Nepal - Second Mahakali Irrigation Project

Document of The World Bank FOR OFFICIAL USE ONLY Reprt No. P-4782-NEP MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVFE DIRECTORS ON A PROPOSED CREDIT OF SDR 29.9 MILLION TO THE KINGDOM OF NEPAL FOR THE MAHAKALI IRRIGATION II PROJECT May 20, 1988 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS USS 1.00 (at appraisal, - NRs 21.9 (official and February, 1988) free market rate) NRs 1 million - US$ 45,662 FISCAL YEAR July 16 - July 15 WEIGHTS AND MEASURES (METRIC SYSTEM) 1 hectare (ha) 1 ton (t) Abbreviations and Acronyms ADBN - Agricultural Development Bank of Nepal DOA - Department of Agriculture DOI - Department of Irrigation ERR - Economic Rate of Return GDP - Gross Domestic Product HMGN - His Majesty's Government of Nepal ICB - International Competitive Bidding LCB - Local Competitive Bidding LIB - Limited International Bidding M - Million O&M - Operation and Ma_ntenance  FOR OFFICIAL USE ONLY NEPAL MAHAKALI IRRIGATION II PROJECT Credit and Proiect Suimnary Borro,wer; Kingdom of Nepal Beneficiaries: Agricultural Development Bank of Nepal (for Irrigation Line of Credit component) Amount: SDR 29.9 million (USS 41.3 million equivalent) Terms: Standard, with 40 years maturity Onlendina Terms: US$ 1.2 million equivalent onlent to the Agricultural Development Bank of Nepal (ADBN) at an interest rate equivalent to the prevailing rediscount facility rate of the Nepal Rastra Bank for the agriculture priority sector, but not to exceed 1OZ per annum; from ADBN to farmers at ADBN standard terms, 15Z interest rate equivalent with a ten year repayment period for surface irrigation subprojects and a five year repayment period for groundwater schemes. The Borrower bears the foreign exnhange risk Financing Plan: IDA US$ 41.3 M HMGN/Farmers US$ 5.4 M Total USS 46.7 M Fconomic Rate of Return: 16Z (For Mahakali Stage II component) 352 (For Irrigation Line of Credit component) Staff Appraisal Report No. 7174a-NEP Repcrt: IBRD 19997 This d(xument 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  MEMORANDUM AND RECOMMEhDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR THE MAHAKALI IRRIGATION II PROJECT 1. The following memorandum and recommendation on a proposed deve- lopment credit to the Kingdom of Nepal for SDR 29.9 million (USS 41.3 million equivalent) is submitted for approval. The proposed credit would be on standard IDA terms with 40 years maturity and would help finance irrigation sector investments, flood rehabilitation and institutional development support. 2. Background. Agriculture, largely rainfed, dominates Nepal's economy. In 1986-87, it accounted for 59Z of GDP, contributed about 70Z of total export earnings, and provided employment to 912 of the working population. However, during the Fast decade, per capita food production has fallen, as the production of foodgrains has grown at only 1.52 per year compared to population growth of 2.6Z annually. For growth in agricultural production to keep pace with population, irrigated area needs to expand by an estimated additional 35,000 ha each year. Under Nepal conditions, much of this development will consist of small groundwater and surface schemes. Current HMGN and IDA irrigation subsector strategy focuses on expansion or rehabilitation of existing systems, improvements in the efficiency of existi.ig faciliti2s particularly through more effective operation and maintenance (C&M), prcvision of adequate agricultural support services and institutional development to strengthen the capacities of key implementing agencies. 3. Rationale for IDA Involvement. IDA assistance enables HMGN to exploit irrigation potential more rapidly, facilitates coordination among 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 c'irrent strategy, a 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 to enable concentration of limited budget resources on activities that farmers cannot assume. However, the concept is largely new to Nepal's irrigation establishment, and the proposed project is designed to help establish farmer organization and participation as an integral part of DOI irrigation development programs. With regard t( the Mahakali Stage II component, IDA involvement would help ensure that, in the transition from construction to full system operation, these innovations are institutionalized by the project authority and made permanent. The Line of Credit pilot project would also provide timely support to develop HMGN's new strategy into an operating sector investment program. For the Flood Rehabilitation component, the proposed project provides a ready vehicle for IDA support of emergency repairs to recently damaged river protection and irrigation works. The Institutional evelopment Support component is designed to help DCJI develop th.e necessary capabilities to implement a large scale subsector program, and in particular establish farmer organization and participation as an integral part of DOI operations.  -2- 4. Proiect Obiectives. The proposed project aims to: (a) raise agricultural production and farm income through expansion and management improvement of a public irrigation system, through construction and rehabilitation of private farmer-managed irrigation schem-s, and through restoration of irrigation schemes and river protection works damaged by August 1987 floods; (b) improve O&M and cost recovery in the project areas through inter alia increased farmer participation; and (c) strengthen Nepal's irrigation subsector. 5. Project Description. The proposed project would comprise four components: the 6,800 ha Mahakali Stage II project; the Irrigation Line of Credit pilot component sxpected to cover an estimated 9,000 ha, mainly rehabilitation and improvement of existing farmer-managed schemes; emergency Flood Rehabilitation of river protection and irrigation works damaged in the August 1987 floods; and Institutional Development Support for DOI. DOI would be the lead implementing agency. 6. The Mahakali Stage II component would extend the existing main canal and construct irrigation and drainage works for the 6,800 ha Stage II area located some 20 km from Stage I. The component also includes groundwater facilities, flood protection works, roads, offices and staff houses, vehicles and equipment, incremental O&M, farmer organization, agricultural intensification, and technical assistance. The Line of Credit component would finance small and medium scale subprojects for construction of new schemes, rehabilitation of existing schemes and groundwater development. All Line of C-edit subprojects would be group- operated and located in the Narayani basin portion of one Terai and three Hill districts of the Western Region. Subproject identification, preparation, appraisal and approval would be delegated to a local institution and carried out under agreed guidelineb and procedures; however, IDA confirmation/approval would be required for the first two subprojects of each type. The Flood Rehabilitation component would restore damaged flood protection and irrigation works. The Institutional Development Support component would provide additional resources and technical assistance required to strengthen DOI especially for implementing the Line of Credit component. 7. Riparian Issues. Under IDA's policy, notification of India regarding the use of water from the Mahakali river (international waterway) for the Mahakali scheme is not required as the water supply is assured under a 1920 agreement between Nepal and India. For the Mahakali component flood protection works, under IDA's policy, the Government of India was notified on January 15. 1988 and has raised no objection. For the Line of Credit component, new surface subprojects would use waters from streams and rivers which originate entirely within Nepal and form part of the Narayani river basin for which an agreement between Nepal and India (dated 1959 as amended in 1964) on water use exists; therefore, under IDA's policy, notification to the riparian is not required. Furthermore, under IDA's policy, other Line of Credit subprojects- -rehabilitation of existing schemes and new groundwater schemes--woulld no-. require riparian notification. The Flood Rehabilitation compo-,ent woul d restore damaged facilities and therefore, under IDA's policy. woculd al-;o not require riparian notification. 8. A breakdown of costs and the financing plan are shown in Sd.Fdu1 A. Amounts and methods of procurement and of disbursements, and thf-  -3- disbursement schedule are shown in Schedule B. Retroactive financing, not exceeding US$ 3.0 million, would be provided for expenditures made after February 10, 1988, except for expenditures on construction of Irrigation Line of Credit subprojects. A timetable of key processing events and the status of Bank Group operations in Nepal is given in Schedules C and D, respectively. A map, IBRD no. 19997, is attached. The Staff Appraisal Report, No. 7174a-NEP, dated May 20, 1988, is distributed separately. 9. Agreed Actions. During negotiations, agreement was reached regarding: (a) farmer organization support; (b) adequate budgets and staffing to implement the project; (c) accounts and audits; (d) legal recognition for water users organizations; (e) Mahakali scheme water user organizations; (f) strengthening of DOI for implementation of the Line of Credit component; (f) DOI Monitoring and Evaluation/Management Information Systems; (g) establishment of the Line of Credit Regional Appraisal Committee and A;,)roval and Coordination Committee; (h) criteria and procedures for selection of Line of Credit subprojects; (i) suitable arrangements for a new DOI headquarters building; (j) O&M plans and budget for the Mahakali scheme; (k) environmental impacts and health risks; and (1) water charges and cost recovery. A condition of effectiveness is th. establishment of a Task Force on Water Charges. 10. Benefits: At full development, agricultural production is expected to increase by some NRs 170 M annually. Some 100,000 people would directly benefit. Under the Mahakali Stage II component, project construction would create about 2,000 new jobs during the implementation period and farm employment would expand by some 2,800 jobs following completion. The economic rate of return (ERR) of the Mahakali Stage II project is estimated at 16Z. For the Line of Credit component, t'.e overall ERR is 35Z, and ERRs for the various subproject types range from 16Z to 66Z. Emergency flood rehabilitation benefits were not estimated. 11. Risks. Implementation risks for the major component, Mahekali Stage II, are low due to good implementation performance under Stage I, provided that the Stage I implementation management team is kept intact. Risks for the Line of Credit component are somewhat higher, as DOI'S farmer organization capability will have to be strengthened and expanded. However, the project ircludes substantial support for DOI institutional strengthening, particularly for farmer organization. Risks for the Flood Rehabilitation component are low, as DOI has had substantial experience with such works under its ongoing programs. 12. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve it. Barber B. Conable President Attachments WashingLun, D.C. May 20, 1988  Schodul# A NEPL MANAKALI IRRIGATION S1 PROJECT ESTIMATID COSTS AND FINANCING PLAN Estimated Costs: Local Foresin 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 U.3 0.4 Irrigation Line of Credit 5.5 2.5 8.0 Flood Rehabilitation 2.2 3.7 6.0 Institutional Development 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 Financina 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  -5- Schee,le B Page 1 of 3 NEPAL MAHAKALI IRRIGATION II PROJECT PROCUREMENT METHOD AND DISBURSEMENTS PROCUREMENT METHOD COMPONENTS ICB LCB LIB OTHER ai/ NA TOTAL b/ ----------------(US$ million)--------------- MAHAKALI STAGE II 21.0 0.8 0.2 2.4 2.8 27.2 IRRIGATION LINE OF CREDIT 0.3 3.2 0.0 4.4 0.8 8.8 FLOOD REHABILITATION 4.4 2.9 7.3 INSTITUTIONAL DEVELOPMENT SUPPORT 0.2 2.0 0.1 1.0 0.1 3.4 OVERALL PROJECT Works 20.1 10.4 0.0 6.9 0.8 38.2 (18.1) (9.9) (6.6) (34.7) Goods 1.4 0.0 0.3 0.0 0.0 1.7 (1.4) (0.3) (1.7) Land Acquisition 0.0 0.0 0.0 0.0 1.0 1.0 O&M During Implementation 0.0 0.0 0.0 0.0 0.5 0.5 (0.2) (0.2) Consulting Services and Training 0.0 0.0 0.0 3.9 0.0 3.9 (3.8) (3.8) Staffing and Other Costs 0.0 0.0 0.0 0.0 1.4 1.4 (0.9) (0.9) TOTAL PROJECT COSTS 21.5 10.4 0.3 10.7 3.7 46.7 (19.5) (9.0) (0.3) (10.5) (1.1) (41.3) a/ Includes piece work contracts and departmental forcb account, as needed, for certain works under the Line of Credit and Flood Rehabilitation components. Overseas training would be through direct placement. Consultants would be employed in accordance with IDA guidelines. b/ Figures in parantheses are the respective amounts to be financed by IDA.  Schedule B KA)IAAL,IRRIGATION It PROJECT Page 2 of 3 Amount of the Percent of expen- credit allocated ditures to be Category (espressed in SDR financed equivalent) 1. Civil Work (a) Mahakali Stage It 13,010,000 90S (b) Ilood Rehabilitation 4,770,000 l00S (c) Institutional Development 940.000 1002 2. Materials, Equiment and Vphicles 100? of foreign (a) Mahakali Stage I 650,000 expenditures, 100? of (b) Flood Rehabilitation 180,000 local expenditures (ex- (c) ISstitutional Development 180,000 factory cost) and 70? of local expenditures for other items procured locally 3. Construction of Line of Credit Subpro1ects (a) New Surface Subprojects (i) ADBN Subloans 400,000 100? (li DOI Contribution 1,900 000 100? (b) Other Subprojects (i) ADBN Subloans 480,000 100? (ii) DO! Contribution 2,000,000 100? 4. Salaries and Allowances for Proiect 730,000 702 of expenditures Staff, and Oopeation and Maintenance up to the first Costs for Mahak;li Stage II SDR 370,000 in disbursements; 602 of expenditures up to the next SDR 110,000 in disbursements; 40? of expenditures up to the next SDR 70,000 in disbursements; and 20? of expenditures up to the next SDR 180,000 in disbursements 5. SalaXies and Allowances for 150,000 100? Incremental Staff &na Operating Costs for Line of Credit and Institutional Development Components 6. Consultants, Training and Studies (a) Mahakali Stage 1I 1,560,000 1002 (b) Line of Credit 180,000 100Z (c) Institutional Development 650,000 1002 7. Unallocated 2,120,000 TOTAL 29,900,000  -7- Schedule B Page 3 of 3 NEPAL MAHAKALI IRRIGATION II PROJECT Estimated Disbursements: IDA Year FY89 FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97 -