Nepal - Second Forestry Project

- Dcumnt Of The World Bank FOR OMCuL USE ONLY G lifoo -A)&o RI_th . P-3618-NEP REPORT AID RECO(EDATION OF TME PRESIDENT OF THE INTENATINAL EVELOPI ENT ASSOCIATION TO TME MECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDI 16.7 MILION TO THE KINGDOH OF NEPAL FOR A SECOND FORESTRY PROJECr June 21, 1983 II& doument ba a rested db&&Wm sd mmy be med by redpieub omy in the pefammee of thiir dlieda de es acestmt mm " .dlrwie be didusd whbout Weed _hck aduion.  CURRENCY EQUIVALENT Currency Unit - Nepalese Rupee (NR) Since December 17, 1982 US$1.00 NRs 14.3 IIR 1.00 US$0.07 ERa 100 US$6.99 NERC SYSTEfl FINACIAL YEAR July 16 - July 15 ABBREVIATIONS AND ACRONYMS CMAD - Cmuniity Forestry and Afforestation Division CFU - Community Forestry Unit CFDTP - Community Forestry Development and Training Project CFO - Comunity Forestry Officer CR - Community Ranger DFO - Divisional Forest Officer FAD - Food and Agriculture Organization G-P - Gross National Product CDP - Gross Domestic Product icB - International Competitive Bidding LCB - Local Competitive Bidding MEDU - Motivation and Education Unit MEU - Monitoring and Evaluation Unit mFTW - ministry of Forest .raining Wing MFSC - Ministry of Forest and Soil Conservation ODA - Overseas Development Administration (UK) PF - Panchayat Forest PPF - Panchayat Protected Forest SIU - Stove Improvement Unit USAID - United States Agency for International Development  FOx OMCIAL USE ONLY SECOND FORESTRY PROJECT Credit and Project Summary Borrower: Yingdom of Nepal Amount: Special Drawing Rights (SDRs) 16.7 million (US$18.0 mlllon equivalent) Terms: Standard Project Objectives The project would promote social forestry and the and Description: rehabilitation of degraded forest in the eastern Terai. It aims at increasing the availability of forest products by motivating inhabitants in the area to: (a) plant trees on private and panchayat land and (b) protect forests planted or managed by the Forest Department. The project would support the planting of forests on private farms, institutionally owned land, waste land, roadsides, river and canal banks, and isolated areas of degraded forest land. Other forests would be established through an agro-forestry scheme, which would permit the cultivation of crops between rows of young trees. Areas of natural forest would be rehab- ilitated thrnugh better management practices. The project woula, improve support services for these activities by strengthening, within the Forestry Department, (a) the organization and management of reforestation programs, (b) forestry research, (c) monitoring and evaluation, and (d) planning. In addition, technical assistance and specialized consultancy services world be provided for these activities. Opportunities for staff training would be increased by the provision of formal and in-service training facilities. As a conservation measure, 20,000 fuel efficient stoves would be distributed. This document has a resturd distnbution and may be used by recpients only in the perfor dof their offrid dutie Its contents mi- not otherwise be dislwd without WoddEBnkauthonk at  - ii - The major benefits would be increased production of fuelvood, timber, poles, fodder, fruits and agricultural crops. Additional benefits would accrue from increased employment opportunities. The project faces no major risks. Since it depends largely on comnunity cooperatior., however, there is a possible risk that the number of panchayats able to mobilize sufficient popular support for reforestation may not reach the targets expected. The project is designed to minimize such a risk through the motivation and publicity activities of the Forest Department. Estimated Cost USS Million of Project Component Local Foreign Total A. Project Coordination 0.01 - 0.01 B. National Forest Planning 0.05 0.02 0.07 C. Conmuniry Forestry 5.75 0.91 6.66 Private Planting (1.30) ( -) (1.30) Panchayat Planting (0.44) (0.12) (0.56) Demonstration and Strip (1.05) (0.13) (1.18) Plantings Stove Distribution (0.22) (0.02) (0.24) Other Community Forestry (2.74) (0.64) (3.38) Costs D. State Agro Forestry 3.54 2.09 5.63 E. Natural Forest Hgmt. 0.28 0.02 0.30 F. Research, Training, & Technical Assistance 1.05 2.00 3.05 G. University & Training wing 2.09 0.94 3.03 Total BASELINE COSTS 12.77 5.98 18.75 Physical Contingencies 0.37 0.22 0.59 Price Contingencies 3.53 1.13 4.66 Total GROSS PROJECT COSTS 16.67 7.33 24.00 Less Taxes & Duties 1.70 - 1.70 Total NET PROJECT COSTS I737 7zT 2n:W  - {li - Financing Plan: US$ f llion Local Foreign Total HUG ~~4.8 - 48 IDA 10.7 7.3 18.0 Farmers 1.2 - 1.2 T6-7T 24.0 Estimated IDA IDA FY FY84 FY85 FY86 FY87 FY88 FY89 FY90 Disbursements: Annual 0.3 1.8 3.8 3.0 2.9 3.5 2.7 Cuulative 0.3 2.1 5.9 8.9 11.8 15.3 18.0 Rate of Return: 27% (based on 84% of project costs). Staff Appraisal Report: No. 4353 NEP, dated June 21, 1983. map: IBRD-16908  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOlMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOMI OF NEPAL FOR A SECOND FORESTRY PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Kingdom of Nepal in an amount of Special Drawing Rights (SDRs) 16.7 million (US$18.0 million equivalent) on standard IDA terms to help finance a Second Forestry Project. PART I - THE ECONOMY 1/ 2. The most recent economic report, "Nepal - Policies and Prospects for Accelerated Growth" (Report No. 3577-NEP) was distributed to the Executive 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. Nepal is one of the least developed countries in the world. Per capita income is estimated at US$156 (1981) and health and education standards are well below the average for South Asia: life expectancy at birth is only about 44 years, infant mortality is about 150 per thousand, and adult literacy is only 20%. The population, estimated to be 15.0 million (1981), grew at a rate of about 2.6% per year during 1971 and 1981. About 95% of the population live in rural areas. 4. Population density with respect to arable land has reached alarm- ing 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 living standards difficult to maintain. 5. Agriculture accounts for nearly 60% of Nepal's CDP and 75% of merchandise exports, and provides the main source of livelihood to over 90% of the population. Crop production accounts for about 60% of agricul- tural output, livestock for 30%, and forestry for 10%. Paddy is the 1/ Parts I and II of this report are substantially the same as in the President's Report (Report No. P-3467-NEP) dated March 3, 1983 for the Cash Crop Development Project in Nepal, approved by the Executive Directors cn Mlarch 22, 1983.  -2- predominant food crop (planted on about half of the total cropped area), followed by maize, wheat, millet, and barley; cash crops (oilseeds, jute, sugarcane and tobacco) are grown on about 10% of the cropped area. About 15% of total rural incomes arise from nonagricultural activities, of which cottage industries are one of the more important and engage over one million people on a part time basis. 6. Apart from apricultural land, Nepal's only other important exploitable resources are hydropower and tourism. The exploitation of the vast hydropower resources beyond that required to satisfy the country's own power demand, however, will depend crucially on Nepal's ability to enter complex financial, exploitation and export agreements with neigh- bouring countries. The tourism sector, based on Nepal's magnificent landscape and rich cultural heritage, has been dynamic though it accounts for only about 1% of GDP. 7. When modernization efforts started in the early 1950s, there was virtually no economic or administrative infrastructure, and initial development efforts were necessarily concentrated on establishing a foun- dation for future development. The Fifth Development Plan (1975/76-1979/80) marked a shift in development objectives; acceleration of economic growth, em loyment creation and raising living standards of the population became major plan objectives. Development expenditures rose during this period and there were substantial shifts in the composi- tion of spending away from transport to agriculture, power and social services. But given the lead time required for investments to start yielding returns, GDP growth barely kept up with that of population. 8. Part of the reason for this stagnation lies in factors beyond Nepal's control. The difficult topography and poor resource base are obviously important 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 gcoods, the ability to pursue independent ecoromic policy measures is circum- scribed. Furthermore, industrial development faces the competition of a far larger and more efficient industrial sector in India. 9. But factors with-n Nepal's control have also contributtd to the stagnation. Problems with the implenentation of projects in most sectors of the econony have constrained the growth of public sector capital forma- tion which grew at an average of only 5.5% per annum in rea] terms during the 1970s. In addition, the returns on investments were often lower than expected because of the lack of necessary complenentary investments or current spending and because of managerial deficiencies. A good example is the agriculture sector, where output stagnated desoite considerable investments in irrigation, a virtual doubling of the irrigated area and a 40% increase in fertilizer use between 1974/75 and 1979/80. In the past,  -3- 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 comprehen- sive and integrated approaches. 10. Over the past decade, the Government has made continuous efforts to increase tax revenues. But, despite the improving long-term trends, the revenue effort (about 9% of GDP) remains small by comparable interna- tional standards. With limited domestic resources, current expenditures have been squeezed in order to generate savings for investment spending, with the result that the efficiency of total spending was lowered. Fur- thermore, while about one quarter of total budgetary expenditures (regular and development) was being financed by the rest of the world in 1974/75, this proportion was 36% in 1981/82. 11. The slow economic growth 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. Increased tourism receipts and remittances, together with foreign assistance in the form of grants and concessionary financing have, however, 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 the early 1970s to six months in 1981. 12. IWhereas 1980/81 was a year of recovery from the previous year's severe drought, 1981/82 was a more modest year; agricultural production is estimated to have grown by 3.5Z and GDP by about 4%. Budgetary develop- ments were quite encouraging. Developrent expenditures increased sharply, and revenue collections increased substantially for the second successive year. Nevertheless, the budget deficit increased from about 5.52 of CDP in 1980/81 to about 8.5% in 1981/82, and while foreign assistance also increased, domestic borrowing rose sharply. Also, the underlying economic trends have not picked up yet, and the economy remains dependent upon the weather. The inadequate monsoon in 1982 is likely to adversely affect economic performance in 1982/83. 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 unchanged at NRs 145 = 100. This completed 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 replaced with a dual exchange system on Narch 31, 1978. A technical adjustment to reestablish cross-rates between the Indian and Nepalese rupees was effected on Decenber 17, 1982 setting the exchange rate with the US dollar at NRs 14.3 = US$1.  -4- 14. During 1979-81 economic policy naking had been delayed by politi- cal developments. Following disturbances in 1979, a referendum was held in flay 1980, uhich 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. Ceneral elections were held in Hay 1981, and the politica'l situation appears to have since stabilized. During the past year, the Co-ernment has focussed its attention on economic problems and on implementing the Sixth Plan (1980/81-1984/85). 15. The Sixth Plan reflects Nepal's determination to search for ways to overcome stagnation and, as a set of objectives, it was endorsed by members of the Nepal Aid group at its December 1981 meeting. The strategy to shift investment into more productive sectors 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 employment, 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 conservation and population control; and (iii) emphasizes full utilization of existing infrastructure and allevia- tion of absorptive capacity constraints. The development strategy also calls for full involvement of the private sector in agriculture, nanufac- turing, trade, tourism, construction and transport operations. 16. Achieving the Plan-s objectives will require quick-yielding sector prograns 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 finan- cial constraints, and the Government has begun to respond to these problems. Reforms in development administration include the establishment of an Administrative Staff College; appointment of a Permanent Pay Commis- sion to review civil service salaries and schemes of service; creation of a Central tionitoring Unit within the Foreign Aid Division of the Mlinistry of Finance; and establishment of treasury offices in each of Nepal's 75 districts to expedite the release and audit of budgetary funds. The record 49% increase in development expenditures during 1981/82 may indi- cate that these efforts have resulted in a speed up in disbursements. To strengthen domestic resource mobilization, the Government has set up a revenue training center; formed a Tariff Board which recommended increases in indirect taxes for the 1982/83 budget; made preparations for close monitoring of all public enterprises and also liquidated certain of these enterprises; and decided to phase out rice and fertilizer subsidies in the relatively higher-income Yathmandu Valley.  -5- 17. Nepal has received substantial external assistance. Aid commit- ments have averaged US$165 million per year since 1976, and, according te current indications, could reach an average of about US$300 million per year during 1981/82-1983/84. Foreign assistance is expected to account for about 53% of total development spending during the Sixth Plan period. The Nepal Aid Group was formed in 1970 to assist in the overall coordina- tion of financial and technical assistance efforts and the Group now accounts for some 70% of all aid disbursements. The Group has met four times at plenary meetings under the chairmanship of the Bank to discuss overall external assistance needs; local Aid Group meetings in Kathmandu axe also held to discuss and coordinate sectoral development strategies. 18. Foreign aid disbursement, grew rapidly in current prices during the past five years and were estimated to be US$156 million in 19B1/82, but only about 42Z of disbursements were from foreign borrowings, the remainder being grants. As of December 31, 1981, official foreign debt outstanding was US$234 million, of which llS$192 million was due to multi- lateral agencies. These loans were obtained on a highly concessional basis and the grant element of total loans remains in excess of 70%. As a result, debt service payments were only US$4.0 million during 1981, equiv- alent to less than 2% of exports of goods and services. PART II - BANK GROUP OPERATIONS IN NEPAL 19. Bank Group operations in Nepal began in FY70 with an IDA credit of USS1.7 million equivalent for a telecommunications pro.ect. Since then, 30 additional credits have been approved, bringing total IDA assistance to Nepal to US$348.5 million 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 about 79% of IDA credits by amount: irrigation/agriculture (US$132.2 million for eleven projects); water supply and sewerage (USS46.8 million for three projects), power (US$40.8 nillion for one project); telecommunications (US$21.7 million for three projects); highways (US$19.2 million for two projects); and rural development (US$19.0 million for two projects). The proposed credit would be t e fourth in FY83, bringing the total amount of IDA * assistance to Nepal to US$366.5 nillion equivalent, net of cancellations. No Bank loans have been made to Nepal. IFC made its first investment in Nepal (US$3.1 million) in a hotel project in Kathmandu in FY75. In addition, IFC approved a loan of US$6.23 million equivalent to Nepal Orind Ntagnesite (Private) Limiited (i.e., a private company) on ltarch 16, 1982. The loan was to help finance a US$24.9 million project to nine and process magnesite ore. Annex II contains a summary statement of Bank Group opera- tions as of llarch 31, 1983, and notes on the execution of ongoing IDA  -6- projects. It shows certain delays in the implementation of some of these projects, particularly during the initial periods. The delays have been largely due to Nepal's limited technical and managerial capabilities. In order to assist Nepal in coping with this constraint, considerable techni- cal assistar.ce is being given by Bank Croup staff, including our Resident Representative in Kathmandu. As a result, the rate of disbursements is improving; during FY81 and FY82, US$27.8 million and US$28.5 million equivalent, respectively, was disbursed compared to US$65.1 million equiv- alent disbursed during the entire previous 10 years. Project completion reports have been prepared for four projects--First Telecommunications (Credit No.166, US$1.7 million equivalent), First Highways (Credit No. 223, US$2.2 million equivalent), Tourism (Credit No. 291, US$3.2 million equivalent), and Birgani Irrigation (Credit No. 373, US$6.0 million equiv- alent). All four projects experienced delays in implementation, and institutional improvements were less than anticipated; however, all four generated acceptable rates of return. A completion report on the Settle- ment Project (Credit No. 505, US$6.0 million equivalent) has also been written and is under review. 20. Bank Croup lending to Nepal has so far been at a modest level compared to the country's need for external assistance. The international cornmunity has shown considerable interest in Nepal's econonic development and, to date, the shortage of funds has not been a major bottleneck. The main constraint on the utilization of increased aid has been Nepal's limited absorptive capacity, affecting the pace of project preparation and implementation. The Bank Group has assisted the Government in project preparation through a Technical Assistance Credit (Credit No. 659-NEP, US$3.0 million equivalent) and by acting as Executing Agency for a number of technical assistance projects financed by UNDP. A second technical assistance credit has also been appraised as a follow up of the first. 21. The Bank Group's current lending strategy places major emphasis upon the directly productive sectors (particularly agriculture) and the development of complementary infrastructure, including manpower training programs and facilities, transport, and hydroelectric power. For agricul- ture, the basic strategy is to assist Nepal in maintaining overall foodgrain self-sufficiency and where possible promoting exports of agricultural products. This strategy has two major elements: (a) to assist in building the irrigation infrastructure in the Terai mainly to increase paddy production, and (b) to help reduce the food deficits in the Hills both through rural development projects which emphasize increasing food production, and more recently through a specific Hill food project. To increase the chances for the success of these efforts, the Bank has, at the same time, assisted in the improvement of agricultural extension as well as the provision of other inputs. Projects are being prepared in forestry, leather industry, agricultural manpower development, highways and hydroelectric power.  -7- PART III - THE FORESTRY SECTOR 22. The present forest area of Nepal covers about 3.8 million ha or 27% of the total land area. About 2.9 million ha of these foresta are in the Hlills and 0.9 million ha in the Teral. Forestry, including log- ging, contributes about 52 of total national income. Hill forests (mainly in patches) lying in the altitude range of 300 to 2,600 meters consist mainly of conifers, with some hardwoods. In general, fir and oak predominate at higher altitudes, gradually giving way to chir pine (soft wood), and a variety of hard wood species at medium elevations. In the Terai (below 300 meters) mixed hardwood forest, mainly sal and asna, is found, which contains no softwood species. 23. Forest land in Nepal is under great pressure from increasing population density, scarcity of agricultural land, and the maintenance needs of livestock herds which significantly exceed the carrying capacity of the available grazing lands. This in turn has caused considerable problems of soil erosion, loss of potential agricultural lands, drying up Of mountain streams and severe downstream flooding and sedimentation. Because of the increased difficulty of sustaining themselves in the over- populated Hills, many settlers have moved to the Terai to clear forests and to attempt to establish agricultural settlements. Recent studies by the Covernment indicate that unless encroachment into the forests for fuelwood, fodder, and settlement is prevented, the accessible forests in the Hills could disappear within 14 years and those in the Terni within 25 years. Governvent figures indicate that over the last 15 years, forest land has been reduced by about 40%. 24. In the rural areas, fuelwood accounts for 95% of all energy con- sumption and for the country as a whole, 87X. Per capita use of fuelwood in the Hills is estiated at a'out 1 cubic meter per year; and about 0.85 cubic meters in the Terai where less heatintg is required. Tree fodder and pasture contribute about 74% of the feed for livestock in the Hills but only 32% in the Terai where crop residues play a larger role. 25. Alternatives to fuelwood, including biogas, solar energy, wind, geothermal, hydroelectric, coal, and lignite are being explored, but it is highly unlikely that these sources would contribute much to the total rural energy needs even in the most optimistic circumstances. Given current sociological and religious attitudes, it is also unlikely that the livestock herd can be reduced. Therefore, in order to satisfy demand for fuelwood in the year 2000, it is estimated that 1.3 million ha of land would need to be reforested. This would mean the reforestation of about 76,000 ha per year, which would be difficult to achieve given Nepal's limited administrative and financial capabilities. The Bank Forestry Sector Review of 1978 indicated that a plantation target of about 20,000  -8- ha a year could be attained if the Government made a determined effort to strengthen institutions and encouraged the participation of local com- munities. The Government's present strategy is to channel available resources towards the achievenent of the target of 20,000 ha per year. Ownership. All forest lands were nationalized in 1957, and S private ownership of forests is now litited to a riaximur of 50 ha per person. In the Forest Act of 1961, the Goverrnent required the demarca- tion of forests and established a Forest Departnent to undertake the a overall administration and management of the national forests. In recog- nition of the need to involve local communities in the protection and regeneration of forests, the 1961 Act was amended to recognize two types of community forestry activities in which land and rights to forest produce are grarted to local communities-the Panchayat Forest (PF) and the Panchayat Protected Forest (PPF). PF was defined as Government forest lands which have been rendered waste or contained only saplings, and which required replanting; PPF was defined as Government forest lands which required only improved management and protection to ensure adequate forest cover. Net proceeds from the sale of products from PPF would be shared between the Government and village panchayats on a 25:75 basis. The disposal from PF would be at the discretion of the panchayat and would not be subject to a royalty payment. Panchayats usually arrange to distribute forest products from PF free of charge, according to a forest managerent plan which is agreed with the Forest Department. Should the panchayat elect to sell forest products, 50% of the resulting revenue nay be used for panchayat community works, and under the forest rules, 50% must b' used to finance new panchayat forestry activities. 27. Institutions. The ?tinistry of Forest and Soil Conservation (1!FSC) is responsible for the development, protection and exploitation of the forestry sector. The main ministerial department is the Forest Depart- ment, under t.le direction of the Chief Conservator of Forests. The Forest Department's jurisdiction covers the entire country and it operates through nine operational areas known 2s circles, further divided into 40 divisions and 174 ranges. These frre.stry units do not coincide with the administrative districts of the Covernment. The Forest Department has been chiefly concerned with forest law enforcement and the licensing and organization of timber sales in the Terai. It Is also responsible for national parks and wildlife, forest survey and research. within the Ilinistry, separate departments for soil and water conservation, botany and medicinal plants, resettlement, and planning have also been established. 28. Prior to 1981, there was no training facility in Nepal at the degree or diploma level for professional forest officers. Forest officers have, in the past, been trained at the Indian Forestry School at Dhera Dun. Training of forest technicians at the certificate level is conducted at Hetauda in the inner Terai, where an Institute of Forestry has been established under Tribhuvan University. A three-year degree course in  -9- forestry and soil conservation has now been established. It is tem- porarily located at the Institute of Forestry, Retauda, but will ultimately be placed at the Institute of Forestry at Pokhara. Previously, training was mainly oriented toward commercial forestry production in the * Terai, but with the increasing importance of community forestry tbroughout the country and the need for large-scale plantations of fast-growing species ih the Terai, forestry training is being gradually reorientated towards community and plantation forestry. 29. Development Strategy. The Forestry Sector Review undertaken in 1978 by the Bank identified five major issues currently facing the forestry sector in Nepal: (a) rural energy shortages; (b) soil erosion; (c) land use policy in the Terai; (d) donestic and industrial wood sup- plies; and (e) social and institutional constraints to implementing effective protection and development programs. To address these issues, the Sector Review recommended that the development strategy give priority to a national reforestation program. Such a program would ensure improved fuelwuod and forest fodder supplies and would also play a significant role in protecting hillsides from further erosion. 30. While additional administrative and financial resources would be allocated to this program,. the key to success was identified as the ability to mobilize the cooperation of village people. Through PF and PPF programs, the Government is seeking to re-establish responsibility in local communities for forestry development and for forest protection and management. To ensure maxinum impact from the forestry operation, the highest priority would be given to the production of fuelwood and leaf fodder-the most urgent and visible needs. This would relieve pressure on existing forests and ease the burden on fuelwood and fodder collection. 31. Traditionally the Forest Department has been concerned with conr- mercial forestry and resettlement operations requiring forestry personnel to function in policing and regulatory roles. The Government has recog- nized that social forestry, being based on direct participation by the local people in forestry activities and benefit sharing, requires the Forest Department to work in harmony with village communities. To this end the Forest Department is seeking to encourage forestry extension and close cooperation between forestry personnel and the local people, and has established a Community Forestry and Afforestation Div'sion (CFAD) within the Forest Department to handle social forestry programs. Besides a limited program of afforestation financed from its own resources, FD also participates in forestry programs from nultisectoral rural develop- ment projects and the IDA supported Community Forestry Development and Training Project (CFDTP). The Government's national community forestry program would ultimately cover all districts. 32. Bank Group Support. The Bank Group financed a Community Forestry Development and Training Project (The First Forestry Project) in 1980.  -10- The related credit (Credit 1008-NEP) of US$17.0 million became effective on September 19, 1980 and seeks to plant, enrich or protect about 51,000 ha of forest land. The project aims at increasing the supply of fuelvood and fodder in the Hills by establishing new plantations and rehabilitating degraded forests. The First Rural Development Project (Credit 617-NEP, US$8.0 million equivalent of April 30, 1976) includes a provision for planting 2,500 ha of fuel and fodder trees and rehabilitating about 6,000 ha of forest in Nuwakot and Rasuwa districts. The implementation of this component has been satisfactory, with about 70% of the target for planting and rehabilitation having been achieved. Over one million people have been brought into contact with the concepts and aims of social forestry. PART IV - THE PROJECr 33. The Project was prepared by Ris Majesty's Government with assi6- tance from the FADIIBRD Cooperative Program. It was appraised in Novem- ber/December 1982, and negotiations were held in Washington during May 4-9, 1983. The Nepalese delegation was led by Mr. N. Raque, Chief Conser- vator of Forests, Hinistry of Forests and Soil Conservation. The staff appraisal report (No. 4353-NEP, dated June 21, 1983) is being distributed separately. A supplementary data sheet is attached as Annex III. Project Objectives 34. The principal objectives of the project would be to: (a) increase supplies of fuelwood and other forest products in the eastern Terai through establishment of new plantations and rehabilitation of degraded forest areas; (b) promote and distribute improved voodburning stoves to increase the efficiency of fuelwood use; and (c) support training facilities in Nepal to help meet the manpower needs of the forestry sec- tor. Project Description 35. The six-year project would comprise: (a) strengthening the operational and managerial capacity and forestry research activities of the Forest Department through the provision of additional staff, training, buildings, equipment and vehicles; (b) establishing forest plantations on about 2,000 ha of Panchayat Forest; establishing the equivalent of 2,550 ha of strip plantations on roadsides, canal banks and river banks; 2,200 ha of demonstration woodlots and 5,900 ha of agro-forestry plantations on land presently under degraded forest; and providing 32 million seedlings for planting on private and institutionally owned lard in the project area;  -11- (c) improving about 35,000 ha of natural forest by silvicultural management techniques; (d) manufacturing and d'Istributing about 20,000 improved stoves; (e) expanding forestry training facilities at the Institute of Forestry at Retauda, the Institute of Forestry at Pokhara and the Ministry of Forest's Training Wing at Rathmandu through the provision of buildings and equipment; providing an in-service training program and study tours for Divisional Forest Officers, Community Forest Officers, Plantation Officers, Community Rangers and junior staff of the Forest Department; technical training of 109 Assistant Rangers in the Institute of Forestry at Retauda and overseas profec- sional training of 34 Forest Officers; (:C) expanding the Forest Department's existing research program to include research in social forestry; Cg) preparing a National Forestry Development Plan; Ch) strengthening and maintaining the evaluation activities of the Forest Department, by providing additional staff and technical assistance; and Ci) providing consultancy services for a mid-term review of the project, forestry research, in-service training, stove tech- nology, socio-econonic surveys. nursery and plantation management, and preparing the National Forestry Development Plan. Organization and Implementation 36. Project Coordination. The position of Project Coordinator would be established in the Forest Department for the purpose of coordinating the implementation of the various components of the project. The designa- tion of the Chief Conservator of Forests as Project Coordinator would be a condition of credit effectiveness (DCA, Section 6.01). In order to assist the Project Coordinator in his day to day activities, an officer with suitable qualifications and experience would be appointed not later than 30 days after credit effectiveness (DCA, Section 3.05). The Project Coordinator would also be assisted by the Project Coordinating Committee established under the First Forestry Project, which would provide coor- dination and cooperation between the different ministries involved in project implementation. The Committee is under the chairmanship of the Secretary for Forests and its membership includes the Director General for Soil and Water Conservation, the Dean of the Institute of Forestry, the  -12- Read of the Survey and Research Div'sion of the Forest Department, the Director General of the Survey Department of the Ministry of Land Reform, and representatives from the National Planning Cnmmission and the Minis- tries of Panchayat and Local Development, Finance, Education, Agriculture, Water Resources and Works and Transport. 37. Community Forestry. The Community Forestry and Afforestation Division (CFAD) has been set up as part of the First Forestry Project to provide an administrative and operational structure for community forestry activities. Under the proposed project, CFAD would be enlarged and placed under the direction of a Deputy Chief Conservator of Forests; and its forest support units would be strengthened by the addition of three professional officers for motivation and education, monitoring and evalua2- tion, and stove promotion. A new Terai Community Forestry Project Unit would be added, headed by an officer who would be responsible for com- nunity forestry development activities in the Terai. 38. The Divisional Forest Officer (DFO), working under the Read of the Terai Community Forestry Project Unit, world be responsible for the over- all development and administration of comunity forestry programs in seven forest divisions in the eastern Terai. They would each be assisted by a Community Forestry Officer (CFO), who would have received orientation training in coomunity forestry. The CFO would be responsible for all community fot-stry activities in a particular division and would be assisted by five Community Rangers (CR) who would be responsible for forestry extension and motivation, coordination of the stove program, monitoring and evaluation, the control of community forest nurseries, and the supervision of forest watchers, stove promoters, forest motivators and stove installers. 39. Part-time forest motivators would be employed under the project at the village level and would be recruited either from among progressive farmers or literate village panchayat members. They would operate under the direction of CR. CFO or CR would train forest motivators in simple communication and extension techniques, as well as provide a comprehensive orientation concerning the project and its objectives at the divisional level. Forest motivators would coordinate operations in village woodlot establishment, private forestry, strip plantations and nursery production. However, the main task of the forest motivator would be to promote the farm forestry scheme under which 32 million seedlings would be planted over the project period. He would explain to farmers the benefits to be derived from establishing private plantations and would keep records of individual plantings. He would visit farmers (individually or in groups) at least once a month to discuss problems that may arise from project implementation. If these cannot be solved satisfactorily they would be referred to the CR or to the CFO. In addition, forest motivators would carry out simple administrative activities such as monitoring survival rates of trees, recording data from research trials at the village and  -13- farm level, and providing a link between the CR and the village panchayat, as wzell as the CR and the farmer. 40. The procedures for establishing PF would be those set up under CFDTP in the Hills. Community forestry staff would work with a total of 220 village panchayats in the eastern Terai to prepare suitable programs for forestry development. Village panchayats would establish panchayat forest committees and, through these, would apply to DFO for the right to areas to be demarcated as PF. A certificate establishing PF would be awarded for those areas considered to be acceptable, once the village panchayat and CFAD had signed an agreement outlining the responsibilities of all parties. Forest management plans, establishing schedules for work, forestry plantings, hiring of staff, and the agreed rules for the manage- ment of forest resources would be issued by CFAD for each participating panchayat. It would be the responsibility of the village panchayat to enforce the agreed rules regarding access to and sharing of the produce and to protect the plantings from theft, fire and other darage. For these services, the village panchayat would receive assistance in establishing nurseries, direct financial support and technical supervision for under- taking forestry plantings. Before a village panchayat could receive assistance under the project, it would be necessary for CFAD to issue an agreed management plan. Under each scheme, it is expected that a nursery would be established and project plantings of about 10 ha of PF accomplished. Funds would be provided to construct houses for community forestry staff working in the districts. Villagers and institutions such as schools and hospitals would also be encouraged to plant trees on their own land. The target would be to plant about 5,300 seedlings per year per village panchayat. Strip plantations (2,550 ha on roadsides, canal banks and river banks) and demonstration woodlots (2,200 ha on cleared areas of degraded forest) would be planted by local labor, paid and super- vised by community forestry staff. taintenance and protection would be the joint responsibility of the village panchayats and CFAD until the fourth year, when the plantations would be designated as PF, and operate under PF rules. All seedlings would be provided by the Forest Department. Seed required by the nurseries would be provided either by the DFO, who would arrange for its collection, or from the CFAD seed store. 41. Improvement of Nlatural Forests. Forestry improvement would be based on silvicultural management practices and implemented in the better quality natural forest. The target would be to begin operations on 1000 ha in each of the seven forestry divisions from the second project year onwards reaching a total of 35,00 ha by project closing. A separate unit for this operation would be set up under each DFO, consisting of an Attached Officer, an Assistant Ranger and forest laborers. 42. Agro-forestry. A total of 5,900 ha of degraded forests would be replanted. Existing trees would be removed and the land allocated in 0.5  -14- ha lots to landless families for cultivation. After one year of cultiva- tion, the area would be planted with trees and intercropping permitted for a further two years. Cultivators would be allocated 0.5 ha of newly cleared land each year so that from the beginning of the third year onwards they would be cultivating three separate 0.5 ha areas. The forest rotation would be on a 10-year harvesting cycle, after which intercropping would again be permitted for three years. The agro-forestry plantation component would be under the direction of the Conservators, whose circles include the four Divisions involved. Plantation Officers would be appointed in each of the four districts in which plantation blocks are to be developed. The Plantation Officers would be responsible for land _learing, nursery production, agro-forestry, tree planting, roads, fire protection and vehicle maintenance, and would be assisted by teams of Rangers, Assistant Rangers, Field Supervisors, Accountants and Clerks. An agreement for cultivating the land would be entered into between the FD and the cultivators. The format for this agreement would be forwarded to IDA for approval by December 31, 1984 and used from May 31, 1985 onwards (DCA, Section 3.11)). 43. Stoves. New stoves have been designed and tested in the Hills under the First Project. These stoves require only half the amount of fuel use~d by the traditional Nepalese stove and can be manufactured by potters from local clay at a small cost (approximately NRs75 per stove). Under tie project the Stove Improvement Unit (SIU) would arrange for tha manufacture of 20,000 improved stoves, and for their distribution among households in the project area. During the project period, emphasis would be on testing, promotion and motivation, and a wide dissemination of the stoves would be required. Since it would not be possible to sell the stoves at this stage, no charge would be made during the project period. Assuming that a demand had been created and a market developed, however, a charge would be levied under any future stove distribution program. Funds would be provided to purchase stoves from potters (who would be trained by SIU employed experts) and to employ stove promoters and installers. Dis- tribution would be arranged through the stove promoters, who would visit villages, initially to set up demonstration stoves at points of greatest impact (e.g. tea houses). This would be followed by a second visit, when new stoves would be installed in houses selected to provide a demonstra- tion to all castes and social classes. An understanding was reached with the Borrower during negotiations that the Forest Department would estab- lish procedures and selection criteria to ensure a fair and equitable distribution of stoves in the project area. 44. Research. The project would provide funds for staff, vehicles, buildings and operating expenses for expanding the research program of the Forest Survey and Research Office in support of community forestry in the Terai. Research on species and provenance trials, including bamboo cul- ture, would be increased. Steps would be taken to meet project seed requirements by establishing genetically improved seed stands and  -15- orchards. Nursery methods would be designed to bptimize efficiency of seedling production. Growth and yield studies appropriate to the project would be carried out, particularly to enable quantification of production from community forestry. National Forestry Development Plant 45. The Covernment has recognized the need for an effective and con- prebensive national forestry development plan. The plan would be expected to give priority to community forestry development and reforestation in Nepal. It would give priority to projects which would emphasize community participation in the protection of existing forests and the development of new forests and projects which would increase the availability of forest products. The plan would integrate the large number of externally aided forestry development projects into a comprehensive development plan for forestry in Nepal. During plan preparation, pricing policies for fuelvood and tinber would be rev'ewed and proposals made for revision of prices charged by the Timber Corporation of Nepal, to bring them into line with the prevailing market prices. Policy guidelines would also be set for the introduction of cheaper methods of reforestation, including the pos- sibilities for leasing forests to firms and private individuals for tree farming. About 15 man-months of consultancy services are included under the project to assist the Planning Division of the 2!inistry of Forests and Soil Conservation in preparing the proposed plan. 46. Training. The shortage of trained forestry staff is a constraint limiting the rate of development of the forestry sector. !ianpower requirements (including a 1OZ replacement of the existing staff) have been estimated at 40 Forest Officers and 200 technicians (Assistant Rangers) annually. To provide increased training facilities in Nepal, the con- struction of the Pokhara campus of the Institute of Forestry and the extension of the Institute of Forestry at Hetauda were supported under the on-going CFDTP. Details for the long-term development of the infrastruc- ture required at these two sites are now complete. The project would finance the construction of offices, houses, teaching facilities, and hostels. The designs for all these buildings have been approved by IDA. Adequate teaching staff, equipment and vehicles have been provided under CFDTP. 47. A 2linistry of Forest Training Win- (C1FTt) has been set up under a Chief Training Officer to provide practical in-service training in forestry and soil and water conservation. The operations would be expanded to cover the needs of this project, and additional courses would be offered on forestry in the Terai, reorientation, notivation and educa- tion, plantation establishment and planning and management. NFTW would also equip trainers at the forest divisional level with the necessary instructions and course notes to enable them to train nursery workers, forest motivators and stove promoters working in the divisions. The Dean  -16- of the Institute of Forestry would be responsible for the organization and management of the formal training conponent. The project would finance the costs of training for 109 Assistant Rangers and 34 Forest Officers required for the Project. 48. Technical Assistance. The concept of community forestry is new to the Terai. Since trained forestry staff are scarce, the project would require substantial amounts of technical assistance, not only to assist in executing field planting programs, but also in helping with the training and research programs. The following technical assistance provisions have, therefore, been included in the project: (a) 195 man-months for the community forestry development and stove programs; (b) 66 man-months for agro-forestry plantations; (c) 12 man-months for natural forest improve- ment; (d) 35 nan-months for training; (e) 12 man-months for research; (f) 15 man-months for the preparation of the National Forestry Development Plan; and (g) 5 nan-months for a mid-term review of progress in project implementation. 49. Monitoring and Evaluation. The project would provide funds to strengthen the existing flonitoring and Evaluation UInit (lIEU) of CFAD by adding a second tIEU Officer (Terai), assisted by a Statistical Tabulator and a Forest Ranger for data collection. Funds would also be provided for about eight manyears of local consultancy services to carry out surveys designed by the Sociologist/Economist consultant employed under technical assistance. The consultant would also assist in setting up systems for project monitoring. The lIEU would, as it already does for CFDTP, suggest improvements for project implementation, assess villagers' acceptance of social forestry activities, determine tree survival rates of the community forestry components and participate in the mid-term evaluation of the project at the end of the third year of project implementation. The unit would produce semi-annual progress reports, each July and January, in phase with the fiscal year. The reports would give details of staff in each field unit and at headquarters, a sumary of activities carried out during the preceding six months, targets achieved, and problems encountered during project implementation. Cost and Financing 50. The total cost is estimated at US$24.0 million equivalent, includ- ing contingencies and taxes and duties. The cost estimates are updated to June 1983 prices and include physical contingencies of 10% for construc- tion costs and maintenance of buildings and roads and for fertilizers and chemicals. Price contingencies are based on projected local cost infla- tion of 9%, 8%, 7%, 6%, 6%, and 6Z for 1983/84 through 1988/89, respec- tively, and on projected international inflation of 7.7X, 7.2%, 6.52, 62, 6%, and 6%, respectively, for the same years. The foreign exchange cost is estimated at US$7.3 million or about 31% of total project cost. The proposed IDA Credit of US$18.0 million would cover all the foreign  -17- exchange cost and about US$iO.7 million equivalent of local costs, amount- ing tu 81% of total project cost net of taxes and duties. The Government would contribute about US$4.8 million equivalent, of which US$1.7 million would be taxeq and duties. Farmers and villagers would contribute about US$1.2 million i.n the form of agricultural inputs. The cost of individual consultant's services is based on US$1,000 per man-month for local con- sultants and US$10,500 per man-month for expatriate consultants, including benefits, overheads and other associated costs. 51. Villagers *would narvest forest products for their own use under the communal arrangtzments embodied in the forest management plans. There would be little cash income from community forestry. Since abject poverty is widespread in the project area, the population would not be able to pay for services provided under the project. No cost recovery is therefore proposed for community forestry components (private planting, strip plan- tations, demonstration woodlots and panchayat forests). This is a jus- tifiable policy given the benefits expected to accrue to the poorer sec- tions of the population, and in the light of experience with similar projects elsewhere, where it has proven difficult to arrange for an effi- cient and cost effective method for collecting numerous small fees. Procurement 52. The construction of major civil works for training institutions at Pokhara and Hetauda (estimated to cost a total of US$3.0 million) would be procured by international competitive bidding in accordance with IDA guidelines. The balance of construction under the project (US$1.4 mil- lion) consists of minor works and buildings scattered throughout the project area and would be carried out either by force account (US$0.3 million) or by local competitive bidding procedures (US$1.1 million) satisfactory to the Association. Procurement of vehicles (US$1.7 million) would be on the basis of international competitive bidding. Equipment and goods in bidding packages valued at less than US$100,000 and aggregating US$3.5 million would be procured by local competitive procedures satisfac- tory to the Association. For procurement under International Competitive Bidding, eligible domestic bidders would receive a 7.5% preference in bid evaluation for civil works, and 15% or the import duty, whichever is lower, for vehicles. Disbursements and Audit V 53. Disbursement would be on the following basis: (a) 1002 of foreign expenditures and 85% of local expenditures for civil works (US$3.5 mil- lion); (b) 85% of local expenditures for civil works carried out by force account (US$0.3 million) (c) 100% of foreign expenditures for directly imported equipment, furniture and vehicles and 100% of local expenditures (exfactory cost) for locally manufactured goods and 75% of expenditures for goods procured locally (US$4.0 million); (d) 100% of expenditures for  -18- training (US$0.9 million); (e) 100% of expenditures for consultant serv- ices including architects/engineers (US$2.3 million); (f) 50% (average) of local expenditures for salaries and allowances for incremental staff engaged in the project on a declining basis; 75% of expenditures in FY84, 85 and 86; 50Z in FY87 and 88, and 25% in FY89 (US$1.1 million); (g) 50% of local expenditures for project operating costs (US$4.5 million); and (h) unallocated (US$1.4 million). Disbursements under items (b), (f) and (g) above would be made against statements of expenditures. 54. Each ministry and university institute would establish and main- tain separate accounts for the project and these accounts would be audited annually by an independent auditor acceptable to the Association. Cer- tified copies of the financial statements would be sent to the Association within six months of the closing of each fiscal year (DCA, Section 4.01). Benefits and Risks 55. Project production would include fuelwood, timber, poles, fodder, fruit, and minor agricultural crops. Total production over the 40-year project life would be: fuelwood, 6.4 million cubic meters (equivalent to a present value of NRs136 million at financial prices); poles, I cubic meter (NPs13 million); timber, 1.4 million cubic meters (NRs83 million); fodder, 1.7 million metric tons (ITRs11 million); fruit, 0.3 million metric (NRs193 million); and minor crops, 43,000 metric tons (NRs33 million). In addition, the project would result in increased employment opportunities, improved distribution of forest plantings, and increased accessibility to fuelwood by the rural poor. The project afforestation program would have the additional benefit of contributing towards arresting ongoing environr- mental degradation, while the introduction of 20,000 improved stoves could result in savings of about 5,000 metric tons (6,900 cubic neters) of fuelwood annually over and above incremental annual production of 116,000 metric tons (160,000 cubic meters). By reducing the need for alternative forms of imported energy, the project would have a positive impact on the country's foreign exchange position. The project would have a positive impact on the standard of living of panchayat residents. Those with some land would benefit fror private plantations and from trees planted on field boundaries. Under the forest management plans agreed by the panchayat, residents, including the landless who suffer fron acute shortages of fuelwood, would be entitled to a share of the available fodder and fuelwood from panchayat forests, strip plantations and demon- stration woodlots. They would also be permitted to collect headloads of fuelwood and fodder resulting from the operations of the natural forest improvement program and the agro-forestry plantation program. 56. Over the six year project period 8,000 ha of largely unproductive land, roadsides, and canal banks would be brought under production using labor intensive nethods. In addition, labor would be erployed in replant- ing degraded forest areas and in improving timber stands in existing  -19- forest. The estimated total of about 2.5 million mandays of employment would largely benefit the disadvantaged and landless sections of the community, which are the usual source of nanual labor. Landless families and forest laborers would be permitted to grow crops as part of agro-forestry techniques for forest establishrent. At full operation, production in terms of foodgrains would be about 4,500 metric tons, enough to satisfy the needs of about 5,600 families. The environmental benefits of the project would include soil conservation, protection of rural water supplies, micro-climatic improvements and restoration of soil fertility. 57. The economic rate of return for the project is 27% (based on 84% project costs). The Nepalese economy would realize net benefits from project investments (at an opportunity cost of capital of 10%) of about NRs 285 million. Economic rates of return for the individual components are all above 19%. The project faces no major risks in terms of unsatis- factory rate of return since the sensitivity analysis shows that large changes would have to occur in costs or benefits before the project would become economically non-viable. Large increases in costs or decreases in benefits are not anticipated. Fisk levels for the individual project components are also low. 58. The project aims at fostering community involvenent in afforesta- tion programs and forest protection, with the initiative for participation coming from the panchayats. There is a risk that the number of village panchayats willing to participate may not reach the targets set. However, a survey of social attitudes, coneucted as part of project preparation, clearly indicates the interest of individuals in forestry enterprises, both of an individual and community nature. With the assistance and experience of CFAD's Motivation and Education Unit and ITEU and a reorien- tation of forestry staff towards the nethodology required for successful implementation of community forestry programs the risks from apathy and ignorance are considered to be low. Monitoring the progress of the project, including the survival rates for seedlings planted on private land, would be continuous, and the mid-termn review would enable the project's goals and targets to be adjusted so that its impetus is main- tained and its achievements are satisfactory. PART V - LEGAL INSTRUMENTS AND AUTHORITY * 59. The draft Development Credit Agreement between the Kingdom of Nepal and the Association 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.  -20- 60. Special conditions of the project are listed in Section III of Annex III. Designation of a Project Coordinator would be an additional condition of effectiveness of the Credit (Section 6.01 of the Development Credit Agreement). 61. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VI - RECONKENDATION 62. I recommend that the Executive Directors approve the proposed credit. A. W. Clausen Presldent Attachments June 21, 1983 Washington, D.C.  -21- FIIiL .6.v3U Umm