population. Crop production accounts for about 60 percent of agricultural output, livestock for 30 percent, and forestry for ten percent. Rice is the predominant food crop (planted on about half the total cropped area), followed by maize, potatoes, wheat and millet; cash crops (oilseeds, jute, sugar and tobacco) are grown on about ten percent of the cropped area. About 25 percent of total rural incomes arise from non- agricultural activities. Cottage industries are one of the more important of these, engaging over one million people on a part time basis, and providing basic consumer goods in the many small isolated markets where such goods would otherwise not be available.  -2- 6. Apart from agricultural land, Nepal's only other important exploit- able resources are hydropower and tourism. The exploitation of the vast hydropower resources, however, beyond that required to satisfy the country's own power demand, will depend crucially on Nepal's ability to enter into complex financial, exploitation and export agreements with neighboring coun- tries. The tourism sector, based on Nepal's magnificent landscape and rich cultural heritage, has been dynamic though it still accounts for only about one percent of GDP. 7. When Nepal started its modernization efforts in the early 1950s, there was virtually no economic or administrative infrastructure, and initial development efforts were necessarily concentrated on establishing a foundation for future development. Investments in the transport sector absorbed a large part of development spending. The Fifth Development Plan (197 5/76-1979/80) marked a shift in development objectives; acceleration of economic growth, employment creation and raising living standards of the population became major plan objectives. Development expenditures rose fairly rapidly during this period and there were substantial shifts in the composition of spending away from transport to agriculture, power and social services. GDP growth, however, barely kept up with that of population, and while it was inevitable that per capita income growth would remain slow in the early stages of devel- opment, the continued economic stagnation since the mid 1970s is disturbing. 8. Part of the reason for the stagnation lies in factors beyond Nepal's control. The difficult topography and poor resource base are obviously im- portant in retarding growth. Nepal's landlocked position, long open border with India and the dependence of its overseas trade on transit through India create additional disadvantages. While Nepal benefits from the proximity of a vast potential market for Nepalese goods, the ability to pursue inde- pendent economic policy measures is circumscribed. Furthermore, industrial development faces the competition of a far larger and more efficient indus- trial sector in India. 9. At the same time, factors within Nepal's control have also contri- buted to the stagnation. Problems with project implementation have been encountered by Government and donors in most sectors of the economy and have constrained the growth of the development effort; public sector capi- tal formation grew at an average of only 5.5 percent per annum in real terms during the 1970s. In addition, the expected returns on those investments which did take place, often did not materialize because necessary comple- mentary investments or current spending were lacking, and because of mana- gerial deficiencies. A good example is the agriculture sector, where out- put stagnated despite considerable investments in irrigation, a virtual doubling of of the irrigated area and a 40 percent increase in fertilizer use between 1974/75 and 1979/80. In the past, insufficient attention was paid to bringing water down to the farm level and this was compounded by inadequate support services such as extension and research, by the lack of timely supplies of improved seed, fertilizer and other inputs such as credit, and by the lack of farm-to-market roads. Recent major irrigation projects financed by IDA and the Asian Development Bank are now addressing some of these problems by taking more comprehensive and integrated approaches.  - 3 - 10. Although Government revenue efforts have improved considerably over time, revenues have by now only reached the equivalent of about nine per- cent of GDP, which is low by international standards. With limited domestic resources, current expenditures have been squeezed in an effort to generate savings for investment spending, with the result that the efficiency of total spending was lowered. Furthermore, while about one quarter of total budge- tary expenditures (regular and development) was being financed by the rest of the world in 1974/75, this proportion rose to close to 40 percent by 1979/80. 11. The disappointing economic performance has been accompanied by a widening trade deficit. Import payments have grown while the trend in export earnings has been sluggish due to declining rice exports. The deterioration on the trade account has been partly covered by increased tourism receipts and remittances, which together with foreign assistance in the form of grants and concessionary financing have generally ensured that the overall balance remained in surplus. But even so, foreign exchange reserves have declined from being equivalent to about one year of imports in 1974 to six months in 1980. 12. The poor monsoon in 1979 resulted in foodgrain production falling by 13 percent in 1979/80 and GDP declining by one percent. With the virtual elimination of rice exports at a time when Nepal's oil bill was rising the overall balance of payments surplus declined sharply in that year and Nepal drew SDR 10.5 million (US$13.8 million equivalent) from the IMF under the Compensatory Financing Facility in September 1980. Better weather in 1980 resulted in agricultural production recovering in 1980/81. Together with the favorable impact this had on other sectors of the economy, GDP is esti- mated to have grown by six-seven percent in 1980/81. But the trends remain disappointing; average GDP growth for 1979/80 and 1980/81 combined is likely to be only 2.6 percent, that is, very little increase in per capita terms. 13. On September 19, 1981 Nepal unified its exchange rate with the US dollar at NRs 13.2 = US$1; the exchange rate with the Indian rupee was un- changed at NRs 145 = IRs 100. This is the latest in a series of steps to reform Nepal's exchange rate system, which began when a complex system of multiple exchange rates and trade restrictions for overseas trade was re- placed with a dual exchange system on March 31, 1978. A basic rate of NRs 12 = US$1 applied for invisible and capital transactions as well as for imports of petroleum products, fertilizer, and cement. A second rate ap- plying to all other merchandise trade was set at NRs 16 = US$1, which was subsequently changed to NRs 14 = US$1 on February 21, 1980. The September 1981 measures devalued the basic rate by nine percent but resulted in a six percent appreciation for most overseas merchandise trade. The latter could adversely affect the balance of overseas trade. 14. During the past two to three years economic policy making has been delayed by political developments. Following disturbances in 1979, a referendum was held in May 1980, which reaffirmed the existing partyless system, with suitable reforms. The constitution was amended in December 1980 to provide, among other things, for direct election of members of parliament; general elections were held in May 1981, though they were boy- cotted by many opposition groups. The previous Prime Minister and Finance Minister have retained their portfolios in the post election government.  -4- 15. These political activities slowed down preparation of the Sixth Plan (1980/81-1984/85) and the Plan was only published in January 1981. The Plan reflects Nepal's determination to search for ways to overcome stagnation and as a set of objectives, it was endorsed in draft form by members of the Nepal Aid Group at its January 1980 meeting. The strategy to shift investment into more productive sectors, which was initiated dur- ing the Fifth Plan, is continued and emphasis is given to alleviating some of the factors that limited past growth. The Plan's principal objectives are to increase production at a faster rate, to increase productive employ- ment, and to meet basic minimum needs in food, fuel (firewood), drinking water, health services, primary education and rural transportation. The strategy: (i) accords high priority to developing agriculture, small-scale industries and Nepal's abundant water resources; (ii) stresses soil con- servation and population control; and (iii) emphasizes full utilization of existing infrastructure and alleviation of absorptive capacity constraints. The development strategy also calls for full involvement of the private sector in agriculture, manufacturing, trade, tourism, construction and transport operations. 16. Achieving the Plan's objectives will require quick-yielding sec- tor programs to generate growth in the short to medium-term as well as human resource development programs to lay the foundation for sustained growth in the longer term. Program targets must also be made consistent with overall financial and implementation capacity, but at the same time vigorous measures are needed to remove administrative and domestic financial constraints. The Government has been considering the actions required to overcome the adminis- trative constraints. A full list would include a slowing down in the growth of government employment and the proliferation of public sector agencies; an overhaul of the present incentive system, including substantial salary increases for senior officials; a reduction in the high rate of turnover in top appointments; and a more professional approach in the management of public enterprises. 17. There also is considerable scope for easing the financial con- straints and the Government plans to improve revenue administration, oper- ate public enterprises more efficiently and to raise public utility charges over a period of years. Selective increases in indirect taxes would also provide substantial additional revenues, while phasing out fertilizer sub- sidies and streamlining rice subsidies could yield substantial savings. 18. Nepal has received substantial external assistance in the past. Aid commitments averaged US$160 million per year during the Fifth Plan, and, according to current indications, could average about US$300 million per year during 1981/82-1983/84. Foreign assistance is expected to account for about 53 percent of total development spending during the Sixth Plan period. However, even this level of foreign assistance would not provide the Government with sufficient resources to meet increasing consumption demands. Additional aid, either through financing a higher proportion of total project costs or in the form of commodity assistance, could provide budgetary support to meet pressing recurrent expenditure requirements, par- ticularly in the social sectors. The Nepal Aid Group was formed in 1976 to  assist in the overall coordination of financial and technical assistance efforts; and the Group now accounts for some 70 percent of all aid dis- bursements. The Group has met three times at plenary meetings under the chairmanship of the Bank to discuss overall external assistance needs; local Aid Group meetings in Kathmandu are also held to discuss and coor- dinate sectoral development strategies. The next plenary meeting is to be held in Paris in December 1981. 19. Foreign aid disbursements grew by 29 percent annually during the Fifth Plan period; only about 40 percent of disbursements were from foreign borrowing, the remainder being grants. As of December 31, 1980, official foreign debt outstanding was US$177 million, of which US$144 million was due to multilateral agencies. These loans were obtained on a highly con- cessional basis and the grant element of total aid remains in excess of 90 percent. As a result, debt service payments were only US$4.0 million during 1980, equivalent to less than two percent of exports of goods and services. PART II - BANK GROUP OPERATIONS IN NEPAL 20. Bank Group operations in Nepal began in FY70 with an IDA credit of US$1.7 M equivalent for a telecommunications project. Since then, 25 additional credits have been approved, bringing total IDA assistance to Nepal to US$296.6 M equivalent, net of cancellations. In view of Nepal's many development needs, this assistance has been for projects in a wide variety of sectors. Six of these sectors account for 87 percent of IDA credits by amount: irrigation/agriculture (US$110.2 M for nine projects); water supply and sewerage (US$46.8 M for three projects), power (US$40.8 M for one project); telecommunications (US$21.7 M for three projects); high- ways (US$19.2 M for two projects); and rural development (US$19.0 M for two projects). The proposed credit would be the first in FY82, bringing the total amount of IDA assistance to Nepal to US$303.1 M equivalent, net of cancellations. No Bank loans have been made to Nepal. IFC made its first investment in Nepal (US$3.1 M) in a hotel project in Kathmandu in FY75. Annex II contains a summary statement of Bank Group operations as of Septem- ber 30, 1981, and notes on the execution of ongoing IDA projects. It shows certain delays in the implementation of these projects, particularly during the initial periods. These delays have been largely due to Nepal's limited technical and managerial capabilities. In order to assist Nepal in. coping with this constraint, considerable technical assistance is being given by Bank Group staff, including our Resident Mission in Kathmandu. As a result, improvement in the rate of disbursements is being realized; during FY81, US$27.7 M equivalent were disbursed compared to US$65.1 M equivalent dis- bursed during the entire previous ten years. Project completion reports have been prepared for three projects - First Telecommunications (Credit No. 166, US$1.7 M equivalent), First Highways (Credit No. 223, US$2.2 M equivalent), and Tourism (Credit No. 241, US$3.2 M equivalent). All three projects faced unexpected engineering and design difficulties, delays in implementation of two-four years, and institutional improvements were less than anticipated; however, all three generated acceptable rates of return.  -6- 21. Bank Group lending to Nepal has so far been at a modest level compared to the country's need for external assistance. The international community has shown considerable interest in Nepal's economic development and, to date, shortage of funds has not been a bottleneck. The main con- straint on the utilization of increased aid has been Nepal's limited ab- sorptive capacity, affecting the pace of project preparation and imple- mentation. The Bank is assisting the Government in project preparation through the Technical Assistance Credit (Credit No. 659-NEP, US$3.0 M equivalent) and by acting as Executing Agency for a number of technical assistance projects financed by UNDP. The Bank Group has also addressed the problem of absorptive capacity through its role in organizing the Aid Group for Nepal (para 18). 22. The Bank Group's current strategy places major emphasis upon the directly-productive sectors (particularly agriculture) and the development of complementary infrastructure, including feeder roads (particularly con- necting the Hills to the Terai), communications and hydroelectric power. Preparation of projects in irrigation, cash crops, area development, tech- nical education and power is under way. PART III - THE INDUSTRIAL SECTOR 23. Prior to 1950, there was practically no formal industry in Nepal. The first industries to be established were agro-based--rice husking, oil seed extraction, jute and tea processing and lumber mills. By the late 1960s, a very limited range of import substitution industries arose, pre- dominantly in the public sector, producing consumer goods such as beverages, cigarettes, and textiles as well as simple agricultural tools and building materials. These initiatives did little to change the basic structure of the Nepalese economy. 24. The industrial sector in Nepal contributes only about five percent to GDP as officially measured and a substantial portion of total industrial output involves agro-processing. Twelve public sector enterprises produce about one half of total industrial output. The private sector is composed of some 3,500 registered firms (mainly small scale) and the informal or cottage industry subsector. Cottage industries are defined by the new In- dustrial Enterprises Act as those firms with fixed investment, including land and buildings, of less than NRs 500,000 (US$38,000) in rural areas and up to NRs 800,000 (US$61,000) in urban areas. Small scale industries are defined as those with fixed investment, including land and buildings, not exceeding NRs 2 million (US$152,000). Nearly one million people are employed in cottage industries, mostly on a part-time basis and mainly in rural areas. Most cottage industry output is in woolen, handloom, food, forest, and metal products. Outside the Kathmandu Valley, cottage industries produce mainly for home consumption. Exports of cottage and small industries (CSI) products have been increasing steadily, reaching NRs 140 M (US$11 M) in 1980/81, ac- counting for about 15 percent of total cottage industry production and a major portion of manufactured exports.  - 7 - 25. The minor role that the industrial sector has played in Nepal reflects the serious constraints that exist. The two most formidable problems are the small size of the Nepalese market and the country's land- locked position. Despite having a population of about 14 M, the effective market for manufactured products is extremely small. The cash income of the majority of people is less than US$50 equivalent per capita per annum, and in the Hill regions, most transactions are by barter. The market for consumer goods is therefore largely confined to the small percentage of the population living in towns, or in the more accessible parts of the Hills and Terai. Moreover, not only is domestic demand small, but Nepalese goods must also compete for this demand with Indian goods which, through econo- mies of scale, are generally cheaper and of better quality. The long open border makes protection of domestic production difficult. Nepal's land- locked position has further exacerbated these problems, since transshipment increases the cost of raw material imports and of exports, as well as caus- ing frequent delays in delivery which seriously impede efficient production and marketing. 26. These constraints to industrial development have not been offset by the low wages earned by Nepal's labor force, since these wages reflect skills for modern industry that are probably close to the lowest of all developing countries. Nor has Nepal been able to rely on easily exploita- ble natural resources that might have been a stimulant to growth. However, in the long run, Nepal must make all possible attempts to diversify and develop its industrial sector. Obviously, efforts in this sector must be on a selective basis, in view of the multiplicity and complexity of the constraints. Substantial benefits could be gained at relatively low cost by improving the performance of public sector enterprises and promoting cottage and small industries (CSI). Expanded CSI production could amelioriate the growing trade deficit through foreign exchange earning or saving endeavors, while increasing employment in the Hills. CSI Prospects 27. Prospects for selected CSI products are promising. Sizeable con- centrations of artisans working in woolen rugs and garments, basketry and cotton textiles exist in the Hills and the Kathmandu Valley. Studies by the National Planning. Commission indicate that such rural dwellers are not directly engaged in agriculture for about two-thirds of the year, and, therefore, would be available to increase their number of days worked in other activities. Artisans currently spend about 15-60 days on CSI en- deavors. Recent studies have shown that in several product lines, the lower wage costs in the Hills than in the Kathmandu Valley would more than compensate for the additional transport costs of linking these Hill clusters to raw material supplies and export markets. 28. Exports have grown by about 35 percent per annum since 1972/73, albeit from a low base. In addition, sales to tourists in Nepal have also grown. Studies of export potential in Europe and the US indicate that, with appropriate design and sizing, there would be significant demand for several uniquely Nepalese products, including carpets, woolen garments, and metal products. Expansion of woolen carpet production and exports would require  -8- better wool supply and increased production capacity; unlike most Nepalese woolen goods, design improvements are not crucial for carpets to expand exports. However, for other woven and knitted woolen goods, modifications in design and sizing, along with improved marketing are prerequisites for sizeable foreign market penetration. Nepalese handlooms, facing strong competition in export and local markets, also would need product adaptation and design work, along with improved supply of cotton yarn and upgraded equipment. The major constraint for metal crafts is access to raw materials, but they would also benefit from access to improved tools, designs, and production techniques. Production of forest-based products is hampered by the lack of commercial orientation of the craftsmen who now produce goods for household needs during free time; tools, designs, workmanship and market links need to be improved. Agro-industries, geared to regional needs and local tourist markets, are limited now by lack of production capacity, ef- fective quality control, and commercial networks. 29. Local market prospects are more limited. A study of industrial imports indicated that less than ten percent by value could be replaced by reasonably competitive products produced by the domestic CSI sector. Not only is local purchasing power small, but in several product lines, including fiber and forest-based products, local demand is relatively price inelastic and saturated. There is, however, significant import substitution potential in textiles and agro-processing as well as more limited potential for build- ing materials, agro-implements and footwear. Some possibilities also exist for subcontracting relations with the larger public sector enterprises, and serving Government agencies, hospitals, and the hotel industry. Institutions 30. The Department of Cottage and Village Industries (DCVI), under the Ministry of Industry (MOI), has a small program of extension services and training for the CSI sector. DCVI has a large staff, but few technical officers, and has concentrated mainly on administrative tasks, such as reg- istration of industries and import licensing. A Cottage Industries Devel- opment Board (CIDB) was created with wide powers for commercial and devel- opmental purposes, but it has not yet been used systematically to handle development programs. DCVI has offered some training and field level ex- tension programs, but these have been sporadic and the impact has not been monitored. The Trade Promotion Centre (TPC), under the Ministry of Commerce and Supplies, was created to provide assistance to private exporters; how- ever, TPC has limited resources and technical staff, and market information and sales promotion activities have been on an ad hoc basis. 31. Sporadic availability, price volatility, and uneven quality of raw materials, such as wool, cotton yarn, and metals, constitute major problems for the CS! sector. Most CSI manufacturers are too small and inexperienced to import directly, and to take advantage of the import duty and sales tax rebates which are granted to CSI raw materials. Although not subject to the taxes, the public agencies have not established themselves as significant suppliers to the CSI sector--National Trading Limited (NTL) provides only about ten percent of present wool supply. The Cottage Industry and Handicraft Emporium, a subsidiary of DCVI, supplies some raw materials  -9- for the CSI sector (mainly cotton yarns) and purchases the finished products for resale either in the Hills or in Kathmandu. The Emporium provides only about 15 percent of cotton yarn demand, and continues to have difficulty with the marketing of the finished goods; the financial viability of its operations remains uncertain. Most raw materials are supplied to the CSI sector by private traders, who are now subject to full duties, which they pass on to their customers. 32. ADBN is the principal institution providing agricultural credit, with a broad network of branches throughout the country. About one half of ADBN loans are made directly to individuals, and about one third through the cooperatives; the balance is accounted for by village committees and their corporate bodies. Total outstandings as of July 1980 amounted to about NRs 460 M (US$35 M), of which about one third is categorized as agro- industry, marketing and warehousing. Cottage industry lending is included in this category, but no separate figures are available. The Asian Devel- opment Bank has provided credit and technical assistance to ADBN and has recently concluded negotiations for a Fourth Line of Credit and a Small Farmer Development Program. The two commercial banks, Nepal Bank Limited and Rastriya Banijya Bank also provide credit for the CSI sector. The out- standing balances for priority sector lending have been small, less than US$2M for Nepal Bank Limited and less than US$3 X for Rastriya Banijya Bank. Cottage industries account for about one half of priority sector lending. With their onlending to ADBN, total direct and indirect lending by these two banks for priority sectors account for about five percent of their total loans and advances outstanding. The average loan size is US$1,000-1,500. Arrears amount to about 20-30 percent of the CSI portfolio, appreciably less than that for agriculture, which exceed 50 percent in some branches. Both banks have branches in Gandaki and Bagmati Zones, but due to lack of suitably trained staff and logistical difficulties, supervision of loans is poor. Industrial Policy 33. As part of the preparation for the proposed CSI project, the Asso- ciation has worked with Government authorities to identify sector issues and has recommended measures to liberalize approval and licensing procedures, streamline fiscal incentives, and introduce effective export incentives. Consultants have been -ngaged under various United Nations agency programs to assist with the r.-ision of the Industrial Enterprises Act and Foreign Investment Act and accompanying rules and regulations, foreign investment strategy, and long range indu. :-ial planning. The Government completed a revised draft of the Industrial Znterprises Act, with the assistance of a consultant funded by UNDP under the Pre-Project Preparation facility (para 53), which now awaits final approval. It incorporates a number of recom- mendations made by the Association and the consultant, and would improve the policy environment for CSI development. Special programs are being tailored for the CSI sector. The definitions of cottage industries and of small industries were revised to eliminate some of the subcategories (such as mini, small, remote) for the provision of incentives. Foreign investment criteria in CSI firms are being clarified. Fiscal incentives, such as tax holidays and import duty drawbacks, are to be extended in certain circum- stances to CSI exporters, who may or may not be the actual producers. While  - 10 - no further revisions to the Industrial Enterprises Act are deemed neces- sary for satisfactory implementation of the proposed CSI project, further improvements to CSI and general industrial policy can be made; in particular, efforts should be made to further simplify the systems. We intend to work with the Government to achieve such improvements, as part of the proposed project and in the course of our economic and sector work program. The Government is now considering streamlining the procedures for exports, and establishing facilities for pre-shipment export finance. 34. The interest rate structure is being revised to increase the final on-lending rate to CSI from the previous levels of eight-ten percent to a uniform rate of 11 percent, the same rate as that now available to larger industry for fixed investment loans. The Industrial Enterprises Act also provides for the Government to make available CSI loans to remote areas at a rate two percent less than that prevailing elsewhere; it is the Government's intention that such areas be limited to the mountainous regions of the country and be kept to a minimum. The Association has suggested that the Government also take into account whether the areas are serviced by a substantial program of assistance to CSI. Bank Group Support to Industry 35. The Bank Group is at present assisting in industrial development in Nepal through several channels. With IDA Credit No. 705-NEP of May 27, 1977 (US$4.0 M), the Bank Group has made available financing for the foreign exchange portions of medium and large scale industrial subprojects, through the Nepal Industrial Development Corporation (NIDC). To date only six sub- loans over US$80,000 each and eight smaller subprojects have been financed. Commitments, now totalling US$2.2 million equivalent, have been slow, re- flecting NIDC's problems in promotion, inadequate local currency resources, and the limited prospects for medium and large scale industry. Cottage in- dustry components are included as part of the two Rural Devolopment Projects (Credit No. 617-NEP of April 30, 1976 for US$8.0 M and Credit No. 939-NEP of August 9, 1979 for US$11.0 M). Progress of the program under the First Rural Development Project has been slow and uneven, while that under the Second Rural Development Project has yet to be initiated. As these components are small and deal only with the outstations of the CSI service agencies, they are not able to address the institutional constraints, nor to offer effective assistance to improve strategy, organization and incentives. Under the Tech- nical Assistance Credit (para 21), the Bank Group is financing feasibility studies for several industrial subprojects, namely silica lime bricks, leather goods and electrical goods. Preparation for the proposed CSI project was also partially financed under this Technical Assistance Credit. PART IV - THE PROJECT 36. The proposed project was prepared by a committee representing key implementing agencies, with assistance from consultants and IDA missions. The DCVI sponsored, and the Industrial Services Corporation (ISC) conducted,  - 11 - a detailed preparation study on the most promising CSI subsectors as well as institutional arrangements. The project was appraised in June 1980. Negotia- tions were held in Washington, D.C. in September, 1981. The Nepalese delega- tion was led by Mr. S. P. Shrestha, Secretary, Ministry of Industry. A re- port entitled "Nepal - Staff Appraisal Report - Cottage and Small Industries Project" (Report No. 3172-NEP, dated October 29, 1981) is being circulated separately to the Executive Directors. A Supplementary Data Sheet is attached as Annex III. Objective 37. The project aims to generate employment, raise incomes and increase foreign exchange earnings through expanded production and export of CSI prod- ucts. The project would upgrade private and public sector technical, commer- cial, and credit services and redirect Government incentives affecting the CSI sector. This first project would focus on the Kathmandu Valley 1/ and the Gandaki Zone (see Map IBRD 15389R), which accounts for about 60 percent of total CSI production, testing and improving the various institutions and services. Description 38. The main components of the project would be: (a) Financing of subloans to cottage and small industries and re- lated commercial concerns; (b) Expansion and improvement of CSI export promotion programs in the Trade Promotion Center (TPC); (c) Strengthening of extension programs and services of the public service agencies--Cottage Industries Development Board (CIDB), the Handicraft Design and Promotion Center programs, and the Cottage Industry and Handicraft Emporium; and (d) Establishment of a monitoring and evaluation system, and preparation for subsequent projects. Credit and Credit Institutions 39. The proposed project seeks to improve the financial system in Nepal to expand credit facilities for economically and financially viable CSIs, related market agents and input supply agencies, on the basis of pro- ject evaluation rather than collateral. The credit component (about US$7.5 million equivalent) of the project would be carried out under the direction of the NRB in accordance with a Project Agreement (PA) to be entered into with the Association (Sections 3.01(a) and (b) of the draft Development Credit Agreement (DCA) and Section 2.01 of the draft PA). The NRB would establish a CSI Refinance Fund with accounting procedures and statement of policies and operating procedures, satisfactory to the Association, to I/ Containing the administrative districts of Kathmandu, Lalitpur, and Bhaktapur.  - 12 - provide refinance facilities for up to 80 percent of subloans made by partici- pating banks to eligible enterprises; the NRB would provide the CSI Fund's initial capital of NRs 5 M (US$379,000) (Section 2.02(a) of the draft PA). The NRB would provide additional capitalization to the Fund as may be required to meet its operational needs (Section 2.02(b) of the draft PA). To supplement the initial capitalization, the Government would relend to the NRB, under a subsidiary loan agreement satisfactory to the Association, the proceeds of the funds withdrawn from the credit account for refinance provided by NRB to the participating banks, estimated at up to US$4.5 million equivalent; the Government would bear the foreign exchange risk (Section 3.01(c) of the draft DCA). Funds would be provided to the CSI Refinance Fund at two percent per annum for refinanced subloans not exceeding NRs 20,000 (US$1,500) and four percent per annum for those over NRs 20,000, repayable over 14 years, includ- ing a three years grace period (Schedule to the draft PA). The NRB would establish a CSI Refinance Unit, with functions and staffing satisfactory to the Association, to manage the CSI Refinance Fund (Section 2.02(c) of the draft PA). It would be a condition of credit effectiveness that: (i) the Government had entered into a subsidiary loan agreement with the NRB, satis- factory to the Association, for the use of the funds available under the credit and (ii) the NRB had completed arrangements, satisfactory to the Association, for the establishment, financing, staffing and operation of the CSI Refinance Fund and CSI Refinance Unit (Sections 6.01(a) and (b) of the draft DCA). 40. Three banks (ADBN, Nepal Bank Limited and Rastriya Banijya Bank) would participate in the proposed project through their access to the CSI Refinance Fund to refinance CSI subloans. The NRB would issue instructions to the participating banks, outlining their operating procedures and respon- sibilities; it would be a condition of its participation in the project that each participating bank had established a CSI unit, with agreed CSI operating procedures, and that the stipulated number of CSI personnel at headquarters and key branches had completed pre-project training programs (Section 2.09(a) of the draft PA). As the resources available to ADBN are in essence limited at present to share capital and borrowings, ADBN does not have the advantages of sizeable deposit mobilization to finance additional loans from its own resources. As such, ADBN is not in a position to finance from its own re- sources the portion of the subloan not refinanced by CSI Refinance Fund. Therefore, the Government would make available to ADBN all amounts required by ADBN to cover the portion of the subloans not refinanced through the CSI Refinance Fund, including an initial amount of NRs 2 M for ADBN's first year of operation under the project, plus funds to finance the cost of any arrears arising out of ADBN's operation under the project (Section 3.02(c) of the draft DCA). It would be a condition of credit effectiveness that the NRB had issued instructions to at least two participating banks which had met the conditions for participation (Section 6.01(d) of the draft DCA). 41. The CSI Refinance Fund would refinance up to 80 percent of subloans on terms and conditions satisfactory to the Association (Section 2.04(a) of the PA). The maximum subloan to CSI and market agents would be NRs 800,000 (US$60,600 equivalent) for CSI with total fixed investment of up to NRs 800,000 and fixed cost per job of up to NRs 12,000 (US$900) after the subloan. The structure of the refinancing rates would be established to provide a slightly  - 13 - higher margin to the credit institutions for lending to the smaller CSI, and thereby enable them to cover the relatively higher administrative costs of such lending. Refinance from the CSI Refinance Fund would be denominated in Rupees and available at five percent and seven percent per annum for loans up to NRs 20,000 and those exceeding NRs 20,000, respectively. The partici- pating banks would make subloans to the subprojects at 11 percent per annum for periods ranging from 18 months to seven years, including a maximum grace period of one year. This would provide a spread to the participating banks of six percent for the smaller loans and four percent for the larger loans. No more than 30 percent of the total amount of refinance under the project would be for production facilities located in the Kathmandu Valley (Section 2.05 of the draft PA). 42. To encourage banks to relax their usual collateral requirements, the NRB would establish a CSI Credit Guarantee Scheme, satisfactory to the Association, for subloans refinanced by the CSI Refinance Fund (Section 2.03(a) of the draft PA). Coverage would be provided up to 75 percent of subloan amount and participation would be mandatory and automatic bnce the subloan is refinanced by the CSI Refinance Fund. A one percent premium would be charged against the outstanding balance of each subloan, which would be paid from the NRB's spread. Procedures would be established to enable banks to claim once their auditors certify a debt,as bad or not re- coverable, rather than wait for the expiration of the maturity of the loan. The Government would pay or make arrangements for an initial contribution to the CSI Credit Guarantee Scheme of NRs 2 M, and provide additional amounts on an annual basis so that the capitalization of the scheme is maintained at no less than ten percent of the outstanding guarantees (Section 3.02(a) of the draft DCA). It would be a condition of credit effectiveness that the CSI Credit Guarantee Scheme had been established and the initial contribution paid (Section 6.01(c) of the draft DCA). The CSI Credit Guarantee Scheme would be transferred to the Credit Guarantee Corporation after the Government has made appropriate arrangements to ensure that it is adequately capitalized and adopts operating policies and procedures to enable it to provide effective guarantees for term credit for CSI (Section 3.02(d) of draft DCA and Section 2.03(b) of the draft PA). The conditions to be met before such a transfer is made were outlined in a draft supplemental letter. 43. Initial short-term training for credit institution staff has begun, financed under the UNDP Pre-Project Preparation facility for which the World Bank acts as executing agency (para 53). Overseas training, lasting eight-ten weeks, has been provided for twentyone officers, including five senior and management level staff for the CSI units in each of the three participating banks and for the CSI Refinance Unit staff. Local training, consisting of three to four week intensive courses on CSI project appraisal and supervision are being held in Kathmandu by trainers from the State Bank of India for about 60 staff from the headquarters and branches of the participating banks. A short one to two week general CSI appreciation course will also be held for about 20 managers and supervisors from the participating banks. Similar training activities are to be undertaken during project implementation and would be financed under the proposed project. The proposed project would also provide 24 manmonths of technical assistance for the manager of the CSI Refinance Fund to assist in establishing and conducting lending and refinance operations.  - 14 - Commercial and Technical Services 44. The commercial and technical services would be focused on five subsectors--carpets and other woolen products; handloom fabric and garments; metal crafts; forestry-based products; and agro-industries. These subsectors were selected because they account for the major portion of CSI production, have good market prospects, and face problems which can be addressed within a project. The key element in the development strategy for CSI is marketing. With effective promotion, product development, and improved input supply in response to specific market opportunities, exports can be increased signifi- cantly. Where feasible, the project would utilize private sector commercial organizations to expand their roles as organizers of CSI production and export. Those who are already organizing and exporting CSI products are in a strong position to assist with arranging input supply, marketing and train- ing. Public sector institutions would concentrate on promotion, extension services, and filling some gaps in the availability of commercial services to reach remote areas. With the new Industrial Enterprises Act, the Gov- ernment is attempting to provide a stable and positive environment for CSI production and export. The Borrower and the Association would exchange views from time to time on industrial policies, as they affect the CSI sector (Section 3.08 of the draft DCA). 45. The Trade Promotion Centre (TPC) under the Ministry of Commerce and Supplies has established a Cottage Industries Export Development Divi- sion (CIED) and a Cottage Industries Export and Product Development Fund (CIEPD), with policies and procedures satisfactory to the Association (Section 3.04(a)(ii) of the.draft DCA) to assist exporters in making market contacts, adapting products and developing an export-orientated supply base. Staffing for the CIED, satisfactory to the Association, would be in place by January 1, 1982 (Section 3.04(a)(i) of the draft DCA). TPC would furnish an action program for the six month period beginning January 15, 1982, satisfactory to the Association, by January 1, 1982 and thereafter, annual work programs for the CIED would be prepared and furnished to the Association by May 31 of each year (Section 3.04(a)(iii) of the draft DCA). The CIED would organize and finance trade and familiarization trips, and arrange consultancy services to assist with product adaptation, technological improvement, and organization. Product specialist consultants would be engaged to support the activities of the four major subsector units of the CIED, and one general consultant hired to assist the CIED Director in overall operations (para 53). 46. As an extension of the CIED, TPC would establish commercial offices in New York and Frankfurt, called IMPACT offices, to provide the necessary communication between exporters of CSI products and relevant markets and importers. These offices are considered to be of critical importance in assuring that production activities respond to market realities. The major functions of these offices would be to: (i) provide information to potential importers on products, prices, and supply capabilities of Nepalese exporters and producers in the priority CSI lines; (ii) provide TPC and Nepalese ex- porters with current information on potential buyers and fashion trends; (iii) perform necessary trouble shooting, follow up and liaison on CSI ex- port orders from Nepal; (iv) prepare and follow up on Nepalese participation in trade fairs and sales trips; and (v) provide feedback from importers on  - 15 - designs, sizing, and prices. Each TPC IMPACT office would have one Nepalese staff member and two from the importing country. Consultants would be hired to help establish the New York IMPACT Center. The New York IMPACT office would be established by July 31, 1982; operations of the Frankfurt office would be launched by July 31, 1983, with systems adapted from the New York office (Section 3.04(b) of the draft DCA). 47. The CIED would also utilize private sector agents to extend com- mercial services beyond the Kathmandu Valley, to take advantage of exporters' skills in sales, input supply and organization. Through performance con- tracts, CIED would engage exporter organizations to develop selected cottage industry clusters in the most promising areas in rural Gandaki and Bagmati Zones, as special subprojects. About 25 performance contracts would be undertaken, each covering about one-three panchayats with clusters of 100-150 cottage industry units. The maximum size of each performance contract would be NRs 200,000 (US$15,200), and each contract would be submitted in draft to the Association for review and approval (Section 3.04(c) of the draft DCA). The contract proposal, developed according to the specific needs of the prod- uct and area, would specify arrangements for training, input supply, orders, quality control, and processing facilities over a two to three year period. Once approved, the CIED would enter into a performance contract to pay the performance contractor for the cost of such development work, including training expenditures, such as staff and materials, and a portion of the initial costs of establishing quality control systems and depots. Perfor- mance contractors would be expected to contribute at least ten percent of the subproject cost from their own resources. Term financing for the remainder of the actual operating costs of the subproject (equipment, buildings, mate- rials, and permanent working capital) would be arranged by the performance contractor with the participating banks, on the standard CSI terms under the project. 48. The existing Cottage Industries Development Board (CIDB) would be reactivated by January 1, 1982, in a form and with a work program for the remainder of fiscal year 1982, satisfactory to the Association, to assume the developmental activities of the DCVI in the project area (Section 3.05(a) of the draft DCA). The CIDB would be responsible for: (i) extension ser- vices in Kathmandu Valley; (ii) extension services and management of subsec- tor development centers in areas of Gandaki too remote to interest private performance contractors; and (iii) operations of the Handicraft Design and Promotion Center. Annual work programs would be prepared and furnished to the Association by May 31 of each year (Section 3.05(b) of the draft DCA). 49. The CIDB would be reorganized along subsector rather than func- tional divisions--cotton textiles, woolen goods, metal products, forest- based products, and other products. The best technical staff of DCVI would be shifted to the CIDB subsector divisions, with DCVI concentrating on ad- ministrative functions. Specialist consultant services would be provided for the four major subsector divisions for six months each to assist with development of subsector-specific extension and training programs and train- ing of CIDB staff and local artisans (para 53). About six wool, six handloom, and four forest-based product development centers would be established in Gandaki Zone, with staff trained and backed up by the CIDB Damauli office.  - 16 - Services from the development centers would include training of artisans and provision of raw materials, processing facilities and marketing services. These development centers would be established in potentially promising areas, which are either too remote or require too much development to initially interest the performance contractors or private sector market agents. 50. The Handicraft Design and Promotion Center would also be shifted to the CIDB, and its programs would be reoriented to provide more commercially relevant assistance to private exporters and the CIDB development centers. Activities would include development of prototype designs and samples, and development of appropriate technological adaptations in CSI manufacturing processes. About nine manmonths of technical assistance would be provided for the development and implementation of these product-specific extension programs and design activities (para 53). Raw Material Supply 51. The proposed project seeks to improve the supply of wool and metal raw materials to CSI's by establishing two private input supply companies. The companies would be established as private limited companies, with member- ship consisting of CSI exporters and manufacturers of wool and metal products respectively; minority shares would be held by the Emporium to monitor pro- curement and ensure that raw materials are sold at reasonable prices directly to artisans, performance contractors, CIDB development centers, and share- holders. These companies would be allowed the same import duty and sales tax rebates as individual CSI importers. With this concession and by buying in bulk, it is expected that the companies could deliver raw materials consider- ably below current prices. At least 20 percent of the total financing for the operations of each company would come from equity participation of the share- holders; the remaining 80 percent would be provided in short and medium term loans from the participating banks on commercial terms. The medium term loans for these companies would be eligible for refinance from the CSI Refinance Fund, subject to their being established with articles of agreement, owner- ship, capital, financing and first year action program, all satisfactory to the Association (Section.2.06(d) of the draft PA). Subloans to be refinanced under the project would be limited to NRs 2.5 million per company in its first year of operation (Section 2.04(a) of the draft PA). 52. Additional assistance would also be required for the cotton hand- loom industries expected to participate in the project. To service the cotton yarn and accessory demands of about nine performance contractors and about six CIDB development centers which are expected to work with cotton handloom clusters, the Emporium would expand its operations. Under the project, the Emporium would be eligible for medium term financing with the participating banks to finance the purchase of cotton yarn in bulk and carry an adequate stock of yarns and handloom accessories and to finance its stocks of handloom products purchased from the handloom development centers for re- sale to public sector enterprises. The Government would provide seed capital to the Emporium, which would be sufficient to cover the 20 percent equity contribution to subprojects as required by the commercial banks under normal lending operations. This is expected to amount to about NRs 1.2 M by year three of the project, when stocks are expected to be built up to about  -17 - NRs 5 M. About six months of technical assistance would be provided to the Emporium to assist in procurement procedures and institutional sales pro- grams (para 53). Disbursements from the credit account for the refinancing of subloans granted to the Emporium or for any equipment purchased for the Emporium would be subject to the Emporium having: (i) established a cotton yarn, equipment, and textile fund with policies, procedures, and staffing satisfactory to the Association to undertake the project activities; (ii) furnished an annual action programs by May 31 of each year, beginning May 31, 1982; and (iii) appointed a suitably qualified and experienced procurement advisor under the technical assistance program (Schedule 1, para 4(ii) and Section 3.06 of the draft DCA). Technical Assistance and Training 53. To facilitate the startup of project activities, technical assistance and training have been arranged under a small UNDP financed Pre- Project Preparation facility (US$224,000) with the World Bank as executing agency. Foreign and local training in CSI lending practices is being pro- vided for NRB and participating bank staff; outside training and exposure trips have been arranged for management and specialist staff from the CIDB, TPC, Emporium and private exporters; consultancy services have been provided to assist in redrafting of the Industrial Enterprises Act, develop a moni- toring and evaluation system for the project, and prepare TPC to undertake CIED and IMPACT office activities. To further strengthen the implementation capacity of the various project agencies, UNDP is expected to provide an additional grant of US$2.0 M equivalent for technical assistance and training under the project, with the World Bank as executing agency. As summarized below, about 163 manmonths of technical assistance would be provided: (a) Advisor to the manager of the CSI Refinance Fund - 24 months; (b) One advisor and four product-specific specialist consultants for the TPC CIED - 48 months; (c) Short term design and sales promotion consultants for the TPC CIED - 48 months; (d) Four product-specific specialists for short-term consultancy in launching CIDB extension and development center programs - 24 months; (e) Short-term design consultancy for Handicraft Design and Promotion Center - nine months; (f) Procurement advisor for Emporium - six months; and (g) Monitoring and evaluation assistance for ISC - four months. In-service training would also be provided for staff from the participating banks. Sales, exposure and promotion trips would be provided through the CIEPD Fund for performance contractors and other CSI manufacturers and exporters. Short-term training and exposure trips would also be provided  - 18 - through CIDB for its staff and leading artisans. It would be a condition of credit effectiveness that the UNDP grant documents for these activities had been duly signed (Section 6.01(e) of the draft DCA). Implementation 54. The proposed project would be implemented over a four year period. The implementing agencies would carry out their specific activities and responsibilities autonomously within the broad framework of objectives, guidelines and procedures agreed between the Government and the Association. The Government would make appropriate arrangements for appropriation and allocation of funds to the project implementing agencies (Section 3.02(b) of the draft DCA). In view of the complementary nature of the various project components (e.g., extension work, access to raw materials and the proposed bank lending), coordination of the various elements is essential. At head- quarters, a CSI Coordinating Committee (CC), chaired by the Secretary, Min- istry of Industry, would be established by January 1, 1982 to review progress of the project, facilitate coordination among the implementing agencies, and provide follow-up remedial measures (Section 3.07(a) of the draft DCA). Key members of CC would include representatives of the National Planning Agency, Ministry of Finance, Ministry of Commerce and Supplies, NRB, CIDB, TPC, ISC, Emporium, and at least one representative of the private sector. A senior officer of the Ministry of Industry would be the key contact point for the various implementing agencies. At the district level, coordination would be achieved by meetings between either TPC or CIDB, depending on the area of operation, and representatives of the participating banks, private sector, and local government officials as and when needed. Monitoring and Evaluation 55. The ISC would serve as a technical arm to the CC, to prepare in- dependent monitoring of inputs, impact, and integration of the various com- ponents. Each implementing agency would establish its own monitoring and reporting systems and furnish financial and operational reports to the ISC, who would then compile and furnish consolidated quarterly reports to the CC (Section 3.07(b) of the draft DCA). These reports would then be forwarded by the CC to the Association. Technical assistance has been provided under the UNDP Pre-Project Preparation facility to the commercial and technical service agencies to develop their monitoring and evaluation systems (para 53). About four manmonths of additional assistance would be provided to ISC during project implementation, to assist with monitoring, surveys, and active evaluation of ongoing programs. The participating banks would estab- lish operating procedures for the CSI subloans, including improved supervi- sion and collection procedures, and would report quarterly to the CSI Refi- nance Fund. The CSI Refinance Fund would monitor and review the activities of the participating banks as part of their refinance procedures. The CSI Fund staff would also monitor appraisal, supervision, and collection stan- dards of the participating banks and report regularly to the ISC on overall performance (Section 2.11 of the draft PA). All subloans over NRs 20,000 (or about 40 percent of all applications) would be carefully reviewed by CSI Refinance Fund staff prior to approval. Although refinance for subloans not exceeding NRs 20,000 would be granted according to minimum pro-forma standards, a random sample of 20 percent of these subloans would be subject  - 19 - to a more detailed post-approval review of technical, financial, and market- ing aspects to ensure that these pro-forma standards continue to be relevant. In addition to the routine monitoring and reporting, a formal review of the project would be undertaken by the Government and the Association within 18 months of credit effectiveness (Section 3.12 of the draft DCA). The Govern- ment and the NRB would prepare and furnish to the Association a project com- pletion report not later than six months after the closing date (Section 3.11(c) of the draft DCA and 4.01(c) of the draft PA). Cost and Financing 56. The total project cost is estimated at US$12.0 M equivalent, in- cluding contingencies and a negligible amount of taxes and duties. The cost estimates are updated to September 1981 prices. The foreign exchange cost is estimated at US$5.1 M equivalent or about 43 percent of total project cost. The proposed IDA Credit of US$6.5 million equivalent would cover all foreign exchange costs (excluding those financed under the UNDP program) and about US$3.2 M equivalent of local costs, amounting to about 54 percent of total project costs. UNDP is expected to provide US$2.0 M equivalent for technical assistance and training programs. The credit institutions and beneficiaries would contribute US$2.0 M equivalent as their contribution to the individual subprojects. The Government and NRB would contribute the balance of about US$1.4 M equivalent or about 12 percent of total project cost. The cost of individual consultant's services is based on UNDP scales of about US$8,000 per month, including benefits, overheads, and travel. 57. The Government would make appropriate arrangements for the allo- cation of funds to cover the costs of implementing the various components (para 54). US$4.5 M equivalent of the IDA Credit would be onlent by the Government to the NRB via a subsidiary loan agreement and subject to the Project Agreement between NRB and the Association (para 39). The interest rates and spreads to the NRB and participating banks would be reviewed at least annually by the Government, the Association and the NRB, and adjusted to ensure that the minimum rate to final borrowers remains positive in real terms in relation to medium term inflation projections, and at a level con- sistent with the interest rates applicable to all term loans made to indus- tries in the country, with spreads to the participating credit institutions maintained at levels as set forth in the Project Agreement and subsidiary loan agreement (Section 3.09(b) of the draft DCA). The NRB shall make the agreed onlending rate for CSI under the project applicable to all CSI final loans made by the participating credit institutions, except for loans for CSI in remote areas as defined by the Borrower, satisfactory to the Asso- ciation (para 34 above and Section 2.04(b) of the draft PA). Inflation, previously estimated at 10-12 percent appears to have abated with the good monsoon and resulting improved agricultural production in early 1981. The current medium term outlook calls for inflation to slow to about eight per- cent by 1981/82. The interest rate to the final borrower of 11 percent should therefore remain positive in real terms. Procurement 58. The NRB would ensure that the participating banks establish pro- cedures to ensure that for the subprojects to be refinanced under the CSI  - 20 - Refinance Fund: (i) the goods procured locally are purchased at reasonable and competitive prices; and (ii) selection of goods procured outside Nepal and estimated to cost more than the equivalent of US$5,000 per item or US$20,000 per contract are made on the basis of at least three price quota- tions (Section 2.07(a) of the draft PA). The CSI Fund staff would review these procedures as part of their regular supervision of subloans. Pro- curement for equipment, materials and consultants' services for the techni- cal services components would be in accordance with Government procedures, satisfactory to the Association (Section 2.03 of the draft DCA). Approvals and Disbursements 59. Disbursements from the IDA Credit would be for: (i) 100 percent of the portion of the subloan amounts refinanced by the CSI Refinance Fund; (ii) 100 percent of foreign expenditures, 100 percent of local expenditures (ex factory), or 80 percent of other local expenditures for equipment and materials for the commercial and technical services components; (iii) 50 percent of staff and operating costs of the commercial and technical services components; (iv) 100 percent of the performance contract; and (v) 100 percent of the foreign exchange costs of the equipment, consultants' services, staff salaries and other operating costs, including rent and other non-personnel related overheads, for the TPC offices abroad. Disbursements would be made by statements of expenditure under (i) for refinancing of subloans not ex- ceeding NRs 330,000 (US$25,000 equivalent) and under (iii). Requests for disbursement against all other items would be fully documented. Prior to submitting the relevant disbursement requests for withdrawals in respect of the refinancing component for subloans in excess of NRs 330,000, NRB would furnish to the Association for its review and approval the participating bank's appraisal of such subproject; the deadline for these submissions would be December 31, 1984 (Sections 2.06(b) and (e) of the draft PA). The records evidencing the expenditures on account of which withdrawals are requested on the basis of statements of expenditure would be retained until one year after the closing date of the credit (Section 4.01(b) of the draft DCA and 3.01 (b) of the draft PA). Audit 60. The Government would cause participating agencies to establish and maintain separate accounts for the project in accordance with sound accounting practices and would ensure that these accounts would be audited annually by an independent auditor acceptable to the Association and fur- nished to the Association not later than nine months after the end of each fiscal year (Section 4.01(a) and (c) of the draft DCA). The NRB would maintain procedures and records adequate to monitor and record progress of the credit component and of each subloan refinanced under the CSI Refinance Fund; the NRB would cause these records and accounts to be audited annually by an independent auditor acceptable to the Association and furnished to the Association not later than six months after the end of each fiscal year (Section 3.01(a) and (c) of the draft PA).  - 21 - Benefi s, Justification and Risks 61. A major benefit of the project would be the strengthening of the private and public sector institutions dealing with the CSI sector and the development of replicable schemes for future CSI development. Significant direct benefits are anticipated in increased CSI production, employment and exports. With the project, exports are expected to maintain the 35 percent annual growth rate experienced in the recent past, compared to a slowdown to about 17 percent annual growth without the project. This would generate about US$27.0 M of incremental exports over the 1981-84 period, for about US$15.0 M incremental net foreign exchange earnings. Production for the local markets, mainly in handlooms and agro-industries, would generate about US$8.0 M of incremental output. The expanded export programs are expected to provide about 10 M incremental days of employment over the three and one half year period, whereas that for local markets is expected to provide about 3 M incremental days of employment. The majority of the employment created would be in the form of additional days worked by existing artisans, rather than new full-time jobs. The performance contractors networks are expected to provide regular employment to about 10,000 rural crafts units by 1984. About one third of the employment and exports is expected to come from rural Gandaki Zone, where CSIs probably would stagnate or decline with- out the commercial and financial services to be provided under the project. 62. About 2,600 loans would be made by the participating banks for a total of NRs 79 M (US$6.0 M equivalent). This represents a 20 percent in- crease in lending volume for CSIs. The majority of these loans would go to CSI units currently not serviced by the credit institutions. The average subloan for cottage industries is expected to be about NRs 12,600 (US$950), with average fixed cost per job about NRs 3,200 (US$240). About 15,000 CSI units would receive credit either directly or through the performance con- tractors. 63. As an operation designed to test innovative product-specific schemes and institutional arrangements, risks exist that targeted results would not be achieved for all components. While no new institutions would be created, programs would be refocused and require significant strengthen- ing. The project preparation period has been long and intensive; training and technical assistance have been provided during preparation and will be provided during implementation to assist each agency to fulfill its role. The project incorporates detailed monitoring and evaluation systems for all components. A formal joint review would be conducted after 18 months and successful schemes may be expanded and others modified. The project design relies heavily on the private sector, and in particular the performance contractors, to manage the various facets of CSI production and export. The performance contractors would be chosen from among the growing number of medium-scale exporters who are likely to have established relations with the credit institutions. The total direct project cost involved in the per- formance contracts is small (less than two percent of total project cost, not including the subloans which are taken at the performance contractors' own risk), and, when compared to the possible benefits, is well worth the risk. 64. One of the most critical factors for the project's success is the marketing function. If orders are not acquired and executed effectively, investments in training, redesign and expanded production will yield few  - 22 - benefits. For this reason, the project provides special attention to market links, through the IMPACT offices, product-specific assistance in design, production, and marketing, and sales trips and fairs. Furthermore, over 60 percent of the expanded exports are expected to come from woolen carpets and metal crafts, subsectors with fairly well-established market links and which require little product design and adaptation to meet export market demands. There is a risk that the credit institutions may not respond to the CSI needs, but the project provides attractive spreads for CSI lending, guarantee cov- erage, and training for credit institution staff, and deals with performance contractors who tend to be the credit institutions' established borrowers. Another risk is that individual craftsmen would not choose to expand their production, but this is thought to be small as income levels are very low and prospects for alternative employment are very limited. PART V - LEGAL INSTRUMENTS AND AUTHORITY 65. The draft Development Credit Agreement between the Kingdom of Nepal and the Association, the draft Project Agreement between the Association and the NRB, and the Recommendation of the Committee provided for in Article V! Section l(d) of the Articles of Agreement are being distributed to the Executive Directors separately. 66. Special conditions of the credit are listed in Section III of Annex III. Additional conditions of credit effectiveness would be that: (i) the Government had entered into a subsidiary loan agreement, satisfactory to the Association, with the NRB for the use of the funds available under the Credit (para 39); (ii) the NRB had established, satisfactory to the Association, the CSI Refinance Fund and Unit (para 39); (iii) NRB had issued instructions to at least two of the participating banks, which have met the conditions for participation in the CSI Refinance Fund operations (para 40); (iv) a CSI Cre- dit Guarantee Scheme, satisfactory to the Association, had been established (para 42); and (v) the UNDP grant documents in support of the technical assistance and training components had been duly signed (para 53). 67. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 68. I recommend that the Executive Directors approve the proposed credit. A. W. Clausen President Attachments November 5, 1981  - 23 - ANNEX I Page 1 TABLE 3A NEPAL - SOCIAL INDICATORS DATA SHEET NEPAL REFERENCE GROUPS (WEIGHTED A9RAGES LAND AREA (THOUSAND SQ. EM.) - MOST RECENT ESTIMATE)- TOTAL 140.8 HOST RECENr LOW INCOME MIDDLE INCOME AGRICULTURAL 40.2 1960 /b 1970 /b ESTIMATE /b ASIA & PACIFIC ASIA & PACIFIC GNP PER CAPITA (US5) 50.0 70.0 160.01k 232.3 1136.1 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 4.7 15.6 13.8 499.4 1150.6 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (THOUSANDS) 9327.1 11415.8 14300.0/k URBAN POPULATION (PERCENT OF TOTAL) 3.1 3.9 4.9 17.3 40.8 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 21.2 STATIONARY POPULATION (MILLIONS) 44.0 YEAR STATIONARY POPULATION IS REACHED 2130 POPULATION DENSITY PER SQ. EM. 66.2 81.1 99.2 153.6 373.1 PER SQ. KM. AGRICULTURAL LAND 243.5 286.8 339.5 360.3 2382.8 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 39.1 42.0 42.5 37.4 39.8 15-64 YRS. 57.4 55.0 54.5 59.2 56.7 65 YRS. AND ABOVE 3.5 3.0 3.0 3.5 3.5 POPULATION GROWTH RATE (PERCENT) TOTAL 1.2 2.0 2.2/f 2.1 2.3 URBAN 4.2 4.3 4.6 3.4 3.8 CRUDE BIRTH RATE (PER THOUSAND) 45.9 44.8 42.1 27.7 29.7 CRUDE DEATH RATE (PER THOUSAND) 29.0 23.2 19.9 10.2 7.5 GROSS REPRODUCTION RATE 3.0 3.0 3.0 2.5 1.9 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 37.4 146.0 USERS (PERCENT OF MARRIED WOMEN) .. 0.7/c 4.3/c 20.4 44.1 FOOD AND NUTRITION INDEX OP FOOD PRODUCTION PER CAPITA (1969-71-100) 106.0 101.0 83.0 107.1 123.7 PER CAPITA SUPPLY OF CALORIES (PERCENT OP REQUIREMENTS) 93.0 96.0 91.0 98.6 112.6 PROTEINS (GRAMS PER DAY) 50.0 51.0 48.0 56.9 62.5 OF WHICH ANIMAL AND PULSE 9.0 9.0 9.0 14.2 19.7 CHILD (AGES 1-4) MORTALITY RATE 34.6 29.1 24.8 14.6 4.8 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 36.9 40.6 44.0 57.7 64.0 INFANT MORTALITY RATE (PER THOUSAND) .. 152.0/d .. 89.1 50.2 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL * 2.0 9.0 30.1 45.9 URBAN 47.7 53.0 81.0 65.8 68.0 RURAL .. .. 5.0 20.1 34.4 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL *' 1.0 1.0 17.6 53.4 URBAN 14.0 14.0 71.0 71.0 RURAL .. .. .. 4.8 42.4 POPULATION PER PHYSICIAN 72867.9 51655.1/e 35253.2/e 3657.7 4428.7 POPULATION PER NURSING PERSON .. 70905.57e 53538.2 6411.8 2229.7 POPULATION PER HOSPITAL BED TOTAL 8188.8 6951.5 6294.1 1132.8 588.5 URBAN 283.2 329.8 354.8 322.3 579.6 RURAL .. .. .. 5600.5 1138.5 ADMISSIONS PER HOSPITAL BED .. .. NOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL .. 5.5 URBAN 5.4 .. RURAL .. .. AVERAGE NUMBER OF PERSONS PER ROOM TOTAL .. .. URBAN 2.0 .. RURAL .. .. ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL .. .. URBAN 30.2 .. RURAL .. ..  -24 - ANMEX I Page 2 TABLE 3A NEPAL - SOCIAL INDICATORS DATA SHEET NEPAL REFERENCE GROUPS (WEIGHTED AVRAGES - MOST RECENT ESTIMATE) MOST RECENT LW IMCAM MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b ASIA & PACIFIC ASIA & PACIFIC EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 10.0 26.0 69.0 85.9 99.8 MALE 19.0 43.0 104.0 94.4 100.6 FEMALE 1.0 8.0 31.0 64.5 98.8 SECONDARY: TOTAL 6.0 10.0 14.0 38.0/ao 53.5 MALE 11.0 16.0 22.0 34.6ca- 58.4 FEMALE 2.0 3.0 5.0 18.0/aa 48.6 VOCATIONAL ENROL. (1 OF SECONDARY) 0.2 6.0 7.0 3.8 21.1 PUPIL-TEACHER RATIO PRIMARY 33.0 22.0 33.0 32.8 34.2 SECONDARY 32.0 21.0 25.0 19.9 31.7 ADULT LITERACY RATE (PERCENT) 9.0/g 14.3 19.2 52.8 86.5 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 0.2 0.4 .. 1.7 12.7 RADIO RECEIVERS PER THOUSAND POPULATION 3.0 4.8 15.0 35.3 174.1 TV RECEIVERS PER THOUS(ND POPULATION .. .. .. 3.7 50.6 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 0.8 2.4 7.4 14.6 In6.8 CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. .. 3.4 4.3 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 4813.2 5566.2 6678.8 FEMALE (PERCENT) 40.5 39.2 38.5 29.3 37.4 AGRICULTURE (PERCENT) 94.6 93.9 93.2 69.8 50.2 INDUSTRY (PERCENT) 2.0 2.1 2.0 14.1 21.9 PARTICIPATION RATE (PERCENT) TOTAL 51.6 48.8 47.8 39.7 40.2 MALE 61.5 58.8 57.7 51.5 49.8 FEMALE 41.8 38.6 37.6 23.3 31.1 ECONOMlC DEPENDENCY RATIO 0.8 0.9 1.0 1.1 1.1 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY hIGHEST 5 PERCENT OF HOUSEHOLDS .. .. 35.3 HIGHEST 20 PERCENT OF HOUSEHOLDS .. .. 59.2 LOWEST 20 PERCENT OF HOUSEHOLDS .. .. 4.6 LOWEST 40 PERCENT OF HOUSEHOLDS .. .. 8.0 PUVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 95.0 134.1 248.6 RURAL .. .. 45.0 111.6 193.7 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. .. .. 249.8 RURAL .. .. 41.0 .. 234.3 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 55.0 41.7 21.2 RURAL .. .. 61.0 51.7 32.2 Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /aa China included in total only. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1976 and 1979. /c Governxent progra only; /d 1971-73: /e Personnel in government services only; /f Estimated annual grovth rote for 1970-79; /x 1962; /b 1979/80.  -25 - ANNX I Page 3 DEFINITIONS OF SOCIAL INDtCATOSS Notes Although the data are dra from sources geer Sly judged the mos uth-ri-aive and reliable, it should also be outed tht they y ro ha li-te- raioalyto -ra "ehc- of the Ilatofsadarie eiiiNa u vo-cets usedby 01ff eretaoutesittlttg heda-Tedtercne- the1l...s,. usfult d-rtab -eder of nagnitudo, ~idiac trend, aod chlracictas cotat, mjo dfat tersoc.e-. sod tnoecifon, patioruct caocrimednrairingvereec vuosidiparrtoaogbc. Tbaeeoregsarc Nty"hful ncvmsvini taclu R_ rreirottatoratatimaaaorgthtoouttryaodrcfarmors frours.~~~~~~~~~~~~~~~~~~~~~~~~Iltd il-t, - idi.I lT- -c AFT-1 -f1 e e ec aiataa urn akrpie,p- tl daI .~ l cr r o tldd Ou-et -bos-ai.hrro,-oidhat onlne b cme ooarin rch a Pndtoo ala-(9--79y bais i__O, and mod. ica.str u emrnl sPblfd byadphyicie (bt b iSSO, and 1070 data. cedical aemascena. nurse. mid97fe..ccc hPeiciufs iv-oacPienlv INF Rl CNITA (US$) Pt p TA ,T -pAnajo- cko f omrileeg pdia uyssabntopnl nld il triccitpalgnolhsias tripaty) in halo race of coal eqoisiror per oa pits 1960, 1971, sod1979, cartrs.ipc ilod opel era--I itpffded Phly unertpcs. b y daaa. i~~~~~~~~~~~~~~~~datisaoas pr Ocdcotli`Netd - 91Total number f eestoen o itht Toitalynriun ta-la (thuso de)h- Ia fJuy1;D iSI,190,an 1579 ODIlSII'dS. .;l _i1 dais, hoarser tier of PousaholdH.2 by T- Ste bo - re h doseold - toa. -tan nod- rural among on idrim - 1960. ..9.0 ad.) A ,,1 90 90 1979 HOUSaeING hl tnmatsiclpnyse Pouain tva,71 uoctrploicpojc-ntrebsdon-9 e opesono per_.1 true "i allurah and ruhelopcuied Io",rI'da total cpulatcr b ag o o n terrrbiy a rtlr rors urh hns respectivel . trlireoLudanrfrsnrmnttos Projectio _aasaefcmra t srsretc fttaiolsise ocoldyra leg lfe epeotacy a hAc ceulgri onr aprc isnoa ceet Elntrciv 'leren of drldgel -Y tol urbanb, en-drats i- fertIlitysopordingto npoorlevel end poet faily plttn performance... l t j 1 1 t.. .d- bah uoac I that ameigb r our of thee cic combnatios pf drneliy TtioTlDf sod coal. lty f.td for . prjrino papch .Aduteinrisrtor itariomary coraatloc-Ioenietlnery popolationthoro it Ic grorh 55rPm Primao school - totl. male end fcela-Grosrtotol,sale and femal ahhnhee Itrulc h dothsr.osio hesg -1srructunIRooa- enole tofallgee-vrpnc dr lenclas pecnagso e-e asnmatd o th bain f te pojetedcheacarieo ofThe popltio acenepplsarbb or ahvtb f u toiae f-inth -y f-nlDfl endebr1-o h.e o elith- fetiico- etralae-Dcorereoto-trs.clcndemleC Mptdebo;scnar cent lee.-adudtiogreqiresit last oot sard0t-pproedlpycsay iodrurior tona ace; ltD 197 ... d 1979 lt data. Iincuetcncl nutra,o ie rgeaYbc prt cead ony 'hi. 9D n 17 drco _oril-tracher rgni - trimary. -an ssodey- Toalsvdet_ rrrlsdh Porue .t. ire 1111 ratre(rmIn).. - . CP,dr (5-4 Seem), mrkie-g (5 primarY and-secondarylevels divid=d y numbers ofilteachers LA - I -rn -dn -yo thDad199Oar bedul b litrac rae deccnt -f,iss pautc shsto den ie Povoltho.nuhtn cron oa ramlgoa ae fatlrd e percentage o nofal adul pouainae-1Yer end nst- l-ction for. .195-tI, 19 i-70 anhd 9(-79.d. . Pesrerir -(rep. thusn rf...tnoa- Psas -ge pasorple ar Crud erh tt vttosnl-anallv itsprcosn o i-mrcr arn less- than eight persons;h: seldsab- noe are n PoPo1ln-Dn ..io 110 19.. sod1959data tili17rpfegiolP.. irud Ist btfe k. uend. Anuld_ ni erth-era fki-yitld- tpa,rmfetrhnlod orlnhrl-Al tps f esdar orrsi popuertm; ltt.195, nod 1970di,hndcss ogrrlpbi pertthousnf fpplnr;scue n r-iiy rcs sal ieya vrgs nigi gI 91 n 99 ma9at c1t70Atl s sbtlsbsdliceIiag Party Pnnnoe-Aoeoorn 19o78 ncusds Anil ube facetosT tcinr nc hosn --dultn y i- acevesfat bodcstn wrent" of ' ohl-beri g (PI-lu yars rhold (0cc y.t) bin -cork eicgg. to5 "Nsmecsrs Cic.to . Star ths Id dorlann)-.T Ibon the vaag ai- 64 marrie-d ara nar t ou.rlno f'sl eme neetrmypr,Ofodaprota ..d 1171 d.,.. ~ ~ ~ ~ ~ ~ ubiaio eotdpimrl t eoriggeea rc.Iti oniee FPOO OhIDTIID o e daiy fi per tlwrfu itae irsased f suentS 9hich se edible and coti nuiiats (e..toffe and Pr tg ftt1dj , tea ar esnlded). ggcm0ns poountl 7 ofsc nneyI 7e n mO O naioalanres enu'rP' isaih 19bt1-i5 -t 19 t0, and 1979 d pt.p.TCNSUMPLAbOrN oc cosns orecal cieproe id Pe nio nrrofrSrer(epn frnlemns Cnse fo redfre adim1opdbtesid.g6acmve,aaers r. energy fquvas of56 net food suyIeevisl ncunr e apt ovrn ouaar fala_.t7itir nvriu onn t macC eebitae ySD ae rpyiological needs . fo fuea aur-,. f(shng a pretage ofd total-labo foc;190 9t a 97 s cit 6en helhcnleigsvroctlameaon,bd egt,ae Ddso nrei Labogfrct i earng.c...rc.ir, hsefetuci arden dmnlhnir f oplaio, ad llrig 0 opon fr ane n ad leneniy,raeran gs s aroatgenft_silaorfooc lnD PFeec' t nrloo rttn(nm s day). - otInpretoprosis Faicain tone..(reacent) --trial,Pmale, antfmlePsnre It opd an97p0.ffndprda.Ntropyv fo t eie a bv. e1ctvt9afseac7ptd sitl,ml,de eal aa frea plspotean nf - a-iT-9 1 b fre shud-ghatnrn prt in. Tb see udn-.rfleting. se-me atobliac af rho r-plad o,adDngtsns crdsas lnwcthacbose fSlgnmaofnnalpoimlradllgrmsof ewsst,nacesea fcensIorsIsdofPs Child psnl1l)_ otliytoe(entouad - A_cusl dIa.ha pr toue it Prstage ofi Pri hst o i -e(ohin nhrd id lcte b lha agellI. g J.u 1- years no chlre.n. hs.g grou; fy mat dvelpitt coon I p..rcet ILbs D ercnt preemp S ecen ed oretO-prcI 9EALTt POStaTO~~~~~~~~~~~~~~~. Toa lty umPPltZ Life ensoanryn toch (eers - Aerag nobe of- seo iermitg h olwn s ae ate vary - t aproimr maae at' poet tl e at- b 1irh; 1960, 197 and , 1979 ' drtr h and shoul be int-rtetedfrTt consderelefntin ofae deRhomnd o bIrths. Absolute pevarn ic hm loyal is that incm-edhl Sh.. icha mima pI nnae f hi.dpctn ouaioa nnrcncnpbi pfcarma income- -1t.b ofte onry rnlvl sdrive frmthai ura foonsir r cedpmt lcate ownmar ake 200 - star f P.e - os a eln itedaaaaEthg rceto igi rsaes resnal com nudiml hadh hasmf o breo h brsod sod- totld d- J h.rsa ofpooltto obradrrl h r sm limter f people ~ (noel uciol, nnd rual seve,yi-cea isnsle ofth g respetiv pp-n-nnirue I. tarea dmpsa mo =nld her inanslblasdLABOoFOsC Pouato F I hsvnn ouanr its9b uhr fpsiuigppi casneit qualifie from- s-1diob-F.scbnc__atoo-varm,_lev__. Frltion tar l- Nusn asn opltofiie byf ndrbCr of pndtioiildg malsrfeml-radsn-nsec ysonca nuse,sd-sisantorca  - 26 - ANNEX I Page 4 of 5 pages ECONOMIC INDICATORS - NEPAL GNP PER CAPITA IN 1980: US$140 a/ GROSS DOMESTIC PRODUCT IN 1980 ANNUAL RATE OF GROWTH, 1960-1979 (%, constant prices) US$ Mln. GDP at Market Prices 1,989 100.0 3.1 Gross Domestic Investment 268 13.5 Gross Domestic Saving 148 7.4 Current Account Balance (exc. official grants) -72 -3.6 Exports of Goods, NFS 241 12.1 Imports of Goods, NFS 361 18.1 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1979/80 Value Added Value Added Labor Force b/ Per Worker US$ Mln. % Mln. % US$ Agriculture 1,065 57 6.9 93 155 Industry 251 14 0.1 2 1,696 Services 543 29 0.4 5 1,468 Total/Average 1,859 100 7.4 100 251 GOVERNMENT FINANCE CENTRAL GOVERNMENT Rs. Mln. % of GDP 1976/77 1977/78 1978/79 1979/80 1979/80 Current Receipts 1,302.2 1,559.3 1,791.6 1,852.9 7.8 Current Expenditures 784.1 815.0 982.1 1,078.9 4.5 Current Surplus 518.1 744.3 809.5 774.0 3.2 Capital Expenditure 1,486.4 1,792.9 61.5 2,346.6 9.6 External Assistance (Net) 538.1 830.7 989.4 2,293.2 5.5 MONEY, CREDIT AND PRICES 1976 1977 1978 1979 1980 1981 (mid-April) c/ (Million Rs outstanding mid-July) Money and Quasi Money 2,524 3,223 3,772 4,512 5,285 6 097 Bank Credit to Government 480 750 966 1,129 1,258 1,254 Bank Credit to Public Enterprise 567 511 869 1,080 1,131 1,190 Bank Credit to Private Sector 716 864 1,072 1,332 1,917 2,382 Money and Quasi Money as % of GDP 14.5 18.7 19.3 21.1 22.1 ... General Price Index (1974/75 = 100) 99.3 102.0 113.3 117.3 128.7 146.4 (March) Annual Percentage Changes in: General Price Index -0.7 2.7 11.2 3.5 9.8 12.4 d/ Bank Credit to Government 67.8 66.3 28.9 16.9 11.4 -6.2 e/ Bank Credit to Public Enterprises -0.4 -9.9 70.1 24.3 4.7 3.0 e/ Bank Credit to Private Sector -8.6 20.7 24.1 24.3 43.9 28.8 e/ Note: All conversions to US dollars in this table are at the average exchange rate prevailing during the period covered. a/ World Development Report 1981. b/ Total labor force; unemployed are allocated to sector of their normal occupation. c/ Estimate. d/ March 1981 vs. March 1980. e/ April 1981 vs. April 1980. not available  -27 ANNEX I Page 5 of 5 pages TRADE PAYMENTS AND CAPITAL FLOWS BALANCE OF PAYMENTS MERCHANDISE EXPORTS 1979/80 a/ USS Mln. % 1977/78 1978/79 1979/80 (Millions US$) Exports, f.o.b. b/ 88.8 108.5 95.1 Agricultural products 67.2 7'.7 Imports, c.i.f. b/ 209.7 244.7 294.3 Manufactures 27.9 29.3 Trade Balance 120.9 -135.2 -199.2 Total 95.1 100.0 Services, net 47.6 65.6 91.6 of which: Tourism 30.2 41.8 54.0 EXTERNAL DEBT, DECEMBER 31, 1980 US$ Mln. Transfers, net 25.1 30.1 36.1 of which: Private Remit. 18.3 25.5 29.6 Public Debt, inc. guaranteed 176.7 Indian Excise Fund 25.1 3.0 3.1 Non-Guaranteed Private Debt Current Account Balance -48.2 -39.7 -71.7 Total Outstanding & Disbursed 176.7 (exc. grants) Official Grants 23.9 42.9 63.2 Official Capital, net 22.7 36.0 48.1 Private Capital, net -10.4 9.7 -37.4 DEBT SERVICE RATIO for 1979/80 c/ Change in Reserves 12.0 -48.9 -2.2 Public Debt, inc. guaranteed 1.5 (- Increase) Gross Reserves (mid-July) 140.6 179.8 187.0 Net Reserves 131.6 151.0 153.2 IBRD/IDA LENDING, (June 1981)(Millions US$) IBRD IDA Fuel and Related Materials Imports of which: Petroleum 18.6 16.7 30.2 Outstanding S Disbursed 92.8 Exports of which: Petroleum -- -- -- Undisbursed ---- 203.8 Outstanding, tncl. undisbursed 296.6 RATE OF EXCHANGE From October 1975 From March 20, 1978 Through October 1975 through March 20, 1978 through September 19, 1981 Since Se:tember 19, 1981 USS1.00 = NRs 10.56 US$1.00 = NRs 12.5 US$1.00 = NRs 12.00 US$1.00 - NRs 13.20 NR 1.00 = USS 0.095 NR 1.00 = US$ 0.08 NR 1.00 = US$ 0.083 NR 1.00 - US$ 0.076 a! Customs basis. b/ Payments basis. c/ Ratio of Debt Service to Exports of Gbods and Non-Factor Services. not applicable South Asia Programs Department September 1981  ANNEX II -28- Page 1 STATUS OF BANK GROUP OPERATIONS IN NEPAL A. STATEMENT OF IDA CREDITS (as of September 30, 1981) /a US$ Millions Amount (less cancellations) No. Year Borrower Purpose IDA Undisbursed Three credits fully disbursed 373 1973 Kingdom of Nepal Irrigation 7.1 0.3 397 1973 Kingdom of Nepal Telecommunications II 5.5 1.3 470 1974 Kingdom of Nepal Water Supply and Sewerage 11.8 2.2 505 1974 Kingdom of Nepal Settlement 6.0 4.1 600 1977 Kingdom of Nepal Kulekhani Hydroelectric 40.8 5.2 617 1976 Kingdom of Nepal Rural Development 8.0 4.1 654 1976 Kingdom of Nepal Groundwater 9.0 1.8 659 1976 Kingdom of Nepal Technical Assistance 3.0 0.7 704 1977 Kingdom of Nepal Second Water Supply and Sewerage 8.0 5.1 705 1977 Kingdom of Nepal Industrial Development Corporation 4.0 3.2 730 1977 Kingdom of Nepal Second Highway 17.0 8.0 772 1978 Kingdom of Nepal Technical Education 5.7 5.2 799 1978 Kingdom of Nepal Telecommunications III 14.5 14.4 812 1978 Kingdom of Nepal Irrigation 30.0 24.2 856 1978 Kingdom of Nepal Irrigation 14.0 12.5 939 1979 Kingdom of Nepal Second Rural Development 11.0 10.9 1008 1980 Kingdom of Nepal Forestry 17.0 16.8 1055 1980 Kingdom.of Nepal Mahakali Irrigation 16.0 15.8 1059 1980 Kingdom of Nepal Third Water Supply 27.0 27.0 1062 1980 Kingdom of Nepal Grain Storage 6.2 6.2 1093 1981 Kingdom of Nepal Babai Engineering 3.5 3.2 1100 1981 Kingdom of Nepal Agricultural Extension 17.5 17.5 1101 1981 Kingdom of Nepal Hill Food 8.0 8.0 Total Outstanding /b 296.6 Total Undisbursed 197.7 /a No Bank loans have been made to Nepal. W Prior to exchange adjustments.  - 29 - ANNEX II Page 2 B. STATEMENT OF IFC INVESTMENT (as of September 30, 1981) Amount of US$ Millions Year Obligor Type of Business Loan Equity Total 1975 Soaltee Hotel Hotel 2.70 0.43 3.13 (Pvt) Ltd. Total commitments now held by IFC 2.27 0.43 2.70 C. PROJECTS IN EXECUTION I/ Credit No. 373 - Birganj Irrigation Project US$6.0 million Credit of April 18, 1973; Effective Date: July 9, 1973; Revised Closing Date: June 30, 1981 The project is nearly completed and final disbursements for com- pleted works are expected shortly. Crop yields achieved in irrigated areas are promising. Water charges are now being levied in a limited area, and farmers' acceptance is satisfactory. A project completion report is being prepared. Credit No. 397 - Telecommunications Project II US$5.0 million Credit of June 20, 1973; Effective Date: September 11, 1973; Revised Closing Date: June 30, 1982 Due to organizational problems, lack of continuity in senior management, and delay in obtaining expert assistance, there have been delays in procurement and the project is about two years behind schedule. Good progress is now being made with the assistance of experts and consultants, provided by the United Kingdom, and a new General Manager. The project is now proceeding satisfactorily and present estimates are for completion by mid 1982, two years behind schedule. 1/ These notes are designed to inform the Executive Directors regarding the projects in execution and, in particular, to report any problems which are being encountered and the action being taken. They should be used in this sense on the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.  - 30 - ANNEX II Page 3 Credit No. 470 - Water Supply and Sewerage Project US$11.8 Million Credit of May 8,1974; Effective Date: June 26, 1974; Closing Date: June 30, 1978; Revised Closing Date: June 30, 1982 After a long mobilization period the project is now progressing favorably with all major works nearing completion. The Closing Date was delayed to allow time for completion of the ongoing contracts after this monsoon period. Credit No. 505 - Settlement Project US$6.0 million Credit of August 14, 1974; Effective Date: February 20, 1975; Closing Date: July 15, 1982 Project implementation is far behind schedule. By the Closing Date, it is expected that only about one third of the originally planned land will be cleared and less than half of the originally planned number of families will be settled. Due to continuing doubts about land use, timber clearing, and timber export policies, the Project will be closed on schedule, with an estimated US$3 M undisbursed. Credit No. 600 - Kulekhani Hydroelectric Project US$40.8 million Credit of January 9, 1976; Effective Date: May 18, 1976; Closing Date: Deecember 31, 1982 Construction progress in the main civil works has been satisfactory and on target. Reservoir impounding commenced June 9, 1981. Generator No. 1 is scheduled to be commissioned in November, 1981. The revised estimate of project costs, excluding taxes and duties, is now US$109 million which is some 60% higher than the estimate of US$68 million at the time of appraisal. The increases in costs are due to a number of factors, and the risk factors inherent in a major project which is remotely located. Cofinanciers are providing additional funds to cover the foreign exchange cost overrun. An IDA supplemental credit of US$14.8 million and an EEC Special Action Credit of US$3.0 million equivalent were approved by the Executive Directors on May 10, 1979. Credit No. 617 - Rural Development Project US$8.0 million Credit of April 30, 1976; Effective Date: July 16, 1976; Closing Date: December 31, 1981 Until recently progress had been satisfactory, with almost all- planned project actions being implemented ahead of schedule. However, the uncertainties regarding the referendum and election aggravated some of the usual difficulties in the administration. Disbursements had been lagging due to delay of project authority in submitting disbursement applications. Interministerial cooperation is good, and at the district level, sound and  - 31 - ANNEX II Page 4 practical development plans have been produced which are fully suppported and understood by project farmers. Shortage of middle-level staff in the project area for construction supervision and agricultural extension may hinder project implementation. However, arrangements have been made for more effi- cient deployment of existing staff and for special training of farmers as part-time agricultural assistants. Under the associated Bank-executed UNDP technical assistance project, the assistant to the Project Coordinator and the Irrigation Advisor have completed their assignments. Follow-up assis- tance is being arranged under the Second Rural Development Project. Credit No. 654 - Bhairawa - Lumbini Groundwater Project US$9.0 million Credit of July 9, 1976; Effective Date: November 16, 1976; Closing Date: December 31, 1982 Drilling of tubewells is in progress. Over fifty of the planned 63 production wells have been constructed. Progress of all civil works is very slow due to the weakness of local contractors. Project implementation is over two years behind schedule. Construction of the 11 KV transmission lines is proceeding more expeditiously and consequently, pumps and motors should be installed soon in the completed tubewells. Credit No. 659 - Technical Assistance Project US$3.0 million Credit of September 16, 1976; Effective Date: November 16, 1976; Closing Date: June 30, 1982 Studies for the agricultural extension and research project, a silica-lime brick factory, an airborne magnetometer survey, an agricultural manpower survey, cottage industries and the grain storage project have been completed, while studies are in progress for river control for the Sunsari-Morang Irrigation Project, the upgrading of mechanical workshops for irrigation projects, electrical accessories and leather goods, and cash crop development. Credit No. 704 - Second Water Supply and Sewerage Project US$8.0 million Credit of Mlay 27, 1977; Effective Date: February 28, 1978; Closing Date: June 30, 1982 There have been serious delays in procurement but bidding of major contracts is now practically completed and the overall progress is expected to be more satisfactory in the future. Due to delays in bid evaluation and receipt of bids which are not fully responsive to the tender document, con- tracts for the supply of pipes and construction of reservoirs have been retendered.  - 32 - ANNEX II Page 5 Credit No. 705 - Nepal Industrial Development Corporation Project US$4.0 million Credit of May 27, 1977; Effective Date: February 17, 1978; Revised Closing Date: December 31, 1983 The UNDO-financed policy advisor completed his assignment and the accounting and information systems advisor took up his post in February 1980. To date, subprojects for about US$2.2 M have been approved by IDA. Progress in implementation of the credit has deteriorated due to shortages of com- plementary local currency resources. Accordingly disbursement have continued to lag. Credit No. 730 - Second Highway Project US$17.0 million Credit of October 19, 1977; Effective Date: December 23, 1977; Closing Date: December 31, 1982 Although the project remains about two years behind schedule, recent major improvements in the Borrower's management give rise to the expectation that project performance will improve and that substantial com- pletion may possibly be achieved by the Closing Date of December 31, 1982. Good progress is being made in the construction of the Tulsipur feeder road and significant improvement has been achieved in the organization of work on the Thankot-Naubise Road. Credit No. 772 - Technical Education Project US45.7 million Credit of April 14, 1978; Effective Date: July 11, 1978; Closing Date: June 30, 1984 Good progress towards implementation has been made. Contracts have been signed for all civil works packages, including external works; however, equipment tendering is behind schedule. Construction is underway for all buildings. Contracts for about 75% of the equipment have been awarded. A second batch of fellowship students have completed their programs and tech- nicians are starting their program shortly. A team of educational experts, financed by ODA, have begun work in the field and a program of cooperation with Paisley College of Technology, Scotland, is progressing satisfactorily. Credit No. 799 - Third Telecommunications Project US$14.5 million Credit of August 22, 1978; Effective Date: February 27, 1979; Closing Date: June 30, 1984 ODA is financing the telex equipment and the satellite earth sta- tion. Project consultants have been appointed. Procurement actions have been initiated, but expected to be about two years behind schedule.  - 33 - ANNEX II Page 6 Credit No. 812 - Sunsari-Morang Irrigation and Drainage Development Project US$30.0 million Credit of July 7, 1978; Effective Date: November 30, 1978; Closing Date: June 30, 1984 In July 1980, a landslide in the catchment area caused a major flood in the Kosi river, causing a considerable erosion and endangering the Chatra Main Canal. Emergency flood protection works were carried out. As a result of this event it was agreed that river training works are not viable. The sediment control studies are expected to be completed by mid-1981. Rehabilitation work on the Chatra Main Canal and procurement of construction equipment are ongoing. Local consultants are completing designs for the first 12,000 ha of the irrigation system and international tenders will be invited to submit bids for construction. Credit No. 856 - Narayani Zone Irrigation Department - Stage II Project US$14.0 million Credit of November 27, 1978; Effective Date: January 8, 1979; Closing Date: December 31, 1983 Project implementation is proceeding steadily, although slower than anticipated. The major constraint is the weakness of local contractors. Construction is now on-going in five of the six irrigation blocks. Procure- ment of construction and O&M equipment is underway. The project is at least two years behind schedule. Credit No. 939 - Second Rural Development Project - Mahakali Hills US$11.0 million Credit of August 9, 1979; Effective Date: January 15, 1980; Closing Date: February 28, 1985 The Project Coordinator has been appointed, but project activities are approximately two years behind schedule. The administrative arrangements for coordination have not been completed since the transfer of responsibility to the Ministry of Local Development. Credit No. 1008 - Community Forestry Development and Training Project US$17.0 million of May 22, 1980; Effective Date: September 19, 1980; Closing Date: June 30, 1986 The Community Forestry Development and Training Project has been established. Satisfactory work is progressing for construction of nurseries and plantings in the first year work program. Training of forest assistants is underway and 31 forest officers have been sent on foreign study tours. Fifteen associate experts and volunteers, plus the silviculturist and socio-economist have taken up their posts under the technical assistance component. Delays in the release of funds has hampered both vital capital and promotion works. The coordinating committees have not been established and staffing of the CFAD and field posts is not satisfactory.  - 34 - ANNEX II Page 7 Credit No. 1055 - Mahakali Irrigation Project (Stage I) US$16.0 million Credit of September 29, 1980; Effective Date: February 27, 1981; Closing Date: December 31, 1985 The engineering consultants have been appointed and are commencing work. The Mahakali Irrigation Board has been established and the Project Manager, senior roads engineer, and agricultural development officer have been appointed. Credit No. 1059 - Third Water Supply and Sewerage Project US$27.0 million Credit of September 29, 1980; Effective Date: August 31 1981; Closing Date: December 31, 1985 The engineering consultants have been engaged. ODA assistance in training and laboratory operations is continuing. Credit. No. 1062 - Grain Storage Project US$6.2 million Credit of January 14, 1981; Effective Date: August 3, 1981; Closing Date: September 30, 1984 Arrangements are nearly completed for employing the engineering consultant. NFC has assumed management responsibility for the Rice Exporting Companies and the Project Management and Coordination Committee have been established. Credit No. 1093 - Babai Irrigation Engineering Project US$3.5 million Credit of March 26, 1981; Effective Date: June 5, 1981; Closing Date: December 31, 1983 Consultants have been appointed and works have been initiated. Credit No. 1100 - Agricultural Extension and Research Project - US$17.5 million Credit of April 6, 1981; Effective Date: July 8, 1981; Closing Date: July 15, 1987 The technical assistance agreement has been signed and recruitment of advisers is underway. The project coordinator has been named. The first shipment of fertilizer under the project has been made. Credit No. 1101 - Hill Food Production Project - US$8.0 million Credit of April 6, 1981; Effective Date: May 28, 1981; Closing Date: July 15, 1987 The project coordinator has been appointed and project activities scheduled to begin in FY1981/82. The first shipment of fertilizer under the project has been made.  - 35 - ANNEX III Page 1 NEPAL COTTAGE INDUSTRIES PROJECT SUPPLEMENT PROJECT DATA SHEET Section I: Timetable of Key Events (a) Time taken by the country to prepare the project 24 months (b) The agency which has prepared the project Committee of key implementing agencies, with assistance of consultants and IDA missions; DCVI sponsored and ISC conducted a detailed preparation study on the most promising CSI subsectors. (c) Date of first presentation to the Bank and date of the first mission to consider the project November 1977 November/December 1977 (d) Date of departure of appraisal mission June 1980 (e) Date of completion of negotiations October 1981 (f) Planned date of effectiveness December/January 1982 Section II: Special Bank Implementation Actions Executing Agency for UNDP-financed technical assistance and training programs.  - 36 - ANNEX III Page 2 Section III: Special Conditions Conditions of Effectiveness (a) Government had entered into a subsidiary loan agree- ment, satisfactory to the Association, with the NRB for the use of funds available under the Credit (para 39); (b) the NRB had established, satisfactory to the Asso- ciation, the CSI Refinance Fund and Unit (para 39); (c) the NRB had issued instructions to at least two of the participating banks, which had met the condi- tions for participating in the CSI Refinance Fund operations (para 40); (d) the NRB had established a CSI Credit Guarantee Scheme, satisfactory to the Association (para 42); and (e) the UNDP grant in support of the technical assis- tance and training programs had been duly signed (para 53). Other Conditions (a) Key staff positions for the Cottage Industries Ex- port Development Division would be filled and annual action program for the remainder of fiscal year 1982, satisfactory to the Association, would be prepared by January 1, 1982 (para 45); (b) TPC would establish IMPACT offices in New York by July 31, 1982, and in Frankfurt by July 31, 1983 (para 46); (c) The Cottage Industries Development Board would be reactivated by January 1, 1982, with a work program for the remainder of fiscal year 1982 and in a form satisfactory to the Association to assume the responsibilities of the DCVI in the project area (para 48); (d) Conditions of disbursement for refinancing of sub- loans to the Emporium or for any equity to be added to the Emporium would be that the Emporium had es- tablished a yarn, equipment, and textile fund with policies, procedures, and staffing all satisfactory to the Association, that it had appointed a suitably qualified and experienced procurement advisor and that it had furnished to the Association an annual action program (para 52); and  - 37 - ANNEX III Page 3 (e) The interest rates and spreads would be reviewed at least annually and adjusted to ensure that the minimum rate to find borrowers remains positive in real terms in relation to medium term inflation projections and at a level consistent with interest rates applicable to all term loans made to other industries, with spreads maintained at least at the levels established for the startup of the project (para 57).   \ ~~~~~~~~~812