Nepal - Arun III Hydroelectric Project : Inspection Panel Report on the Request for Inspection

THE INSPECTION PANEL The Inspection Panel Report on Request for Inspection Nepal: Proposed Arun III Hydroelectric Project and Restructuring of the Arun III AccessRoad Project (Credit 2029-NEP) RequestNo. RQ94/1 December 16, 1994 Washington, D.C.  ABBREVIATIONS AND ACRONYMS ACRP - Acquisition, Compensation andRehabilitation Plan BP - Bank Procedures EA - Environmental Assessment EAP - Environmental Action Plan HMG/N - Kingdomof Nepal IDA - InternationalDevelopment Association IEPS - Initial Executive Project Summary LCGEP - Least Cost GenerationExpansion Program MOP - Memorandum andRecommendation of the President MW - Megawatts NEA - Nepal Electricity Authority NGO - Non-governmental Organization OD - Operational Directive OMS - Operational Manual Statement OP - Operational Policies OPN - Operational Policy Note PAF - Project Affected Family PIC - Public Information Center PID - Project Information Document POE - Panel of Experts RAP - Regional Action Plan for Arun III Project SAR - Staff Appraisal Report SPAF - Seriously Project Affected Family  TABLE OFCONTENTS Page Preface 2 A. BACKGROUND ..................................... 3 PR OPOSED PROJECT3 .................................... 4 THEREQUEST .................. 3 REGISTRATION.................. 4 OPERATIONAL POLICIES AND PROCEDURES..................................... 4 B. THE REQUEST and THE RESPONSE ..................................... 5 I. Economic Analysis of Investment Operations ..................................... 5 ALTERNATIVES ..................................... 6 RISK ANALYSIS ................... 6 POVERTYREDUCTION ........... ,6 Environmental Assessment......................9 II. ALTERNATIVES. ..................... 9 ALCCESSROAD ALIGNMENT.............1........... CUMULATIVE EFFECTS AND INADEQUACIES.................................... 13 III. DISCLOSURE OF INFORMATION .................................... 15 PROJECT INFORMATION DOCUMENT ("PID").................................... 15 ENVIRONMENTAL ASSESSMENT ("EA') .................................... 15 FACTUAL TECHNICAL INFORMATION.................................... 16 IV. Involuntary Resettlement .................................... 16 HILL ROUTE...................... . . . . . . , . 17 VALLEYROUTE ..................... 17 V. INDIGENOUS PEOPLES ..................... 19 ANNEX A: NOTE ON APPLICABLE OPERATIONAL POLICIES AND PROCEDURES ANNEX B: ACCESS ROAD ALTERNATIVES - COMPARATIVE TABLES ANNEX C: THE REQUEST FOR INSPECTION ANNEX D: MANAGEMENT RESPONSE 1  PREFACE This is the Inspection Panel's Report on the Request for Inspection (the "Request") relating to the proposed Nepal, Arun III Hydroelectric Project and restructuring of the Arun III Access Road Project; Credit 2029-NEP, granted under Development Credit Agreement, dated August 8, 1989 between the Kingdom of Nepal and the International Development Association ("IDA") (collectively referred to as "Arun III"). The Request was filed with the Panel on November 2, 1994 and registered by the Chairman on November 3, 1994. On the same date the Notice of Registration and text of the Request was transmitted to the President of IDA. The Chairman and Panel members note that prompt registration is required by IDA Resolution 93-6 (the "Resolution"). The Panel received the Management Response (the "Response") on November 22, 1994: it addressed the substance of the Request rather than impeding and delaying an independent review of the issues by questioning formalities. The attached report likewise deals with the substance of the Request. The Panel's initial findings are based on the information contained in the text together with a limited review of supporting or referenced documents in the Request and the Response; and in addition, supplementary clarifications from the Requesters, Management, the proposed borrower and the executing entity. On the basis of this preliminary review and in accordance with the Panel's Operating Procedures of August, 1994 (the "Procedures"), the Panel is satisfied that conditions required by paras 12-14 of the Resolution have, in substance, been met. In accordance with the Resolution the Panel consulted the proposed borrower and the Executive Director representing the Kingdom of Nepal on the subject matter of the Request. The Panel wishes to thank all those who assisted them both in Kathmandu and in Washington, D.C. 2  A. BACKGROUND PROPOSED PROJECT 1. Managementof IDAis planningto seekapprovalforan SDR 99.5million development creditto the Kingdomof Nepal ("HMG/N"- the borrower)and the restructuringof an existing creditfor SDR 24.4million(ArunIII AccessRoad Project- Cr. 2029-NEP)to help financethe proposed Arun III HydroelectricProject.! The revised project components include a 122 kilometer access road through the Arun Valley, constructionof a 201 MW run-of-river (includinga 68 meterdam)hydroelectricpowerscheme(thefirstphaseof the ArunIII 402 MW scheme)in the Sankhuwa-SavaDistrictand 122kilometersof transmissionlinesfromthere to Duhabi. TheArunbasinis about170kilometerseastof Kathmandu. 2. Theproposedcreditwouldbe on standardIDAtermswitha 40 year maturity. HMG/N would onlend to the implementingagency,the Nepal ElectricityAuthority ("NEA"), the Nepalese rupee equivalentof US$136.1million plus US$34.3 million (available under the existing Arun III Access Road Project) at a rate of 10.25percent for a period of 30 years includinga 9 year graceperiod. HMG/Nwouldbearthe foreignexchangerisk. The remaining US$4.6 million would be utilized by the Ministry ofWaterResourcesto finance a Regional ActionPlan("RAP"). 3. Total project costs are estimated at about US$800 million. The project would be cofinancedbythe AsianDevelopmentBank,KreditanstaltfurWiederaufbau,the Governmentof France,the SwedishAgencyfor InternationalTechnicaland EconomicCooperation,the Finnish InternationalDevelopmentAgencyandotherdonors. THE REQUEST 4. Summary: ThePanelreceiveda Request,datedOctober24, 1994,fromcitizensof Nepal (the "Requesters") who claim that their rights and interestshave been or are likely to be materiallyand adverselyaffectedbythe actsoromissionsofIDAduringthe designand appraisal of ArunIII. Two of the Requestersclaimthattheyhavebeendirectlyand adverselyaffectedby the design and implementationof the resettlementprogramrelatedto Arun III. The Requesters claim to be, or likely to be affected by alleged violationsof provisions of,inter-alia, the followingpoliciesandprocedures: * Operational Policy/Bank Procedure 10.04: Economic Evaluation of Investment Operations * The World Bank Policy on Disclosure of Information, September 1994; Bank Procedures17.50and 10.00,AnnexA * OperationalDirective4.01: EnvironmentalAssessment * Operational Directive4.30: Involuntary Resettlement * OperationalDirective4.20: IndigenousPeoples 5. The two Requestersfrom the now abandonedHill Route askedfor anonymityand, in accordancewithNepaleselaw, appointedMessrs.Siwakotiand Ghimireof Kathmandu,Nepal (theothertwo Requesters),torepresentthem. (ForfurtherdetailsseeAnnexC) 3  REGISTRATION 6. EligibilityIssues:Para17of theProceduresrequiresthe Chairmantoregisterthe Request "[I]f the Requestappearsto containsufficientrequiredinformation...".While recognizingthat there were deficienciesin the formalities,in accordancewith this para, the Chairman, on November 3, 1994, registeredthe Request in the Panel Register; notifiedthe Requester,the ExecutiveDirectorsandthe Presidentof IDAof the registration;andtransmittedto the President a copy of the original Requesttogetherwith faxed copiesof the attachmentsand evidenceof representation. Upon receipt, on November 8, of the originals of the accompanying documentation,copieswereforwardedtothe PresidentofIDA. 7. ThePaneljudged that the seriousnatureof the substanceof the Request as a whole and its timing in relationto the projectprocessoutweighedoutrightrejectionof the Request onthe groundsof doubts on the standingof the Requestersand incompletecompliance with formal procedures. Managementapparentlycameto the same conclusionsince, as noted before, it addressedthe substanceof the Requestwithoutquestioningits eligibilityunder the applicable termsof theResolution. OPERATIONAL POLICIES AND PROCEDURES 8. Giventhat a periodof about sevenyearshas elapsedsincethe inceptionof Arun III, the evolvingnatureof IDApoliciesand proceduresand the timingof their applicationin relationto variousstages of this proposed projectis a source of disagreementbetweenthe Request and Response. Thesequestionsare addressedin AnnexC and referredto,as necessaryinthe textof thisReport. 4  B. THE REQUESTandTHE RESPONSE 9. The Request lists a number of statements of policies and procedures which the Requesters believe IDA has failed to follow in the course of the design, appraisal and initial implementation of Arun III. The Response provides information indicating that Management believes it has not failed to follow the relevant policies and procedures. The Request and the Response are reviewed briefly below and are followed by the Panel's initial comments. 1.EconomicAnalysisof InvestmentOperations ALTERNATIVES 10. THE REQUEST states that IDA "has violated its operational policies regarding the Economic Evaluation of Investment Operations, as a basic criterion for acceptability. For the project to be acceptable on economic grounds, 'the expected present value of the project's net benefits must be higher than or equal to the expected net present value of mutually exclusive project alternatives.' By not undertaking the relevant studies of the alternatives..., the World Bank has not fulfilled this very basic criteria for acceptabilityof the project". 11. The Request also complains that IDA violated this Directive throughout the project cycle by not considering alternative sequencing until 1993/94 and that the study is incomplete as the comparison was made with only very preliminary costs for the alternative schemes; that the earlier Least Cost Generation Expansion Plans ("LCGEP") of 1987 and 1990 failed to take into account that the same amount of power generated from Arun III could also be generated from a series of smaller alternatives in the 1MW to 100 MW range; and that by not completing feasibility studies of the 30 or more smaller alternatives identified by HMG/N, IDA has not fulfilled the policy requirement to compute the LCGEP for additional power generation for Nepal. The Request also states that "there is every reason to believe that once the detailed studies are completed, the smaller alternatives can be built at prices lower than or competitive with Arun III"..2 12. THE RESPONSE, while answering the Request in line with OP/BP 10.04 suggests, in its Annex A, that this policy was not in effect at the time of identification and appraisal: that only those instructions in this OP/BP which are identical to those in force at the time are applicable. It indicates that the basis for the LCGEP was the initial consideration of "some 3000" alternative generation and expansion plans of which 11 individual hydro investment project candidates of varying sizes were examined to the pre-feasibility level or "beyond." However, "in response to questions, additional alternative strategies were investigated in order to check the robustness of the standard least-cost analysis. This involved the consideration of project candidates that preliminary analysis had previously screened out." The Response concludes that the cost of an alternative was higher than the cost of HMG/N's proposed program.3 13. The Response also states that there are no hard and fast rules on how many alternative proposals should be investigated to the "pre-feasibility" stage, it is a question of professional judgment. The number of hydro candidates explored to the pre-feasibility level is considered to represent "a very respectable effort for a country such as Nepal"--given that the determining factors are the extra cost and associated delays. Noting that the project contains funding for further pre-feasibility and feasibility work for smaller hydro projects4 - which, if attractive, will 5  be accommodatedperiodicallyintothe LCGEP- it is pointedout that thereis no evidencethat suchfurtherstudywoulddisplaceArunIII fromthe LCGEP.5 RISKANALYSIS 14. THEREQUEST complainsthatthe risk analysisisfaulty,inparticularthat: * one largenaturalcatastrophewouldvirtuallyruintheNepaleseeconomy; * noaccounthasbeentakenof the riskof undertakingsucha largeprojectin relationto the sizeof theNepaleseeconomy; * while over 80% of the catchmentarea of the Arun River lies under the controlof China and a proposedChangsunBasin IrrigationProject is pending,no accountof upstreamdevelopments(riparianrights)hasbeenincluded;and * there is no bilateralagreementwithIndiaeventhoughPhaseII of Arun III and future developmentinthevalleydependon surpluspowersalesto India.6 15. THERESPONSEexplainsthat: * underOP 10.04treatmentof risksassociatedwithlargeprojectsis not mentionedand there isnoexplicitpolicywithrespecttothe valuationof risks- as distinguishedfrom the analysis and/or managementof risks - associated with large projects. But "recognitionof Arun's magnitude and importanceto the Nepalese economy was whatledthe Banktoundertakesuchcomprehensiveanalysisofthe project.";' * the analysisdoesnotconsiderthe risksto projectviabilityof the possibleconstruction of the ChangsuoBasinIrrigationProjectbecausethe appraisalteamjudgedtheserisks to be minimal;recentlythe Chineseauthoritieshavereconfirmedtheir non-objection to the projectand that the small size of the projectis likely to have no effect on downstreamwaterusers;8 and o withrespectto salesto India: inthe past bilateralagreementshavenot beennecessary and suggeststhat evenif nosurplussalesoccur,therewouldbeonlya 1%drop inthe project's economicrateof returnwhich remainsabovethe project's opportunitycost of capital.9 POVERTYREDUCTION 16. THE REQUESTsuggeststherewillbe immediateandthreatenedlong-termirreversible adverse impacts on the already absolutepoor inhabitantsof the Arun Valley, as a result, in particular,of NEA'slackof capacityto implementenvironmentaland socialsafeguards. 17. At the nationallevel,the Requestsuggeststhat the largesizeof the projectin relationto Nepal's annualnationalbudgetwill not directlybenefitthe poor as its high cost will crowdout investmentsin socialservicesandtargetedpovertyinterventions. 10 18. THE RESPONSE acknowledgesthat 450,000inhabitantsof the Arun Valley lead a "harsh subsistencelife;" it states that the primary objectiveof the projectis to meet Nepal's growingpowerrequirementsin the mediumterm at least cost so that this constrainton growth and poverty reduction can be overcome. Referring to the EnvironmentalAction Plan the Response suggeststhat it aims to limit negativedirect impactsand to maximizethe Valley's prospectsfor sustainablegrowthand povertyreduction." 6  THE PANEL ALTERNATIVES 19. With respect to examination of alternatives, the Panel notes that previous policies and procedures would appear to be applicable. Apreliminary review (see Annex C) of thosepolicies and procedures suggests that thefundamental requirements are substantially the same as those in OP/BP 10.04. In particular it is noted that OMS 2.21, para 8, states that: "Considerationof altemativesis the single most important feature of proper projectanalysisthroughoutthe projectcycle, fromthe developmentplan for the particularsectorthroughidentificationtoappraisal." It is also noted that the Response deals with the issues of alternatives and analysis of project risks in the context ofthe requirements of OP 10.04. 20. It is clear that Nepal's hydropower potential is considerable (estimated at 25,000 MW). However less than 1% of the resource has been developed and there is no complete inventory that could be used reliablyfor long term planning. 21. Out of about 107 potential hydroelectric sites that have been identified, technical and economic screening criteria yielded only 18 projects for which pre-feasibility or further engineering studies have been carried out. The latest LCGEP considered only 11 projects. It is a matter of judgment whether this is an adequate number of options that should have been considered in the 30-80 MW range. 22. The Panel notes that the MOP recognizes that: "Theonlyrealisticalternativetothe hydropowerinvestmentprogramproposedby the Governmentis a seriesof hydro investmentsin the range of 10MW to 100 MW. Whiletheseare certainlysmallprojectsbyinternationalstandards,most are similarinmagnitudetothe two previousmajorhydroinvestmentsmadeinNepal; namely, Kulekhani (60 and 32 MW) and Marsyangdi(69 MW). Past pre- investmentstudiesinNepal's majorriver systemshaveidentifieda largenumber of suchpotentialinvestments. Pre-feasibilityand feasibilitywork hasbeen done on some 18of the 93 sites identified. About halfof the 18are under 100MW; these have alreadybeen takeninto accountin the least cost generationanalysis. Hence, the effort to developan alternativehydropowerinvestnent programhas had to drawfromamongthoseprojects,mostlyin the 30to 80MW range,which had previously been screened out (on the basis of rather crude technical and economiccriteria)as lessattractivethan thosefor whichpre-feasibilityworkhas beencommissioned. The alternativeinvestmentprogramthusidentifiedhasbeenlabelledPlanB (SAR Annex 5.4, [paras 41, 42]) The costsof Plan B are estimatedto be about 5% higherthan the Government'sproposedinvestmentprogramunder assumptions about the future consideredmost likely, and 5% less in the scenariowhere demandgrowthfollowsthe lowloadforecast.12 23. There is reason to believe that if a less restrictiveassessment, including a wider range of hydro resources, could be undertaken it would result in expanding the number of economically and environmentally acceptable options. 7  RISKAANALYSIS 24. IDApolicies provide for evaluation of investmentprojects to ensure that theypromote the borrower's development goals and that the economic analysis be conducted to determine whether the project creates more net benefits to the economy than other mutually exclusive optionsfor the use of the resources in question; and state that assessing sustainability includes evaluating the project's financial impact on the implementing/sponsoring institution and estimating the direct effect onpublic finances of the project's capital outlays and recurrent costs. This process also includes an analysis of the sources, magnitude and effects of the risks associated with theproposed project. 3 25. The Panel notes that, with the information available, the comparison of the risks associated with theproject and its alternatives is very difficult due to the large number offactors involved including: * natural catastrophic events such as Glacial Lake Outburst Floods (GLOF) and high monsoon rains leading to high riverfloods which constitute a permanent risks in the project area These risks were considered a majorfactor in the original decision to choose a Hill Routefor the accessroad; - the steep tariff rate increases that NEA must implement, likely cost overruns, lower economic growth; - major risks associated with the economic performance of the project are associated with the rate of growth of demand, which in turn is related to the unforseeable response to price increases and export sales The lack of a long term power sales agreement with India poses a potential long term risk to the project.. This risk has been highlighted by IDA, particularly in the case of Nepal, in the 1986 Project PerformanceAudit Reportfor the Kulekhani Hydroelectric Project (Cr. 600-NEP and 600-1-NEP) which concludes that: "Agreementson exportwouldbe requiredprior to the start of any large scale development, and because most countries are reluctant to be dependenton others for electricalenergAy, negotiationson such matters maylastoverextendedperiodsof time".14 The MOP contains a rather detailed discussion of risks and concludes that: "Comparisonof the overallrisks of the alternativestrategiesshowsthat both have problemsrequiringcarefulmanagement. There is simply no low riskwayto meetNepal's powerrequirementsoverthe nextdecadeor so. 26. All power development options require careful risk management unprecedented in Nepal and therefore institutional capacity building is critical to the success of any strategy. Major risks associated with institutional capacity in the NEA and HMG/N emerge as significant in a variety of ways: to oversee construction, long-term O&M, reorganization of the power sector management, and ability to sustain appropriate tariff increases. Each could endanger the viability ofArun III at any time. Whilefunding agencies can supplement institutional capacity in the short-term, the strengthening of institutions will still have to develop rapidly and extensively; 27. The Request cites, as a potential risk thefact that 80percent of the river lies in China The Response refers to the small size of theproposed Changsuo Basin Irrigation Project. At the 8  request of the Panel, Management has provided satisfactory evidence showing that the Government of China does not oppose Arun III 28. Risk assessment must include all factors that might have a bearing on the project, and compare them with those of the alternatives. IDA has attempted to deal with those issues, but, the environmental and social impacts of the alternative have not been systematically analyzed; therefore a realistic comparison of risks associated with theproposed project and its alternatives could not have been carried out. POVERTYALLEVIA TION 29. OP 10.04 states that the economic analysis examines the project's consistency with IDA's poverty reduction strategy. 30. The Panel recognizes two levels ofpotential impacts on poverty. Thefirst relates to the localized effect of Arun III on the Arun basin 'spoor, particularly the people whose land, like that of the Requesters on the abandoned Hill Route, was expropriated; and those on theproposed ValleyRoute whose land might be expropriated The second relates to the likely macro economic impacts on the country as a whole due to the large size of the investment to be undertaken in relation to the size of the economy. These impacts on a national level might result in: (a) an initial increase in poverty because the opportunity cost of capital to address poverty directly and the resources needed for other targeted interventions may be consumed byArun III; (b) a reduced consumption due to the effect of rising electricity tariffs on consumers as they devote a larger share of their disposable income to electricity; and (c) a constraint on public expenditure and investment - as noted in a recent Bank document: " The power sector as a whole is expected to absorb 15 percent of local resources and 40 percent of foreign resources, and AHP [Arun III] alone will absorb close to 20 percent of total development resources during the peak implementationphase in FY97-FY99."'6 31. The high priority of poverty alleviation in Nepal has been reiterated by the Bank However, steps already taken by IDA and HMG/N suggest it will be more difficult to implement thepolicies on poverty. Future steps, such asfurther cancellation of "low priority projects" in social sectors and the largefiscal demands of Arun III may contribute to the risk thatpolicies on poverty cannot be implemented. 11.EnvironmentalAssessment ALTERNATIVES 32. THE REQUEST states that the environmental and social issues and available alternatives to Arun III were not integrated into decisions on whether to proceed with the project. Citing the 1991 Basinwide Environmental Impacts Study ("RAP"), it states that: "the road alignment [hill route] and dam site were already decided and the study team did not have the mandate to change these decisions;" and the 1992 study17of the valley route was conducted to 9  detennine whetherit "might providetime and cost savingsin providingaccessto the Arun III hydropowersite. Servingthe needsof the population...is a secondaryconsideration... and that the need for and the siting of the powerprojectand thereforethe justificationfor the road, is takenas a given." It is notedthat, inresponseto pressureto investigatealternativesadequately, and after the EIA process was completed,the Bank commissioneda studyknown as Plan B whichwasconductedfromthe standpointof whetherArunIII isthe "leastcost"optionforNepal - withoutconsiderationofthe environmentalandsocialcostsof eitherArunIII or its alternatives. 33. TheRequestalsopointsoutthat: "[t]heso calledEIAof the Valleyrouteof the accessroadfailsto takeinto considerationand comparefromenvironmentalstandpointany alternative approach to build this road. For example, applying environmentally friendlyapproach in buildingthe roads in the Himalayanfoothills by employing simple and conservation-orientedtechniques and labor intensivemethodshavebeenprovedsuccessful. Thepaceof the proposed constructionof the road and the approach adopted, thus, is a serious environmentalconcernthatthe EIAignores.18 34. THE RESPONSE questions the applicability of the policy on Environmental Assessmentfortiming reasonsbut then statesthat Managementneverthelessproceededas if it were applicable. As evidenceof compliance,the Responsecitesthe considerationof three dam sites in the Arun valley and two differentaccess roads. The Responsenotes that the 1993 Environmental Assessment Executive Summary'9 ("EA Summary") clearly states that identificationof Arun III was basedonleast cost studiesundertakenupto 1990andthat "these studiesaddressedenvironmental/socialissuesatthe reconnaissancelevelforallfeasiblesites.20 THE PANEL 35. Notes that while the current policy was not in effect when the Credit 2029 for the Hill Access Road Project was approved, it was in effect at the time when it was decided to change the access road to the ValleyRoute.21 The 1993EA Summarystatesthat: "The Arun III...was identifiedas the best majorhydropowerschemefor early addition to the Nepal InterconnectedSystem under the LCGEP completedbytheNEAin 1987.... [This] choice was confirmedby an LCGEPUpdate Studycompletedin 1990....This study included estimates of resettlement costs in its comparativeanalysisof the various projects,but not the costs of other environmentalimpactsor economicbenefits". 22 36. The Panel notes that the major environmentaland social impacts of the Arun project are due to the construction of the access road, and not due to the hydroelectric generating facility itself Given the timing of the change of the choice of road alignment the social impact has been magnified and the environmental impact assessment studies dealt primarily with the original route (Hill Route). 37. The Panel finds it necessary to look at this decision in more detail, particularly in view of thefact that almost all of the land of thefamilies on the Hill Route had already been acquired. 10  ACCESS ROADALIGNMENT 38. In 1987, a detailedfeasibility study was carried out by the Department of Roads for the so-called "Hill Route". Detailed designs and tender documents were completed in 1988, in anticipation of an early start of construction, and further refined in thefollowing years. The final alignment chosen, designs and construction methods were referred to in the SAR as environmentally the "state of the art" for a major roadproject inNepal. 39. The SAR for the Arun III Access Road Project of May 12, 1989 refers to the selection of alignment for the access road inpara 3.08: "The route selected as being most economical in terns of construction and maintenance, consistent with sound enviromnental planning, is in mountainous terrain and follows the ridges wherever possible, descending only for crossings of the Piluwa Khola near Chainpur, the Sabhaya Khola at Tumlingtar and at the sites of the powerhouse, adit and dam. The streams and rivers of this area are unpredictable and can be very violent and destructive. They cause excessive steepening of the valley sides and consequent instability of the slopes. The route has therefore been chosen to avoid rivers as far as possible, and to follow the contours closely in order to minimize the quantities of cut and fill, and to reduce negative environmental impact. The contract documents for road construction also incorporate environmental conservation measures."23 40. The Panel notes that within three years of this decision, the project designfor the road took the opposite approach, selecting a route where more than 50 percent runs close to the previously described unstable, steep, unpredictable and hazardous slopes of the Arun River. 41. In 1992, according to the EA Summary,following a decision to revise Arun III's design and reduce initial expenditure and given the sole criterion ofproviding access to thepower sites as quickly as possible, thefeasibility of a "Valley" route was investigated again. Engineering and construction planning studies had shown that although the construction costs would be similar to those of the Hill Route, there would be a time saving of one year and a total length construction of only 122 KM.2" The EA Summarypoints out however, that: "The speed of construction of a project can have a considerable effect on its environmental impact. Slower construction of the access road would allow a less capital- intensive approach with a higher local labor demand (and therefore local benefits), and modified construction techniques with lower physical impact * Slower construction of the hydropower components of Arun III would reduce the size of the labour force required, reduce the volumes of spoil to be excavated and disposed of annually, and pernit more gradual institutional development."25 Comparative data on the tworoutes is given in Tables 6.1 and 6.2. are in Annex B. 11  42. The proposed change in routes was presented to the Panel of Experts (POE) and approved inprinciple by them.26 However, the POE pointed to the apparent disadvantages of the Valley Route: "- increaseof forestedland in the RoW and possiblyless disturbedand higher quality forest and protected wildlife habitat in the ROW: approximately209havs. 145ha - closerproximitytotheMakalu-BarunConservationArea - losses and uncertaintiesresulting from the circumstance that land compensationforthehillrouteis already94percentcompleted - additionalimpactsassociatedwith futureconstructionof spur roads or other connectionsto hill villagesthat wouldhave been connectedby the hill route."27 The POE also concluded, inter alia, that: "The recommendationfromthe environmentalperspectivetherefore is to proceedwiththe designandtenderingof the projectusingthe valleyroute, to dropthe hillroutefromfurtherconsiderationatthis time,to establisha clear and equitablepolicy concerningthe families within the hill route whohavealreadyreceivedcompensation,and toupdateandamendproject environmentaldocuments,in parallel with the detailedengineeringand alongthe followinglines,toreflectthe changeinroute. 1. It wouldbe usefulif the September1992JointVentureEIA of the valleyroute wouldmakea moredetailedcomparisonof the impactsof the hill route and the valley route, including implicationsfor associated changesin transmissionlineimpacts,if any,and optionsand implications for familieswithinthe RoWof the hill route who have alreadyreceived compensation. 2. Regardlessof which route is adopted,the recommendationsand cost estimates(aboutUS$14million)of the KingMahendraTrust report on "EnvironmentalManagementand Sustainable Development in the Arun Basin" should be released to the public, reviewed, screened and prioritized to facilitate the development of an action plan for implementation.Withoutsucha plantherewillbe nomechanisminplace for controllingoff-siteimpacts (especiallyencroachmenton forests and wildlife)in the vicinityof the accessroad and power station, southand eastofthe Makalu-BarunConservationArea."28 43. The decision to pursue the Valley Route led NEA to commission a study to "revise and update the existing environmental impact assessment studyof the access road in accordance with World Bank guidelines " (Terms of Referencefor JV Consultants). This update was supposed to 12  be carried out in a period offour months although the road alignment had not been completed Thefollowing clause was included in the Terms of Reference: "In order to completethe update of the EIA withinthe four months of Period A, it is mandatoryto have a preliminaryalignmentor alignment options availableat the latest six weeks after the commencementof the serviceswithrespectto the accessroad, and in the first week of August [1992]regardingthe transmissionline."29 Also included in the terms of reference is thefollowing disclaimer: "The timeavailablewillnotallowit to performa detailedsocio-economic and ecologicalsurveyalongthe entire alignment. Rather,surveyswillbe of a qualitativenatureandwill concentrateon selectedareasfromwhich 30 conclusionswillhaveto bedrawntothe totallengthof alignment." 44. The Environmental Impact Assessment for Arun Access Road-Valley Route published in September, 1992, concludes that the impact on biological resources is significant since the Valley Route transverses forested areasfor the major part of its length (71 Km out of 124 Km), and that most of the areas show high species diversity and presence of rare, endemic and endangered species of trees and other plants. In addition, the loss of habitat will result in significant impact on vertebrae. The ELAfor the access road concludes that: "The road runs close to the Arun River for 67 km and therefore construction of the road will have direct impact on mammalianand reptilianwildlifedue to directhabitat,severanceof territory,disturbance and increasedaccesstohunting. Quantitativedata onpopulationsizesare not available."31 45. The Panel finds the process of choosing the access road has created uncertainties of a serious nature with regard to IDA's ability tofollow OD 4.01 on environmental assessment. The Response cites three major components to the Environmental Action Plan: an Environmental Mitigation Plan, A Land Acquisition Resettlement and Compensation Plan and a Regional Action Plan ("RAP"). During consultations with the proposed borrower and executing entity, the Panel learned that the updated RAP will not be completed until January 1995. On the basis of the evidence reviewed, the Panel concludes that the environmental assessment and processing of the proposed loan do not appear to be consistent with the provisions of OD 4.01 and its annexes. Thepotential of direct, serious long-termdamage is significant. CUMULATIVEEFFECTS AND INADEQUACIES 46. THE REQUEST states that cumulative impacts of all three Arun Valley hydropower schemes (i.e. Arun III, Upper Arun and Lower Arun) have not been evaluated and that there should be a comprehensive study of the long term effects including those of additional road construction; that other inadequacies of the EIA include no thorough assessment of the impact of the transmission lines, mitigation plans for natural disasters, effects on fish and disposal of construction spoils.32 13  47. THE RESPONSErefersto the 1991basin-wideenvironmentalsustainabilitystudy as meeting the Bank's requirements.33 "The effects of Upper Arun which are likely to be environmentallymore sensitivethan Arun III were studied separatelyin a 1991 feasibility study." It notesthat LowerArun"is generallyrecognizedto have less significantimpacts"; it is acknowledgedthat furtherworkwillbeundertakeninthe firstyearof the projectto verifythat effectson fisheriesareminimalandidentify mitigationmeasuresasnecessary.3 48. Mention is also made of the approval of environmentalmitigationmeasuresby the project's POE35, refefringtoparas3.23.and3.44(b)of theSAR. THE PANEL 49. Observes that, according to the SAR, the POE included a single "expert in environmental management and resettlement" 6 and that in June 1994 a decision was made to "reconstitute the POE by the end-December 1994for review of assistance and guidance on the critical technical and safety aspects and dam safety monitoring during construction and supervision." It is also noted that the reconstituted Panel will be "expanded to include environmental expertise to advise effectively on detailed RAP and resettlement issues."37 In addition the MOP states that a POE, "both international and Nepali, will advise, on, inter alia, the RAP and resettlement implementation, and propose modifications where appropriate." It is pointed out that the reconstituted Panel will "include a core of specialists in area development, resettlement, biodiversity and agriculture management;" and that other experts will be consulted as needed3 8 50. Applicable IDA policies provide for Regional Environmental Assessments and special provisions relating to Dam and Reservoir projects.3 9 In particular Environmental Advisory Panels are recommended: "For major, highly risky, or contentiousprojects with serious and multi-dimensional environmentalconcerns,the borrower should normally engage an advisory panel of independent,internationallyrecognized,environmentalspecialiststo adviseon (a) the terms of reference(TORs)for the EA, (b)key issuesand methodsforpreparingthe EA, (c) recommendationsand findings of the EA, (d) implementation of the EAs recommendations,and (e) developmentof environmentalmanagementcapacityin the implementingagency." 4 51. Given that OD 4.01 was applicable when the Valley Route was chosen and the Arun III Hydroelectric Project appraised, the environmental assessment should have included a comprehensive approach to the Arun basin, including a long term perspective that also considered the Upper and Lower Arun Projects, access roads (including the Valley Route and additional spurs), as well as transmission lines. Environmental assessments should be integrated into project design from its inception and, must go beyond descriptive studies, focusing on the interaction of all project components and decisions that affect the natural and social environment, including mitigation plans and the institutional capacity to develop, implement and monitor them. It is not clear that the composition of the POE properly reflected the requirements set out by IDA policies. 52. Given the nature and complexity of the environmental and social risks of the project, IDA policy would appear to require the existence of a POE solely devoted to environmental and social issues. Instead, IDA and the borrower agreed in 1994 to consolidateplanning for such an environmental panel into the existing POE. 14  Ill. DISCLOSUREOF INFORMATION 53. The World Bank Policy on Disclosure of Information, September 1993, states in part that the Bank "recognizes and endorses the fundamental importance of accountability and transparency .... Dissemination of information to local groups affected by the projects supported by the Bank, including non-governmental organizations, particularly as it will facilitate the participation of those groups in Bank-financed projects, is essential for the effective implementation and sustainability of the projects.... It follows that there is a presumption in favor of disclosure."4 ' PROJECT INFORMATION DOCUMENT ("PID") 54. THE REQUEST complains that the PID was not prepared before January 24, 1994 and has subsequently not been updated to include all the information required by BP 10.00 Annex A. 55. THE RESPONSE states that the "content and dissemination of the Arun PID were substantially in line with Bank policyandprocedures." THE PANEL 56. IDA's Procedures for operations in which major changes are made after appraisal, require preparation of a final revision ofthe PID following appraisal.42 57. The Panel notes that the PID is an effective means of providing timely and concise information on proposed projects. It is highly desirable,for projects that command this degree of interest at the national and international level, that this document be updated in accordance with emerging Bankpolicies. The September 1993 BP 17.50Annex D required a completed PID for all projects beyond the IEPS stage but not yet presented to the Board by January 1, 1994. The document was not available at the Public Information Center ("PIC") until March; and not subsequently updated or expanded after the issuance inJune 1994 which of BP10.00 Annex A. ENVIRONMENTAL ASSESSMENT ("EA'9 58. THE REQUEST asserts that this provision was not followed by IDA and notes that the environmental impact assessment was one of the documents for which release was requested in the law suit filed with the Supreme Court on December 31, 1993.43 59. THE RESPONSE claims that the "dissemination of the results of the Environmental Assessment was substantially in line with Bank policies and procedures.4 THE PANEL 60. Notes that the 1993 procedures on information disclosure require that "before the Bank proceeds to appraisal, the EA [Environmental Assessment] must be made available in the borrowing country at somepublic place accessible to affected groups and local NGOs. " 61. The Panel notes that the EA for the Hill Route (the RAP in this case) was completed in 1991; that the EA Summary was published in Kathmandu in May 1993, and the "Due Process Manual" prepared in Nepali by NEA in November 1993 is restricted to information on land acquisition and compensationprocedures. While the Response provides detailed information on 15  the timing and applicability of specific IDA policies on disclosure of information, it does not refer to the relevant policiesrelating toEnvironmentAssessment. 62. Considerable efforts have been made to gather and release environmental data about the project and the IDA appears to have made substantial efforts to make it available in Washington. However, much of the relevant information was not available inNepal. FACTUAL TECHNICAL INFORMATION 63. THE REQUEST claims that factual technical information was requested during project preparation to enable the Requesters to have aninput into the design and promote alternatives but such information was received too late (after appraisal) to allow input. In particular it is noted that the study of alternatives was not released until after appraisal and the completion of loan negotiations.45 64. THE RESPONSE mentions initial delays in implementing the new disclosure policy in this respect but notes that sections of the SAR have been available at the PIC since September 1994. THE PANEL 65. IDA policy allows for the release, by the Country Director concerned, of additional factual technical informationfor projects underpreparation through the PIC. 46. 66. The Panel notes Management's prompt disclosure of relevant parts of the SAR but the Request suggests this is not available in Nepal. In light of the high degree of interest in the project in Nepal it appears unfortunate that delays in implementing the newpolicy occurred and that no mention is made in the Response of supplying such factual technical information to NEA 'sArun Information Center. 67. The Panel is concerned about the seriousproblem of enforcing release of information in borrowing countries; and notes a gap in the availability of information in Washington, on the one hand, and in the country where the project is located on the other - in particular in the actual project area. 68. With regard to overall disclosure of information, the Panel recognizes theprogress made by the Management in last two years in relation toprojects such as Arun III. In the borrowing countries progress varies, as evidenced by the need to take cases to the Nepalese Supreme Court twice thisyear to obtain release ofproject information. 69. Disclosure is not an end in itself, according to Bank policy, but rather a means of enhancing the ability of affected people toparticipate in the design and consideration of project alternatives. 70. Meeting the requirements of Bank policy on release of information in Nepal appears to have been difficult. The Panel urges continued attention to this evolving issue. IV. InvoluntaryResettlement 71. THE REQUEST claims that (a) specific violations of IDA's policies or involuntary resettlement have occurred (Hill Route) and that (b) violations of the policies are likely to occur (Valley Route). 16  HILL ROUTE 72. Withreferenceto the cash compensationraisedby two of the Requestersit is claimed that the central objective of improvingor at least restoringaffected people to former living standardshas alreadybeen violated.47It points out that the effect of ACRPhas been to inflate prices far beyond compensatedvalue.;and that in violationof para 14 of the policy, land has been undervalued. TheRequestalsocriticizesthe factthat landfor 48 landcompensationwas not appropriatelyoffered VALLEYROUTE 73. The Request notes that the proposedproject benefits will be electricitybut affected peoplewill not benefit49 that employmentbenefitswillbe temporarybut the adverseeffectsof displacementare permanent- SPAFsare to be givenonly first priorityfor employmenton road construction." The Requestalso notesthat the EIA showsthat cashcompensationwas already failingin case of the Hill Routeand that the ValleyRoutepeoplewill have even lessabilityto deal withcashbecausetheyare poorer: thisraiseswholequestionof landforlandcompensation and actual implementation. According to the Request the law is basicallylimited to cash compensationandPAFsare not beinginformedof a landoption. TheRequestersare not aware that any socio-economicsurvey has been done to determinevalue of land.52 In additionthe Request notes a violationof the policy as no resettlementplan has been establishedbefore appraisalforthosetobe displacedbythetransmissionlines. 74. THERESPONSEexplainsIDA's compliancewiththe OperationalDirective("OD")on Involuntary Resettlement in relation to the Valley Route, noting that implementation arrangementshave been agreed at negotiations; SPAFsare to be offered and are to chose replacementlandto be purchasedby NEA; PAFswill receivecashcompensation; a cadastral survey of all areas expectedto be affected by the project was completed prior to land acquisition.53 75. Furthermore,the Responsesuggeststhat the OD contains no requirementsas to how projectbenefitsshouldbe shared; 54 nor doesit requirethatpermanentemploymentbeprovided todisplacedpersonsbut inthiscasetheACRPprovidesthatat leastonepersonfromeverySPAF is to be offered temporaryemploymentby NEA;35full socioeconomicsurveys covering all PAFs were carriedout for the Hill route in 1990and the Valley Routein 199356;resettlement planning was timely and that only 8 familieswill be affected by transmissionlines.57The Responserefers to preparationof a Due Process Manual in Nepali which describes the ACRP policiesandproceduresanddesignedto informaffectedpeopleof theirrights.58 THE PANEL 76. The Staff Appraisal Reportfor theoriginalAccess Road (Credit 2029-NEP) describes the resettlement plan: "Resettlement. To provide necessarycompensationand rehabilitation measures for the population whose land, buildings and means of livelihoodwould be either temporarilyor permanently affectedby the road/damconstruction,the projectincludesimplementationof an ACRP. The ACRPcontainsan overallplanfor the resettlementto be carriedout under the project as well as details on the nature and magnitudeof the operation, compensation packages offered to the affected families, 17  developmentplans for relocation sites, transfer/transportarrangements, implementation timetable and costs. The legislative basis for implementingthe ACRP is containedin the LandAcquisitionGuidelines 2045approvedbyHMGonJanuary5, 1989."59 77. When the Hill road was designed IDA approved a resettlementplan regarded as a model at that time. The resettlementplan for theproposed Valleyroute is based on it. Hill Route 78. A very large number offamilies (estimated at about 1600) were deprived of their land for purposes of thisproject. After the change in access route alignment it appears that this land is not needed for project purposes. Nevertheless, the "Hill Route RoW will be retained in government ownershipfor future road construction purposes." 60 79. The POE Report No. 7pointed out that among the apparent disadvantages of the Valley Routewere"lossesand uncertaintiesresultingfromthe circumstancethat landcompensationfor the hill route is already 94 percentcompleted,"and concludedthat "[i]f the valley route is selected,NEA's 'EnvironmentalAssessmentand ManagementExecutiveSummary' shouldbe updatedand amended to reflectthe selectionof the valley route, [and] address the issue of impactsonfamilieswithinthe RoWof thehillroutewhohavealreadyreceivedcompensation,"1 6 80. A decision was made, in 1992, to change the Arun access road to the Valley Route. The Panel notes that apart from the reference to completion of a socio-economic survey, the Response does not address the issue of impacts on families within the RoW of the now abandoned Hill Route who have already received compensation. Those affected appear to have beenforgotten which gives rise to a number of issues: land has been purchased from those who will not longer share in any benefits the construction of an accessroad might confer . there is no systematic information on what adverse impacts the acquisition has caused exceptfor the claimsof the two Requesters * there does notyet appear to be any mitigationplanfor the Hill Route people * under Nepalese law it appears that HMG/N is supposed to return land no longer neededfor theprojectfor which it was acquired. ValleyRoute 81. Although no foreign exchange resources have been utilized under the Arun III Access Road Project of 1989. thisproject triggered actions by HMG/N that could have negative impacts on local populations since the land of a large number offamilies was expropriatedfor the RoW of the original route. 82. By the time the change of route was introduced in 1992, most of the landpurchases had been completed for the original route. According to the Panel of Experts' Report No.7, by September 1992, 94 percent of the landpurchases of the RoW had been completed, supposedly according to specific Land Acquisition Guidelines approved by HMG/N. The total number of affectedfamilies by the Hill Route is estimated at 1661. 83. Therefore, the comparison between the number offamilies affected by the Hill and Valley Routes must clarify thefact that over 1600families have already been affected in the Hill Route, while an additional 1146families will also be affectedby the RoW of the Valley route. 18  84. The Panel has received a specific requestfrom two people who claim to be directly and adversely affected by acquisition of their land for the now abandoned Hill Route. This claim requiresfurther study. Prima facie these material adverse effects appear to be a direct result of omissions by IDA during preparation and appraisal of the project and appear to be a serious violation of IDA 's resettlementpolicies. 85. Because this gives rise to uncertainfuture implications regarding implementation of the resettlementprocess for theproposed ValleyRoute, steps need to be taken to ensure the apparent adverse effects of the Hill Route will not be repeated V. INDIGENOUSPEOPLES 86. THE REQUEST claims that there are no benefits provided for the Indigenous peoples, who will suffer only adverse impacts and lists those impacts; there is no mitigation or indigenous peoples plan--it is unclear whether documents contain actual work plans or just recommendations--many recommendations in EIA are not taken into consideration; there are many issues to be resolved in bidding documents - which are secret; mitigation of negative effects on indigenous peoples does not constitute a development plan; land appropriation on the Hill Route started before completion of the cadastral survey; the policy on participation in the decision making process was violated as stated in 1991 EIA - "the road alignment and dam site were already decided and the study team did not have mandate to change these decisions".62 87. THE RESPONSE explains that all aspects of the policy have been met, mostly by reference to documents. It notes that the cadastral survey is nearing completion in Sankhuwasabha and acknowledges that, despite all precautions "a close watch will be necessary throughout project implementation to ensure that the objectives of the OD are met. To this end, the project supervision plan involves careful monitoring and evaluation of the impact of project related activities on vulnerable groups in the valley"63 88. IDA's policy on Indigenous Peoples requires a specific "Indigenous Peoples Development Plan" that is comprehensive, that avoids or mitigates potentially adverse effects and ensures that the indigenous people receive culturally, socially and economically compatible benefits.64 THE PANEL notes that: 89. There are a variety of different ethnic groups along the Arun basin. The original regional action plan (RAP) whichfocuses on the Hill Route reviews an extensive range of social and environmental issues including vulnerable groups, indigenouspeoples and women. Some of these groups are unfamiliar with a cash economy which poses additional risks to their welfare requiring special attention. 90. IDA 'spolicy is that an Indigenous Peoples development plan should be prepared. The NEA has informed the Panel that a revised RAP will be ready in January 1995: it may be that this will contain an appropriate Indigenous Peoples development plan and provisions for implementation. Provision for technical assistance to support the RAP Secretariat at base cost of US$2million aimed atfacilitating implementation of the RAP was introduced and agreed during June 1994 negotiations.6 5 19  ENDNOTES l The President of IDAhascirculatedtothe Board,forinformation,a MemorandumandRecommendationon Arun III (ReportNo. P-6381-NEP,datedAugust29, 1994,hereinafterreferredto as"MOP"),andthe StaffAppraisal ReportNo. 12643-NEP,datedAugust29, 1994(hereinafterreferredtoas "SAR"). 2 Request,4.A. 3Response, Chapter3, paras2-3: unlessotherwisenotedreferencestoparasintheResponsereferto Chapter3. 4The HydroFund (basecostUS$5million)toprovidefundingtoassistNepal'sprivatesectortoundertake feasibilitystudiesof micro/minihydroschemesandtoimplementviableschemeswas agreedto asanadditional projectcomponentduringnegotiationsin June 1994.(SeeAgreedMinutespara 4.(b)) 5 Response,para4. 6 Request,para4.A. 7Response, para8. Ibid, pam 6. 9Ibid, para 7. 10Request, para 5.A. "IResponse,Chapter1,paras 8, 10,11. 12MOP,paras 47-48. 13 OP 10.04,paras 1,5and6. 4 Seepara24. 5 MOP,para 54. 16 See "Nepal - Fiscal Restructuring and Public Resource Management in the Nineties",Report No. 1228 1-NEP, datedMarch171994 (para8at p. iv). Thesamedocumentrecognizesthat: * "thehighcostsand financingrequirementsof AHP[ArunIII]poserisksto theorderlymanagementof theNepal'soveralldevelopmentprogram,includinginvestmentsinhumanresourcesandrural infrastructure."(para3.6) * "Thesimulationshowslocalresourceavailabilitycomingunderseverepressure....Thelocalfinancing gapwouldbeequivalentto 3.1percentof GDPor approximatelyUS$125millionayear,whichwould betoo largeto befilledbyreasonablerevenueeffortandadditionaldomesticborrowing,andsteps wouldhavetobetakentoredresstheimbalance.Inevitably,expendituresotherthanArunwouldhave to contract. Itisdifficulttomap outtheexactnatureof theexpenditurecontractionintheabsenceof a meaningfulprioritization,but basedonpastexperience,non-wageO&Mactivitiesandcapitalintensive programswouldbethemostvulnerable,andthiswouldaffecttherecurrentcostfnancingforvarious sectors,suchastransport irrigation,forestry,agricultureservicesanddrinkingwater,therebylimiting theproductivityof theseactivitiesandthegrowthprocess.Alsowiththelimitson localresources, aidedactivitiesand on-goingprogramswouldhavelongerimplementationdelays."(para3.7) * "...acutbackinsocialprogramswouldbeunavoidableforaccommodatingthelocalfinancinggap." (para3.8) 7 "Environmental ImpactAssessment- ValleyRoute"- MainReport,September,1992. 18 Request,4.D. "Arun III Hydroelectric Project: Environmental Assessmentand Management -Executive Summary", National ElectricityAuthority,Kathmandu,May 1993. 20Response,para 15. 21 OD4.01 AnnexB, para(f)requiresa "systematiccomparisonof theproposedinvestmentdesign,site ....in terms of their potentialenvironmentalimpacts;capitalandrecurrentcosts;suitabilityunder localconditions;and institutional,trainingandmonitoringrequirements.Foreachofthealternatives,the environmentalcostsandbenefits shouldbequantifiedtotheextentpossible,andeconomicvaluesshouldbeattachedwherefeasible. Thebasis forthe selectionof thealternativeproposedfortheprojectdesignmustbestated." 22EASummary,para6.1. 23 For details see SAR(para3.26). 20  EASummary1993,para 6.32. 2 4 25 Ibid,6.2.3. 26 At itsseventhmeetingof September26-October2, 1992. (See:Panelof ExpertsReportNo. 7) 2 7 Panelof ExpertsReportNo. 7, p.21 . Ibid,pp. 22-24. Arun Access Road - ValleyRoute" Volume 2, September1992,Joint 29 "Environmental Impact Assessmentfor VentureArunIII: AnnexA, p A-1. 30 Ibid. AnnexA,p. A-3 September,1992,pp. 4-13. 31 ''The Environmental Impact Assessmentfor Arun Access Road-ValleyRoute ', Request,para4.D. 32 3 Response,para 17. 34 Ibid,paras 18-20. Ibid,para 19. 36 SAR,para3.23. 37 Ibid,para 3.44b. 3 8 MOP,para 32. 39 OD4.01 para5callsforRegionalEAs "wherea numberof similarbut significantdevelopmentactivitieswith potentiallycumulativeimpactsareplanned... [and]areparticularlyusefulwhentheyprecedethefirst ina seriesof projects ... in an undeveloped region ..wherecumulative impacts are anticipated ..."See also, OD 4.01 ANNEX B EnvironmentalPolicyforDamandReservoirProjects:allprovisions(4/89); 40 OD4.01,para 13;para 15of AnnexB"EnvironmentalCapacity of National and Sectorial Institutions: Major damandreservoirprojectsshouldbeusedtohelpbuildenvironmentalcapacity(analytical,regulatory,and enforcement)inthe institutionsatthenationalandsectoriallevelsthroughtraining,consultancy,and policydialogue, andto fostercoverageof damsandreservoirsby environmentallegislation."Formoredetailon theselectionand functionsof thepanel,seepara 18of OD4.00,AnnexB. 41 SectionII, pp.2-3. 42 BP17.50(para4). Request,para4.C. 44 Response,para 14. 45 Request,para4.C. 46 BP 17.50para 5 (andtheSeptember1993documentonDisclosureofInformation,para 12) Request,para4.E. 47 48 Ibid. 49 Ibid. 50Ibid. 5' Ibid. 52 Ibid. 5 Response,paras22-25. Ibid,para26. 5 Ibid,para27. Ibid,para28. 5 Ibid,para29. 58Ibid,para 31. SARpara3.11. 60EA Summaryat6.3.2 61 POEReportNo7, pp.23-24. Request,para4.F. 63 Responst,para36. 64OD 4.20 65AgreedMinutes,para4. 21  ANNEX A Bank Policies and Procedures Applicable to the Different Items of the Request for TheResponsestatesthat anumberof policydocumentsreferredto in the Request are not applicabletothe proposedproject(seeits AnnexA). Accordingto the Response this approach means that OP/BP 10.04, "Economic Evaluation of Investrnent Operations,"wouldnot be applicableto this projectbecauseit was issuedin September 1994. The applicablepolicy, accordingto Management,is to be found OMS 2.21, "EconomicAnalysis of Projects," issued in May 1980, and CPN 2.01, "Investment Criteria in EconomicAnalysis,"issued in June 1977. If such is the case however,a number of other CPNs as expressly referred to in OMS 2.21, such as CPN 8.01, "Contingency Allowances in Project Cost Estimates," CPN 2.04, "Economic Analysis of Projects with Foreign Participation," CPN 2.02, "Risk and Sensitivity Analysis in Economic Analysis of Projects," etc., as well as several OPNs, such as OPN 2.05, "ForeignExchangeEffectsand ProjectJustification,"OPN2.06,"Useof the Investment Premium and DistributionWeightsin ProjectAnalysis,"etc., all of which have been supersededby OP/BP 10.04, could also be applicableto the economicevaluationand analysisofthe proposedproject. The applicabilityof policy statementsother than the existingODs and OPs/BPs raisestwo fundamentalissues: (a) whatkindof informationis availableto the publicin general, and to potentially affected parties in particular, about IDA policies and procedureswhichare notcontainedin themostrecentlyissuedandmorewidelypublicly availablepolicystatements;and(b)inthe eventthattwoor morepolicystatementsonthe same subjectcould be applicableduringthe design,appraisal,and implementationof a particular project,what are the substantialpolicyprovisionsto be followedby IDA in eachof suchstages: (a) It is apparentthat currentIDA policystatementsare not widelyavailable in areas, such as the ArunValleyinNepal,wherepeopleaffectedby IDA-financed projectslive. It is alreadya heavyburdenfor such people to identify--evenin substance--whatpoliciesandproceduresIDAmayhaveviolatedwhencausing--in fact or potentially--harmto their rights or interests. This problem would be compoundedif theywererequiredtobe awareof old policystatementsthatdo not seemreadilyavailableto IDAstaff,let aloneany internationalNGOs that could be assistingtheminthe preparationoftheirclaims. Thisproblemmay arise in an array of scenariosranging frompolicy statements issuedright beforeBoard presentationof a given project--asin the present case concerningeconomicevaluationof projects--tostatementsissuedmanyyearsago (see discussionbelow). In any event,this problemis one of many facedby an I  affectedparty whentryingto lodge a validrequestpursuantto the terms of the Resolution. (b)Whenpolicystatementsavailabletothe publichavebeenonlyrecentlyissued, it would not be appropriateto make them immediatelyapplicableto a given project and assess IDA's performancein accordancewith the standards and proceduresstated in them. To the extent that new policy statements become applicable in the midst of project processingand implementation,and to the extent that these are not followedby IDA in their entirety,the questionswould then be: (i)do the newpolicystatementsdeviatefromIDA's pre-existingpolicy in a substantialway? and (ii) are the provisionsin the new policy statements different and mutuallyexclusive with the provisionsof the old policy. In reviewing the different policy documents referred to by the Requester and Response,thefollowingquestionsbecomerelevant: (i) OP/BP 10.04, "Economic Evaluation of Investment Operations": fortunately,in this casethe basic premiseof projecteconomicevaluation that "[floreveryinvestmentproject,Bankstaffconducteconomicanalysis to determinewhetherthe projectcreatesmorenet benefitsto the economy than other mutuallyexclusive options for the use of the resources in question"' hasremainedunchangedthroughthe yearsand it is, therefore, fully applicableto the reviewof the factsallegedin the Request. Several policy statements reiterate and fuirtherdefine this requirement. For example, paragraph 8 of OMS 2.21 provides that "consideration of alternativesis the singlemost importantfeatureof properprojectanalysis throughoutthe projectcycle,fromthe developmentplan for the particular sectorthroughidentificationto appraisal,"and OD.4.01,"Environmental Assessment," stresses the importance of a "systematic environmental comparison of alternatives in investments, sites, technologies and designs."2 The Panel believes, therefore,that regardlessof the specific policy statementapplicableto the design of the projectin question,the Panel believesthat IDA policycalls for a systematicand comprehensive analysis and comparisonof all existing mutually exclusive options to attain the objectives of the project to be financed by IDA. Paragraph 1 of OP 10.04, seealso paragraph 8 of OMS 2.21 2OD 4.01, paragraph 4(c), See also Annex B, paragraph2(f). The applicability of OD 4.01 is discussed later in this Response. 2  (ii) OD 4.00, "Environmental Policies," Annexes A and B; OD 4.01, OD "Environmental Assessment"; OD 4.20, "Indigenous People"; and issued 4.30, "Involuntary Resettlement." All of theses documentswere betweenApril28, 1989and October 3, 1991,that is, betweenmore than fiveyearsto almostthreeyearsbeforethe dateonwhichthe MOPand the SAR were issued for Board distribution. Thesepolicy documentswere also issuedbeforethe date on which a decisionwas madeto changethe major individualcomponentof the project,interms of environmentaland resettlement and financial impact. The Panel sees no merit in the allegationsthatthesepolicydocumentsarenotfullyapplicableto ArunIII, becauseof themerefactthatthe IEPSwasissuedbeforethe date onwhich the policy documents were issued. The applicabilityof new policies shouldbe interpretedin a manner consistentwith their objectives. For example,the Responsestatesthat OD 4.01 on Environment Assessment would not be fully applicabletothe new valley route alignment(which raises a numberof environmentrelatedissues)becauseof the mere fact that the IEPS was issuedin 1987. In the Panel'sview, the new valley alignmentrepresenteda majordeparturefromthe projectdescribedin the IEPS and, as such,cannotbe exemptedfromthe standardsor policiesin force when the new project design and executingstudy for the Access Roadwereagreeduponandevaluated. In facttherewasplentyof time to conformtothe newpolicyrequirements. (iii) New policyon disclosure and BP 17.50, "Disclosure of Operational this policy Information." The Panel agrees with IDA Managementthat cannotbe appliedretroactivelyin the caseof ArunIII but it notesthat the new informationrequirementsmust be adheredto as soon as possible, to be consistent with the overall aims of the policy on disclosure of information. Forexample,sincethe PID is the most accessibledocument on project information--bothbecause of its comprehensive and yet condensedformatandthe factthatit is widelyavailable,evenonInternet-- the Panelconcludesthat everyeffortshouldhavebeenmadeto updatethe PID ontheproposedproject,in linewiththenewrequirementsset forthin Annex A of BP 10.00. The fact that the PID has not yet been updated it accordinglymay not constitutea seriousviolationof IDA policy but maybeconstruedas suchbythe public. 3  ANNEX B Page 1 of 2 NEA's Environmental Assessment and Management Executive Summary May 1993 (pages 53 and 54) Table 6.1ARUN ACCESSROAD - COMPARATIVECHART: DISTANCE, LAND USE, LAND TAKE and FAMILIES AFFECTED Route Options Valley' ITEM (includingpowercavern Hill access) Distance(km) New construction 121.9' 197.2 Travel(Hile-Intake) 116.8' 171.4 Forest 27 28.5 ShrubandGrazing 30 16 LandUse Cultivation:Khet 27 41 (%/0) Cultivation:Bari 16 15 Totalcultivation 43 56 Abandoned/Other __0.5 Total 100 100 Forest 106 145 ShrubandGrazing 119 81 LandTake Cultivation:Khet 106 209 (ha) Cultivation:Bari 63 77 Totalcultivation 169 286 Abandoned/Other __3 . Total Land Take 3944 510 AverageLandTakeha/km' 3.2 2.59 AverageHouseholds/km 9.4 8.6 TotalFamiliesAffected 1146 1661 ThiscolumnfromdraftACRPReport,April 1993 2 Recommendedalignmentforaditaccessalongrightbankof Arunriver 3 Thisfigureisbasedon preliminaryengineeringandcouldincreaseby 1%to 2%duringdetailed engineering 4 3375hapermanentplus 19hatemporary HillRouteRoWchangesfrom30mto 20 mat Chhyangkuti,alsopowerhousespur n.d. Nodata(availabledatanotdisaggregated)  Page2 of2 Table6.2ARUNACCESSROAD:HILLVERSESVALLEY- A QUALITATIVEASSESSMENT HillRoute Topic ValleyRoute Longer Length: Shorter PhysicalImpacts: soils,slopes,naturalhazards High Moderate BiologicalImpacts: Direct:Moderate Direct:Moderate/Low forests,habitat,wildlife Indirect:High Indirect:Moderate/High SocialImpacts: Moderate landtake,familiesaffected (approx.twothirdsHillRoute) High Construction: Longer (i) time Shorter Equal (ii) costs Equal (iii)constructiondifficulty High Moderate (iv)riskof off-sitedamage/injury Moderate/Low Moderate/High EconomicBenefits: High (i) immediateconnectivity Moderate (ii)long-termregionalaccess High Moderate Conclusion:ValleyRouteispreferable,assumingsoundmanagementof impactsandrisk  ANNEXC ARUN CONCERNED GROUPRECEIVED ORIGINALSecretariat: c/o INHURED International 4 OCT 31 Ptl5: 22 uORxINA\18 IGlJ^ ffL P.O. Box2125 Kathmandu. Nepal Tel: (977-1) 419610 * Fax: (977-1) 412538 October 24, 1994 The Inspection Panel The World Bank 1818 H Street, NW Washington, DC 20433 United States REQUEST FOR INSPECTION We, as the Arun Concerned Group, the local residents of the Sankhuwa-Sava District, and the citizens of Nepal. claim the following against the proposed controversial Arun III Hydroelectric Project which is to be partly financed by the World Bank: 1. INTRODUCTIONOF THE PROJECT The World Bank, with other lending agencies (Asian Development Bank, KfW. France, Finland, Sweden), is planning to finance the proposed Arun III Hydroelectric Project in the Sankhuwa-Sava District of Nepal with the total cost of US $1082.3 million for the first 201 MW stage of 402 MW. The Bank is proposing to lend US $175.0 millions in International Development Association (IDA)funds. The Nepal Electricity Authority (NEA)is to invest US $290.7 million from its internal sources. The major project component includes a 122 lan access road, a 68 m dam and power intake, desanding basins and appurtenant structures, an 11.4 km headrace tunnel, a surge tank leading to a power cavern to house three 67 MW turbogenerators, a downstream surge tank and tailrace tunnel, and outlet structures. Transmission equipment includes a 120 km, 220 kV double-circuit line to a 220 kV/ 132 kV sub-station at Duhabi. Because of its size and complexity, the project has implications for the entire country, including significant risks relating to crowding out of high-priority investments in other sectors due to cost overruns, "worse-than-expected" management of the Government budget, or failure of the NEA to meet its share of investment, unforeseen delays in implementation, unsatisfactory design and implementation of Environmental Management Plan, including the Regional Action Plan, and others. 2. RELEVANTPOLICIES AND PROCEDURES OF THE WORLDBANKWHICH HAVE BEEN VIOLATED 2.A. Economnic Evaluation of Investment Operations * OP 10.04 2.B Policies on World Bank Role in the Electric Power Sector and Energy Efficiency and Conservation in the Developing World 2. C The World Bank Policy on Disclosure of Informnation, March 1994 * BP 17.50, page 1, para. 4, updating Project Information Document: * World Bank Policy on Disclosure of Information, March 1994, page 5, para. 10, content of PIDs (see also OD 10.00 Annex A. page 1): * BP 17.50, page 1, para. 5, releasing Factual Technical Information; * BP 17.50, page 3, para. 12, availability of environmental assessment; * World Bank Policy on Disclosure of Information, March 1994, Section II Policy, page 2; importance of accountability, dissemnination of information in order to facilitate participation, and presumption in favor of disclosure. * BP 17.50 Disclosure of Operational Inforrmation 2.D Environmental Assessment * OD 4.01, Annex B, para. 2(f): analysis of alternatives (see also para. 3 in 4.01) * OD 4.01, para. 13: engaging advisory panels for highly risky and contentious projects 1 '  ORIGINAL * OD 4.01, para. 5: regional environmental assessments * OD 4.01, para. 19 and 20: involvement of affected groups and non-governmental organizations * OD 4.01: disclosure of information 2.E Involuntary Resettlement: Land Acquisition, Compensation and Rehabilitation * OD 4.30, para. 3(a) * OD 4.30, para. 3(b) * OD 4.30, general violations * OD 4.30, para. 14 * OD 4.30, para. 11 2.F Indigenous Peoples * OD 4.20, general violations * OD 4.20, para. 3 * OD 4.20, para. 15(d) * OD 4.20, para. 11 2. G Wildlands Policy: In addition to the policies listed above and discussed herein, the claimants request the Inspection Panel to investigate whether there are violations of the Bank's Wildlands Policy OP 4.04 and the Bank Operational Policies on Investment Lending OP 10.00 in connection with the Arun III Project. 3. OUR RIGHTS/INTERESTS A. Effective participation in policy-making and decision-making processes: B. Timely access to information; C. Balanced development: D. Adequate analysis of alternatives: E. Adequate compensation and rehabilitation: F. Fair access to electricity supply at affordableprices.: G. Freedom from debt: H. Freedom from inappropriate lending conditionalities: I. Right to development; J. Maintenance of adequate living standards: and K. Healthy envirornment and sustainable development. 4. VIOLATIONSOF ITS OWNPOLICIESAND PROCEDURES BYTHE BANK 4.A. Violations of Operational Policies: Economic Evaluation of Investment Operations 4.A. 1 Criterion for Acceptability: The Bank has violated its operational policies regarding Econormic Evaluation of Investment Operation, as a basic criterion for acceptability. For the project to be acceptable on economic grounds, "the expected present value of the project's net benefits must be higher than or equal to the expected net present value of mutually exclusive project altemative". By not undertaking the relevant studies of the alternatives such as those listed in Plan B, the World Bank has not fulfilled this very basic criteria for acceptability of the project. 4.A.2 Alternatives: The Least Cost generation and Expansion plan (LCGEP)of 1987 and 1990 failed to take into account that the same amount of power generated from Arun III could also be generated from a series of smaller altematives in the 1 MW to 100 MW range. It was only in the 1993/94 Argonne National Laboratories (ANL)study (Analyses of Options For the Nepal Electrical Generating System, May 1994) that such an altemative sequence was even considered. However, the ANLstudy was clearly incomplete as the comparison was made with very preliminary costs for the alternative schemes. Even though there was an arbitrary addition of 20% to the cost of the alternatives on the grounds that 'costs always go up with more detailed studies', the study concluded that the cost difference between the sequence of doing Arun immediately versus doing it in 10 years was only percent. Thus without undertaking relevant studies of the smaller alternatives to get more accurate costs, and depending solely on "costs always go up with more detailed studies" ground, the criteria for acceptability of the project cannot be concluded to have been fulfilled. Over 30 schemes in the 10 MW to 60 MW range have been identified that can produce in total over 1,000 MW of power in studies conducted by the His Majesty's Government of Nepal (HMG/N). Recently constructed or ready for construction schemes such as Jhimruk (12 MW),Khimti (60 MW1,Modi (14 2  ORIGINAL MW)for which accurate costs are now known have per that are significantly unit installation lower than and energy production that of Arun costs III. There studies are is every reason completed, to believe the smaller that once altematives the detailed Arun III. can be built Feasibility at prices studies lower than of the altematives or competitive with must be policy requirement completed to compute for the Bank the LCGEP to have fulfilled for additional its other World power generation Bank least for Nepal. cost energy (For violations requirements of Resources: see also Tenth Replenishment, IDA 10 Agreement, Additions March 1, to IDA 1993; and World Bank Energy Policies). 4.A.3 Risks: The weak Nepali economy faces numerous Arun III. Due weightage risks in has not been taking on a project given to of the size of could be these risks taken to in preparing reduce the the project risks have for and steps not been that taken. importance: The following issues are of particular i. Riparian Issue with China: Over 80% of the Autonomous catchment Region of of the Arun the Peoples' river lies Republic in the Tibetan China to China. The HMG/N maintain does not the present yet have dry season a guarantee from flow over objection" the lifetime which China of the project. has reportedly The letter sent to the of "no water flow. The fact HMG/N does that a proposal not constitute a guarantee is pending of Arun's in China the Arun for the Changsuo (Punggu) river with Basin Irrigation a proposed Project on half the comrnmandarea dry season of 9.000 hectares flow of Arun that could presents withdraw a serious up to project. This risk to the risk has projected not been economnic taken into account retums of the in the sensitivity analysis. ii. Lack of Power Sales Agreement with India: future development Since Phase in the Valley It of the have been Arun III project predicated and not be approved on the sale until a bi-lateral of power to India, the agreement project must has been reached. iii. All Eggs in One Basket: By the time they are constitute completed. 50% of the total power Phase I and supplied II of the Arun to the national III will the HMG/N grid under agreed to the present by the Bank. investment A natural plan of catastrophe landslide, or a Glacial such as a very large Lake Outburst flood caused Flood (GLOF). by a project would or an earthquake virtually ruin the Nepali that might economy. affect this one This risk national of "putting economy needs to all the eggs be taken in one basket" into account to the in performing the economic analysis 4.B of this project. Policies on World Bank Role in the Electric Power Sector Conservation and Energy Efficiency in the Developing and World The World Bank's Energy Policies require the Bank development in the energy of integrated sector to sustainable be based on the strategies components which include such as demand energy conservation side management or efficiency Agreement, (see also Additions policy requirement to IDA Resources: under IDA Tenth Replenishment. 10 been paid to end-use March 1. efficiency 1993.) Attention in the formulation has not of the Arun III. 4.C Violation of Information Policy Late in the project preparation process, the Bank including released a study on some factual alternatives technical information, known as claimants "Plan B". However, to influence by then the design it was too and planning late for the and loan of the project negotiations as the appraisal between the Bank had been completed and the HMG/N had been completed. The issue of timeliness of information release in a meaningful goes to heart way cannot of the issue be overstated. of who participates This really and who for this project benefits in a project. were not participatory The design at the national and planning or local level. 4.C. 1 Arun III Project Information Document the main (PID): In public document the early stage of the available project, the on a project PID is According in addition to the Bank to the environmental Policy, when it is first assessment. created, elements a PID should of the project, including contain information the project's on the main objectives, financing, expected environmental or probable components, issues, status costs and of procurement undertaken, and consulting implementing services, agencies studies and relevant to be contact points. (See also Attachment In addition - I). to these points, OD 10.00 Annex A: Document requires Outline for an Investment that PIDs contain country and Project Information learned from sector background, the past operations project sustainability, in the country/sector. lessons and project Updated risks. PIDs should include project benefits Despite a high level of interest by Nepali NGOs in the project, of the components the Arun required III PID does by the Bank not contain many policy, for example, critical information: it does not contain any of the following 3  ORiGiNAL i. background description of the country, region or the Arun Valley or exact location of the project; ii. justification for Bank involvement; iii. background on the sector and sector strategy and how this project fits into the overall planning for the energy sector in Nepal; iv. information on project sustainability or lessons from previous experience of large scale darn projects in Nepal; v. information on the Arun Valley and its unique ecosysterns; vi. information on the 450.000 people, including the indigenous groups living in the Valley; vii. information on project benefits or risks; viii. project alternatives which were considered; ix. a discussion of issues and actions; x. information on a cost-benefit analysis; and k. relevant contact person in the World Bank and in the regional office in Nepal. According to Bank Procedures BP 17.50, PIDs are supposed to be expanded and updated as the project progresses. For all operations, the PID is supposed to be updated before appraisal. The PID for Arun III was prepared only in early 1994 (January 24) and has never been updated. 4.C.2 Environmental Information: Under the Bank's information policy and procedures, the environmental impact assessment for IDA funded category A projects is supposed to be made publicly available in the country "at some public place accessible to affected groups" and in a local language before the Droject proceeds to appraisal. The claimants believe this provision was not followed by the Bank. In fact, a law suit was filed with the Supreme Court on December 31, 1993, in order to get access to information about the project. One of the documents listed as demanded was the environmental impact assessment. On March 8, 1994 the Court decision required the government to release information, but this was after the appraisal was started. (See also Attachment - II). 4.C.3 Factual Technical Information on Arun III: Paragraph 5 in Bank's Procedures 17.50 requires the release of factual technical information upon request on project in preparation. This provision was meant to provide interested people with more factual technical information between the time the PID is released and project approval when the final staff appraisal is released. The claimants attempted to obtain factual technical information during project preparation in order to have input in the design or promote alternatives to the project. However, it was not until project appraisal was almost finished that the claimants received factual technical information. 4.C.4 Staff Appraisal Report: The claimants have repeatedly requested the copies of the Staff Appraisal Report (SAR)which is now final and has been sent to the Board of Executive Directors. Under the current Bank information policy, final SARs are only released publicly after the Board approves the project. Under the Bank's current definition of "factual technical information" does not include draft SAR (see Office Memorandum. Jan Wijnand. June 20. 1994). The claimants understand that failure to release the SAR before the Board approval is not a violation of the Bank's current policy. However, the claimants wish to challenge this aspect of the Bank policy, because the SARis the basic technical document of a project and should be classified as factual technical information. The small amount of confidential information contained in the SAR should be excised and the rest of the document should be released. The SAR contains the basic justification for the Bank's involvement in the project. Without access to the SAR before Board approval, it is impossible to understand how the Bank uses, manipulates, or misrepresents other factual technical information to support its involvement in the Arun III project. 4.1D Environmental Impact Assessment 4.D.1 Analysis of Altematives: The ELAreport should include "Systematic comparison of the proposed investment design, site, technology, and operational altematives in terms of their potential environmental impacts, capital and recurrent costs, suitability under local conditions; and institutional training and monitoring requirements. For each of the alternatives, the environmental costs and benefits should be quantified to the extent possible and economic values should be attached where feasible. The basis for selection of the alternative proposed for the project design must be stated". An essential part of any environmental assessment process is the investigation of alternatives to the project. to discover whether there are options which are more viable from an environmental and social standpoint. As stated above, the Bank's OD requires an environmental analyses of alternatives to the proposed project. Unfortunately, in the case of Arun III, the environmnental issues at stake and the available alternatives have not been integrated into decisions about whether to proceed with project. 4  ORIGINAL to investigate alternatives to the dam site or During the 1991 EIA, the team did not have a mandate which the road aligrunent (hill route) at the timne.The King Mahendra Trust for Nature Conservation Impacts Study stated "the road alignment and the dam site undertook the Basinwide Environmental to change these decisions". were already decided, and the study team did not have a mandate for the purpose of determining whether this Later in 1992, an EIA for the Valley route was conducted Arun III hydropower site. Serving route "might provide tirne and cost savings in providing access to the which the road will pass is a secondary the needs of the population in the general area through - Report, September 1992). consideration." (Environmental Impact Assessrnent Valley Route-Main was preferable route even though the EIA This EIA concluded that the Valley route to the hill also limited significant imnpacts to the valley. This EIAwas recognized that there would be irreversible and not to III and road itself, which were both to investigating altematives to the road the Arun and " .... the need for and the siting of the power project, considered a fait accompiL In this case, is taken as a given". Limitations, page therefore the justification for the road, (ETA.Valley Route Study 1-6). Valley route of the access road fails to take into Still more importantly, the so called EIA of the any alternative approach to build this consideration and compare from environmental standpoint the roads in the Himalayan road. For example, applying environmentally friendly approach in building methods have foothills by employing simnpleand conservation-oriented techniques and labor intensive construction of the road and the approach adopted, been proved successful. The pace of the proposed thus, is a serious environmental concern that the EIA ignores. cycle. the Bank comrmissioned a study After the EIA process was compIeted, and well into the project known as "Plan B" was issued only after a year of intense of alternatives to the project. This study The Plan B was local and intemational pressure on the Bank to adequately investigate alternatives. Arun III is the "least cost" option for Nepal, without regard conducted from the standpoint of whether to environrnental and social costs of either Arun III or the alternatives. called 23 public meetings to justify the 4.D.2 Public Participation: The Bank has relied on the so the project. The fundamental question is whether basic participation of the local people in designing available to the local people and the public at large project documents and infornation were made only two or three meetings of before the holding of such consultations. In fact, There have been to discussion on the positive side of the project. consultation nature which were also limited no elaborated information on the project Moreover, during or prior to the so called 23 public meetings, knowledge, there were no public meetings held in Nepali language were made available. So far in our In addition, meetings were held in Kathmandu by the HMG/N or the Bank. all of the above-mentioned information and document before the Nepali Supreme Court's verdict on the disclosure of all project only after the show-cause notice on March 8, 1994. The so called Information Centre was established The govermnent-controlled radio, was issued against the HMG/N and the NEA on the writ petition. and disinform the Nepali people about the existence television and the print media were used only to debate about various aspects of the project. Most benefits of the project but were not open to critical groups and individuals as well as the local importantly, the mere participation of some selective influence cannot represent the whole Arun Valley, and government authorities through governmental of the size and complexity of the project. (See also for this matter, the people of Nepal because Attachment-III). and discussion in the absence of the basic Therefore, we strongly claim that the holding of meetings any sense of meaningful debate about the project documents and information do not make in terms to information and genuine public positive and negative aspects of the project, and meeting the access consultation policy requirements of the Bank. the cumulative impacts to the environment in the Arun 4.D.3 Cumulative Impacts: Furthermore, The World bank has argued valley of Arun III, Lower Arun and Upper Arun have not been evaluated. 1,044 MW can be generated from the that the benefit of the 122 km road into the Arun valley is that to the environment will thus be confined to one river three schemes in Arun and that the impact it is widely accepted (including by the basin rather than scattered among diverse sites. However, the cumulative impacts of all three schemes will result in Environmental Department of the ADB)that "irreversible environmental damage to the valley". (EIA).The Arun III is The Bank has violated OD 4.01, Annex B on Enviro=nental Impact Assessment Arun Valley. Despite this, environmental only the first phase in a plan to build three dams in the Arun III, and therefore, there is a need of a studies have only covered the adverse impacts of cumulative impacts of building the other two schemes and comprehensive study of the long-term additional road construction in the Valley. 5  ORIGINAL 4.D.4 General Violations: There are clearly noticeable inadequacies in the EIA studies of the various components of the project. For example, there is no thorough assessment of the likely environmental impact by the 120 km high-voltage transmission lines. In the analysis of risks due to GLOF and land-slide floods it is claimed that the risks are minimal. However small the expected risks are, there should be a mitigation plan for the same needs to be developed. The environmental studies lack such mitigation plans for natural disasters. Similarly, no mitigation measures have been developed for the adverse impacts on the fish populations. There are no mitigation plans for the likely adverse environmental impact to be caused by the disposal of construction spoils of project elements like dam, tunnel, power house, access road and the like. The impact of dumping construction spoils into the river has not been studied. Though this is definite to have significant adverse impact on the down-stream side of the river. 4.E Involuntary Resettlement: Land Acquisition, Compensation and Rehabilitation In 1990, the Bank established an involuntary resettlement plan because "development projects that displace people involuntarily generally give rise to severe economic, social and environmental problems." One of the main objectives of the policy is to provide people displaced by a project with the means to improve, or at least restore, their former living standards, earning capacity and production levels. This central objective has already been violated in the case of Arun III. 4.E. 1 Under Valuation of the Compensation: The EIA states "For the majority of households compensation with cash would not enable them to recover from the loss of a significant proportion of the family land holding, unless the money were used to buy an equivalent of land In the vicinity. However, the effect of ACRP on the hill route has been to inflate land prices far beyond the compensated value, thus making the purchase of replacement land impossible for most PAFs" (Project Affected Families), (see, Arun III HEP: Environmental Impact Assessment for Arun Access Road - Valley Route; Volume 1/2 Main Report; Sept. 1992; p. 5-4). The report also confirms that land has been undervalued by the District Land Revenue Officer, therefore, making it impossible for the displaced people to recover their losses. The report further states that "The filed surveys for this report found that land values fixed by the local Land Revenue Offices seriously underrate the reported market value." (see Ibid.). This action also violates para. 14 of OD 4.30 which states 'Valuation of lost assets should be made at their replacement cost." 4.E.2 Opportunities to Share in Project Benefits: The benefit of this project will be electricity. but it is not electricity, however, for the Arun Valley. One section of the EIA(6-11), however, describes the expectation of local people to receive power from this project at affordable rates. The modification made in the project which corresponds with this expectation has been an increase in the width of the transmission lines so that sometime in the future the Valley can benefit from a future electrification program, as of yet undeveloped. In no way will the main benefit of this particular project - electricity - be conferred to people who are directly affectedby the project. 4.E.3 Employment to the Seriously Project Affected Families (SPAFs): Noting that the displacement of project affectedpeople would be permanent, earlier versions of the EIArecommended that permanent employment be made availablefor at least one member ofthose families expected to be severely affected by the Arun III project. In later versions, this recommendation seems not to have been carried through. Localpeople affected by the project are to be given first priority for employment in the construction of the access road. This employment opportunity, however, is not permanent whereas adverse effects ofdisplacement are permanent. 4.E.4 Land Based Resettlement: The World Bank experience and policy on involuntary resettlement states that replacement ofresettlement land ("landfor land strategies") is far superior to cash compensation. In fact, experience has shown that most people who have been displaced by the Bank projects that received only cash for their land have not regained their standard of living, but instead have become impoverished (see Resettlement and Development, April 8, 1994; also Involuntary Resettlement in DevelopmentProjects, MichaelM. Cenea, 1988). In addition, the EIAhas shown that cash compensation is already failing in the case of people displaced by the hill route in the Arun III project. The ETAhas further stated that it is expected that the Valley route Project AffectedFamilies (PAFs)will have been less ability to be able to deal with cash compensation because they are poorer than the people along the hill route. Despite the overwhelmingevidence against cash compensation. it is still the centrepiece of the HMG/N land acquisition guidelines. The updated Land Acquisition, Compensation and Rehabilitation Plan (ACRP)has attempted to cope with this issue by requiring that the project affected people be given the option of receiving land instead of cash. However, the burden of identifying land has been put on the displaced people themselves and they also must arrange for the HMG/N to purchase the land. Furthermore, those 6  ORIGINAL already displaced do not have the option of receiving land. According Awareness Group to the Sankhuwa-Sava that is raising Peoples' its concerns about the project within the Arun documented that the people Valley has recently who received cash compensation earlier have not about whether been informed they would prefer or asked land, and not the cash. (See also Attachment - IV). The HMG/N has now given on October 5, 1994 a 30-day public notice Land Acquisition of land acquisition Act, 1979 in under the Manakamana Village. However, the notice does whether the not say anything families are about eligible to ask for land for land compensation limited to cash since the law compensation. Is basically The claimants believe that many Valley residents' decrease as a standard of living result of cash will compensation, and the loss of land. 4.E.5 Surveys: In violation of section 11 of OD 4.30, there has not been completed on a socio-economic the Valley route survey to determine whose lands will be affected or to deternmine the land. the value of 4.E.6 Resettlement Planring: According to the Bank policy, the resettlement before appraisal. should take place However, no resettlement plan has been established for houses due families who to the power will lose their transmission lines. 4.F Indigenous Peoples There are over 24 different ethnic groups within the Arun Valley. Some cultural identities of which maintain separate and are organized under a network of ethnic groups in Nepal. These and Limbu tribes include the Rai who maintain communal types of land ownership. in the Arun Many of the Valley can be ethnic groups living classified as indigenous people using the characteristics Bank Operational described in World Directive 4.20: Indigenous People. These people natural resources have a close attachment in the Valley. to the They are considered as a series of have well established distinct cultural customary groupings. They social and political institutions and are primarily oriented producers subsistence- (The World Bank Operational Manual; Operational Directive p. 1).The original 4.20; September EIAdescribed 1991; the communities of the Arun Basin as "predominantly little influenced by outsiders. traditional and They are unique in themselves and practice cultural practices. diverse socio-economic and Many local people have never been outside the Valley." Mitigation Plan, In the Environmental a reference is made to protecting indigenous people. These within the rubric definitions clearly of OD 4.20. Operational fall Directive 4.20 has as its basic indigenous people tenant "a] to benefit from ensure that development projects, and b) avoid or effects on indigenous mritigate potentially adverse people caused by Bank-assisted activities." At the policy is to its centre the main objective "ensure that indigenous of people do not suffer adverse process, particularly effects during the development from Bank-financed projects." (See ibid., p. 2). In indigenous the case of the communities Arun III, the in the Valley will be adversely affected by the assessments project. But, do not demonstrate the impact any local benefits for the indigenous commnunities. Adverse impacts identified by the EIAinclude: i. a further deterioration of natural resources upon which local comrnmunitiesdepend population growth because of related to the project: U. further marginalization due to the introduction of an unfamiliar cash economy proposed road along the route; iii. the introduction of disease, through work camps in an area where iv. introduction epidemnicsare unknown- of income inequality between comnmunities situated close to the proposed route and communities road further from the road; v. further income inequality between original inhabitants and migrants and entrepreneurs attracted by the labor and market opportunities: vi. severe food deficits: and vii. cultural disintegration resulting from the employment of up to 6000 non-local workers, of whom will some settle permanently. The cumulative risk to the well-being of the indigenous peoples in the higher. Yet, no Valley could not risk seems to possibly be be great for the Bank. Perhaps the reason the even though Bank is willing the risks are very to go ahead high Is because in essence the Bank does not people, including bear the risk The Nepalis the claimants do. 4.F. 1 Lack of Mitigation Efforts: The HMG/N and the Bank has which mitigation produced three documents in efforts are discussed. These are the Environmental Action Plan and Mitigation Plan, the Regional the Land Acquisition, Compensation and Rehabilitation each of these Plan. The effectiveness plans in coping of with the above problems is questionable. documents It is unclear represent whether the work-plans or only reconunendations for work-plans. Many of the mitigation 7  ORIGINAL recommendations made by relevant experts of the three in the EIA plans. Lastly, have not many issues been taken into consideration are outlined explicitly raised as needing in any in bid documents. to be resolved in tender Whether documents or documents or not are kept this has secret. happened is unclear as the tender 4.F.2 Preparation of the Indigenous Peoples' peoples development Plan: As required plans have by OD been prepared 4.20, no indigenous RAP do not constitute by the project. a regional The mnitigationrecommendations development in the Mitigation plan or of negative a special indigenous impacts on indigenous peoples development peoples do not constitute plan. development. 4.F.3 Lack of Adequate Cadastral Survey: recognize property The World rights should Bank, OD 4.20, be taken states that steps to recognized before land titles. other planning In the case steps that of the Arun may be contingent cadastral III, land appropriation on survey was completed. for the project started before the Section 15.d of OD 4.20 calls for indigenous project peoples planning, participation implementation in decision-making and evaluation. throughout the process was in According question to the because 1991 EIA, "the road the value study team alignment of the whole did not and dam have a site were mandate already to change decided, and the 4.20, but other Bank these decisions." policies This is as well. a violation of not only OD 5. ADVERSE EFFECTS ON OUR RIGHTSAND INTERESTS 5.A Threatened Direct Adverse Impacts on the Claimants Because as Nepalis Nationals of the size and cost of the Arun claimants III project submnit in relation that the to annual project national vill have budget the Nepal, direct adverse of Nepal, including the poorest effects on many parts segments of society. of the population in almost twice one The total years national project cost is US $1082.3 development million claimants budget submit for Nepal which is that in addition (US $640 million to violations for FY 1993-94). The violate the of operational objectives policies, of IDA 10 and if the project IDA's country goes ahead, it will Arun III assistance is completely strategy out of proportion for Nepal. that a project to the size The total cost of of this size of the Nepal's the economy. and cost Cormnon that will sense dictates development not directly benefit at this juncture. the poor The claimants is not appropriate for Nepal's poverty further alleviation believe in Nepal, that the rather project it will contribute will not contribute project requires to more to poverty higher investment because conmnitment of the high investments from the cost of the in social HMG/N sectors and that such as threatens health and education. to "crowd out" 5.A. 1 Project Cost and Crowding Out of countries Social with a Sectors: per capita Nepal annual is one of income the world's malnutrition, of only poorest US $180. overpopulation Nepaii people and illiteracy. suffer from severe poverty, investment Health is a priority and social services need for are currently targeted inadequate, poverty and services interventions and education. According and for health to the Bank's and family planning objective country in Nepal assistance is poverty strategy, alleviation. IDA's main over-arching intensive In order to achieve projects which this there generate should income be investments opportunities in labor health, nutrition, for the and family poor and planning. investments Investments in education, investments in these in the Arun areas. (See III project also Attachment will threaten - IV). to prevent 5.A.2 Institution Building: All the components international contractors. of the project This will are proposed directly adversely to be built by country capacity through affect efforts public by the Nepalis institution building, to increase local management increasing in- and control private in undertaking sector capacity and promoting of the size hydropower 1-60 megawatts schemes. Altemative which are smaller scale projects the Alliance being promoted for Energy by Intermediate and others Technology are already Development Group, sector companies being built in Nepal. by local government Alternatives agencies help build for an IDA and private local institutional Credit for smaller and medium capacity, as well size projects would sector companies as generate income in Nepal employ for local local expertise private sector. and create Private jobs for Nepalis. 5.A.3 Crowding Out of Small and Medium that financing Scale Hydroelectric the Arun III will Projects: directly scale hydropower and adversely The claimants believe affects in Nepal the development by crowding of small size. Smaller out research, and medium development projects have the and financing advantage for projects of this self-sufficiency. of bringing electricity Smaller to rural projects communities are much appropriate less environmentally and promoting for Nepal's development and financially at this juncture. risky and more For fulfilling the requirements of the national 1 MW to grid, the 100 MW range small and medium can be hydropower developed in a number schemes in the of river basins spread throughout the country. 8  Pre-feasibility and reconnaissance studies for such alternatives that can produce over 1,000 MW of power have already been completed by the HMG/N. Feasibility studies for a large number of the alternatives including a full EIA, could be completed within the time period needed just to build the road for the Arun project. Additionally, the schemes that are studied and ready to go now could be already built. Over 500 MW of schemes in the 1 MW to 100 MW range have already been identified close to existing roads. 5.A.4 Underrnining Democratic Processes Inside Nepal: The formal and meaningful debate of the project in the sovereign Parliament is a fundamental requirement under the Constitution and the laws of Nepal since the project involves riparian issues with China, power-sale agreement with India, if any, and huge investment from internal sources as well as other socio-economic, natural and environmental risks. This has never taken place. (See also Attachment - V). 5.B Threatened Adverse Direct Impacts to Claimants in the Arun Valley Violations of the Bank policy on environment, indigenous people, and resettlement, combined with the fact that the NEA does not have the capacity to implement environmental and social safeguards threatens to cause long-term irreversible direct adverse impacts on the claimants. The impacts include the following (See also Attachment - VI): A. Increased Food Deficit, Loss of Income and Increased Unemployment B. Fall in Food Availability.Prices Rise and Fall in Nutritional Level C. Loss of Forests D. Adverse Health Impacts E. Deterioration of Living Standards as a Result of Cash Compensation 6. RESPONSIBILITYOF THE BANK We believe that some of the main responsibilities of the Bank are: A. To ensure that the proposed project promotes just. balanced and equitable national development: B. To justify the achievement of its originally stated goals and objectives; C. To address the priority needs and sectors of the country; D. To be accountable in its assessment and analysis leading to the investment; E. To guarantee transparent and democratic decision-making processes; F. To protect, promote and respect the other rights and interests of the country and the people as stated under the title "Our Rights and Interests" above; and G. To fully ensure, at least, the compliance with its own policies and procedures in the design. planning and implementation of the proposed projects. (See also Attachment-VII). 7. PREVIOUS COMPLAINTSTO THE BANK A. We wrote the Bank in Kathmandu or in Washington, DC numerous times; B. We made our formal presentations during a one-day consultation meeting held on June 28.. 1994 at the Bank's Headquarters; C. We submitted letter of memorandums to the Bank Staff/Management as well as a number of the Executive Directors of the Board: D. We met the Bank officials in Kathmandu, in Washington, DC and in Madrid (during the recent annual meeting) and raised our concerns; and E. We made our concerns public through the publication of booklets and pamphlets, press conferences, and public meetings. (See also Attachment -VIII). 8. RESPONSE ONTHE PREVIOUS COMPLAINTS All our requests were either turned down or ignored or misinterpreted, and we have found most of their answers unsatisfactory and/or unreliable - not based on facts, and not reflecting transparency and accountability. (See also Attachment - IX). 9  ORIG!!Nl AIl 9. ADDITIONAL EFFORTS 9A We wrote and/or contacted several times to the NEA. Residential the Arun Office in Kathmandu, III Project Office,the Bank's and its Headquarters in Washington, document and information DC in seeking as well as satisfactory basic project answers to replied by our queries. the concerned But, mostly authorities, we were never or our requests were rmisinterpreted, and unsatisfactory or we only answers. (See received partial also Attachment - X).. 9.B On December 31, 1993 we filed a law suit against the HMG/N information and documents for the disclosure about the of all project project . The Court ordered to provide the defendants all project documents on March 8, 1994 and information about the laws of Nepal, project under and has further the Constitution established and the a set of procedures Even after for the disclosure the Court's of such information. verdict in our favor, the HMG/N has complete list still been denying of project information the release of the and provide documents. We, therefore, believe that the above actions/ornissions procedures which are have materially contrary to the above and adversely policies or affected our rights/interests recommend to the Bank's and request Executive Directors the Panel to that an investigation order to resolve of these matters the issues be carried and problems out in prior to any final decision. As advised in your Operating Procedures, this Request for Inspection provide you is intended with more details to be brief. and particulars. We can Signature: / 1D Name: Gopal Siwakoti Affiliation:Arun Concerned Group Status: IndirectlyAffectedClaimant; Lawyer.Human Rights Activist Permanent Address: Hwaku 4, Terathum District, Koshi MailingAddress: c/o INHUREDInternational. P.O. Box 2125. Kathmandu. Tel: (977-1) Nepal 419610 * Fax: (977-1) 412538 Signature: Name: Ganesh Kumar Ghinire Affiliation:Arun Concerned Group Status: IndirectlyAffectedClaimant from the Arun Valley; Environmentalist/Sustainable DevelopmentActivist Permanent Address: MaltaVillageDevelopment Committee 5. Sankhuwa-Sava. MailingAddress: Koshi P.O. Box4067. Kathmandu, Nepal - Tel: (977-1) 526722  ARUN CONCERNED GA&"D Secretariat: c/o INHURED InterjtR 8 P1 2: 12 P.O. Box 2125. Kathmandu, Nepal Tel: (977-1) 419610 * Fax: (977-1) 4TR` INSPECTION PANEL November 2. 1994 Ernst-Gunther Br6der Chairman, The Inspection Panel 1818 H Street. NW Room No. MCI 1-103 Washing'ton. DC 20433 Unites States Dear Mr. Chairman: With reference to your fax message of 24 October and 1 November 1994. we are sending herewith the Attachments l-X of the Claim filed at the Inspection Panel on 24 October 1994 and the evidence of the letters of authority to represent the two of the directly affected people from the project-site. Please replace "Attachment-IV" by "Attachment- IV.A"under "5.A.1: Project Cost and Crowding Put of Social Sectors" in the Claim. Regarding the use of the terms "directly" and "indirectly" affected people in the claim, we would like to clarify that all the four claimants, including the undersigned who also represent the other two claimants, are the "directly affected" people from the Arun III project. The term "directly affected" and "indirectly affected" have only been used in the claim simply to make distinction between the claimants who have been eligible for compensation from the project for their acquired land from those who are directly and adversely affected due to the impacts of the project at national and regional levels. The undersigned claimants fall in the latter type. Therefore, we would like to request you to use the term "directly affected people" for all the four claimants for the purpose of the Claim. Please contact us for any further Information that you may need. We would also like to request you to contact Ms. Lori Udall, Washington Director of the International Rivers Network. 1025 Vermont Ave.. NW#300, Washington. DC 20005, tel: (202) 8794280. fax: (202) 879-3186 for additional information and documents regarding the Claim and the Attachments. Ms. Udall is our representative in Washington. DC. Sincereh, yours, Ganesh Kumar Ghimire Gopal Siwakoti Claimant Claimant enclosure  U[lUINAL RECEIVED INTERLfl $ov-8 F'M2 12 INTER-CONTINENTAL LAW ASSC P.O. Box 2809 - Putaltsadak. Kathmau LR 7C 226325 The following is an unofficial translation of the authorization to Mr. letter of Ganesh Kumar filing of Ghimire a claim at the Inspection in connection Panel. with the legyallyvalid The original Nepali authorization version (attached) letter according is a to the National Code of Nepal. I, the resident *. of Khrang Village 7, of Sarnkhuwa-Sava District havereceived the cash compensation of my land that of Nepal is acquiredby the Government for the access road for the proposed Arun III Hydroelectric Project. adversely This has affected my economic condition since I was not used to the cash economy already spent the and I money that I received. In the process of compensation, informed nor I was neither asked whether I could choose land to land compensaion. In addition, not been able to I have know what are the direct benefits of the project tome. I am also aware of not well- relevant laws and rules. Iam hearing that there have been many debate controversies and about the project at local, national and international levels. I, authorize Mr. Ganesh thus, hereby Kumar Ghimire, age 34, the resident of Malta Villaae 5, Sankbuwa- Sava Districtpresently leavina in Kathmandu Municipality 10, Kathmandu District, member of the Arun and a Concerned Group, to represent my rights and interests claim against the World by filing a Bank at the Inspection Panel. I have fully accepted defend that a claim my rights to and interests by direct and indirect effectsof the project at present future be or in filed on my behalf. I or my representative will be ready to furnish further informationthat the Panel it may may require.Dated October 16, 1994. Chandra Mani Adhikari, Attorney, Supreme Court of Nepal October 26, 1994  ORiu IixAL RECEIVED INTERLRWS 94NoHj-8 PM2:12 INTER-CONTINENTAL LAW ASSOCIATES, Inc. P.O.Box 2809 - Putalisadak. Kathmandui