Nepal - Second Mahakali Irrigation Project

Document of The World Bank FOR OFFICIAL USE. ONLY Report 7174a-NEP STAFF APPRAISAL REPORT NEPAL MAHAKALI IRRIGATION II PROJECT May 20, 1988 Agriculture Operations Division Asia Country Department I This document has a restricted distribution and may be used by recipients only In the performance of their olUcicl duties. Its contents may not otherwise be discosed t World Bank authorization.  CURRENCY EQUIVALENTS US$1 - NRs 21.9 a/ WEIGHTS AND MEASURES (METRIC SYSTEM) 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) - 0.62 miles (mi) 1 hectare (ha) - 2.47 acres (ac) 1 million cubic meters (Mcu m) = 810 acre-feet or 35.3 Mft3 1 cubic meter per second (cu m/sec) = 35.31 cubic food per second (cfs) 1 cubic foot per second (cfs) = 0.028 cubic meters per second (cu m/sec) 1 kilogram (kg) = 2.2 pounds (lb) 1 metric ton (t) = 2,205 pounds (lb) FISCAL YEAR July 16 - July 15 a/ The (official and free market) exchange rate at the time of appraisal.  FOR OMCIAL USE ONLY ACRONYMS AND ABBREVIATIONS ADBN - Agricultural Development Bank of Nepal AIC - Agricultural Inputs Corporation DAO - District Agriculture Office DIO - District Irrigation Office DG - Director General (DOI and DOA) DOI - Department of Irrigation DOA - Department of Agriculture ERR - Economic Rate of Return HMGN - His Majesty's Government of N1ep-l HYV - High-Yielding Variety ICB - International Competitive Bidding IDA - International Development Association LCB - Local Competitive Bidding LIB - Limited International Bidding LRD - Land Pevenue Department HIDB - Mahakali Irrigation Development Board M&E - Monitoring and Evaluation MWR - Ministry of Water Resources NFC - Nepal Food Corporation NPC - National Planning Commission O&M - Operation and Maintenance T&V - Training and Visit System WUA - Water User Association WUG - Water User Group WUO - Water User Organization 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.  NEPAL MAHAKALI IRRIGATION II PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. CREDIT AND PROJECT SUMMARY . ......................... ....... . iv I. BACKGROUND ................................................... 1 Agriculture in Nepal ....... .................................. 1 Background and Organization of the Irrigation Subsector ...... 2 Irrigation Development Prospects and Constraints ..2........... Past Bank Support for Irrigation Development .. ............... 4 Performance of Mahakali Stage I. .....l.............. 5 Rationale for IDA Involvement ............................... 5 II. THE PROJECT AREA .............................................. 6 Mahakali Stage II Project Area ............................... 6 Irrig-tion Line of Credit Project Area ................ 6 Flcod !.ehabilitation Project Area .................... 7 III. THE PROJECT ........ .......................................... 8 Project Scope and Objectives ............... ..8................ Mahakali Irrigation Project Stage II ................ 8 Irrigation and Drainage Facilities ................... ... 8 Agricultural Intensification Support ................ .... 10 Farmer Organization Support ............................. 10 Training ................................................ 11 Administration, Establishment and O&M Support .......... . 11 Engineering and Consultant Services .. ................... 12 Design, Construction and Commissioning ......... ......... 12 Irrigation Line of Credit Pilot Project .. .................... 12 Scope and Objectives .................. .................. 12 Irrigation Subprojects ................. ................. 13 Irrigation and Agricultural Support Services ............ 13 Subproject Credit Support ............. .. ................ 14 Flood Rehabilitation .................... ..................... 15 DOI Institutional Development Support ..... ................... 15 Strengthening of DOI Regional and District Offices ...... 16 DOI Headquarters Renovation and Strengthening .... ....... 16 DOI Human Resource Development ......... ................. 16 Sector Program Development Support .... .................. 16 Monitoring, Evaluation and Management Information ....... 17 Specialized Consultant Services, Training, and Studies .. 17 This report is based on the findings of a February 1988 appraisal mission com- prising Messrs. R. Reidinger, Y.K. Choi, R. Siy and Ms. N. Mattson (IDA), Messrs. D. Campbell, W. Barber and L. Rijk (C).  -ii- IV. PROJECT COSTS, FINANCING AND DISBURSEMENTS .................... 19 Project Cost Estimates ........................................ 19 Financing ........ 19 Procurement ...... ....... ..................................... 20 Disbursements .................................... ............ 22 Accounts and Audits ........................................... 23 V. ORGANIZATION AND MANAGEMENT ............... .. ................. 25 Mahakali Irrigation Project Stage I ............................. 25 Mahakali Irrigation Development Board ................... 25 Project Manager ......................................... 26 Project Authority Organization ... ...................... 26 Staffing ................................................ 26 System Water Management ... I ............................. 26 Water User Organizations ................................ 26 Project Coordination Committee ............................ 27 Monitoring, Evaluation and Reporting .................... 27 Irrigation Line of Credit Pilot Project ...................... 28 Ministry of Water Resources ............................. 28 Department of Agriculture ............................... 28 Agricultural Development Bank of Nepal ............... ... 29 Water User Organizations ................................ 29 Flood Rehabilitation and Institutional Development Support ... 30 VI. AGRICULTURAL PRODUCTION AND BENEFITS ......................... 31 Mahakali Stage II ............................................ 31 Cropping Patterns ....................................... 31 Crop Yields ............................................. 31 Crop Production ......................................... 31 Market Prospects ........................................ 32 Prices .................................................. 32 Farm Incomes and Impact on Poverty ...................... 32 Cost Recovery in the Mahakali Irrigation Scheme ........... ... 32 Irrigation Line of Credit Project ............................ 34 Cropping Patterns and Yields ............................ 34 Marketing and Prices .................................... 34 Farm Incomes and Impact on Poverty ...................... 34 Recovery of Investment Costs from Farmers ............ ... 35 VII. ECONOMIC ANALYSIS AND JUSTIFICATION ........... .. ............. 36 Economic Analysis ................ 36 Environmental Effects ........................................ 38 Project Risks ................................................ 39 VIII. AGREEMENTS AND RECOMMENDATION ................................ 41  -111- ANNEXES: Annex 1. Tables Table 1: Climatic Data 44 Table 2: ILC Identified Surface Irrigation P6rential in the Western Development Region (Narayant Basin Only) 45 Table 3: ILC Potential Subprojects 46 Table 4: Summary Accounts by Project Components 47 Table 5: Project Components by Year 48 Table 6: Summary Accounts by Year 49 Table 7: Financing Plan by Summary Accounts 50 Table 8: Estimated Disbursement Schedule 51 Table 9: Credit Allocation 52 Table lOas Mahakali Stage II Without Cropping Patterns 53 Table lOb: Mahakali Stage II With Cropping Patterns 54 Table 11: Mahakali Stage II Crop Yields and Inputs 55 Table 12: Summary of Financial and Economic Prices 56 Table 13: Estimated Incremental Rent and Cost Recovery 57 Table 14: Financial Analysis for Model ILC Subprojects 58 Table 15: Procurement Methods 59 Annex 2. Project Component Areas 60 Annex 3. Mahakali Stage II Component: Summary Description of Irrigation Facilities 66 Annex 4. Mahakali Stage II Component: Agricultural Support Services 68 Annex 5. Mahakali Stage II Component: Farmer Organization Activities 70 Annex 6. Mahakali Stage II Component: Guidelines and Concepts for System Operation 76 Annex 7. Irrigation Line of Credit: Implementation Guidelines and Procedures 79 Annex 8. Flood Rehabilitation Component: Design and Construction of Works 88 Annex 9. Mahakali Stage II Component: Project Organization 90 Annex 10. Assumptions for Mahakali Stage II Financial and Economic Analysis 92 Annex 11. Selected Documents and Data Available in the Project File 95 CHARTS: 1. Organizati'n Chart for DOI 97 2. Organization Chart for Mahakali Irrigation Scheme Project Authority 98 3. Mahakeli Stage II Cropping Calendar 99 4. Irrigation Line of Credit Subproject Implementation Proredures 100 MAPS: 1. Mahakali Irrigation I1 Project Component Areas (Map 19997) 2. Mahakali Irrigation Scheme Stages I and II (Maps 19998 and 20715)  -iv- NEPAL MAHAKALI IRRIGATION II PROJECT STAFF APPRAISAL REPORT Credit and Proiect Summary Borrower: Kingdom of Nepal Beneficiaries: Agricultural Development Bank of Nepal Amount: SDR 23.9 million (US$ 41.3 million equivalent) Terms: Standard, with 40 years maturity Description: The project would comprise: (a) the Mahakali Stage II Irrigation Project comprising construction of irrigation and drainage facilities to serve an additional 6,800 ha under the Mahakali Irrigation Project; (b) an Irrigation Line of Credit pilot project to finance subprojects for construction of new small and medium surface and groundwater irrigation schemes and rehabilitation of existing surface schemes to cover a total of about 9,000 ha and be operated and maintained by farmer groups; (c) emergency Flood Rehabilitation works to repair flood-damaged irrigation and river control facilities; and (d) Institutional Development Support to help the Department of Irrigation strengthen its capability for sector program development and implementation. Benefits: Agricultural production is expected to increase by some NRs 170 1 annually. Some 100,000 people would directly benefit. Emergency Flood Rehabilitation benefits were not estimated. Risks: With regard to the major component, Mahakali Stage II, there is a risk that full projected benefits will depend on disciplined operation based on irrigation scheduling to maximize production with the dry season water available. This risk has been mitigated 'by including a small amount of supplemental water from augmentetion tujewells. Risks for the Line of Credit component are somewhat higher, as the Department of Irrigation's farmer organization capability will have to be strengthened and expanded. However, the project includes substantial support for institutional strengthening. Risks for the Emergency Flood Rehabilitation component are low, as the Department of Irrigation has had substantial experience with such works under its ongoing programs.  Estimated Costs: Local Foreign Total (USS million) Mahakali Stage II Irrigation and Drainage 8.0 12.3 20.3 Farmer Organization 0.2 -- 0.2 Agricultural Support 0.4 0.1 0 5 O&M 0.1 0.3 0.4 Irrigation Line of Credit 5.5 2.5 8.0 Flood Rehabilitation 2.2 3.7 6.0 Institutional Development Support 1.2 1.7 2.9 Total Base Cost 17.6 20.6 38.1 Physical Contingencies 1.5 2.4 3.9 Price Contingencies 2.2 2.4 4.6 Total Project Cost 21.3 25.4 46.7 Financing Plan: Local Foreign Total (USS million) IDA 16.4 24.9 41.3 HMGN/Farmers 4.9 0.4 5.4 TOTAL 21.3 25.4 46.7 Estimated Disbursements: IDA Year FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 -----------------------------(US$ million)------------------------ Actual 3.8 8.0 8.8 6.7 5.2 4.8 3.0 1.0 0.1 Cumulative 3.8 11.8 20.6 27.2 32.4 37.2 40.2 41.2 41.3 Economic Rate of Return: 16? (For Mahakali Stage II component) 35? (Fo, Irrigation Line of Credit component)  NEPAL MAHAKALI IRRIGATION II PROJECT STAFF APPRAISAL REPORT I. BACKGROUND Agriculture in Nepal 1.01 Nepal is a landlocked country with a total area of 147,000 sq km situated between China and India. Its population in 1988 totals about 18 million, of whom 942 lived in rural aireas. Population growth between 1970 and 1986 has averaged 2.6Z a year. The country can be divided into three broad ecological zones -- the Mountains, the Hills and the Terai. The Nepal Terai plain, part of the Gangetic basin, accounts for only 16Z of the total area but 90? of the country's cultivable land and is the center of agricultural production in the country. 1.02 Agriculture, largely rainfed, dominates the country's economy. In 1986/87, it accounted for 59Z of Gross Domestic Product (GDP), contributed about 702 of total export earnings, and provided employment to 912 of the working population. Increasing pressure on land due to rapid population growth has led to a situation where self sufficiency in food production is dependent on better than average rainfall. During the past decade, the production of foodgrains has grown at only 1.5? per year compared to growth in production of cash crops of 5? per year. However, due to the large proportion of grain production in the total (94? of the area sown), the overall annual rate of production growth was only 1.6?. The National Planning Commission targets for the agricultural production call for an annual growth rate of about 52. This goal appears to be difficult to achieve, especially compared to historical growth rates. For growth in agricultural production to keep pace with population, irrigated area needs to expand by an eatimated additional 35,000 ha each year. 1.03 Agriculture in Nepal is characterized by small-scale subsistence farming, Most of the cultivation is performed by human and bullock labor. In general, the agricultural sector has been slow to adopt improved practices. Crop yields are generally low, but could be increased considerably with effective irrigation, the use of improved seeds, proper fertilizer and pesticide application, and improved farming methods. In 1984/85, fertilizer consumption averaged about 15.0 kg/ha and only 38? of the foodgrains area was under high-yielding varieties (HYVs).  -2- Background and Organization of the Irrigation Subsector 1.04 Nepal has abundant surface and groundwater irrigation resources. About 802 of Nepal's potential irrigated atea is on the Terai. It is estimated that river discharges average about 150 billon cu m/yr. However, only about 1.3 M ha of land are suitably located for command by gravity, of which about 0.4 M ha are already irrigated. Exploitable groundwater 'esources could irrigate about 0.6 M ha, of which 0.1 M ha have so far been developed. 1.05 The development of surface water irrigation was initiated centuries ago by farmers who built temporary weirs to direct river flows into ungated intakes. Most of the schemes were in the Hills until the 1920s, when development started to expand into the Terai. Many such schemes are in operation and some have been improved through government assistance. In total, farmer-managed irrigation schemes account for about 70Z of the total irrigated area in Nepal. The Agricultural Development Bank of Nepal (ADBN) has supported private sector irrigation with loans to individuals for minor irrigation and for shallow tubewell development. ADBN has also provided a few loans to farmer groups for the rehabilitation or improvement of small schemes. 1.06 The Department of Irrigation (DOI) under the Ministry of Water Resources (MWR), established in 1951 and headquartered in Kathmandu, is responsible for the planning, design, construction and management of all public sector irrigation systems in Nepal. Regional Directorates are located in each of the five regions of the country. DOI is headed by a Director-General and is currently structured with central divisions for Planning and Design, Construction and Administration, each headed by a Deputy Director-General. Major irrigation projects are executed by DO! and are managed by centrally-controlled project boards or by DOI. In late 1987, the irrigation development units of the Ministry of Panchayat and Local Development and the Farm Irrigation and Water Utilization Division of the Ministry of Agriculture were both integrated into DOI. A new DO! organizational structure has recently been proposed, which includes the establishment of DOI district-level offices and a new division responsible for small-scale irrigation (Chart 1). Irrigation Development Prospects and Constraints 1.07 Subsector Strategy. Overall HMGN and IDA irrigation strategy emphasizes: expansion or rehabilitation of existing irrigation systems; improvement in the efficiency of existing irrigation facilities, particularly through more effective operation and maintenance (O&M); provision of adequate agricultural support services; and institutional development to strengthen the capacities of key implementing agencies, especially skills in system management and in organizing water user groups to take responsibility for O&M. Recent HMGN policy initiatives have focused specifically on establishing a framework for a long-term irrigation sector lending program. The proposed project would support this policy through the Irrigation Line of Credit pilot project component. Specific sectoral objectives of the pilot project would be to:  -3- (a) establish a "subsector program" approach which would support national objectives, in place of the "project-by- project" approach of the past, and enable donors to provide large scale, long term support to small schemies which are individually too small to justify involvement; (b) make the program as "demand driven" as possible, based on local felt needs and demands, in contrast to traditional "supply driven" projects; (c) help develop, test and establish effective subproject selection criteria and implementation procedures which would be the basis for operating the subsector program; and (d) reduce the burden of irrigation costs on HMGN's budget, particularly for O&M of completed projects, through increased farmer participation to cover full O&M and a share of capital costs. 1.08 To meet these sectoral o)jectives, HMGN conisiders farmer participation in irrigation planning, construction and management as especially important in view of limited HMGN budget resources available for government O&M of completed projects. This has led HMGN to give priority to the development and improvement of farmer-managed irrigation, and to adopt the sector program approach to promote private sector irrigation. For this program to succeed, DOI will need to gradually develop the appropriate project cycle procedures and institutional capability to implement the program on a nation-wide basis. The proposed project aims to build these necessary capacities in DOI through a "learning process" approach, drawing lessons from the pilot project in order to refine and improve management systems and field operating procedures. 1.09 Constraints. Less than a third of the surface water irrigation potential of Nepal has been developed, and most of the remaining potential is located on the Terai where about 940,000 ha could be developed using surface water sources. However, the constraints to developing this potential include: (a) Cost of Headworks. The main sources of reliable perennial water supply are provided by eight major or medium-sized rivers, but they require large investments in headworks relative to the small areas that can be commanded; (b) Siltation. Most rivers in Nepal carry heavy sediment loads which cause operational problems and high maintenance costs for irrigation systems; (c) Financial Constraints. A large proportion of the Terai surface irrigation potential must bf developed by the public sector because of size, technology ;nvolved, sy'tem management requirements, and high capital investment costs. The rate of development is therefore limited by Government budget constraints which are severe; and  -4- (d) Riiarian ConiAderations. Riparian concerns may limit development of new surface irrigation projects. This is perhaps the most difficult constraint facing HMGN's long-run irrigation strategy. 1.10 In recent years, groundwater development, mainly through shallow tubewells owned by individuals, has become an important source of irrigation. It is currently the least-cost option for expanding irrigated area, yields quick returns, and moreover is not a financial burden on HMGN's budget. However, prospects for future growth in individual demand for such tubewell development are limited due in part to small and fragmented land holdings. Expanding private groundwater development through group owned and managed facilities, however, has good possibilities and is included on a pilot basis under tha proposed project. Past Bank Support for Irrigation Development 1.11 IDA became involved in irrigation development in Nepal in 1973. To date, IDA hac supported seven major irrigation projects, of which four have been completed. Together, they provide improved surface water irrigation facilities in about 36,000 ha and groundwater irrigation for about 6,000 ha. IDA has also financed three rural developrent projects with irrtgation components. In addition to financing the ajove projects, IDA serves as Executing Agency for two UNDP finatnced projects: (a) Preparation of Medium Irrigation Projects in the Hill zone of Central Nepal (UNDP-NEP/80/033) which is now complete; and (b) the Irrigation Planning and Design Strengthening Project (UNDP-NEP/85/013). 1.12 Four IDA-assisted irrigation projects are ongoing: Mahakali Irrigation Proiect (Stage I) (Cr. 1055-NEP, US$16.9 M, 1978) which will close in December 1988; Bhairawa-Lumbini Groundwater II Project (Cr. 1316-NEP, US$16.0 M, 1983) which finances the completion of Stage I works, O&H of the completed wells during the five-year implementation period, and introduction of improved designs for construction of new tubewell systems; Naravani Irrigation III Project (Cr. 1715-NE&, US$24.5 M and Swiss Government Grant US$7.5 M, 1986) which is designed to complete the development of the irrigation and drainage system of the 37,000 ha Nepal Eastern Canal Command; and Sunsari Morang Irrigation II Proiect (Cr. 1814-NEP, US$40 M, 1987) which will extend irrigation to an additional 16,700 ha and provide desilting facilities for Stages I and II. 1.13 Several other IDA-financed projects include small-scale irrigation components. The Second Rural Development Project (Cr. 939-NEP, US$11.0 M, 1979) finances improvement of small scale irrigation schemes in the hills of the MahaKali Zone. The Third Rural Development Project (Cr. 1727-NEP, US$19.1 M, 1986) includes construction of 28 small-scale irrigation schemes and rehabilitation of 18 existing schemes in the hill districts of Rasuwa and Nuwakot in the Bagmati Zone, construction of four medium scale irrigation schemes, and rehabilitation of two existing medium schemes. The Hill Food Production Project (Cr. 1101-NEP, 'JS$12.8 M, 1981) finances improvement of small farmer-managed schemes totalling about 3,000 ha.  -5- Performance of Mahakali Stage I 1.14 After a slow start, implementation of the Mahakali Stage I Project proceeded rapidly, and the project is now physically complete. With the successful on-site establishment of a Pilot Farm and training center, agricultural intensifica*ion has had exceptional results. In terms of cost recovery, the project's water charge collection efficiency is the highest among the public surface irrigation systems in Nepal. The main lessons learned during iiplementation include the need to: establish viable tertiary level water distribution regimes; strengthen the O&M establishment; establish water users groups at an early stage and involve them in tertiary level design and construction; improve water charge collection mechanisms; and provide adequate extension services. These lessons have been reflected in the preparation and design of the proposed Stage II project. Rationale for IDA Involvement 1.15 IDA assistance enables HMGN, which faces severe budget constraints, to develop irrigation infrastrLcture and exploit irrigation potential more rapidly. In addition, IDA participation facilitates coordination among the various donors who support irrigation development in Nepal, and assists HMGN with introduction of new concepts of design, planning and operation of irrigation schemes. In line with HMGN's current strategy, a new key concept is increased farmer participation and responsibility in irrigation development and management. This is essential to reduce HMGN budgetary requirements for O&M and enable concentration of limited budget resources on activities that farmers cannot assume. However, the concept is largely new to Nepal's irrigation establishment, and it is essential to develop the necessary skills and capabilities to implement the concept. For the Mahakali Stage II component of the project, IDA involvement would help ensure that, in the transition from construction to full system operation, such innovations are institutionalized by the project authority and made permanent at the project level. The Irrigation Line of Credit pilot project would help develop HMGN's new strategy into an operating sector investment program based on mobilizing local resources for irrigation development and management. The Flood Rehabilitation component provides IDA support of emergency repairs to recently damaged river protection and irrigation works which are needed to maintain food production. Finally, the Instituitional Development Support component is designed to help DOI develop the necessary capabilities to implement a large scale subsector program, and in particular establish farmer organization and participation as an integral part of DOI operations.  -6- II. THE PROJECT AREA Mahakali Stage II Project Area 2.01 Location. The Mahakali Irrigation scheme is in Kanchanpur District of Nepal's Far Western Region. The Mahakali Stage I project serves 4,800 ha lying between the Mahakali and Chaudar rivers and extending southwards from the Mahakali main canal. The Mahakali Stage II project area totals about 6,800 ha, bordered by the Royal Suklaphanta Wildlife Reserve Forest to the west, a national forest reserve in the north, the Kapti Nala in the east, and the Mahakali river and the Indian border to the south. A description of natural, social and agricultural conditions in the project area is provided in Annex 2. 2.02 Water Supply. The surface water supply for the project area is the Mahakali river which runs adjacent to the project area along Nepal's western border with India. Mean monthly discharges range from 130 cu m/sec in May to more than 11,000 cu m/sec in the wet season. Sediment concentrations are high during the monsoon period. However, silt in the Mahakali has not been a serious problem compared to projects on rivers of the central and eastern Terai, and, in addition, silt control facilities would be installed under the proposed Stage II project. Water for the Stage I and proposed Stage II area is diverted from the Mahakali at the Sarda Barrage. Located entirely within Indian territory about 1.0 km from the border, the Sarda Barrage is owned and operated by India, supplying Nepal's Mahakali project according to a fixed seasonal allocation under a 1920 agreement between HMGN and the Government of India. Under the agreement, Nepal receives 13 cu m/sec during the wet season (15 May to 15 October) which can be increased to 28 cu m/sec if a surplus is available. During the dry season (15 October to 15 May), Nepal receives 4.25 cu m/sec (the agreement actually stipulates a dry season delivery of 8.5 cu m/sec during alternate 10 day periods, but to date, India has always supplied the water on a continuous basis of 4.25 cu m/sjc). 2.03 Riparian Considerations. With regard to water supply for the Mahakali scheme, the project is designed to allow Nepal full use of the water allocated under the 1920 agreement with India. Notification of India regarding water supply is therefore not required. With regard to Mahakali Stage II flood protection works, it is IDA's assessment that the proposed works will not cause appreciable harm to the downstream riparian and, in fact, would result in flood protection benefits in Indian territory. In accordance with IDA's policy, the Government of India was notified on January 15, 1988 about these works, and has raised no objection. Irrigation Line of Credit Project Area 2.04 Location and Access. Subprojects under the irrigation line of credit pilot project would be implemented in two distinct subproject areas, one covering the Nawalparasi district in the Terai and the other covering four Hill districts in the Gandaki zone (Narayani River basin). Both  -7- subproject areas are located in the Western Development Region and are part of the Narayani river basin for which use of water is covered under an existing agreement with India (dated 1959 as amended in 1964). The administrative centers of the selected districts are accessible by road, but the majority of irrigation schemes in the hill districts can only be reached by foot. Because all new surface subprojects will use water only from the Narayani basin from rivers originating entirely in Nepal, under IDA's policy, riparian notification is not required. 2.05 Subproiect Districts: Line of credit subprojects would initially be implemented in the following districts: District Western Region District HQ Identified Name Location Access a/ Area b/cl Nawalparasi Terai Yes 3,600 ha Tanahu Hills Yes 3,500 ha Gorkha Hills Yes 4,500 ha Lamjung Hills Yes 2,500 ha Syangja Hills Yes not available a/ All weather road except Lamjung which is a dry season road. b/ Identified by DOI's Feasibility Section, except Nawalparasi which includes 1,600 ha of improvement of farmer-managed schemes identified under UNDP project NEP/80/033 and about 2,000 ha planned under the line of credit for small-group tubewells. 5l Does not include six proposed "turnover" subprojects damaged by 1987 floods. Flood Rehabilitation Proiect Area 2.06 Location and General Description. Rehabilitation works proposed under the project are mainly in the Terai portion of the Eastern and Central Regions, and to a lesser extent in the Hill areas of the Western Region. The districts involved are: Jhapa, Morang, Sunsari, Udaypur, Saptari, Siraha (all Terai areas) in the Eastern Region; Dhanusha, Mahottari, Sarlahi, Rautahat, Bara, Parsa and Chitwan (Terai and Hill areas) in the Central Region; and Gorkha, Kaski, Lamjung and Syangja (all Hill areas) in the Western Region. Rehabilitation of flood damaged canal systems are also proposed for six Hill projects in Gorkha District of the Western Region, namely Bhimsen Kulo, Arutar, Bhorletar, Sangepateni, Mallatar, and Chorkate Tar. Since all flood rehabilitation works are to restore flood damaged facilities and no new works are proposed, there would be no change in downstream river regimes. Under IDA's policy, riparian notification is therefore not required.  -8- III. THE PROJECT Proiect Scope and Obiectives 3.01 The proposed project comprises four separate components: the Mahakali Irrigation Project Stage II, an Irrigation Line of Credit Pilot Project, emergency Flood Rehabilitation, and Institutional Development Support for DOI. The objectives of the proposed project are to: (a) raise agricultural production and tarm incomes through expansion and management improvement of a public irrigation system, through construction and rehabilitation of private farmer-managed irrigation schemes, and through restoration of irrigation schemes and river protection works damaged by August 1987 flooding; (b) improve O&M and cost recovery in irrigation systems in the project areas through, inter alia, increased farmer participation; and (c) strengthen Nepal's irrigation subsector, particularly as needed to implement HMGN's new sector program approach to irrigation investment. Mahakali Irrigation Project Stage II 3.02 The Mahakali Stage II component of the project would include: (a) irrigation and drainage facilities for the 6,800 ha (net) Stage II area located about 20 kms from Stage I, including canals, ;tructures, buildings, and augmentation tubewells to supplement dry senson water; (b) agricultural intensification support; (c) farmer organization zur,port; (d) training for project staff and farmers; (e) administration, establishment and O&M financing on a declining basis; (f) engineering and consultant services; and (g) provisions for protection of wildlife in the Royal Suklaphanta Wildlife Reserve along the right-of-way of the main canal extension. Irrigation and Drainage Facilities 3.03 Main Canal Modifications. Extension and Road. The Mahakali main canal receives an assured water supply from the Sarda Barrage in Indian territory under a 1920 agreement with India. The project includes modification of the 14 km Mahakali main canal to carry the additional discharge required for Stage II, mainly desilting facilities, enlarging selected cross sections, and modification of one structure. The main canal extension would run about 15 km through the Royal Suklaphanta Wildlife Reserve to the main Stage II service area, crossing three major rivers (Annex 3). The main canal extension crosses permeable soils for part of its length and would be lined with compacted selected fill where necessary. The canal road for the main canal extension would be the main access to Stage II and would be constructed to all-weather standards with gravel surfaced top width of 4.5 m. With regard to the Suklaphanta Reserve, environmental implications of the canal have been analyzed. To minimize negative impacts on the Reserve, precautions would be taken during construction to avoid harm to wildlife, ramped animal crossings into and out of the canal would be provided at about half km intervals, and bridge crossings would be incorporated into drop structures which would be  -9- constructed at appropriate locations. Under the project, the impact of the canal on the Reserve would be monitored and evaluated regularly (see paras. 3.14, 5.09 and 7.07) and specialized technical support would be provided for wildlife population monitoring, development and management. HMGN has given official approval for construction and operation of the main canal extension in the Royal Suklaphanta Wildlife Reserve. An agreement was reached at negotiations that HMGN would provide the Department of National Parks and Wildlife Conservation with guard posts at the Royal Suklaphanta Wildlife Reserve in accordance with detailed plans and timetables satisfactory to IDA. An understanding was reached at negotiations that such plans and timetables would be provided to IDA by December 31, 1988. 3.04 Secondary and Tertiary Canals and Canal Roads. The branch and secondary network under the project would total some 125 km of unlined canals (see Annex 3). They would be sized to operate on an 'on/off" basis to provide a simultaneous flow equivalent to 1.0 1/sec/ha of command at the heads of all offtaking tertiary canals. Canal inspection roads would be gravel-surfaced and constructed to all-weather standards, as they would provide primary public access for most of the interior service area, and bridges would be provided where needed. The length of tertiary canals in the Stage II area would total over 300 km, all unlined. Each tertiary would serve a command of about 30 ha, with turnouts to blocks of about 4 ha. Within 4 ha blocks, farmer-built field channels would convey water to farm plots. An understanding was reached at negotiations that a special study to evaluate the comparative benefits, costs and cost recovery arrangements for the 4 ha tertiary block design would also be financed under the credit. 3.05 Auamentation Tubewells. The Stage II project includes provision for about 12 augmentation tubewells to provide dry season supplementary water supplies of about 1.0 cu m/sec (see Annex 3). An understanding was reached at negotiations that the actual number of tubewells to be installed would be decided during the latter part of the project implementation period. 3.06 Flood Protection and Drainage Works. Some 40Z of the Stage II area suffers substantial annual flood damage from the Chaudar, Mahakali and Donda Rivers. To protect the area, the project would include realignment of the Chaudar to its pre-1979 course, protection of the southwestern corner 3f the command from Mahakali flood spillage, and exclusion of the Donda flood flows from the aortheastern edge of the project area (see Annex 3). The "captured" course of the Chaudar River, formerly a drainage way, would provide an excellent primary drain for the command area. Discharge characterist.'cs of other natural drains would be improved by enlarging their sections and by the provision of embankments on specific reaches to enable them to carry the runoff from a 1 in 5 years probable storm of three days duration. 3.07 Buildings, Vehicles and Equipment. Under the project, living quarters (for 28 staff), an office, a workshop and a store would be constructed at Belauri for use by the construction supervision personnel for the Stage II area. The colony would convert for use by O&M, agricultural and farmer organization staff when construction is completed. Three additional living quarters would be provided for staff at the Pilot  -10- Farm. Additional four-wheel drive passenger vehicles would be required for construction supervision and eventually for O&M activities, and motor cycles and bicycles would be required for overseers and other junior technical staff. Some O&M equipment in addition to items being procured under Stage I would be required for the Stage II ar3a, such as a long reach excavator, tractors and trailers. Workshop equipment would be provided at the Stage II colony to service plant and vehicles, and radio communications equipment would he. provided to support coordinated operation in both Stage I and II areas and construction in Stage II and to enable reliable radio communication with headquarters in Kathmandu. Guard posts, vehicles and equipment for use by staff of the Department of National Parks and Wildlife Conservation directly responsible for protection of the Royal Suklaphanta Wildlife Reserve would also be provided under the project. Agricultural Intensification Support 3.08 The Project includes continued operation and strengthening 3f the Pilot Farm established under Stage I to serve both the Stage I and II areas. An important function of the pilot farm would be to provide training for extension workers and farmers in on-farm water management and improved irrigated farming practices. To assist the Farm's operation and further development, consultancy services provided under Stage I would continue under Stage II. The project would also include agricultural staff and costs required to promote agricultural intensification in Stage I and Stage II and guide farmers in irrigated agriculture and efficient water management practices (see Annex 4). HMGN has employed a suitable agricultural consultant for the component. Farmer Organization Support 3.09 Compared to the Stage I Project, the proposed Stage II project would place increased emphasis on development of effective farmer water user organizations, which -ould play an essential role. Their involvement would start at an early stage beginning with tertiary layout and design, and continue through to operation, initially in tertiary-level maintenance and water allocation under rotational water supply, and eventually in system management at various levels (see Annex 5). Stage II farmer organizations would build on the simple water user's groups (WUGs) established on tertiary outlets under the Stage I Project, expanding their role to management of the tertiaries. Stage II would also establish farmer Water User Associations (WUAs) to assist in management of secondary and higher-level canals. Approximately 20 association organizers and one or two supervisor organizers would be provided under the project. They would be the key agents for establishing WUGs and WUAs, developing their decision making and resource mobilization capabilities, and motivating efficient group action to accomplish specific water allocation and O&M t -ks. DOI's USAID-supported Irrigation Management Project would assist in identification, training, and deployment of AOs and SAOs for the project and provide technical supervision and support as needed for farmer organization work under the project. An understandinR was reached at neRotiations that, for farmer organization work in the Mahakali Stage II component, HMGN would take suitable action satisfactory to IDA to ensure provision of qualified and trained organizers and their supervisors,  -11- technical supervision and support, and training as needed for project staff and farmers. Training 3.10 Under the Stage II project, the ongoing in-service training activities would be expanded, and training procedures would be formalized. The design staff training would concentrate on design and layout of tertiary canal and field channel systems, including farmer involvement. Engineering and construction staff would receive training on construction supervision and quality control of irrigation and drainage works. Training for the operations staff would emphasize integrated operation of the Stage I and II canal system for rotational water supply, and the need for high efficiency with scarce dry season water supplies. Appropriate training would be given to canal operators at all levels. Training would also be provided to association organizers and to project technical staff (design, construction and O&M personnel) in order to orient them to the farmer organizing process; agricultural technicians would receive similar training in irrigation techniques, farmer organization, on-farm water management, and other itrigation-related agricultural activities. Farmers and their organizations would be trained in operating their tertiary and field channel systems, and lead farmers would receive training in on-farm water management and other irrigation and agricultural practices. Staff of the Department of Wildlife and Nature Conservation would also be trained under ; the project. The project authority w-uld plan its training program to begin operating on July 1, 1989. Administration, Establishment and O&M Support 3.11 Administration, staffing and O&M of the Mahakali Stage I and II areas would be handled as a unit. HKGN budget allocations for O&M are generally insufficient to cover full establishment and O&M as required for efficient implementation and O&H at design standards. This is because budget allocations are based on set norms unrelated to actual manpower requirements. Based on manpower and O&M work required, the estimated O&M budget requirement in 1988/89 is NRs 1.5 M, rising to about NRs 3.3 M upon completion of Stage II, or about NRs 3001ha annually (in constant 1988 prices). To assist HMGN in providing adequate establishment and O&M budgets, the IDA credit would provide supplementary budget support for those costs at a rate which would be progressively reduced during the project period, with the difference covered by increased HMGN budget allocations and/or farmer contributions. O&M operations and procedures would be based in part on an overall O&M plan which would integrate the Stage I and II areas and cover, inter alia, water supply and demand, operational concepts, organizational arrangements and staffing, operational procedures, roles and responsibilities of farmers' groups, training of staff and farmers, annual budget requirements and cost recovery regulations and procedures (see Annex 6). Agreement was reached at negotiations that HMGN would for Mahakali Stage I and II: (a) prepare and by December 31, 1988 provide to IDA for comment an overall O&M plan; (b) by March 31 of each year beginning in 1989 and thereafter provide to IDA for its review and comments data showing estimated O&M budget requirements for the next year and actual budget allocations made for the current year; and (c) thereafter taking into account IDA's comments, if any, ensure adequate O&M budgets are provided in HMGN's forthcoming fiscal year.  -12- Engineering and Consultant Services 3.12 To assist project engineering, supervision and implementation, the IDA credit would cover full costs of consultant services, including the Project Consultant, who would assist the Project Manager full time in a staff function. To avoid interruption of critical ongoing project activities and assure efficient t;ansition to Stage II, the Project Consultant for Mahakali Stage II has already been selected in accordance with IDA guidelines. Design, Construction and Commissioning 3.13 Status of Designs and Contract Documents. Completion of bid documents for IDA review is expected by end-June. The pre-qualification notice has been drafted and issued. It is anticipated that invitations to bid will be issued in October 1988, with award by April 1989. Detailed layout and design of tertiary channels, with alignment revised to follow property boundaries, will continue through the first two years of project execution. 3.14 Construction Methods. A substantial pool of semi-skilled and skilled local Nepalese labor is available for work in Stage II. In addition, a considerable proportion of the labor requirement for construction could be provided by farmers in the area. Project work would be tendered on the basis of a comprehensive package for construction and procurement of principal items, and the prime contractor will be free to sub-contract to local contractors, with approval of the Project Manager. Per HMGN policy, the prime contractor would employ manual construction methods where quality control and construction schedules permit. In addition, the contractor would take steps to minimize adverse impacts of mein canal construction on wildlife in the Suklaphanta Wildlife Reserve. 3.15 Commissioning. Construction would be scheduled to complete the Stage II area block by block. Following completion, each operational block of the command area would he "commissioned' and formally put in service. Commissioning procedures wo-.id ensure that all facilities are in proper operating order, the system can deliver water as designed, and farmers are fully informed of the status of their system. Commissioning would be supervised jointly by the Project Manager, the Project Consultant and the prime contractor, and the results would be reported to farmer water user organizations (WUOs); the prime contractor would make changes necessary to bring the facilities up to operational and design standards. The Project Consultant and the contractor would correct any deficiencies which develop during the first two years of operation. Irrigation Line of Credit Pilot Project Scope and Objectives 3.16 The Irrigation Line of Credit Pilot Component consists of irrigation subprojects comprising new small and medium surface schemes, rehabilitation of existing surface schemes, and new groundwater schemes  -13- covering an estimated 9,000 ha in total. All subprojects would be operated and managed by farmer groups who would also contribute to capital costs. In addition, all subprojects would be selected according to agreed technical, economic, and institutional criteria, and be prepared and approved according to agreed procedures (Annex 7). Indicative subproject implementation procedures are presented in Chart 4. Agreement was reached at negotiations that HMGN would ensure that pilot component subprojects are selected and implemented according to agreed criteria and procedures. Irrigation Subproiects 3.17 The pilot component would finance three general types of subprojects: construction of new surface schemes, rehabilitation of existing surface schemes, and construction of new groundwater schemes. Subprojects would be located in four Hill districts (Tanahu, Gorkha, Syangja and Lamjung) and one Terai district (Nawalparasi) in the Western Region. However, additional districts may be added by mutual agreement of HMGN and IDA. Implementation would be the responsibility of the Western Region Irrigation Directorate, which would assist, direct, supervise and guide District Irrigation Offices in execution of individual subprojects. In the selected districts, such subprojects would account for all of HMGN's irrigation development for the type of works included under the pilot component. Regarding subproject cost sharing arrangements between HMGN and water users for Line of Credit subprojects, an understanding was reached at negotiations that suitable cost sharing formulae would be provided to IDA by December 31, 1988. A condition of disbursement for construction of subprojects would be agreement by IDA and HMGN on such cost sharing arrangements (para. 4.10). Irrigation and Agricultural Support Services 3.18 Mobile Irrigation Team. Under the project a Regional Mobile Irrigation Team would be set up in WRID. The team would comprise a divisional engineer responsible for the supervision of pilot component implementation, the supervisor organizer from the regional directorate, and representatives from the regional ADBN and DOA offices. The team would provide technical support, guidance and training to the District Irrigation Offices, and be the focal point at the regional level for technical assistance directly related to implementation of the pilot component. To support the team, the project would finance incremental costs for equipment, travel, operation, and staff. The DOI Director for the Western Region would appoint the Team Leader, who would also function as the registrar for participating subproject WUOs assisted under the pilot component. The team would be financed as part of strengthening DOI Regional and District Offices (see para. 3.24). 3.19 Association Organizers. In each pilot district, an organizer would be attached to the DIO. Organizers would be responsible for orienting farmer groups at candidate subprojects on conditions and procedures for participation in the pilot component, assisting farmer groups in preparing and updating subproject requests, transforming ad hoc farmer groups and WUOs into formal Farmer Irrigation Associations (see para. 5.14), discussing subproject details and negotiating participation and cost sharing agreements with farmer WUOs, and training and preparing WUOs for O&M of completed subprojects. The Irrigation Management Project,  -14- also under DOI, would recruit, train, and deploy organizers and their supervisors, and would provide guidance to the Regional Directorate for supervision of the organizers and execution of the above activities. To support the organizing work, the project wculd finance incremental costs for equipment, travel, and training. An understanding was reached at negotiations that HMGN would for farmer organization work under the Irrigation Line of Credit Pilot Component: (a) take suitable actions to provide and support technically at all times the organizers and their supervisors in the Western Region for developing and promoting farmer participation; (b) establish wlthin DOI a central unit headed by a qualified officer for overall planning, technical support, coordination, supervision and monitoring of farmer organization activities by December 31, 1989; and (c) regularlize positions of organizers and their supervisors within DOI's organizational structure by December 31, 1989. 3.20 District Irrigation Office Technical Staff. In addition to the association organizer, staffing of each District Irrigation Office would comprise an assistant engineer to head the office, two overseers, and administrative personnel. District-level technical staff would be mainly responsible for identification of subprojects including collection of basic data for rapid appraisal, preparation and implementation of minor rehabilitation subprojects, and providing administrative and organizational support to the field establishments set up to implement larger subprojects and subproject clusters. District office establishment costs would be financed under the Institutional Development component of the project, and the Irrigation Line of Credit would finance incremental costs related to implementation of the project. The USAID-financed Irrigation Management Project would provide staff orientation and training on farmer participation. 3.21 Agricultural Extension Support. The Western Regional Agricultural Directorate of DOA is responsible for agricultural extension services through its zonal ofEice and District Agricultural Development Offices. To serve the special extension requirements for irrigated agriculture in the completed subprojects, close cooperation would be required between DOI and DOA at regional and district levels. At the regional level, a representative of the agricultural directorate would be an ad hoc member of the mobile team and would give specific attention to coordination of agricultural extension staff with the District Irrigation Office in Line of Credit activities. To support this collaboration, the project would finance incremental costs to DOA for office space at regional and district levels, equipment, transport and travel, and specialized technical assistance and training on irrigation for extension staff. DOA would provide adequate agricultural extension and services to Line of Credit subproject areas under the framework of its ongoing programs, and participate in the Mobile Team and other Line of Credit activities as needed. Subproiect Credit Support 3.22 Under the project, ADBN would provide group credit to farmer WUOs to help finance farmer contributions to subproject capital costs. The estimated group credit requirement totals about USS.L.2 M, which is overall about 152 of total estimated capital costs for subprojects and 60Z of the  -15- farmers' contribution. However, the actual percentage of ADBN financing for any specific subproject would depend on the type of subproject and the farmers' preference. ADBN staff would assist DOI district staff and