Nepal - Selected Issues in Infrastructure Development (Vol. 1 of 2) : The Executive Summary and Main Text

FILE COPY CONFIDENTIAL Report No. 11800-NEP CONFIDENTIAL 11800- NEP VOL.1 NEPAL SELECTED ISSUES IN INFRASTRUCTURE DEVELOPMENT (In Two Volumes) Volume I: Executive Summary and Main Text February 2, 1994 South Asia Country Department 1 Energy & Infrastructure Operations Division FOR OFFICIAL USE ONLY Document of The World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Currency and Equivalent Units (As of October 1, 1993) Currency Unit = Nepalese Rupee (NR) US$1.00 = NR 48.60 NR 1.00 = US$ Weights and Measures km = kilometre (0.62 miles) m = metre (39.37 inches) kmO = square kilometres (0.386 sq. miles) ha hectare (2.469 acres) ton = metric ton (2,204 lbs) Fiscal Year Nepalese Fiscal Year Equivalent Calendar Year 2042/43 1985/86 1986 2043/44 1986/87 1987 2044/45 1987/88 1988 2045/46 1988/89 1989 2046/47 1989/90 1990 2047/48 1990/91 1991 2048/49 1991/92 1992 2049/50 1992/93 1993 ABBREVIATIONS GDP - Gross Domestic Product GIS - Geographic Information System HMG/N - His Majesty's Goverment of Nepal NEA - Nepal Electricity Authority FY - Fiscal Year RNAC - Royal Nepal Airlines Corporation STOL - Short Take-Off and Landing DCA - Department of Civil Aviation WSS - Water Supply and Sanitation TIA - Tribhuvan International Airport NTC - Nepal Telecommunications Corporation FYP - Five Year Plan ICOR - Incremental Capital/Output Ratio NEPAL SELECTED ISSUES IN INFRASTRUCTURE DEVELOPMENT Table of Contents Page No EXECUTIVE SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . I. NEPAL - AN ECONOMY IN TRANSITION . . . . . . . . . . A. Malaria Control in the Terai . . . . . . . . . . . . B. Demographic and Spatial Change . . . . . . . . . . . . . . 2 C. Agriculture and Manufacturing Industry . . . . . . . . . . 5 D. External Trade . . . . . . . . . . . . . . . . . . . . . 9 II. RURAL-URBAN LINKAGES . . . . . . . . . . . . . . . . . . . . . 11 A. Urbanization . . . . . . . . . . . . . . . . . . . . . 11 B. Rural Development and Urban Growth . . . . . . . . . . . 12 C. Internal Trade and Price Variations . . . . . . . . . . . 13 III.OUALITY OF INFRASTRUCTURE SERVICES . . . . . . . . . . . . . . . 15 A. Coverage of Infrastructure Services . . . . . . . . . . . 15 B. Cost and Adequacy of Infrastructure . . . . . . . . . . . 19 C. Ranking of Infrastructure Problems . . . . . . . . . . . . 22 IV. INFRASTRUCTURE STOCK AND DEVELOPMENT PLANS . . . . . . . . . . 23 A. Transport Infrastructure . . . . . . . . . . . . . . . . . 23 B. Water Supply and Sanitation . . . . . . . . . . . . . . . 30 C. Telecommunications Sector . . . . . . . . . . . . . . . . 32 V. INFRASTRUCTURE DEMAND AND RESOURCE MOBILIZATION . . . . . . . . 35 A. Infrastructure Demand Projections . . . . . . . . . . . . 35 B. Investment Levels . . . . . . . . . . . . . . . . . . . . 38 C. Infrastructure Spending and Resource Mobilization . . . . 40 D. Improving Domestic Resource Mobolization . . . . . . . . . 42 VI. ENVIRONMENTAL CONCERNS FOR INFRASTRUCTURE DEVELOPMENT . . . . . 45 VII.MAIN CONCLUSIONS AND RECOMMENDATIONS . . . . . . . . . . . . . . 49 BIBLIOGRAPHY. . . . . . . . . . . . . 52 This report was prepared by George Tharakan (Task Manager, Sr. Transport Economist, MN2IN). Juan Gaviria (Transport Specialist, SA1EI) managed the preparation of the final drafts and discussions with the Government. The report is based on missions that visited Nepal in April, 1991 and March, 1992, led by G. Tharakan with Messrs./Mmes. Hugh Evans (Regional Planning), Rita Ghei (Trade), Asha Katti (Researcher), Sriram Panday (Infrastructure Surveys), Reino Routsalainen and Seppo Raula (GIS), Kumares Sinha (Infrastructure Planning) and Jonathan Stevens (Environment). Messrs. Charles Chandler (Water Supply Sector) and Mark Gallagher (Public Expenditures) also contributed to the report. Ann 0. Hamilton and Pradeep Mitra are the Director and Lead Economist, respectively, of this sector work. Page No TEXT TABLES Table 1. Regional Shares of Total Population 1971-1991 . . . . . . 3 Table 2. Gross Domestic Product by Industrial Sectors 1980-1990 . . 5 Table 3. Regional Shares of Manufacturing Activity 1981/82 & 1986/87 8 Table 4. Gross Domestic Product by Regions 1984/85 . . . . . . . . 8 Table 5. Nepal's Foreign Trade . . . . . . . . . . . . . . . . . . 9 Table 6. Exports Classified by Major Commodity Group . . . . . . . 10 Table 7. Trade Volume of Main Gateways - 1990 . . . . . . . . . . . 11 Table 8. Regional Shares & Growth Factors of Urban Population 1971/91 12 Table 9. Growth of Urban Centers 1971-1987 . . . . . . . . . . . . 13 Table 10. Sources of Procurement by Wholesale Units . . . . . . .. 14 Table 11. Regional Variations in Retail Price Indices 1988 15 Table 12. Road Densities in Nepal and Other Countries . . . . . . . 16 Table 13. Spatial Distribution of Road Densities in Nepal . . . . . 16 Table 14. Estimated Water Supply Coverage (% of Population) - 1992-92 17 Table 15. Status of Electrification in Nepal . . . . . . . . . . . 18 Table 16. Spatial Distribution of Telephone Coverage in Nepal - 1991 19 Table 17. Infrastructure Costs in Industrial Cost Structure . . . . 20 Table 18. Complaints About Public Infrastructure . . . . . . . . . 23 Table 19. North-South Roads Planned for Completion . . . . . . . . . 26 Table 20. Estimated Financial Requirements of Road Sector in Nepal . 27 Table 21. Regional Distribution of Airports by Category . . . . . . 28 Table 22. Summary of Proposed Works for Aviation Development 1992-2010 29 Table 23. Telecommunication Facilities in Nepal . . . . . . . . . . 33 Table 24. Projected Growth in Transport and Communications Demand . 36 Table 25. Distribution of Discretionary & Total Cash Incomes . . . . 37 Table 26. Infrastructure Investment Needs Implied by Growth in Demand 39 Table 27. Estimated Investment Levels and Five Year Plans . . . . . 40 Table 28. Changes in Area of Natural & Enriched Forests 1978/79-1985/86 46 Table 29. Soil Loss Rates Under Different Land Uses . . . . . . . . 47 TEXT FIGURES Figure 1. Distribution of Population, 1971 - 2010 (Projected) . . . 4 Figure 2. Spatial Distribution of Agricultural Output, 1986 . . . . 6 Figure 3. Forest Cover and Degraded Forests, 1980 . . . . . . . . . 48 Annexes Annex I. An Overview of the Nepalese Economy . . . . . 1 Annex II. Geographic Information and Analysia . . . . . . . . . 19 Annex III. External and Internal Trade . . . . . 38 Annex IV. Quality of Infrastructure Services for Industry . . . 46 Annex V. Transport . . . . . . . . . . . . . . . . . . . . . 57 Annex VI. Water Supply and Sanitation . . . . . . . . . . . . . 83 Annex VII. Telecommunications . . . . . . . . . . . . . . . 95 Annex VIII. Infrastructure Demand and Resource Mobilization . . . 109 Ma M IBRD Map No. 23949 NEPAL - INFRASTRUCTURE DEVELOPMENT STRATEGY - i - EXECUTIVE SUMMARY i. Nepal is undergoing a unique demographic transformation which has strong implications for the country's infrastructure development strategy. The report examines the spatial distribution of demand for infrastructure, and appropriate allocations of infrastructure development resources among the various types of infrastructure and between various parts of the country, and in particular between rural and urban areas. Based on analyses of economic crrowth and infrastructure demand, and the concomitant ability to pay for infrastructure services in Nepal, the report's main recommendation is that future infrastructure investments should favor the rural Terai and urban areas of the country. It is recognized that infrastructure alone will not induce economic growth, but rather its absence will constrain growth areas with development potential. ii. The report's main contribution is to sharpen the understanding of changes taking place in the spatial distribution of economic activities, and to provide pointers for infrastructure development which would increase the likelihood that infrastructure investments undertaken will match the country's evolving needs. The work reported here involved identifying present and likely future trends in the distribution of population and economic activity, assessing existing infrastructure services, stock and development plans, estimating desirable investment levels and the distribution of that investment among the competing demands for infrastructure of rural and urban areas, of the mountains, hills and Terai (plains), and among the five development regions of the country the Far-West, Mid-West, West, Central and East.' The report also examines key environmental consequences of the developments anticipated in the sector. iii. The methodological framework adopted in this report relied on three elements to assess the spatial and sectoral priorities for infrastructure development in Nepal. First, a geographic information system was assembled of the spatial distribution of population/migration patterns, of output and trade, of agricultural production/productivity and inputs, of forest resources and forest degradation, and of the availability of infrastructure services, etc. The level of disaggregation of this database was the 75 districts of Nepal, though in some cases information was only available for the 15 zones of the country, i.e., 5 development regions divided into three ecological zones - hill, mountain, and Terai. This information was analyzed to develop an understanding of likely future trends in demand (population shifts) and infrastructure deficiencies. As always, projections of the regional 'allocation of income serve mainly to define only broad orders of magnitude of demand, especially considering the deficiencies in the data, including the absence of reliable relative price variables. The second element was a review of existing infrastructure and present development plans in each sub-sector. Finally, the level of investment likely to be needed was estimated based on assessments of growth in aggregate demand for infrastructure services, and estimated capital/output ratios for Nepal. These projections were made over a 20-year horizon, and projected investment ranges were compared with planned investments in the Eighth Five Year Plan (1993-97). The analytical framework does not consider, in any detail, the institutional aspects of the various infrastructure sub-sectors. Analyses of institutional 1/ A Geographic Information System was developed with information on population, economic activity, agriculture, forestry, and infrastructure availability in the 75 districts of Nepal. - ii - aspects, which would be central to any infrastructure strategy, are contained in various reports2 on the respective sub-sectors. Background iv. Geographic and Sectoral Distribution of Output. While Nepal is among the poorest of developing countries, with a per capita GDP of only US$170 in 1992, the situation in Kathmandu Valley is hardly representative of the extreme poverty in some of the more remote parts of the country. Among the fifteen geographical zones of the country (Mountains, Hills and Terai of the five development regions - Far-West, Mid-West, West, Central and East), the poorest zones in the mountains of the Mid- and Far-West had per capita incomes of about a third of the national average. The Terai and the Central Hills were 30% to 40% above the national average, which accounts for the migration now occurring into these areas. Agriculture remains the mainstay of the Nepalese economy accounting for about 60% of gross domestic product and over 90% of employment. Manufacturing, however, has made significant advances increasing its share of GDP from 4.3% in 1980 to 5.4% in 1990. The growth in manufacturing is clearly associated with the rapid expansion in exports of garments and carpets which has taken place over the 1980s. Despite the recent expansion in industry, infrastructure strategy in Nepal will continue to be determined by needs in the agricultural sector; in particular, the agricultural potential in the Terai, a growing trade in agricultural commodities and inputs, and the rapid growth of market towns linked to agricultural development. v. As a result of successful malaria control programs carried out in the 1950s and 1960s, the plains in the south of the country, or the Terai, which was once the most sparsely populated area has become the most densely inhabited, having attracted large numbers of migrants from the Hills and Mountains in the north. Migration into the Terai, which began in the 1970s and is still ongoing, is expected to significantly change the distribution of Nepal's population, which is expected to grow from around 19 million in 1991 to around 27 million by the year 2010, with the Terai's share increasing from 38% in 1971 to over 50% in 2010. Some parts of the Terai have already experienced a large increase in population, for instance the Far-Western Terai's population in 1991 was 3.5 times the population in 1971. These shifts in population, have resulted in economic activity becoming increasingly concentrated in a few areas of the country: the Terai and the Central Hills, which includes Kathmandu Valley. The following paragraphs briefly summarize key features and trends in the three main facets of economic activity in Nepal, namely, agriculture, trade and urbanization. vi. Agriculture. Agricultural development in Nepal has been very uneven, with most development concentrating in the Central and Eastern Terai, and the Central Hills. The Central region accounts for about a third of agricultural output, while the Eastern region accounts for about a quarter. The western regions (West, Mid-west and Far-West) account for the remaining 40% of agricultural output. Agricultural productivity (per hectare of agricultural land) varies considerably from 3 times the national average near Kathmandu to a quarter of the national average in some Far-Western Hill districts. Within the 2/ Grey Cover, "Expenditures in the Road Sector", Report No. 10988; Green Cover, "Water Supply and Sanitation Sector Issues", Report No. 11479; and SAR, "Power Efficiency Project", Report No. 9077. - iii - Terai also, agricultural productivity ranged between 1 and almost 3 times the national average. The differences in productivity among various parts of the country are fairly well explained by differences in the availability of inputs, such as fertilizer and irrigation, and infrastructure such as roads. Fertilizer use for instance is heavily concentrated in the Central region, with Kathmandu Valley and the parts of the Central Terai consuming between 4 and 7 times the national average per hectare of agricultural land. The western and the eastern extremities of the Terai both appear to consume fertilizer at about half -the national average. The data indicate a fairly strong potential for increasing (tripling in some cases) agricultural yields, particularly in the Western Terai, through improved infrastructure (fairly strong correlations were found between road network density and fertilizer use), and increased availability of inputs such as fertilizer and irrigation facilities. vii. Trade. Nepal's internal and external trade suffers from a number of disadvantages such as its extremely rugged terrain, scattered settlement patterns, and land-locked situation with costly international communication links. Its internal markets are poorly integrated, with large differences in the prices of commodities between various parts of the country; price indices were found to range from 76 in parts of the Terai (average for Nepal = 100) to over 150 in the Mountains, and on average, prices in the Mountains were two-thirds higher than in the Terai. Despite its land-locked situation and difficult international links, Nepal's external trade has grown rapidly from NRs 2.7 billion in 1974-75, to NRs 20.5 billion in 1988-89, and to NRs 52.1 billion in FY 1992/93. However, the trade balance has worsened with the trade deficit increasing from NRs 0.9 billion in 1974-75 to NRs 18.9 billion in FY 1992/93. The most interesting development in Nepal's external trade (i.e., official trade), aside from the rapidly growing trade deficit, has been the shift away from trade with India, to trade with the rest of the world. Four main gateways account for about 90% of (officially recorded) trade, even though Nepal's long border with India contains 15 designated trading points. The four main gateways are Birganj (47% of trade - mainly imports), Tribhuvan Airport (23% - mainly exports), Biratnagar (12%) and Bhairahawa (5%). Tribhuvan Airport's importance as a trade gateway has grown primarily due to the increases in garment and carpet exports. viii. Urbanization. With growth in trade and the high levels of internal migration, Nepal has experienced a fairly recent increase in urbanization, particularly in the Terai. Terai towns such as Mahendranagar, Bharatpur, Rajbiraj, Birganj, Janakpur and Tribhuvannagar have grown at rates between 8% and 14% p.a. during the period 1971 to 1987. Overall, the country's urbanization rate (percent of population living in urban areas) increased from under 3% in 1954 to 4% in 1971, and to over 9% in 1991. Municipalities, of which there are 33, have grown at a median rate of about 6% p.a. since 1971. There is evidence to indicate that urban growth in Nepal is strongly linked to agricultural development rather than to growth in manufacturing. Kathmandu Valley, for instance, which has seen the largest increases in manufacturing, grew at 4.2% which is below the median rate. Terai towns, located in areas with rapidly expanding agriculture, were the ones experiencing the fastest urban growth; of the 16 towns growing faster than the median, 14 were located in the Terai. - iv - Sub-Sectoral Issues ix. Increasing spatial concentration of the economy has a special significance for the provision of infrastructure. A spatially expanding economy poses fewer risks for infrastructure provision; concentration on the other hand can result in infrastructure provided in response to present needs becoming under-utilized or even abandoned as the loci of economic activity shifts. In Nepal the recent demographic changes, i.e. migration to the Terai, indicate that such considerations are central to an infrastructure strategy which is appropriate to the future needs of the country. Present infrastructure development strategy, however, does not appear to have appreciated this fundamental and ongoing transformation, and appears to continue to emphasize the need for infrastructure development in the Hills and Mountains. The analyses of infrastructure sub-sectors presented in this report are essentially based on the spatial dimensions of changes taking place in Nepal's economy. The recommendations provide a spatial distribution dimension to the Government's on- going efforts to improve public resource management3 and sub-sectoral initiatives (footnote 2) aimed at strengthening sub-sector prioritization and programming. Since transport and communications infrastructure tend to be more strongly impacted by such spatial dimensions of changes, therefore, they have received greater attention in the analysis. x. Infrastructure Services. Not surprisingly, in view of the problems the country faces, Nepal offers its citizens one of the poorest levels of infrastructure services in the world. Road densities of 0.4 km per 1000 of population and 5 km per 100 sq. km. of land area are among the lowest in Asia. Only 42% of the country's population is estimated to have access to safe drinking water. Less than 10% of households have electric power, and the number of telephones per 100 of population is around 0.3. Much of this infrastructure is concentrated in Kathmandu Valley. When the infrastructure available in Kathmandu Valley is removed from these figures, the statistics for the rest of the country become considerably worse. The number of telephones per 100 inhabitants in the rest of the country, for instance, declines by two-thirds, and road densities decline to about half the level noted for the nation. To close the gap between infrastructure demand and supply, and particularly to expand into rural areas, the Government must reform infrastructure markets and open them to low-cost technologies which are appropriate for smaller-scale, decentralized provision of infrastructure services in rural areas. xi. Infrastructure Costs. A survey conducted of 150 industrial establishments provided some insight into the situation with regard to infrastructure costs, both spatially as well as by industry type. Among development regions, infrastructure related costs appear to be the highest in the Mid-Western region (10% of industry expenditures) and the lowest in the Eastern (6%) and Central (8%) regions. In particular, transport related costs in the Mid-Western region was 2.5 times the average for all industrial establishments. Freight costs of the industries in the sample were generally found to be excessive, and it was estimated that on average they were incurring costs on the order of $1 /ton-km which is 5 to 10 times normal levels. Relative differences in infrastructure costs are even sharper among ecological zones; whereas, in the 3/ Yellow Cover, "Fiscal Restructuring and Public Resource Management in the Nineties" (Report No. 12281-NEP). - v - Terai on average infrastructure accounts for 5% of industrial expenditures, in the Hills this is almost doubled at 8% and in the Mountains it rises sharply to 28% of expenditures. xii. Road Network. Out of 75 districts in Nepal, 23 districts with a population of about 2.5 million, mostly in the Western and Far-Western hills and mountains, have no roads and are served exclusively by trails accessible only by foot or by pack animals. In the Terai, the road network has a density of a little over 11 km per 100 sq. km. which is extremely low when compared to other countries in the region: India - 41 km/100 sq.km., Sri Lanka - 38 km/sq.km., Bangladesh - 112 km/100 sq.km. A strong case can be made for at least doubling the road network density in the Terai; increasing population densities in the Terai and the potential for rapid expansion of agricultural activities there, means that improving road access could provide some of the highest returns from road network expansion in the country, and should therefore receive priority. In contrast, the Government has emphasized construction of the North-South roads linking the Hills to the Terai, and it is doubtful whether the high cost of these roads and the difficulties entailed in maintaining them will prove to be economically justifiable. xiii. The total length of the road network in Nepal has expanded from 624 km in 1956 to over 8300 km in 1992. In addition, the country has a trail network in the Hills and Mountains of between 15,000 and 20,000 km including some 2,500 trail bridges, and of this about 7,000 km are considered main trails. Key road developments planned are: (a) farm-to-market roads in the Terai; (b) North-South roads linking the Hills to the Terai; (c) Kathmandu-Hetauda direct link; and (d) trail improvements including primarily the construction of suspension bridges. Of these, maintenance of a strategic network and construction of farm-to-market roads in the Terai, including the construction of about 1,200 km of such roads to provide access to agricultural areas in the Western Terai deserves to be given the highest priority. The North-South roads, some of which are under implementation are extremely expensive both to construct and to maintain; the economic value of over two-thirds of these is dubious. The Government's proposal to expand the road network to connect all of the 75 district headquarters has similarly doubtful economic justification, and could prove to be a serious mistake if expectations are raised to the point where HMG/N feels compelled to begin implementing such a plan in the Hill and Mountain regions. It would appear that concentrating road network expansion efforts in the Central Hills and the Terai would provide the highest developmental impact in view of the concentration of economic activities already taking place in these areas. According to the report "Expenditures in the Road Sector" (Grey Cover) which are corroborated here, annual expenditures needed in the road sector, excluding the North-South roads, is estimated at an average of about US$55 million per annum over the next ten years. xiv. The spatial distribution recommendations complement the emerging strategy for the transport sector, which is outlined in the Eighth Five Year Plan and is supported by planned investments, and would ensure that the highest priority be given to the following: completing the East-West Highway, maintaining the strategic road network (mostly in the Central Hills and Terai), emphasizing the development of a farm-to-market network in support of agricultural development in the Terai, and providing access to important national development projects. The spatial re-distribution issues highlighted in this report could be addressed, as part of sub-sector initiatives underway stated in "Expenditures - vi - in the Road Sector" (Report No. 10988), with the following policy instruments: (a) prioritizing sector expenditures through the development of network-based planning and basic data considering new construction, upgrading and rehabilitation on the basis of economic criteria; (b) insuring funding for maintenance of the strategic transport networks; and (c) establishing a sector allocative framework consistent with a rolling three-year budget review process which will start in FY 1993/94. xv. Aviation Infrastructure. Aviation is important for Nepal both in respect of the country's growing tourism industry, as well as for internal communications to remote areas in the Hills and Mountains. Kathmandu's Tribhuvan Airport is the only international airport, and in addition there are 42 air- strips of which 26 are short take-off and landing strips located in the hills and mountains. In general, conditions at these domestic air-strips are poor, and services, especially in the hills and mountains, are extremely unreliable. Aviation investments being considered by the Government are primarily for upgrading facilities at Tribhuvan Airport (about US$500 million) and Pokhara Airport (US$100 million), and paving of runways and other improvements to the domestic air-strips (about US$60 million). This level of investment, particularly those for Tribhuvan and Pokhara, is unlikely to be justifiable or feasible given the constraints on financing. Critical needs in the sub-sector include improvements in navigation aids and other aviation safety enhancements, and selected investments in upgrading runway and terminal infrastructure of airports and air-strips. Maintenance of aviation facilities also deserves careful attention, and is presently very poor due to a lack of funding, and it is estimated that the maintenance budget needs to be increased ten-fold from the present level of about NRs 10 million p.a. xvi. Telecommunications. Telecommunication services have expanded rapidly in the past three decades. However, most of this growth has understandably occurred in Kathmandu Valley. Whereas, in 1989 there were about 3 telephones per 100 inhabitants in the Valley, for the rest of the country the average was about 0.10 telephones per 100 inhabitants (para x.). For the rural population, telephone service is available only in the form of some 50 public call offices, though a recently started project should considerably improve the situation in rural areas. xvii. Development plans in the telecommunications sector call for almost a doubling of telephone lines, to about 140,b00 lines by 1997. In addition, long distance facilities will be upgraded with complete digitalization of the main transmission links, and rural telecommunications will be improved with the installation of multi-access rural radio telephone systems (MARTS) to provide telephone service to the remaining 26 district headquarters and to more than 400 rural community centers. Total investments for this program is expected to be on the order of US$130 million, of which donor aid is expected to contribute about 85%. xviii. Water Supply and Sanitation. Water supply coverage data shows that nationally about 42% of households have access to safe drinking water. Although the data is poor, coverage varies considerably among rural and urban households, with rural households having 39% coverage while urban households have 67%. Historical data indicate that urban water supply facilities have been deteriorating primarily due to lack of maintenance and increases in the urban population over the period. A survey of industrial establishments conducted in - vii - this study found that just over 40% of 150 establishments surveyed, relied on public water supply, and over half of the establishments preferred to use boreholes or natural sources in order to ensure reliable supplies. The cost of operating boreholes was found to be comparable to the unit cost of public water supply. Unregulated borehole use, particularly in major urban areas, has caused considerable externalities through drawdown of the water table, thus exacerbating the already difficult water supply situation in major urban areas such as Kathmandu. The situation in the sanitation sector is considerably worse; overall sanitation coverage is estimated to be around 6%, with urban populations having a 24% coverage while rural coverage is estimated to be around 3% of households. xix. In the water supply and sanitation sector, HMG/N plans call for considerably increasing the coverage by the year 2000. While the target of 100% coverage for water supply is ambitious, a coverage of about 75% could be within the financial capacity of the Government. Such a doubling over present coverage levels in the next decade or so, however, is likely to face institutional capacity constraints. Investments in water supply and sanitation need to be accompanied by better management and decisions need to be based on system performance. Rough estimates of investment requirements indicate that of US$20- 25 million per year are needed over the next ten years. Operating and maintaining such an expanded water supply system will require substantial effort on the part of the Government to mobilize resources (water tariffs are presently considerably below cost recovery levels) and develop the needed institutional capacity. A recent IDA report (No.11479-NEP), Nepal Water Supply and Sanitation Sector Issues Paper, provides a detailed assessment of the sector. xx. The spatial dimensions highlighted above provide pointers which would complement sector-specific initiatives brought forward in the "Water Supply and Sanitation Issues Paper" (Report No. 11479). The subsector framework supports the need to restructure public sector delivery through greater decentralization, greatly increasing the opportunities for private sector participation and increasing local user group participation. Improvements in resource allocation in the sector, are consistent with the spatial recommendations of this report, and would require: (a) prioritizing sector expenditures through the preparation and review of a rolling three-year budget, (b) emphasizing maintenance of existing schemes; and (c) providing adequate pricing and regulatory frameworks for efficient and economic operation of urban schemes, and test innovative institutional options for rural water supply delivery that allow local participation. Infrastructure Demand xxi. In order to assess desirable levels of infrastructure investment, based on the likely evolution of future infrastructure demand, the report estimates aggregate demand for transport and communications infrastructure using cross-country comparisons of per capita demand at various levels of per capita GDP.4 Growth in demand together with sectoral incremental capital/output ratios 4/ Desirable investment levels were estimated utilizing regression analyses of cross-country data, and an "efficient" distribution of investment was derived by examining two aspects of effective infrastructure demand: the distribution of economic activity demanding infrastructure (i.e., social overhead capital), and the (continued...) - viii - (ICORs) were used to estimate desirable investment levels to meet the increases in demand. These estimates, which may be considered upper bounds in view of the optimistic assumptions made about future economic growth rates, indicate that planned investment levels are slightly higher than would be desirable in the transport and communications sectors. For the water supply and sanitation (WSS) sectors, similar analyses were not possible due to data limitations, but based on relatively crude assessments, it is believed that planned investments are below levels which would be desirable. In the transport and communications sectors, the public sector investment envelope indicated by the analyses lies between US$475 million (medium demand with 5-Year lag) and US$575 million (high demand, no lag) for the period 1991-1995, whereas the Eighth Plan (1993-1997) calls for investments totalling US$850 million. In the WSS sector, the analysis indicates that desirable investment over the period 1991-1995 should be on the order of US$160 - 190 million; however, to achieve such levels of investment considerable efforts are required to increase the institutional capacity in particular at the local level. Recommendations xxii. Key recommendations of this report have to do with the allocation of scarce infrastructure development resources among the demands of urban and rural areas, various geographical areas of the country (mountain, hill, Terai), the five development regions, and various types of infrastructure services. Other recommendations have to do with the mobilization of resources, particularly at the local level, for infrastructure development. The recommendations of this report are primarily based on efficiency and sustainability considerations, i.e., the methodology emphasizes the effective demand for infrastructure services, and concomitantly the ability to pay for the upkeep of the infrastructure provided. In some areas, allowance will need to be made to accommodate equity or distributional concerns, particularly with regard to those services which impact on the welfare of the poorest segments of society. In general, the evidence indicates that rural infrastructure can positively affect the rural development process and improve the lives of the poor, as stated in a recent discussion paper.' Care is needed, however, to avoid associating poverty or distributional concerns simply with geographical location; provision of expensive road infrastructure in the hills and mountains for instance may not help the poor in these areas, who tend to migrate to the Terai, but rather the property owning segments of the population. In fact, providing services in the Terai, to which the poor have been migrating and will continue to migrate, may have a more targeted impact on the poor. Finally, distributional concerns must be addressed in ways that are physically and financially feasible; in the case of roads into the hill and mountain areas, the high cost of construction and maintenance would limit this as a vehicle of distributional improvement for all but a very limited number of the poor, while at the same time imposing a very high cost on the rest of the country. 4/(... continued) distribution of discretionary income available to pay for "consumption infrastructure", eg. water supply. 5/ Goldstein, E., "The Impact of Rural Infrastructure on Rural Poverty: Lessons for South Asia", World Bank. - ix - xxiii. Distribution of Infrastructure Investments. Based on the growth of economic activity, infrastructure demand, and the ability to pay for infrastructure services, it is estimated that infrastructure investments should favor the rural Terai and urban areas of the country. Urban areas should receive slightly over one-half (approximately 55%) of infrastructure spending; with Hill urban areas (including Kathmandu Valley) receiving about three-fourths and urban areas in the Terai receiving one-fourth of this total urban infrastructure spending. Rural infrastructure should receive slightly under one-half (about 45%) of total infrastructure spending, with rural Terai receiving about two- thirds of the spending on rural infrastructure. xxiv. Such an allocation of infrastructure spending may strike some as inequitable: Urban Hills and rural and urban Terai while accounting for little more than 60% of the population in the year 2010 would receive about 85% of infrastructure investment; rural Hill and Mountain population on the other hand while accounting for almost 40% of the population would receive about 15% of infrastructure spending. Such an allocation, is however, likely to be the most efficient, and significant deviations from it would result in a loss of developmental impact, and the infrastructure created may be unsustainable due to the lack of an economic base to finance operations and maintenance expenditures. xxV. Among sectors there are large differences in infrastructure requirements. The industrial survey pointed out that tourism (hotels) appears to be the most infrastructure intensive (16% of expenditures), while manufacturing (6%) and agro-processing (6%) were found to be the least infrastructure intensive. Tourism in general would appear to be very infrastructure intensive and further development of infrastructure to support tourism should take this into account as it would require considerable resources. xxvi. Reforms aimed at improving public resource management have been started by the Government and should provide the broad framework in which the spatial considerations arrived at in this report should be addressed for future infrastructure development. These reforms include: (a) allocating a greater share of development resources to power, rural infrastructure, health, education and family planning, (b) strengthening prioritization of expenditures with the formulation of a three-year rolling plan and an annual review process, (c) completing on-going priority projects, and (d) improving the management of development programs and supporting district level agencies to improve service delivery. xxvii. Resource Mobilization. Infrastructure development (and maintenance) in Nepal is severely handicapped by a very low level of resource mobilization by the Government, particularly at the local level. Cross country comparisons indicate that Nepal could increase its tax effort substantially without exceeding international norms for low income countries. Presently, central government revenues in Nepal are a little over 10% of GDP, whereas regression analysis with data from other countries indicates that these revenues could be between 14% and 18% of GDP at Nepal's level of per capita income. Resource mobilization by local governments in Nepal is even more deficient, and studies have estimated that annual own source revenues of local government bodies are on the order of $0.01 to $0.10 per capita. The primary source of revenues for local governments is the octroi (an internal trade tax) which accounts for 80% of the own source revenues of municipalities. Other types of taxes, e.g. property taxes and VAT, would have a number of advantages over the octroi, not least the greater burden octroi - x - places on poorer segments of society and its disruptive effects on the inter- district movement of goods. This report recommends that local governments considerably increase resource mobilization to finance infrastructure, and to achieve this rely increasingly on taxes other than the octroi. Changes in tax administration are currently underway or being considered; it is important to ensure that the required strengthening of administrative capacity needed to implement these changes at the local level takes place. xxviii. Environmental Assessment. As a result of increasing population pressures, which are likely to intensify with the completion of the East-West Highway, forest degradation has become a key concern in the mid and far-western Terai. This area being relatively undeveloped, in comparison to the eastern and central Terai, is home to much of the remaining forest resources in Nepal. If development proceeds in an unplanned manner, the forest losses evident in the rest of the Terai are also likely to occur here. To forestall this, a controlled approach is needed, and planned development of settlements, roads and electric supplies in the western Terai can be used to guide development and minimize the damage to forest resources. Improvements and additions to the infrastructure stock in the Terai and Kathmandu Valley must be carefully monitored, recognizing that the environment, especially in the Valley, is under considerable stress. xxix. A matrix summarizing the main issues and recommendations emerging from this assessment is provided in a table (attached) . The matrix sets out the key near-term objectives, issues and recommended actions for infrastructure development in Nepal. - xi - Matrix of Key Issues and Recommendations Objectives Issues Recommendations 1. Improve agricultural output, 1. Poor access to infrastructure has 1. Construction of about 1,200 particularly in the western Terai. caused low level of agricultural km of farm-to-market roads in inputs and hence, productivity. the Terai. 2. Improve sustainability of 2.a. Infrastructure investments in 2.a. Infrastructure investment infrastructure investments. areas with low growth potential. allocations should favor urban areas (slightly over one-half of investment) and the rural terai (about one-third of investment). 2.b. Domestic Resource 2.b. Tax effort could be Mobilization is weak, especially at increased significantly in line the local level. Tax effort is about with international comparators, 50% below international and most increases could be comparators. through VAT and through property taxes at the local level. 3. Improve allocative efficiency 3.a. Inadequate expenditures for 3.a. Increase road maintenance in the road sector. road maintenance. funding. 3.b. Excessive investment in 3.b. Curtail significantly expensive North-South roads in the programs to construct North- Hills. South roads and allocate additional resources to increasing the network density in the Terai. 4. Improve Water Supply and 4.a. High cost of increasing water 4.a. Assign a higher priority to Sanitation coverage. supply coverage in Kathmandu schemes to improve water supply Valley. coverage in secondary towns. 4.b. Weak institutional capacity to 4.b. Strengthen institutional operate and maintain water supply capacity in the sector particularly systems. in secondary towns. 5. Increase the positive impact 5.a. Rapid migration into the 5.a. Planned development of of sustainable infrastructure and western Terai, with population settlements and infrastructure in minimize the possible adverse doubling between 1971 and 1981. the western Terai. impacts, especially in the western Terai. 5.b. Significant forest resources 5.b. Coordinate infrastructure located in the Far-West, especially development in the western Terai Far-Western Terai are vulnerable. within an overall program of forest resource management. NEPAL Infrastructure Development Strategy 1.1 Located in the foothills of the Himalayas, landlocked Nepal suffers from a number of natural disadvantages: an extremely rugged terrain, scattered settlement patterns, and costly international communication links. Geographically, the country is characterized by sparsely populated mountains to the north, the Terai (plains) to the south, and a hill region in between (see Map IBRD No. 23949). The Terai, which is the country's primary agricultural resource and originally the least inhabited region, is now the most densely populated, having attracted large numbers of migrants from the hills and mountains. Migration to the Terai was stimulated by successful malaria eradication programs carried out in the Terai during the 1950s and 1960s. Nepal's population is expected to grow from around 19 million at present to over 27 million by the year 2010, and the distribution of this population is expected to change markedly. Provision of a minimum level of infrastructure in Nepal is rendered difficult owing to the scattered settlement system, rapid population growth (2.2 percent p.a.), strong migratory trends and extreme poverty (per capita income was US$154 in 1991) with 40 percent of the population in absolute poverty and many of these people living in remote areas with little access to basic services. I. NEPAL - AN ECONOMY IN TRANSITION 1.2 Perhaps the single most important message emerging from this report, is that the Nepalese economy is undergoing a unique transformation which has important implications for infrastructure strategy. Unlike most developing economies which tend to be expanding spatially, the Nepalese economy appears to be concentrating in a few geographical areas with economic activity shifting out of most of the Hills and Mountains, into the Central Hills (in particular, Kathmandu Valley) and the Terail/. Increasing spatial concentration of economic activity has a special significance for the provision of infrastructure. A spatially expanding economy poses fewer risks for the development of infrastructure in various parts of the country. Concentration of activity in some regions, on the other hand, can result in infrastructure provided in response to present needs becoming under-utilized or even abandoned as the loci of economic activity shifts. In order to understand this unique feature of recent changes in Nepal, an appreciation is needed of the malaria control programs undertaken in the 1950s and 1960s and the impact these have had on the country's demographics. A. Malaria Control in the Terai 1.3 In the mid-1950s a program to control malaria was launched by the United States Agency for International Development and the World Health Organization (Insect Borne Disease Control Project, 1954; Rapti Valley Malaria For the purposes of spatial disaggregation the country is generally divided, in this analysis, into 5 development regions (Far-Western, Mid-Western, Western, Central and Eastern) which are each then divided into 3 ecological zones (Mountain, HiLL, and Terai) of which the Mountain is the northerrnmost and the Teral, the southernmost. - 2 - Control Project, 1956-59; Malaria Eradication Programme, 1958y). Initially, the programs' coverage was restricted to the Central region, but the results were encouraging and by 1965 anti-malarial activities were expanded to cover other problem areas primarily in the Terai. Most malarial transmission occurs in the Terai, with 60 percent of all malarial cases being recorded in seven of the country's 75 districts (Kanchanpur, Sindhuli, Dhanusha, Mahottari, Nawalparasi and Surkhet), five of these districts are in the Terai (see Map IBRD No. 23949) and the other two are in the inner Terai; out of three other problem districts two, Kailali and Jhapa, are also located in the Terai. 1.4 By 1970, the incidence of malarial cases had fallen from an estimated 2 million cases per year in the pre-eradication period, to 2,500 cases. More recently there has been a resurgence of malaria with the number of cases increasing to about 25,000 per year in the late 1980s. These increases have to do with increasing DDT resistance, a significant number of imported cases from north-eastern India, and cutbacks in the financing of malaria control programs. 1.5 Success in malaria control, combined with nationalization of forests (1957) and Government settlement policies, has permitted human settlement of large areas of the outer and inner Terai, and the release of formerly malarious areas to productive agricultural uses. One study?2 estimated that malaria control encouraged migration of 2 to 2.5 million people from the Hill region into the Terai. For instance, Kanchanpur district in the Far-West Terai had a population of 68,000 in the pre-malaria control period compared to 250,000 people at present, and most of these migrants are engaged in agricultural activities in newly opened agricultural areas. The growth of market towns along the inner Terai was also facilitated by malaria control activities which allowed rapid expansion in agriculture and the consequent increase in trading and other commercial activities. Districts that were previously highly malarious and later, through malaria control in the 1960s and 1970s, experienced high agricultural growth are Nawalparasi, Kapilbastu and Rupandehi in the Western Terai, Makwanpur in the Central Hills, Chitwan and Parsa in the Central Terai and Udayapur in the Eastern Terai. The output and area under crops, particularly paddy, wheat and oil seeds, in these districts increased by a factor of between 1.2 and 5.0 between 1967 and 1987Y. High rates of growth in Terai towns such as Mahendranagar, Bharatpur, Rajbiraj, Birganj, Janakpur and Tribhuvannagar, which grew at rates between 8 and 14 percent p.a. during the period 1971-87, can be linked to rapid expansion in agricultural output in their areas of influence. B. Demographic and Spatial Change 1.6 Nepal's population has grown from just under 10 million at the time of the 1961 census, to 18.5 million (1991 census). Population growth rates which averaged 1.7% p.a. in the 1960s, accelerated to about 2.7% in the early 1970s, and is now believed to be at around 2.2% based on the 1991 'census. More remarkable than this increase in the overall population, however, are changes Z' Shrestha, J.P.B. and N. K. Banerjee. Malaria Control Assessment Project, World Bank PopuLation and Health Project, 1989. ' MiLLs, A. Economic Study of Malaria in Nepal, 1987. ' Vector Biology & Control Project. An External Assessment of the Malaria Control Program in Nepal. HMGN/WHO/USAID/ODA, ArLington, VA., 1990. -3- that have taken place in the distribution of population among various parts of the country. Figure 1 shows the evolution of the spatial distribution of population in Nepal'. Trends in the Distribution of Population 1.7 Between 1971 and 1991, there was a pronounced shift of population from the Mountain and Hill areas to the Terai, and this occurred consistently across each of the five development regions i.e. Far-Western, Mid-Western, Western, Central, and Eastern. Most of this shift originated in the Hills, whose share of the total population fell from 52.5% to 45.6% during the period (Table 1) . Another shift involving a further 2.1% of the population moved out of the Mountains. Together these shifts raised the Terai population from 37.6% to 46.6% of the nation's total. Shifts between the regions, on the other hand, have been much smaller. The most pronounced change occurred in the Far-Western Terai where the population in 1991 was about 3.5 times the population in 1971 (see Gr. Fct. of 3.48 in Table 1), similarly the Mid-Western and Western Terai also experienced rapid population increases with growth factors of 2.4 and 2.2 respectively. Overall the Terai population just about doubled during this 20 year period. Table 1 REGIONAL SHAPES OF TOTAL POPULATION 1971-1991 Ecological Year and 'Far- Mid- Western Central Eastern Total Zones Gr.Fct. ' West West Mountain 1971 2.1% 1.8% 0.3% 3.1% 2.6% 9.9% 1991 1.8% 1.4% 0.1% 2.6% 1.9% 7.8% Gr.Fct. 71-91 1.37 1.24 0.53 1.34 1.17 1.26 Hill 1971 4.5% 7.7% 15.7% 15.1% 9.6% 52.5% 1991 3.6% 6.6% 13.1% 14.5% 7.7% 45.6% Gr.Fct. 71-91 1.28 1.37 1.33 1.53 1.28 1.39 Terai 1971 1.7% 3.4% 5.1% 15.3% 12.0% 37.6% 1991 3.7% 5.0% 7.1% 16.4% 14.4% 46.6% Gr.Fct. 71-91 3.48 2.35 2.22 1.71 1.92 1.98 Total 1971 8.3% 12.9% 21.1% 33.5% 24.2% 100.0% 1991 9.1% 13.0% 20.3% 33.4% 24.1% 100.0% Gr.Fct. 71-91 1.75 1.61 1.54 1.59 1.59 1.60 Total (000s) 1971 958 1488 2446 3866 2798 11556 1981 1320 1955 3129 4909 3710 15023 1991 1681 2406 3752 6174 4448 18462 SOURCE: CBS, Population Monograph 1987 and Preliminary Results, 1991 Census. Gr. Fct: Growth Factor is the ratio of 1991 population to 1971 popuLation. 1.8 Analysis of inter-regional migration flows indicates (Annex I, Table 1.9) that in order of importance the four most preferred destinations have been !' Methodology for population projections: Population in each district was projected by extrapolating past growth rates in each district; these extrapolations were then adjusted pro-rata to conform with the aggregate projection of total population. - 4 - Figure 1: Distribution of Population 1971 - 2010(Projected) IBRD 24679 NEPAL DISTRIBUTION OF POPULATION 1971, 1991, 2010 - - -Population Density, 1971 - -- - -- -- - PO PU LA TIO N D EN SITY - PERSONS/KM2 < 10O/KM2 - Population Density, 1991 10-50/KM2 50-100/KM2 100-200/KM2 200-300/KM2 - 300-500/KM2 TM -Population Density, ---(Projected), 2010 Temp een - p,rp d by The W,ird Snn i. f.o ~h co-mneofraesad, 1ý #for t -nl f The Wd Bonk Goup The denomonnon, use d th. boundones shon,onth, mop d no, rmpy on the pn of The W.r<d Bnk Group eny ,udgmnt, en the lego> sttus of any ternror ny endorsemneen Oacpence 0> such b-undo MARCH 1993i - 5 - the Eastern, Central, Western and Far-Western Terai which together were the destination for about 70 percent of migranty-. Also favored destinations were the Hills in the Central and Western regions which accounted for another 12 percent of destinations. Zones with the largest exodus have been the Eastern Hills and Mountains, together accounting for 48 percent of out-migrants, followed by the Western and Central Hills which accounted for another 26 percent of out- migrants; these four zones therefore accounted for almost three quarters of all out-migrants. Most migration has been intra-regional: in the east from the Hills and Mountains to the Terai; likewise in the center; and in the west from the Hills to the Terai. In general the Terai attracted the majority of migrants (74 percent). If present trends continue, by the year 2010 the Terai is likely to become as densely populated as Kathmandu Valley is today (about 500 persons/sq. km.) . C. Agriculture and Manufacturing Industry 1.9 Agriculture has always been and still remains the backbone of the Nepalese economy, accounting for around 60% of gross domestic product (Table 2) and about 92 percent of total employment. While there have been few signs in Table 2 GROSS DOMESTIC PRODUCT BY INDUSTRIAL SECTORS 1980-1990 (in 1990 NRs Million) Gross Domestic Product Sector 1980 1985 1990 1980/90 NRs Percent NRs Percent NRs Percent Annual % Share Share Share Growth Agriculture 32329 61.8% 38200 57.6% 45848 58.6% 3.56% Mining 100 0.2% 224 0.3% 107 0.1% 0.64% Manufacturing 2238 4.3% 3190 4.8% 4200 5.4% 6.50% Electricity 143 0.3% 313 0.5% 657 0.8% 16.43% Construction 3754 7.2% 5720 8.6% 5620 7.3% 4.23% Commerce 2126 4.1% 2933 4.4% 4059 5.2% 6.68% Transport & Comnunications 3685 7.0% 4413 6.7% 4413 5.6% 1.82% Financial and Real Estate 4383 8.4% 5460 8.2% 6524 8.3% 4.06% Social Services 3575 6.8% 5893 8.5% 6787 8.7% 6.62% TotaL 52335 100.0% 66345 100.0% 78275 100.0% 4.11% Source: Ministry of Finance, Economic Survey, 1990-91 Migration Estimation: District-wise migration for a given period was estimated by finding the difference between actual population at the end of the period and the population that might have resulted from natural increase since the beginning of the period, i.e. by assuning a growth rate equal to the national average. - 6 - recent years that agriculture is losing its importance there have been significant shifts among non-agricultural activities. Manufacturing's share of GDP increased from 4.3% in 1980 to 5.4% in 1990. The growth in manufacturing is clearly associated with recent increases in exports of textiles, clothing and leather goods. Social services have also increased their share of the total, from 6.8% to 8.7%. These gains among non-farm sectors have been offset by declines in transport and communications (down from 7.0% to 5.6%), mining and in the financial sector. Agriculture 1.10 of the five development regions, the Central region is the main area of agricultural production, accounting for about a third of agricultural output and employment in 1984. The Eastern region accounts for a fourth of production and employment, while the Western region accounts for a fifth part of each. The Mid-West and Far-West regions provide the remainder, about a fifth part between the two of them. The regions follow the same rankings in terms of land and labor productivity, with the Central region above the national average, the Eastern close to the average, and the western regions well below the national average. Estimates of production and consumption of edible cereal grains indicate, in general terms, that the Eastern region and usually the Central and Western regions produce surpluses, while the two most westerly regions, Mid-West and Far- West, are almost invariably in deficit. 1.11 The spatial dimension of agricultural production is shown in Figure 2. The Figure shows the spatial distribution of total output value for eleven major crops, meat and milk production using an aggregate index (Average for Nepal = 1.0). Value of output was computed using average national prices for various Figure 2: Spatial Distribution of Agricultural Output 1986 IBRD 24683 NE PAL SPATIAL DISTRIBUTION OF AGRICULTURAL OUTPUT - 1986 Agricultural Value of Output Index AGRICULTURAL VALUE INDEX < 2 2-A 4-6 6-8 > 8 Th -np has bee prepared by The Wa-d Bank' s iftxff ey a e- co- -sec of rad-r and, s lo0-e n,seo _ at rThe W_Wd Bank Grp The d_nmnaa,, .d and h boundones how n d", mdo o Aripalt of The WVald 8eo GOop any.dgen on . ;=go sla any on-ay a' any -lbniorn a, o cpanponc. f/ -.,h bou..on.- - 7 - commodities such as paddy, maize, wheat, millet, barley, potato, oil seeds, sugar cane, tobacco, jute, pulses, meat and milk. The concentration of output value in the Kathmandu Valley and the Eastern and Central Terai would be even more marked if meat and milk production were excluded as the production of these is more prevalent in the Hills and Mountains (see also Annex II, Figure 2.6). 1.12 As would be expected, the data shows fairly strong correlations between the productivity of agricultural lands and the availability of infrastructure such as roads and irrigation facilities, and inputs such as fertilizer. Annex II, Figure 2.8 presents four maps showing distribution of the value of agricultural output per hectare of agricultural land, density of the road network, irrigated land as a percentage of agricultural land, and fertilizer use per unit of agricultural land. A regression of agricultural value per hectare against road density, irrigation and fertilizer use for the 75 districts yielded a fair correlation with an R Square of 0.65. 1.13 Availability of irrigation appears be the most significant factor of the three considered, followed by fertilizer use, and finally road density. The latter is almost uniformly low and perhaps nowhere, other than in the Kathmandu Valley, has the extent of the road network made a significant impact on agricultural production. There does, however, appear to be a fair correlation between fertilizer use and the density of the road network (R Square = 0.56). Geographically, fertilizer use is extremely concentrated, with use in Kathmandu Valley being 7.5 times the national average. In the Terai, the other region with high fertilizer use, it ranges from 4.5 times the national average (in Parsa) to as low as half the average (in Bardiya). In general, the Central region has the highest fertilizer use. The western and eastern extremities of the Terai both appear to use about half the national average, and this would appear to reflect their general disadvantage with regard to transport and communications. 1.14 The value of agricultural output per hectare of agricultural land varied from 3 times the national average (Bhaktapur) to one quarter for some Far- Western Hill districts. In the Terai, all districts were above the national average ranging between 1.0 (Saptari) to 2.8 (Bara) times the national average. Interestingly, Rasuwa district in the Mountains has a level of agricultural productivity comparable to districts in the Terai and in the Kathmandu Valley, and the area appears to have benefitted from the good road link established through Nuwakot in the Hills to Kathmandu Valley. Manufacturing Industry 1.15 As in the case of agriculture, the Central region is the major player in manufacturing, and has substantially increased its dominance in recent years. In 1981/82 the region accounted for 48% of total employment in the sector, 58% of fixed assets and 51% of value added (See Table 3). Five years later, the region had increased its shares of manufacturing employment by 11%, fixed assets by 4%, and value added by a remarkable 17%, implying that most of the increase was in labor intensive activities. The greatest part of this increase occurred in the Bagmati zone, which includes Kathmandu. Some part of this increase, perhaps a large part, is associated with the contemporaneous increase in exports of carpets and ready-made garments (see para. 1.20) much of which is produced in the zone. In interpreting the data on manufacturing it is important not to lose sight of the fact that manufacturing is still a very small part of the Nepalese economy, contributing only about 6% of total employment. - 8 - Table 3 REGIONAL SHARES OF MANUFACTURING ACTIVITY 1981/82 AND 1986/87 1981/82 1986/87 1981/82-1986/87 1 1 -Changes in Shares Region Employees Fixed Value Employees Fixed Value Employees Fixed Value Assets Added Assets Added Assets Added Eastern 34.1% 25.1% 21.1% 22.2% 19.3% 17.2% -11.9% -5.8% -3.9% Central 47.8% 58.2% 51.3% 58.4% 62.6% 68.4% 10.6% 4.3% 17.1% Western 10.2% 11.3% 17.1% 12.9% 11.2% 8.7% 2.7% -.1% -8.4% Mid-West 4.4% 2.2% 3.9% 3.6% 2.1% 3.2% -.9% -.2% -.7% Far-West 3.5% 3.1% 6.6% 3.0% 4.9% 2.4% -.5% 1.8% -4.1% Total 100.0 100.0% 100.0% 100.0% 100.0% 100.0%1 SOURCE: Census of Manufacturing Establishments 1986-1987, and Development Atlas of Nepal, 1988 Regional Contributions to Gross Domestic Product 1.16 Unlike some developing countries where a major part of national production is concentrated in a single primate city region, production in Nepal is relatively dispersed. Nevertheless, in 1984/85 some 60% of total national output came in roughly equal shares from just three of the country's fifteen geographic zones, the three being the Central Hills (19%), and the Central (21%) and Eastern (20%) Terai (see Table 4). Collectively, the Terai accounted for 58% Table 4 GROSS DOMESTIC PRODUCT BY REGIONS 1984/85 (1990 NRS) Development/ Far- Mid- West Central Eastern Total Ecological Region West West Mountain GDP NRs Million 464 398 164 1128 995 3052 GDP % Share 0.7% 0.6% 0.2% 1.7% 1.5% 4.6% GDP per Capita NRs 1503 1542 7840 2603 2839 2225 GDP Capita Index 36 36 186 64 73 56 Hill GDP NRs Million 929 1990 4910 12871 4246 24879 GDP % Share 1.4% 3.0% 7.4% 19.4% 6.4% 37.5% GDP per Capita NRs 1435 1767 2121 5625 3218 3233 GDP Capita Index 36 44 53 141 80 81 Teral GDP NRs Million 1990 3450 5772 13800 13402 38414 GDP % Share 3.0% 5.2% 8.7% 20.8% 20.2% 57.9% GDP per Capita NRs 3475 4265 5079 5128 5335 4971 GDP Capita Index 87 108 129 129 134 125 Total GDP NRs Million 3317 5838 10814 27201 18643 66345 GDP % Share 5.0% 8.8% 16.3% 41% 28.1% 100% GDP per Capita NRs 2210 2688 3130 5031 4489 3977 GDP Capita Index 56 67 79 129 113 100 SOURCE: Regional GDP shares from Basic Features of the National Development Master Plan (1990-2000)., National Planning Commission, 1989. of total output, substantially more than the Hills with 37%, even though both geographic zones had similar population size at the time. 1.17 Among the fifteen geographical zones of the country, there was an unusually wide variation in estimated per capita income levels, with the poorest zones being in the Mountains of the Mid and Far-West with indices of little more than a third of the national average, compared to around 1.3 times in the Terai of the Western, Central, and Eastern regions, and over 1.4 times in the Central Hills (the index of 186 for the Mountains in the west may be associated with the concentration of tourist activities among a small population). In general, per capita income levels in the Terai exceed those in the Hills and Mountains, which accounts for the sustained migration to the Terai. D. External Trade 1.18 Nepal's external trade has grown from NRs 2.7 billion in 1975 to NRs 20.5 billion in 1989, which represents an annual growth rate of 16 percent in nominal terms (See Table 5). Exports have grown at an annual rate of 12 percent from NRs 0.9 billion in 1975 to NRs 4.2 billion in 1989, while imports have grown faster at 17 percent p.a., from NRs 1.8 billion to NRs 16.3 billion over the same period. The trade deficit which was NRs 0.9 billion at the beginning of the period and NRs 12.1 billion by 1989, grew at around 20 percent p.a. over the period. Inflation during the 1980s has been around 8 percent p.a., which indicates that in real terms exports grew at around 4 percent, imports grew at around 9 percent, and the trade deficit has been growing at around 12 percent p.a. Tabte 5 NEPAL'S FOREIGN TRADE Trade VoLumes (NRs BiLLion) Nominal Growth Rates % p.e.) 1974-75 1984-85 1988-89 1975-85 1985-89 1975-89 TotaL Trade 2.7 10.4 20.5 14 17 16 - India 2.2 5.5 5.3 9 -1 6 - Rest of World 0.5 4.9 15.2 23 29 28 Exports 0.9 2.7 4.2 11 11 12 - India 0.7 1.6 1.0 8 -12 2 - Rest of WorLd 0.2 1.1 3.2 17 27 25 Imports 1.8 7.7 16.3 15 19 17 - India 1.5 3.9 4.2 10 2 8 - Rest of WorLd 0.3 3.8 12.0 26 29 27 Deficits 0.9 5.0 12.1 17 22 20 - India 0.7 2.3 3.2 12 8 11 - Rest of WorLd 0.2 2.7 8.9 26 30 27 Source: StatisticaL Year Book, HMGN, 1990 1.19 The most interesting development in Nepal's external trade, aside from the rapidly growing trade deficit, has been the shift away from trade with India, to trade with the rest of the world. Overall trade with India has either declined or remained static (imports) in real terms since 1975. The second half of the 1980s shows a decline even in nominal terms, and this data pre-dates the trade and transit impasse which occurred in 1989/90 following which trade would - 10 - have diminished even further. Recent developments in India which have led to significant liberalization of India's trade regime could further reduce trade levels with Nepal since some of Nepal's trade with India was due to businesses in India using Nepal's more liberal trade regime to circumvent Indian controls. Composition of Exports 1.20 The past decade has seen a significant shift in the composition of Nepal's exports. Whereas in the late 1970s the main exports were raw agricultural materials, foodstuffs and live animals, today they are manufactured goods (especially carpets and to a lesser extent leather goods) and miscellaneous manufactures, primarily clothing (see Table 6). The current value of both categories of manufactured exports increased sharply during the 1980s, at the rate of 25% per year for the former (carpets), and 40% per year for the latter (clothing). In 1990, manufactured goods accounted for over 80 percent of total export value, as compared with 30 percent in 1980. Agricultural exports have declined due in part to rising domestic consumption, which has meant not only less surplus available for export but also a widening trade deficit in farm goods dde to increased imports of agricultural commodities. TabLe 6 EXPORTS CLASSIFIED BY MAJOR COMMODITY GROUP (NRS MILLION) Commodity Group 1979/80 (a) Percent Total 1989/90 (b) Percent Total Annual % change 1980-1990 Food/Live AnimaLs 306.5 26.6 647.7 12.5 7.8 Tobacco/Beverages 2.6 0.2 21.2 0.4 23.3 Crude Materiats 469.6 40.8 226.0 4.3 -7.1 Mineral FueLs 0.5 0.0 0.0 0.0 0.0 AnimaL/Veg. Oils 20.4 1.8 15.0 0.3 -3.0 ChemicaL/Drugs 1.3 0.1 20.6 0.4 31.8 Manufactured Goods 291.8 25.4 2724.8 52.1 25.0 Machinery/Transport 3.2 0.3 0.1 0.0 -29.3 Misc. Manufacturing 54.0 4.7 1580.1 30.2 40.2 Other Commodities 0.6 0.0 0.0 0.0 0.0 TOTAL 1150.5 100 5235.5 100.0 16.4 SOURCE: (a) 1989 StatisticaL Year Book of Nepal (b) 1991 Statistical Pocket Book of Nepal Major Trade Gateways 1.21 Four main gateways, Birganj, Tribhuvan Airport, Biratnagar and Bbairahawa, accounted for about 90% of the country's trade in 1989. Table 7 shows the value of imports and exports at each of these gateways for trade with India and with the rest of the world (ROW). Birganj in the Central Terai is clearly the main import gateway and this is due to its position as the main import point for imports from both India and ROW. Tribhuvan Airport, is the primary export gateway serving the high value carpet and garment export trades and its importance is growing as these exports gain an increasing share in the country's overall exports. Bhairahawa in the Western Terai and Biratnagar in the Eastern Terai are both primarily import gateways serving local import needs, as opposed to Birganj where the imports are primarily for Kathmandu Valley and for national distribution. - 11 - Table 7 TRADE VOLUME OF MAIN GATEWAYS - 1990 Exports I nmrts Total % of Gateway Location India ROW India Trade Total (--------NRs Mill-ions-------- % Birganj Centrat-Terai 114 172 3276 5802 9364 47 Tribhuvan Airport Central-HiLLs -- 2850 -- 1757 4607 23 Biratnagar Eastern-Terai 266 47 599 1369 2281 12 Bhairahawa Western-Terai 48 N.A 881 N.A 929 5 Total of Four Gateways 428 3069 4756 8928 17181 87 TotaL for Nepal 909 3219 5759 9906 19793 100 II. RURAL-URBAN LINKAGES 2.1 Unlike many developing countries, the urban settlement system in Nepal is not dominated by a single large metropolis, but is characterized by a hierarchy of cities and towns that adhere to a smoothly declining curve of city size. A measure of primacy, based on the four largest cities, declined from 0.66 in 1971 to 0.57 in 1987, which is well below the figure of 0.8 to 1.2 typical of a primate city structure. In 1987, according to a sample survey of urban centers made that year, Nepal had two cities with populations greater than 100,000, seven cities in the range 50,000 to 100,000, and twenty-three urban centers in the range 10,000 to 50,000 people. Kathmandu-Lalitpur with a population of just over 400,000 was two and a half times the size of the second city, Biratnagar, and four times the size of the third city, Birganj. A. Urbanization 2.2 As is to be expected, given the small proportion of the work force occupied in activities outside of agriculture, the level of urbanization in Nepal is still very low, among the lowest in the world. At the time of the 1952/4 census, only 2.9% of the population lived in urban areas (Annex I, Table 1.10). By 1971, the proportion had risen to 4.0%, and by 1991, the urban population was up to 9.1%. As in neighboring India, the rate at which the country is urbanizing is slow, though it accelerated between 1971 and 1981 with the rate of growth of urban population rising to 7.6% per year in the 1970s. Subsequently however, it appears to have dropped back to 5.8% p.a. between 1981 and 1991. Urban growth in Nepal is ultimately restricted by the slow growth of demand for goods and services. Exports and tourism, despite their high rates of growth, are not yet large enough to affect the urban sector as a whole. The domestic market is constrained by low incomes, poor domestic transport, poor infrastructure, a high import content to domestic output, high import transit costs and labour force of poor skills. 2.3 Urban population is concentrated in the Central Hills, and in the Central and Eastern Terai, which together account for more than 70% of the total urban population in the country (Table 8). None of the Mountain zones has any urban areas. Between 1981-91, urban population in Nepal has increased by 75 percent (Gr. Fct. of 1.75), with the Terai experiencing the strongest increase. Urban areas in the Central Terai more than doubled their population (Gr. Fct. 2.12), while in Eastern and Western Terai the increases were about 80 and 70 - 12 - percent respectively. The main features of shifts in the urban population is the marked decline of the Central Hill region, whose share of total urban population fell 17 points from 58% to 41% in the period 1971-91, and the corresponding gains in the Terai, mainly in the Center (7.6%), and surprisingly in the Far-West (6.4%) due to the rapid growth of two towns, Mahendranagar and Dhangadhi. TabLe 8 REGIONAL SHARES AND GROWTH FACTORS OF URBAN POPULATION 1971-1991 Far-West Mid-West Western CentraL Eastern Total Hitt 1971 0.0% 0.0% 5.9% 57.5% 1.6% 65.0% 1981 0.0% 1.5% 6.3% 41.6% 2.5% 51.8% 1991 0.7% 1.4% 6.4% 40.9% 1.8% 51.3% Gr. Fct.1 81-91 1.64 1.79 1.73 1.27 1.74 Terai 1971 0.0% 5.1% 6.5% 5.9% 17.5% 35.0% 1981 7.4% 7.2% 5.6% 11.1% 18.4% 48.2% 1991 6.4% 4.6% 5.4% 13.5% 18.8% 48.8% Gr. Fct. 81-91 1.51 1.12 1.68 2.12 1.79 1.77 TOTAL 1971 0.0% 5.1% 12.4% 63.4% 19.1% 100% 1981 7.4% 5.7% 11.9% 52.7% 20.8% 100% 1991 7.1% 4.6% 11.9% 54.4% 20.6% 100% Gr. Fct. 81-91 1.68 1.42 1.75 1.81 1.74% 1.75 TOTAL (000s) 1971 0 24 57 293 89 463 1981 71 69 114 504 199 957 1991 120 101 200 915 346 1682 2' Gr.Fct.: Ratio of 1991 urban popuLation to that in 1981. B. Rural Development and Urban Growth 2.4 The mutual interdependence of agricultural production and urban growth, especially at early stages of urbanization, is well illustrated in the case of Nepal, where areas with prosperous agriculture have also experienced rapid growth of urban population. Of the 16 urban centers which grew as fast or faster than the median rate of 5.8% per year during the period 1971 through 1987, 11 were located in zones where agriculture was strong (Table 9), i.e., those with above average increases in output, as measured by shifts in the value of production of four major commodities in the period 1975 through 1986. On the other hand, thirteen of the sixteen slower growing urban centers were located in zones where agricultural output also increased more slowly. It should also be noted that of the 16 towns growing faster than the median, 14 were located in the Terai; whereas, 80 % of the towns located in the Hills, including Kathmandu- Bhaktapur-Lalitpur, grew at rates below the median. Also interesting is the relationship of gateway (for imports/exports) towns with urban growth; of 15 towns categorized as gateways, 10 grew faster than the median rate. 2.5 Given the incipient state of manufacturing in Nepal today, it is not surprising to find that the performance of the sector has little impact on the growth of urban population, even in zones with major shares of manufacturing activity. The most noticeable examples are the five cities in Bagmati zone which includes Kathmandu, Bhaktapur and Lalitpur. Even though these cities collectively increased Bagmati's share of total manufacturing employment by 17 - 13 - percentage points in the five year period 1981/82-87/88, all five experienced population growth rates below the median. Table 9 GROWTH OF URBAN CENTERS 1971-1987 Town Geog. Gate- Dev. Population Ag. Change Mfg. 71-87 Region Way Region in 76-86 Change Growth 1987 81-86 Rate Mahendranagar T G FW * 55464 + (*) 13.9% Birganj T G C 98858 + (+) 13.5% Bharatpur T C * 38494 + (+) 11.4% Rajbiraj T G E 43334 - (-) 11.3% Janakpur T G C 62509 + (-) 9.7% Tansen H W 22403 - (-) 8.1% Pokhare H G W 70984 + (-) 8.0% Tribhuvannagar T MW * 29316 + - 7.9% Dharan T E 67832 + (+) 7.8% Biratnagar T G E 148855 + (+) 7.7% Hetauda T C 52507 + (+) 7.6% ButawaL T W 38910 - (-) 7.2% Inaruwa T G E ** 24809 + (+) 7.1% Siddarthanagar T G W 48429 - (-) 6.7% Malangawa T G C** 20672 + (-) 5.9% Dhangadhi T G FW * 29140 - (-) 5.8% Damak T E** 30344 - - 5.0% Bhadhrapur T G E 14510 - 4.2% Kathmandu-Latitpur H G C 405336 - + 4.2% KaLaiya T C ** 19159 + (+) 4.2% Lahan T E * 16630 - (-) 3.8% Nepatganj T G MW 42916 - (-) 3.8% Itam H E 12118 - - 3.2% Banepa H C ** 12607 - + 3.2% DipayaL H FW ** 11794 - (-) 3.1% Dhankuta H E * 14949 + (+) 3.1% Taulihawa T G W ** 14552 - (-) 2.8% Bidur H C * 15354 - + 2.3% Bhaktapur H C 56741 - + 2.2% JaLeswor T G C 15843 + (-) 2.2% DhuLikheL H C ** 10650 - + 1.5% Birendranagar T MW * 22054 - N/A TOTAL 1 1568073 6.1% SOURCE: 1. Ministry of Housing and PhysicaL Planning, Recommended PoLicies and Strategies for Urban Development, 1991 2. CBS, PopuLation-1981, Vol. III, Kathmandu, 1984 3. USAID, Nepal Urban Development Assessment, 1984 NOTES: * Not Urban Areas in 1971 ** Not Urban Areas in 1971 and 1981 E Eastern, C: Central, W: Western MW Mid-Western, FW: Far-Western + = Positive shift in 3 indicators - = negative shift in 3 indicators (+) = Positive shift in 2 indicators (-) = negative shift in 2 indicators 2.6 It appears, then, that at Nepal's present stage of development, agriculture and trading rather than manufacturing are still the primary local economic base that determines the growth of population in urban centers. C. Internal Trade and Price Variations 2.7 Rapid growth in the Terai towns has been based on strong trading - 14 - links with the local agricultural economy. Data on the sources of procurement by wholesale units in various parts of Nepal reveal the differences in economic and market activity between Terai and Hill/Mountain economies in Nepal. Table 10 presents data for 16 towns on the percentage of purchases by wholesale units from various sources of supply (local, national and Indian). Most towns located in the Hills and Mountains procure very little from their respective local areas, the exceptions are major urban centers such as Kathmandu, Pokhara and Banepa (which is close to Kathmandu). By contrast, most Terai towns rely on local markets for a significant portion (40% to 90%) of their procurement. This is indicative of the relative lack of integration of Hill and Mountain market towns with any production base in their economic hinterlands. Table 10 Sources of Procurement by Wholesale Units Development Region Local (%) National (%) India (%) Mountain Towns JumLa Mid-Western 50 50 Khandbari Eastern 100 HiLL Towns Birendranagar Mid-Western 100 Gorkha Western 100 Pokhara Western 47 50 Tansen Western 96 5 Banepa Central 89 11 Kathmandu Central 45 32 23 Dhankuta Eastern 100 Terai Towns NepaLganj Mid-Western 46 22 33 Butwal Western 53 29 18 Bharatpur Central 68 3 29 KaLaiya Central 90 10 Birganj Central 42 28 30 Rajbi raj Eastern 84 16 Biratnagar Eastern 73 9 19 Source: "Inter and Intra-Regional Trade Flows Study", CEDA, Tribhuvan University, Kathmandu, 1988 2.8 Large variations in prices among regions also indicate the poor accessibility and lack of market integration in the hill and mountain zones. Table 11 presents price indices for farm and non-farm products in various parts of the country. The indices are based on simple averages of the prices of 5 farm commodities (rice, wheat, pulses, sugar, potatoes) and 5 non-farm commodities (soap, kerosene, sandals, pencils, paper). Since this is not a sophisticated price index, the results should only be treated as indicative of price variations. Prices of farm produce ranged from an index of 76 in the Mid-Western Terai to 152 in the Western Mountains (average for Nepal = 100). For non-farm products the index ranged from 64 in the Central Hills to 155 in the Western Mountains. By ecological zone, the average index for all products was 85 in the Terai, 95 in the Hills (12% higher), and 142 in the Mountains (67% higher than in the Terai). Among development regions, prices in the Central region appear to be the lowest, increasing progressively towards the western parts of the country, with prices in the Far-West being 25 percent higher than in the Central region. - 15 - TabLe 11 REGIONAL VARIATIONS IN RETAIL PRICE INDICES 1988 Far- Mid- Western Centra Eastern TotaL Western Western MOUNTAIN Farm Produce N/A N/A 152 N/A 148 150 Non-Farm Products N/A N/A 155 N/A 116 136 ALL Products N/A N/A 153 N/A 131 142 HILL Farm Produce 95 102 96 83 119 99 Non-Farm Products 83 108 97 64 92 89 ALL Products 96 105 96 75 104 95 TERAI Farm Produce 100 76 82 81 85 85 Non-Farm Products 107 69 N/A 87 85 87 All Products 102 76 82 82 85 85 AVERAGE (HiLL and Terai only) Farm Produce 97 89 89 82 102 92 Non-Farm Products 95 89 87 76 89 89 All Products 99 91 89 78 95 90 Source: Weekly Prices Information BuLLetin: Wholesale and Retail Prices of EssentiaL Food and Non- Food Commodities by Districts Markets in NepaL, VoL. 1, 1990. III. QUALITY OF INFRASTRUCTURE SERVICES 3.1 Not surprisingly, in view of the problems the country faces, Nepal offers its citizens one of the poorest levels of infrastructure services. Road densities of.0.4 km per 1000 of population, and 5 km per 100 sq. km. are among the lowest in Asia. Only 42% of the country's population is expected to have access to safe drinking water by the end of 1992, and the coverage with regard to sanitation is even more limited, with just 6% of the population having access to existing or projected facilities by the end of 1992. The results of a survey, carried out in Nepal, of the adequacy and cost of infrastructure services is also presented in this section. A. Coverage of Infrastructure Services 3.2 Coverage in terms of the proportion of the population served or the geographical area provided with infrastructure services is a primary indicator of infrastructure adequacy. The following provides information on coverage for various types of infrastructure services in Nepal. Road Network 3.3 Table 12 compares road densities in other countries (as of 1984) with those found in Nepal. Even countries with mountainous terrain, such as Afghanistan, have constructed considerably more roads on a per capita basis than Nepal. Considering the Terai separately, this relatively flat region has less than a third of the road densities found in neighboring India, and a little over 10 percent of the densities per square kilometer found in Bangladesh. - 16 - TABLE 12 ROAD DENSITIES IN NEPAL AND OTHER COUNTRIES Km of Road per 1000 Population Km of Road per 100 Sq.Km Afghanistan 1.4 2.9 Bangladesh 1.8 112.0 China 0.9 9.0 India - Total 1.9 41.3 - Uttar Pradesh (1961) 0.8 20.9 Pakistan 1.1 11.9 Sri Lanka 1.6 37.7 United States 27.5 66.4 NepaL - TotaL 0.4 5.0 - Mountains & HiLLs 0.5 4.0 - Terai 0.4 13.5 Source: Trends in the DeveLopment of Roads and Road Transport in Asia and the Pacific, ESCAP, Bangkok 1984; Dept. of Roads, HMG/N, Kathmandu, 1992; History of Road DeveLopment in India, Central Road Research Institute, 1963. 3.4 In general, parts of the country situated to the north and towards the west have an extremely difficult terrain and are sparsely populated. Thus, out of 75 districts in Nepal, 23 districts with a population of about 2.5 million, most of which are in the Western and Far-Western regions, do not have any roads. Cost of road construction in the rugged terrain found in many parts of the country is high, and thus access to these areas is limited mainly to trails used by human and animal traffic. Air travel is the only motorized mode of transportation available in some of these areas. Table 13 provides data on road densities in the 15 zones of the country. As is evident from the table, road densities are extremely low in most of the country with only the Eastern Terai approaching the densities found in neighboring India. Both on a per capita basis, as well as on the basis of land area, a very strong case can be made for at least doubling the road densities in the Terai. The case for increasing the road densities in the Hill and Mountain areas is more difficult in view of the terrain and the consequent high cost of construction. Increasing population densities in the Terai and the potential for expansion of agricultural activities there, also mean that improving road access in the Terai should receive priority attention. TABLE 13 SPATIAL DISTRIBUTION OF ROAD DENSITIES IN NEPAL Far-West Mid-West West CentraL East Total Road km/1000 Pop Mountain - - - 0.8 0.1 0.3 HiLL 0.2 0.2 0.3 0.5 0.3 0.3 Terai 0.6 0.6 0.5 0.3 0.5 0.5 Total 0.3 0.3 0.4 0.4 0.4 0.4 Road km/100 sq.km Mountain - - - 5.7 0.2 0.7 HiLl 2.2 2.0 3.5 10.8 3.4 4.5 Terei 8.3 7.6 12.6 10.2 18.1 11.4 TotaL 2.8 2.0 4.5 9.4 6.2 4.8 - 17 - Water and Sanitation 3.5 Table 14 gives details of the water supply coverage as of 1991-92 by development zone and region. Existing water supply coverage in rural areas Table 14 ESTIMATED UATER SUPPLY COVERAGE (% OF POPULATION) - 1992 Deelopment Regita Ecological Far-West Mid-West West Central East Total Zone Nountain Rural 44.0 38.0 76.0 23.0 30.0 40.9 Total 44.0 38.0 76.0 23.0 30.0 40.9 Hill Rural 44.0 42.0 43.0 32.0 30.0 37.9 Urban 12.0 98.0 78.0 86.0 85.0 85.0 Total 45.0 43.0 45.0 46.0 31.0 43.0 Terai Rural 68.0 72.0 16.0 50.0 26.0 40.5 Urban 16.0 57.0 50.6 51.0 51.0 47.0 Total 60.0 71.0 19.0 50.0 28.0 41.1 Total Rural 53.0 52.0 34.0 43.0 27.0 39.0 Urban 24.0 66.0 67.0 77.0 54.0 67.0 Total 51.0 53.0 35.0 48.0 29.0 42.0 Source: Based on "Water Supply and Sanitation Coverages", Dept. of Water Supply and Sanitation, HMGN. 1992. is estimated on the basis of the design population of completed water supply projects (piped water supply and shallow handpump tubewells installed by various governmental agencies and non-governmental organizations). In urban areas, the coverage is estimated based on average water usage rates which vary from 45 liters per capita per day (lcd) to 180 lcd depending upon the type of connection. As of 1990, an overall 38 percent national coverage was estimated, rural coverage was 35 percent (about 5.75 million people out of a total rural population of 16.5 million) and urban was 75 percent (about 1.2 million out of a total 1.6 million urban population)'. 3.6 There are two points of caution worth mentioning with regard to the coverage figures. First, the coverage indicators employed to arrive at the above estimates can be questioned as safe water does -not necessarily mean piped water or that from tubewells. Protected traditional wells or even some natural springs can provide a level of quantity and quality sufficient to safeguard a community's health. Second, the estimated coverage figures may be somewhat higher than the actual as they include the service population of all completed schemes some of which are in need of rehabilitation, and are probably not serving all of the intended service population. 3.7 Estimation of actual sanitation coverage in Nepal is even more difficult as no systematic records are available. Except for about 25 percent ' For more detailed information, see Nepal : Water Supply and Sanitation Sector Issues Paper. IBRD Report No. 11479-NEP. 1993. - 18 - of the population living in the Kathmandu Valley towns of Kathmandu, Lalitpur, and Bhaktapur, no proper sewerage system is in place elsewhere. Sanitation coverage in the municipalities is still low. In rural areas sanitation coverage is virtually nonexistent. Most estimates of sanitation coverage are based on the number of facilities constructed directly through various projects, mainly for demonstration purposes. However, there are some privately constructed facilities as well. Sanitation coverage estimation is further confounded by the lack of a consistent definition of adequate sanitation. In 1990, the population using household latrines has been estimated to be 3 percent in rural areas and 34 percent in urban areas or 6 percent of the total national population. Power Supplies 3.8 Currently, the energy sector in Nepal is dominated by traditional fuels such as fuelwood, agricultural waste and animal dung, which collectively account for about 94 percent of all energy consumed in Nepal. Commercial energy, including that derived from fossil fuel and electricity, provides the remaining 6 percent. With the current installed capacity of about 300 MW, electricity accounts for 2 percent of all energy consumption. Although Nepal is well endowed with hydroelectricity resources, only 9 percent of the population has access to electricity. 3.9 Residential consumers of electricity (accounting for 45 percent of all electricity sales in 1991) make up the largest consumer group. Industrial consumers are the second largest consumer category and their share of total sales has ranged between 34 and 39 percent. The total number of electricity consumers is estimated to have risen from 168,000 in 1985 to 318,500 in 1991, indicating an increase of about 12.4 percent per annum or more than 20,000 new connections a year. Of the total 318,500 electricity consumers in 1991, about 301,000 are estimated to be in the residential category. This means that about 9 percent of households in the country have access to electricity. Table 15 provides details of electrification status in 1990, by development region and ecological zone. Interestingly, the Far-West and Western Terai appear to have better electrification coverage than the Central Hills. However, in the future as the population in these areas increase the need to expand distribution networks is likely to become evident. Tabte 15 STATUS OF ELECTRIFICATION IN NEPAL (% of Households with Electricity) Ecological Development Region Zone Fer-West Mid-West West- Central East Total Mountain 1.1 0.8 25.0 16.0 1.6 6.7 Hiu 1.4 2.0 4.5 15.4 2.4 7.0 Terai 15.2 6.0 25.4 6.5 11.9 11.5 Total 6.2 3.3 11.3 11.2 8.0 9.0 Source: World Bank, 1990 - 19 - Telecommunications 3.10 During the past three decades, though the telecommunication network in Nepal has expanded considerably, accessibility to service is still severely limited. The density of telephone connections per 100 inhabitants in Nepal, at 0.29 in 1989, was one of the lowest in the world. Even this very low density does not reflect the real situation which varies substantially between Kathmandu Valley and other parts of the country. Thus, in 1989, there were 3.29 telephones per 100 inhabitants in Kathmandu Valley and only 0.11 in the rest of the country. Recent investments are expected to raise the coverage per 100 inhabitants to 0.33 for the entire country by end 1991. The coverage for Kathmandu Valley would increase to 3.53 per 100 inhabitants and for the rest of the country to 0.13. Table 16 provides details of actual coverage by zone. About 60 percent of all telephones in the country are in Kathmandu Valley, and in the other parts of the country most telephones are located in the larger towns and district headquarters. For the rural population telephone service is available only in the form of some 50 public call offices. TabLe 16 SPATIAL DISTRIBUTION OF TELEPHONE COVERAGE IN NEPAL - 1991 DEVELOPNENT REGION Telephones/100 op.) Ecological Far-West Kid-West Vest Central East Total Region Mountain 0.00 0.00 0.00 0.00 0.00 0.00 Hill 0.02 0.05 0.10 1.50 0.04 0.49 Terai 0.47 0.21 0.17 0.19 0.23 0.22 Total 0.17 0.10 0.13 0.74 0.14 0.32 Source: World Bank, 1992 B. Cost and Adequacy of Infrastructure 3.11 In order to assess inadequacies in infrastructure services, a survey was conducted of 150 industrial establishments located in various parts of the country. Annex IV presents the detailed results of the survey. Industrial establishments, being generally better staffed and more sophisticated than other users of infrastructure, constituted a superior source of information on the quality of infrastructure services. In interpreting the results presented here, however, caution should be exercised as some of the results may in different ways be biased towards an industrial view point on infrastructure deficiencies. Profile of Industrial Expenditures 3.12 In order to understand the relative significance of infrastructure to industrial operations, the survey included collection of data on infrastructure related expenditures. Table 17 presents a breakdown of industrial production costs among various cost categories such as raw materials, labor, infrastructure costs, etc. The data is presented as percentages of total operating expenditures, and is classified by development region, by ecological zone and by industrial sector. - 20 - Table 17 INFRASTRUCTURE COSTS IN INDUSTRIAL COST STRUCTURE Location/Type of Raw Wages & ELect- Trans- Water Tele- Sewerage TotaL Infra- Industry Material Salaries ricity port SuppLy Comm. & Waste Other Expenditure structure (%) (%) (%) (%) (%) %) (%) (%) :NRs 000s) (%) Development Region Eastern (34) @/ 74.7 14.0 4.1 1.3 0.1 0.5 0.1 9.4 17,211 6.1 CentraL (75) 67.2 14.4 2.5 2.9 0.2 0.8 0.1 14.5 42,655 6.5 Western (21) 68.9 14.6 4.7 2.5 0.5 0.7 0.2 12.8 9,550 8.6 Mid-Western (10) 62.2 27.7 2.6 6.6 0.5 0.4 0.0 5.5 5,025 10.1 Far-Western (10) 81.5 7.5 3.0 3.7 0.2 0.5 0.2 6.5 17,916 7.6 Ecological Zone Terai (77) 71.5 11.1 2.5 2.2 0.2 0.4 0.1 14.8 32,150 5.4 Hits (69) 65.6 18.3 3.2 3.5 0.4 1.2 0.1 10.9 24,899 8.4 Mountains (4) 22.4 44.1 15.0 11.0 0.0 1.5 0.2 20.8 5,387 27.7 Industrial Sector Manufacturing (89) 69.2 14.2 2.5 2.4 0.2 0.5 0.1 13.4 27,544 5.7 Agro-Processing 77.4 8.7 1.8 3.5 0.2 0.3 0.1 10.0 27,265 5.9 (48) 21.1 35.5 6.8 0.7 0.7 7.0 0.3 34.7 22,062 15.5 Tourism (10) 62.9 24.1 8.1 3.8 0.2 0.4 0.1 8.6 77,924 12.6 Mining (3) Overall 68.8 14.2 2.8 2.7 0.2 0.7 0.1 13.2 28r095 6.5 a/ Numbers in parenthesis are the number of industriaL estabLishments 3.13 Among development regions, infrastructure related costs appear to be the highest in the Mid-Western region (10.1% of expenditures) and the lowest in the Eastern (6.1%) and Central (6.5%) regions. The Mid-Western region has in general the least developed infrastructure and therefore it is not surprising that industries located there need to spend relatively more on infrastructure services. In particular, transport related costs in the Mid-Western region appear to be high at 2.5 times the average. Relative differences in infrastructure costs are even sharper among ecological zones. Whereas in the Terai, on average infrastructure accounts for only 5.4% of total expenditures, in the Hills the figure is half again as much at 8.4%, and rises sharply to 27.7% of expenditures in the Mountains. 3.14 Among the various industrial sectors covered by the survey, tourism (hotels) appears to be the most infrastructure intensive (15.5% of expenditures). This is probably an underestimation of the importance of infrastructure to tourism since the importance of water supplies and transport to the tourism industry are clearly underestimated; the former due to low water tariffs and the latter due to hotel expenditures not reflecting the transport costs of the tourism industry overall. 3.15 On average, infrastructure costs appear to contribute 6-7% to the cost of industrial production. These figures, however, are likely to be a lower bound owing to the fact that some infrastructure related costs are built into the costs incurred on other accounts, e.g. the cost of transporting raw materials may sometimes be included in the cost of raw materials. On individual types of infrastructure, the most noticeable feature is the extremely low expenditures on water supply (0.2%) and sewerage/waste disposal (0.1%). We have already commented on the low water tariffs; the low expenditures on sewerage/waste disposal probably reflects the almost total lack of facilities in most parts of the country. - 21 - Electric Power 3.16 About one third (34%) of the industries surveyed have installed their own generating capacity to supplement power supplied by the Nepal Electricity Authority (NEA). The reliance on NEA is somewhat higher in the Central Hills. Among development regions, the Eastern and the Far-Western appear to be least well served by NEA with about half of the industries in these areas having their own generators. Industries located in the Terai also appeared to be somewhat less well served, with over 40 percent relying to some degree on their own generating capacity. Water Supply and Sanitation 3.17 Only 42 percent of the 150 establishments surveyed used water supplied by a public agency. The remaining for the most part either had their own boreholes (53 percent) or used natural sources. Only a very small proportion (2%) received water from private tankers. Use of public water supply is most common in the Central Hills, which probably reflects such use by establishments located in Kathmandu Valley. In the Terai, by far the most important source of industrial water supplies are boreholes (77% of establishments) with only 20% of establishments reporting use of public water supplies. 3.18 The situation with regard to sanitation and solid waste disposal was found to be even more deficient. Only 36 establishments, out of 141 responding, were served with public sewer connections. Expenditures associated with sanitation/waste disposal are correspondingly low. Only 7 of the establishments surveyed had any form of treatment facilities. Such facilities also tend to be expensive, averaging a little over NRs 1.1 million per establishment. Only 13 establishments were served by a public solid waste disposal system, 12 of them in the Central region and all of them in the Hills. Eighteen establishments contracted out for waste disposal, and another two establishments owned their own trucks to dispose of solid waste. 3.19 Water supplied by public agencies was estimated to cost NRs 1.8 per cubic meter, while the operating costs of boreholes was estimated to be in the region of NRs 0.8 per cu.m. If the capital costs of boreholes (NRs 700,000 on average) is also included, amortised over 10 years at a 10% interest rate, the costs of water from boreholes increases to about NRs 2.1 per cubic meter. However, given the poor reliability of public water supply, the capital costs of boreholes may be perceived as a cost of ensuring reliable production capacity. Clearly, the economic incentive for using boreholes exist even at the present low levels of water tariffs, and higher tariffs will only strengthen this incentive. Borehole use may create externalities for the community, such as depleting the aquifer and lowering the water table, and regulation of borehole use combined with improved (reliable) public water supply is needed to prevent further deterioration of the water situation, particularly in the Kathmandu Valley. Transport 3.20 Over 90 percent of transport requirements of the industries in the sample was met by road transport, and about a third of this was provided by trucks/vans owned by the firms themselves. The proportion of own-account trucking appears to be highest in the Terai and Mountains (see Annex IV, Table 4.9), which probably reflects the greater availability of common carrier vehicles in the Kathmandu Valley. The high reliance on own account trucking results in higher than normal transport costs. Industries using own account fleets, had on - 22 - average four vehicles which operated about 20,000 km per year which is about a fourth of normal truck utilization rates. These vehicles carry between 3 and 7 tons, and assuming an average 5 ton load, and a 70 percent load factor, the average transport costs are on the order of NRs 45 per ton/km (about US$1.00) which is a very high cost of transport. The small sample (48 industries) makes it difficult to draw conclusions about individual regions or industry groupings. C. Ranking of Infrastructure Problems 3.21 In order to assess and rank the problems industry faces with regard to various types of infrastructure, the survey requested the establishments to cite the types of infrastructure services which caused them the most significant difficulties. Table 18 presents a summary of the results. Clearly, unreliable electric power was the most frequently cited infrastructure problem, with fully one third of the establishments considering this a significant constraint. Drainage problems and transport tended to feature in about 15 percent of responses, whereas only 7 percent cited water supply problems, probably because most industries possessed their own boreholes. Table 18 COMPLAINTS ABOUT PUBLIC INFRASTRUCTURE (% OF RESPONSES) Location/Type of No Electricity Lack of Water from Difficult to Industry Complaints Voltage Drainage/Poor BorehoLes not get Local Fluctuation Condition of Hygienic & Piped Transportation Drainage Supply System for Industry Insufficient Development Region Eastern 65 15 6 - 9 Central 41 25 12 4 15 Western 24 52 14 10 29 Mid-Western - 80 50 30 - Far-Western - 70 40 20 10 Ecological Zone Terai 32 23 23 6 14 Hills 48 7 7 7 12 Mountains - - - - 50 Industry Type Manufacturing 36 12 12 7 19 Agro-processing 40 21 21 8 6 Tourism 60 20 20 0 0 Mining 33 0 0 0 33 Total 38 15 15 7 14 Note Figures do not add to 100% since some minor complaints have been excluded from the Table 3.22 Regionally, however there were some considerable variations from the above overall statistics. Industries in the three western regions (Western, Mid- Western and Far-Western) appear least satisfied with infrastructure services. About 70 percent complained of electricity supply problems. In the Mid-Western and Far-Western regions more than 40 percent of the responses complained about drainage, and over 20 percent cited water supply problems. In the Western region, about 30 percent complained of poor transport facilities. Among ecological zones, industries located in the Terai were less satisfied with their infrastructure services than those located in the Hills. The latter is probably due to the generally better facilities in the Kathmandu Valley. The ranking of problems, other than unreliable supply of electricity, does not generally appear - 23 - to change between development regions or ecological zones which in descending order of severity appear to be: electricity supply reliability; drainage; transport; water supply. The exceptions being in the Hills where water supply is ranked second, and in the Central and Western regions where transport is ranked second. 3.23 Among industry groups, electricity supply appears to be the most critical problem with manufacturing, agro-processing and mining industries citing this most often. Manufacturing and mining industries cited transport second most often, whereas agro-processing industries indicated poor drainage as their second most frequent concern. None of the industry groups cited water supply as an important concern probably reflecting their ability as large users to invest in boreholes. IV. INFRASTRUCTURE STOCK AND DEVELOPMENT PLANS 4.1 This section examines the present condition of infrastructure stock and sub-sectoral development plans for transport, water supply and sanitation and telecommunications. Annexes V, VI, VII respectively, provide detailed reviews of each of these subsectors. The situation in the power sector is not reviewed here since this has been the subject of very detailed studies carried out by the Bank in the context of various power sector loans!'. Key findings and sub- sectoral development plans are summarized below. A. Transport Infrastructure 4.2 Road transport, trails and aviation are the main transport modes in Nepal; minor modes include railways and ropeways. The role of ropeways and railways is very limited and hence are not discussed here. Roads and trails (for the Hills and Mountains) constitute the main surface transport modes. Domestic aviation which provides access to remote,parts of the country, not accessible by the main road network, plays an important role in the welfare of people living in these remote areas, and hence, despite its small scale of operations, is a vital transport mode in Nepal. Total transport costs in Nepal could be substantially reduced through more efficient resource use in the road sub-sector which accounts for 85% of resources used in the transport sector. The analyses included in "Nepal - Expenditures in the Road Sector" highlight the urgent need to address the maintenance crisis and recommends shifting resource allocation away from new construction to increase basic maintenance capabilities. The Road Network 4.3 The total length of the road network in Nepal increased more than tenfold over the last thirty-five years, from 624 km in 1956 to 8300 km in 1992. In fact, it is estimated that the road network in Nepal increased at an average rate of 250 km per year in the 1980s. In 1991, 3016 km (40.8 percent) of roads were paved, 1655 km (22.4 percent) were gravel and the remaining 2730 km (36.8 percent) were earth roads. Of the 7400 km of roads in 1991, Highways accounted World Bank, "Nepal Power Sector Efficiency Project", Staff Appraisal Report, Energy and Infrastructure Division, Washington D.C., 1992. See also World Bank, "Nepal Power Subsector Review", Industry and Energy Operations Division, Washington D.C., 1988. - 24 - for a total length of 2100 km (28.7 percent), Feeder Roads, 1900 km (24.9 percent), Urban Roads, 1100 km (15.0 percent) and District Roads, 2300 km (31.4 percent). The main network (about 1700 km) comprises the East-West Highway (Mahendra Rajmarg, about 1024 km), running mainly through the Terai, and the North-South highways. Annex V, Figure 5.1 shows the network of main roads in Nepal. 4.4 The East-West Highway, when completed, will traverse the entire length of the country and link major population centers in the Terai. Major North-South roads include the Tribhuvan Rajmarg which connects Kathmandu to Birganj at the Indian border (192 km); the Arniko Rajmarg (114 km) connecting Kathmandu to the Chinese border; the Sidhartha Rajmarg (180 km) connecting Bhairahawa at the Indian border to Pokhara in the Western Hills; and the link between Biratnagar on the Indian border to Dharan and Dhankuta (100 km) in the Eastern Hills. The main network also includes Prithvi Rajmarg (200 km), the east-west link connecting Pokhara with the Tribhuvan highway; and the north-south Gorkha- Narayangadh highway (61 km) which connects the Prithvi highway to the main East- West Highway (Mahendra Rajmarg). 4.5 In 1992, about 75 percent of the total network was estimated to be in poor to fair condition, a high percentage when compared to other low-income countries where road networks have been recently developed. The network's poor condition compounded by Nepal's difficult geography and weather, has resulted in high network operation costs which are four to five times higher than if adequate maintenance were implemented (Gray Cover Report on "Nepal - Expenditures in the Road Sector"). Based on a 1988 survey, out of a total 1700 km of paved roads surveyed, about 650 km were in immediate need of pavement remedial works ranging from extensive patch work to rehabilitation and reconstruction!'. Some 476 km were estimated to be in need of extensive shoulder repair works and numerous other cases of repair of drainage structures, correction of settled road sections and reconstruction of washed out road sections were also indicated. A number of roads, although in otherwise good physical condition, had pavements of varying width and other such hazards. The conditions of gravel and earth roads were, in some cases, even worse than the paved roads. Regravelling is seldom done on gravel roads resulting in the development of ruts. Improper drainage is another problem and some roads, that are otherwise considered to be all weather roads, are almost impassable in wet season. 4.6 In the Hill and Mountain regions, the trail network is extensive and well used, and for those areas not connected to the road network human porterage remains the only form of transport. With the development of a road system, however, the nature of the trail network has changed, with trails no longer providing long distance transport but feeding up into the hills from roadheads. With 23 out of 75 districts having no road access and some others with a single earth road, many villages are accessible only on foot. The main trail and the relationship between trails and the road network is shown in Annex V, Figure 5.1. The overall length of these trails is estimated to be around 15,000-20,000 km. Of the total 7,000 km of main trails, about 5,000 km are in the three western regions. 4.7 Over time trails have been, and are continuing to be, improved by construction of pedestrian suspension bridges over rivers and gorges, which V Asian Devetopment Bank, Nepal - Transport Sector Profile Study, 1988. - 25 - improve accessibility and reduce distances. Some 2500 trail bridges exist along various routes. Of these, around 400 are modern suspension bridges constructed by local districts and the suspension bridge division of the Ministry of Local Development. The condition of these bridges is highly variable and the older bridges are generally in poor condition; -Accidents are not uncommon and in the worst one at Joljhibi some 100 people died when a bridge collapsed under load. Future Demand for Roads and Trail Improvements 4.8 Agriculture being the most important sector of Nepal's economy, future road development would be closely linked with agricultural development. Also of interest is access to remote communities in the hills and mountains. The following summarizes key elements of HMGN's development plans for the road sector. 4.9 Farm to Market Roads: Future expansion in agricultural activities is likely to be concentrated in the Terai. Surplus production from the area needs to be efficiently transported to deficit areas within the country. Similarly, fertilizer and other agricultural inputs need to be transported to the production areas. In the Terai, a well planned network of low cost all weather feeder roads conveniently connected to the East-West Highway system, preferably at an interval of 10-20 km, is desirable. Of the 700 km or so of Terai, the eastern quarter has reasonable access to the East-West Highway (but not all at 10-20 km interval) whereas many parts of the Western Terai are relatively inaccessible. A program of 50-60 such roads, typically 20 km long through selected corridors, would require construction of 1000-1200 km of new roads. 4.10 To build an estimated 1000-1200 km network of all-weather low-cost farm-to-market roads primarily in the Terai region of Nepal over a period of 20 years, would have cost about NRs 430 to NRs 515 million in 1987. Taking into consideration the effects of about 63 percent devaluation of the Nepalese currency and domestic and international inflation, the equivalent cost of these roads in terms of 1991 prices is estimated to be around NRs 718 million to NRs 860 million (US$ 20.5 million to US$ 24.5 million). In view of the importance of such a program, particularly for agricultural development in the Western Terai, construction of such a network of feeder roads could be accelerated and completed within a 10 year period. This would require annual expenditures in constant 1991 prices on the order of NRs 70 to 80 million (US$2-2.5 million). 4.11 North-South Roads Linking Terai with the Hills: The key sections of North-South roads that were included in the Seventh Five Year Plan, and are unlikely to be completed by the early 1990s, are shown in Table 19. These roads involve a considerable length in difficult terrain, and are therefore expensive to construct. The estimated sum of NRs 7.7 billion needed to complete on-going projects is extremely high and reflects the high cost of these ambitious North- South corridor development programs. The economic justification of many of these roads is dubious at Nepal's present stage of development. - 26 - Table 19 NORTH - SOUTH ROAD PROJECTS Roads by Region Total Type Surface ERR Years Remaining Estimated Length Under Work Cost of Construction in Kms Remaining (1) (2) (3) Work in NRs Eastern 1. Chatara-Barah Chhetra-Bhojpur 97 F E+G 11 97 776 2. Katari-okhaLdunga 131 N-S G 2 113 688 3. Phidim-Taplejung 86 N-S G 9.3* +6 72 437 4. Dhankuta-Basantpur- Arun 227 N-S G 17.1* 192 1,752 Central 1. Sindhuti-Manthali 58 N-S G 58 580 Western 1. Dumre-Besisahar- 115 F G 17.4 +10 115 532 Chame 13 F E 13 92 2. Baglung-Beni Mid-Western 1. Bhatubang-Pyuthan 44 F G +10 44 266 2. SaLyan-Musikot (Rapti Roads) 107 N-S E 7.4 107 856 Surkhet-Dungeswor 60 N-S E 5.0 +3 60 700 Far-Western 1. Dadeldhura-Baitadi- DarchuLa 215 N-S E 2.9 +10 215 1r088 TotaL 1,153 1,086 7 767 Source: EFYP Notes : (1) F=Feeder, N-S=North-South Highway; (2) E=Earth, G=GraveL; (3) Based on Feeder Road Study (LBI, Renardet, East, CEMAT) for 5 meter att-weather road, except where denotes data from MoF. 4.12 Kathmandu - Hetauda Direct Link: Another project under consideration for the road network is a direct route from Kathmandu to Hetauda. This project, although non-strategic, would offer substantial user benefits, as the existing 96-km long Tribhuvan Rajpath built in 1956 is too tortuous, and most vehicles use the much longer (217 km) route via Mugling and Narayangadh. There are possible shorter routes. One such route is 67 km in length saving 150 km. Development of this route was estimated to cost, in 1991, at NRs 7000 million (about US$150 million)0'. Such a project however would require a five-fold increase in the present traffic levels, assuming that 80 percent of the traffic from the Naubise - Hetauda road and 60 percent of the traffic from the Mugling - Narayangath road would opt to be diverted to the shorter route. Therefore, during the next 5-10 years, the most likely justified investment would be improvements on the existing Kathmandu-Hetauda links. 4.13 Trail Improvements and Remote Area Access: There are areas in Nepal, particularly in the Western and Far-Western regions, where the cost of construction of roads is prohibitive. Previous studies have estimated that at least for one such corridor (Jumla in the Western region) the cost of road construction is almost seven times as high as that of providing regular air transport services to the area. Air travel will, therefore, continue to be the only form of motorized transport in these areas. The only means of surface transport for a long time to come will be trails, an extensive network of which already exists. It may be desirable to undertake improvements of trails, where 20 "Preliminary Study on Kathmandu-Hetauda Road TunneL Project", Ministry of Construction, Tokyo, Japan, September 1991. - 27 - possible, to make them usable for small tractor, motorcycle or draught animals such as mules. A recent studyL1' estimated that about 20 percent of trail lengths in Mid-Western and Far-Western regions need or have potential for upgrading to "mule trails" of 2 m width. Installation of suspension bridges to replace existing bridges that are in poor condition along the trails is the major component of trail improvement works. Over the period 1990-2000, a continuing program of around 50 new or replacement bridges per year is a very rough estimate of requirements. 4.14 Table 20 provides a summary of estimated expenditure needs of the road and trail sector in Nepal. Details of these estimates are in Annex 5. It should be noted that the Table reduces new construction of N-S roads by two-thirds to include only high priority economically justified projects (para. 4.11) connecting the Hills to the Terai, in view of the high cost of such roads. Further, a more effective maintenance strategy is needed and would mean increasing the sectoral share for maintenance from about 20 percent to about 60 percent of available resources, in order to cover adequately the requirements of essential roads in good and fair condition (50 percent of network) and minimum maintenance of the remaining roads to prevent closures. Table 20 FINANCIAL REQUIREMENTS IN THE ROAD SECTOR IN NEPAL Item FY 1993 FY 1994 FY 1995 FY 1996 FY 1997 TotaL EFYP US$ ArteriaL Road Construction 8.6 9.6 10.8 12.0 13.6 54.6 174.9 Connector & LocaL Access Roads 4.1 4.1 4.1 4.1 4.1 20.5 33.2 Construction 7.4 7.4 7.4 22.2 22.2 On-Going Rehabilitation 5.5 8.2 12.0 19.5 20.0 65.2 17.7 AdditionaL RehabiLitation 61.1 Upgrading (1) 8.3 10.2 12.5 15.3 18.5 64.8 37.1 Periodic Maintenance 2.0 2.4 2.9 3.5 4.2 15.0 Routine Maintenance 1.0 1.1 1.2 1.3 1.5 6.1 Emergency Repair 0.5 0.5 0.5 0.5 0.5 2.5 4.7 TraiL Improvement 3.2 3.2 3.8 4.2 4.6 19.3 19.9 Suspension Bridges 1.0 1.5 2.4 2.8 3.2 10.9 11.7 Land Acquisition 2.0 2.0 2.0 2.0 2.0 10.0 10.8 InstitutionaL Development TotaL 43.6 50.2 59.6 65.2 72.2 291.1 393.3 Source: NepaL - Expenditures in the Road Sector, WorLd Bank, 1992 Notes : (1) Upgrading includes graveL to paved surface, but excludes rehabilitation. (2) Periodic and routine maintenance aLLocations refLect a shift from Low-mediun to medium-high absorptive capacity scenario in order to cover maintenance needs of the network in 1997. Aviation Infrastructure 4.15 Aviation, second only to roads, is an important mode of transport in Nepal. There is an extensive network covering almost the entire country, and penetrating many areas inaccessible by road. Airports in different parts of Nepal vary widely in their characteristics and services offered. Until 1992, Royal Nepal Airlines Corporation (RNAC), a wholly owned government undertaking, exclusively provided scheduled air services to most of the domestic airports. Fares for domestic flights are low and need to be subsidized from surpluses generated by RNAC in its international operations. More recently, the Government has licensed four private airline operators. Demand for domestic air transport i/ BCEOM et al, "Remote Area Access Study", prepared for UNDP, Washington D.C., 1990. - 28 - is generally linked to the poor access provided by the road network, and with expansion of the road network, demand on some routes has fallen considerably. There are 43 airports in Nepal, of which only Tribhuvan Airport in Kathmandu is classified as a Category A international airport. Two recent air tragedies linked to human errors have put pressure on the Government to upgrade the navigational aids at Tribhuvan Airport. 4.16 Among the 42 domestic airports (excluding Kathmandu), standards and facilities vary considerably because of extreme variations in topographic and other physical conditions. The Department of Civil Aviation classifies these airports in three categories B, C and D. Table 21 shows the regional distribution of airports and Annex 5, Figure 2, shows the location of airports in Nepal. There are 26 airfields located in hilly and mountainous areas of the country where terrain and approach conditions permit only short take of f and landing (STOL) operations. 4.17 The condition of the four category B airports was reported to be generally good, except for Nepalganj Airport. The poor condition of Nepalganj runway was a cause of concern for the Civil Aviation Department and studies for runway improvement and strengthening are planned. Concern about certain safety aspects of runway orientation at Pokhara has prompted the DCA to acquire a new site for the airport. Table 21 REGIONAL DISTRIBUTION OF AIRPORTS BY CATEGORY' AIRPORT CATEGORY Region A B C D Total Eastern 1 2 8 11 CentraL 1 - 3 4 8 Western 2 - 5 7 Mid-Western - 1 1 6 8 Far-Western - 1 8 9 Total 1 4 7 31 43 Category A: ALL weather airports with paved runways Long enough to handle jet aircraft Category B: ALL weather airports with paved runway, except in case of Pokhara which has a gravel runway Category C: Fair weather airports with unpaved runways suitable for operation of HS-748 type aircraft Category D: All other fair weather airports with unpaved runways, 26 of these are STOL airfields and four are at aLtitudes exceeding 3000 m. Source: DCA 1990 4.18 The seven category C airports are similar in size and layout to Category B airports but have unpaved runways; those in the Terai have excellent approaches but a few in the Hill regions are restricted. In 1988, the condition of category C airport runways was generally good considering the fact that these runways are not paved. Exceptions to this were the airports at Dhangadhi, Janakpur and Tumlingtar where inadequate strength, flooding or softness of the runway during the monsoon season have been observed. 4.19 Several of the 31 Category D airports, especially the STOL airports, are characterized by steep sided valleys and unsurfaced runways permitting only - 29 - short take off and landing from one direction. These airports are situated either beside rivers, on level benches of land on valley sides or in some cases on the top of ridges. The conditions at Category D airports varies considerably. Some of them are well grassed and are easy to maintain while the others are in poor condition. Usually the bad condition is attributed to some specific problems, such as water runoff erosion, surface irregularities, visual obstructions and so on. Buildings at these airports are basic or in some cases nonexistent. 4.20 Only Kathmandu and Nepalganj airports have an approach lighting system. Runway edge lights and runway threshold lights are provided at Biratnagar and Bhairahawa airports. There are Precision Approach Path Indicators (PAPI) at nine airports, the rest have no lighting facilities. Half-hourly weather observations are made in Kathmandu airport, and another four airports have facilities for hourly observations. Many airports in the mountains do not have electric power supply, and solar battery power is used. Aircraft fueling facilities are provided at only five airports and flights to other airports must carry enough fuel for a round trip. Annex V provides additional details on the condition of navigational aids, telecommunications and other facilities needed for safe aircraft operations. Proposed Aviation Investments 4.21 To improve both international and domestic operations, a 1989 JICA study 2 suggested projects for implementation on a priority basis. Table 22 summarizes these projects and their respective estimated costs in terms of 1991 Table 22 SUMMARY OF PROPOSED WORKS FOR AVIATION DEVELOPMENT 1992-2010 (USS MILLIONS) Component Investment Maintenance Total 1. TIA Kathmandu (extension) 580 580.00 2. Pokhara Airport (construction at new site) 102* 102.00 3. Jomsom, Simikot LukLa, Syangboche (extension, improvement) 14* 14.00 4. Construction of New Airports (Mugu and 3 others) 28 28.00 5. Lengthening and Surfacing of Runways 1.508 1.50 6. Navaids & Telecommunication 19.50 7. Maintenance of Airports 19.50 3-4b 3.50 8. Aircraft acquisition for RNAC (domestic operations) 92.004 92.00 TotaL 836.00 3-4b 839.50 a rounded to nearest 0.5 mitLion b per year prices. The original costs based on 1988 prices have been revised to reflect the estimated domestic and international annual rates of inflation. The projects for Kathmandu and Pokhara airports were scheduled to be completed in two phases - Phase I was recommended to be completed by 1994 and Phase II by year 2000. These developments, if implemented, will enable the airports to handle the expected traffic to the year 2010. All other works were recommended to be completed by 1995. Clearly, the levels of investment proposed, quite apart from the economic viability of individual projects, is considerably beyond levels affordable for 1' Japan InternationaL Cooperation Agency (JICA), "DeveLopment Study of CiviL Aviation in NepaL", Tokyo, Japan, 1989. - 30 - the aviation sector. The magnitude of investments proposed for Kathmandu TIA, and for Pokhara airport are clearly excessive in relation to the overall capacity of HMGN to finance investments in the sector. 4.22 The strategy for the aviation sector calls for reducing the number of airports, and concentrating resources on those airports which are (i) essential to provision of basic services in remote areas, and (ii) potentially important to development of tourism in the country. Airports in areas with limited tourism potential, and where recent expansion of the road network has provided road access are slated for closure. Altogether some 12 to 13 airports have been identified as candidates for closure in the 1990s. 4.23 The airport maintenance budget in recent years has been of the order of NRs 3-4 million for domestic airports and NRs 7 million for TIA. The total amount is considered highly inadequate, but if fewer airports (possibly 13 less) are in operation and some of the more problematic STOL airfields are paved, the need for maintenance will be less. However, under current conditions the maintenance requirements are considerably higher than what is spent now and probably an annual allocation of US$3-4 million will be necessary for a minimum level of maintenance. B. Water Supply and Sanitation (WSS) 4.24 Sources of drinking water supply in the rural areas of Nepal are piped water supply schemes, shallow handpump tube wells, private lined and/or unlined wells, natural streams and ponds, and so on. In urban areas piped water supply schemes are the main source of drinking water. As of 1990, there were a total of 2250 piped water supply systems in Nepal along with some 11,700 shallow tube wells. The number of traditional (mostly private) wells is not known. About 70 percent of the piped systems and 90 percent of the shallow tubewells were provided by various public agencies. All 33 towns in the country are served with piped water supply schemes. 4.25 The level of water supply services in urban areas of Nepal is generally inadequate and deteriorating as a result of a lack of maintenance and rapid population growth in urban areas. In most of the 33 municipalities where a water supply system is in place, the supply is intermittent with some areas receiving less than 6 hours of supply per day in two shifts. The level of service among the municipalities varies depending on the agency responsible for the system and the type of connections. Thus, for the 19 municipalities under the jurisdiction of the Department of Water Supply and Sanitation (DWSS) the designed consumption rates are 150 lcd for fully plumbed connections, 65 lcd for yard taps and 45 lcd for public standposts. The corresponding rates for the towns under the jurisdiction of the Nepal Water Supply Corporation (NWSC) are 180 lcd, 120 lcd and 45 lcd, respectively. 4.26 Besides these quantitative shortages there are various problems related to quality of water as well. Groundwater generally contains relatively high proportions of iron and manganese in Terai towns and ammonia in Kathmandu Valley. Due to the intermittent nature of supply, infiltration due to the lack of adequate standards and proper supervision during construction may cause contamination. Furthermore, only a few cities have facilities for proper treatment of supplies from surface and ground water sources, elsewhere treatment is limited to occasional chlorination. - 31 - 4.27 The level of sanitation services is even lower and far more limited. Only about 25 percent of the population in the three cities in Kathmandu Valley have access to a proper sewerage system. The fact that just an access to a latrine is considered sufficient for sanitation services indicates the expected level of service. In fact 94 percent of the country's population does not have even this facility. There is no operating sewage collection and treatment facility in Nepal and only Kathmandu has a solid waste collection and disposal system. The solid waste system was started with German assistance in 1980 and some 62,460 cu.m. was collected and disposed of during the first 8 months of 1988-89. Elsewhere the municipalities are responsible for waste collection and disposal and perform these functions in a limited way without proper planning or environmental impact considerations. Discharging untreated water from factories and municipalities into natural water bodies is common. 4.28 Another related problem is the lack of storm water drainage facilities. At present, except for ditches along some roads, there is no planned arrangement for storm water drainage. This creates a number of environmental and other problems, especially in the Terai where the terrain is flat and the amount of rainfall is high. Low terrain slopes in the Terai dictate that roadside channels (among other drainage facilities) must be carefully designed with close attention to culvert invert elevations and backwater effects. Installation of storm water drainage systems in some of the major cities is proposed for future development plans (Eighth and Ninth Five Year Plans). WSS Development Plans 4.29 The population coverage target of HMGN for water supply by the year 2000 is 100 percent. A Sector Review conducted in 1986 under the UN International Drinking Water Supply and Sanitation Decade Program, however, suggested a somewhat different scenario keeping in view the financial, institutional and human resources constraints. According to this review, a target of 100 percent coverage for urban and 81 percent for rural populations with water supply schemes would be more realistic. This plan calls initially for the rehabilitation of completed schemes, and then it proposes to complete ongoing projects, some 900, which are expected to cover an additional 4.0 million people by 1995, raising the rural population coverage to 50 percent. Based on these coverage estimates and assuming that future investment will remain at present levels with an annual 10-15 percent increase to cover inflation the coverage targets were revised, as follows: 1995 - 75% urban, 50% rural, and 53% overall; and in the year 2000 - 90% urban, 75% rural, and 77% overall. 4.30 The estimated average per capita construction costs for different types of water supply schemes in 1990 prices is quoted by DWSS to be as follows: Large urban system - NRs 4,750 per capita Rural piped system - NRs 750 per capita Rural shallow tubewell - NRs 50 per capita Based on the targeted coverage figures and the above per capita costs, the construction cost for water supply systems (both urban and rural) is estimated at NRs 3,860 million for the period 1991-95 and NRa 6,270 million for 1996-2000 in 1990 prices. Total cost for various support programs including institutional strengthening, sanitation/hygiene education and human resources development for the corresponding periods can be estimated to be NRs 712 million and NRs 686 million, respectively, for the first and second periods. Thus, the overall - 32 - investment need for the sector has been estimated to be NRs 4,572 million for the period 1991-95 and NRs 6,956 million for 1996-2000, or NRs 11,528 million for the entire decade (1991-2000). This compares to NRe 6,273 million in the Eighth Plan (FY 93-97). 4.31 Lack of reliable data about existing sanitation coverage and the uncertainty associated with the proposed approach requiring programs to rely almost entirely on community and household financing, make it difficult to project future sanitation coverage especially for the rural areas. Improved urban coverage to some extent is expected through sewerage schemes. In view of this and experience in other developing countries, a modest 25 percent rural and 75 percent urban sanitation coverage target is projected for the year 2000. The corresponding HMGN targets based on its previously declared policy of ensuring "provision of basic needs for all" is 100 percent by the year 2000. 4.32 For achieving 25 percent rural and 75 percent urban sanitation coverage, an estimated 1.2 million latrines will have to be constructed by the year 2000. Based on an average cost of NRs 1000 per latrine (somewhat lower than prevailing rates, to be achieved through technology refinement and use of local material) a total private investment of NRs 1,200 million will be required during the decade for this purpose. 4.33 Donors contribution to the WSS sector during the 1980s has been of the order of 40 percent of total investment in the sectorl'. Assuming a 50 percent share, the donor contribution can be estimated to be about US$20-25 million per year during the period 1991-2000. This amount appears to be well within the limits of donor capacity and interest. Therefore, it seems that institutional capacity issues rather than the financial resource constraints will drive the pace of WSS sector development in Nepal during the 1990s. C. Telecommunications Sector 4.34 Telecommunication facilities in Nepal, although still very limited, have been expanding continuously since the 1960s. The number of telephone lines and exchanges has increased substantially, and outdated equipment is gradually being replaced, resulting in a considerable improvement in the quality of service. Table 23 gives details of the growth of telephone facilities over the period 1969-1991. 4.35 Targets for 1991 aimed at a 14-fold increase in installed telephone lines over the period 1969-1990 with the rate of growth during the period 1984-91 being the highest at about 26.7 percent per year. The overall growth in the number of telephone lines for the period 1969-90 was about 14 percent per year. At the completion of the IDA supported IVth Telecommunication Project in 1991, of the total of 42 telephone exchanges in Nepal, only 4 smaller ones, with a total installed capacity of 600 lines, would remain manual. The total installed capacity of modern digital exchanges will be 67,100 lines or about 87 percent of the total available capacity. The total capacity of the crossbar type exchanges is expected to be more than 9,000 lines. 'L' Nepal : Water SuppLy and Sanitation Sector Issues Paper. IBRD Report No. 11479-NEP. - 33 - Table 23 TELECOIMINICATION FACILITIES IN NEPAL No. of Telephone No. of Telephone Type of Facility Year (Install ecity) Exchanges (Percentage) ManuaL Automatic 1969 4,900 3 9.0 91.0 1972 5,450 7 9.0 91.0 1977 10,770 13 16.0 84.0 1984 20,580 24 22.0 78.0 1991 (projected) 77,450 44 1.3 98.7 Source: WorLd Bank 1969, 1973, 1978, 1985, 1989, 1991; NTC 1990, 1991 4.36 International telephone service has improved considerably with the installation of the satellite earth station at Kathmandu in 1982 largely replacing the old land lines or microwave system based service of the past. The satellite link has helped improve both the quality and availability of the international telephone and telex services. Sizeable increases in the number of international calls and revenues was noted in the first few months after the establishment of the satellite link, indicating potentials for future growth if adequate facilities are provided. In fact, it is believed that the tourism sector has greatly benefitted from improved telecommunication facilities. Development Plan 4.37 Although details of allocations for the telecommunication sector under the Eighth Five Year Plan (1992-97) are not known, the Nepal Telecommunications Corporation (NTC) has proposed a Vth Telecommunication Project, 1992-97. Key features of the proposed project are listed as follows: (i) Local Service - Increasing the installed capacity of telephone lines by 60,850 lines to a total of 138,550. Of the new lines 42,640 will be for Kathmandu Valley and 17,940 for the rest of the country. - Establishing 28 new independent exchanges with a total capacity of 27,250 lines. - Extension, relocation and replacement of existing facilities with new improved ones involving some 23 exchanges and a total of more than 15,000 existing lines and 31,550 new lines. Thus, by the end of Vth project (i.e., 1997) over 138,550 telephone lines (86,500 lines in Kathmandu Valley and remaining in the rest of the country) from 58 exchanges would be available. (ii) Long Distance Service - Installation of a new national and international trunk switch with 114 two-way 2 Mega-bytes/sec (Mb/s) trunk terminations at Patan in Kathmandu. - 34 - - Installation of new main transmission links and a number of spur links to connect new exchange sites to the existing network. - Completion of digitalization of the main transmission links with the introduction of a new 68 Mb/s radio system linking Kathmandu to Pokhara, Bhairahawa, and Nepalganj, with spurs to Bharatpur and Bhairahawa. - Expansion of radio links established under the IIIrd and IVth Telecommunications Projects to their full capacities. Biratnagar-Damak-Bhadrapur 34 Mb/s system will be converted to 68 Mb/s system and the Bharatpur-Tandi link to 8 Mb/s. - Introduction of about 90 route-kilometers of Optical Fiber Systems of capacities up to 140 Mb/s in Kathmandu valley to connect major exchanges, the earth station (satellite link) and Nepal television. (iii) International Service - Extension in international routes by adding circuits in the earth station. - Establishment of a new digital radio link between India and Nepal (Biratnagar-Farbeshgunj). (iv) Rural Telecommunication Network - Installation of 25 multi-access rural radio telephone systems (MARTS), 6 VISTA type small earth stations and 12 point-to-point microwave systems to provide telephone service to the remaining 26 district headquarters and more than 400 rural community centers. (v) Data Communication Systems - Installation of a packet-switched network that can interact with the existing telex exchange with provision for service for district headquarters. (vi) Land Acquisition and Buildings - Land acquisition and building construction for new exchanges at Thimi and Butwal. - Construction of NTC Headquarters in Kathmandu and Patan Building Complex. Besides the above mentioned physical development works, the Vth Project also proposes activities related to institution building. These include further computerization of NTC operations, completion of the computerization of billing systems, expansion of the telecommunication training center, and training. 4.38 Financial requirements to implement the above development plan, as estimated by NTC, are shown in Annex VII, Table 7.9. The Table shows component- wise funding requirements based on 1991 prices and an exchange rate of 1 US$ = NRs 42. Total project cost, exclusive of the ongoing JICA Rural Telecommunication Project, is about US $127 million. Approximately US $19 million is expected to be covered out of the financial arrangements for the IVth - 35 - project. The provisions of the new Vth project are therefore estimated to cost about US $108 million. NTC plans to make US $21 million (16.5 percent) available from its own internal resources, and expects to get a World Bank/IDA credit of Us $21 million (26 percent) to finance the project. Other donors including the Danish International Development Agency (DANIDA), the Finland International Development Agency (FINNIDA) and JICA are expected to finance the remaining foreign costs. 4.39 NTC's operational and maintenance expenses for 1991-92 are estimated at about NRs 44 million (US$ 1.1 million). The projected O&M expenses for the year 2000 are of the order of NRs 139 million (US$ 3.3 million). The projected expenses are moderate owing to the fact that most of NTC's facilities are new and the technology chosen for them ensures relatively low maintenance requirements. It is believed that NTC is capable of providing necessary financial needs for O&M from its own resources. V. INFRASTRUCTURE DEMAND AND RESOURCE MOBILIZATION 5.1 In planning the level and composition of infrastructure investment in Nepal, it is necessary to ensure that investments for various types of infrastructure are consistent both with the likely evolution of infrastructure demand, and with the capacity for mobilizing adequate levels of domestic resources to cover the costs of infrastructure provision. Aggregate demand for infrastructure can generally be related to the overall levels of economic activity, and by utilizing appropriate sectoral Incremental Capital Output Ratios (ICORs) can provide rough approximations of desirable investment levels. Financing these investments, and paying for infrastructure services requires an assessment of various avenues for resource mobilization such as increased tax effort, user charges for public infrastructure, and/or private provision of specific types of services. This section examines the above issues and also seeks to provide some guidance on the desirable composition of infrastructure investment both by sector as well as spatially, i.e. among various parts of the country. Details of the analysis are given in Annex VIII. A. Infrastructure Demand Projections 5.2 The approach to assessing future infrastructure demand adopted in this report, is based on relationships between aggregate output in the infrastructure sector and per capita GDP, which are established through regression analysis of cross-sectional data from a number of countries. Clearly, such an approach can only produce rough approximations of infrastructure needs since it does not account for numerous factors such as terrain, climate, and differences in resource endowments such as the natural availability of clean water. However, our purpose in carrying out the analysis is a fairly modest one, which is to seek indicative assessments rather than very accurate quantifications. Since the object of this analysis is to establish investment envelopes which would demarcate the boundaries beyond which there is a risk of considerable over investment, we have tended to err on the side of optimism so that the investment envelope may be considered an upper-bound. For instance in projecting per capita GDP growth, a 5% average annual growth rate is used whereas most observers of the Nepalese economy would select a growth rate for total GDP of about 5%, which when adjusted for population growth would result in a growth rate for per capita GDP of around 3% p.a. - 36 - Aggregate Demand for Transport and Communications 5.3 Aggregate output in the transport and communications sector is estimated through regressions of per capita transport and communications expenditures with per capita GDP for a cross-section of 36 developing countriesL'. Annex VIII provides details on these regressions and Table 24 presents projections of transport and communications aggregate demand to the year 2010 based on these regressions. The three demand series in Table 24 correspond to the three income elasticities of 1.12 (one standard error above the estimate), 1.02 (elasticity estimated in the regression) and 0.90 (one standard error below the estimate). Present estimates for the transport and communications sector indicate that aggregate demand is on the order of US$ 150 million which corresponds to the estimate computed using e = 1.02. Hence, the demand series produced using e = 1.12 is a reasonable upper bound, especially in view of the- high growth in per capita income (5% p.a.) assumed in producing the demand forecast. The high forecast for year 2010 of USS 1.1 billion in aggregate transport and communications demand represents about 10% of GDP which would be up from the present level of around 5% of GDP. TabLe 24 PROJECTED GROWTH IN TRANSPORT & COMMUNICATIONS DEMAND (MilLions of US$) Aggregate Trans & Commun. Demand (US$ in MN) Year GDP, Population (1990 USS) (MiLtions) e = 1.12 e = 1.02 e = 0.90 1985 146 16.5 208 128 72 1990 158 18.0 247 152 84 1995 202 20.0 361 216 116 2000 259 22.2 529 309 161 2005 332 24.6 776 442 224 2010 427 27.3 1142 634 313 Aaregate Demand for Water Supply and Sanitation 5.4 Unfortunately, the approach used above cannot be applied in the water supply and sewerage sectors, since comparable data are lacking. For the purposes of this analysis, therefore, it has been assumed that aggregate demand for water 14/ Demand for transport and communications was estimated using a doubLe Log form regression (since this allows for estimation of elasticities), based on a cross-section of 36 developing countries using 1985 data for per capita GDP and transport and communications output. The following was the estimated regression: Ln (TC,) = -3.03 + 1.02 In (GDP,) R = 0.67 (8.36) d.f. = 34 Thus, the aggregated demand for transport and comnunications was projected to grow at the rate of per capita income times the income elasticity of demand for transport and communications (i.e. the regression coefficient of 1.02) times the increase in population. - 37 - supply and sewerage is one tenth of that for transportation and communications which appears reasonable in the light of recent experience in Nepal. Distribution of Infrastructure Demand 5.5 Future distributions of infrastructure demand will be determined both by the distribution of economic activity, as well as by the ability to pay for infrastructure services. The latter, which would largely depend on levels of discretionary income, will particularly influence the demand for consumption infrastructure services, e.g. drinking water supply. Those types of infrastructure that are primarily social overhead capital, i.e. needed to support the productive sectors of the economy, will be demanded in proportion to the levels of economic activity in various parts of the country. These two determinants of infrastructure demand can produce quite different assessments of the distribution of aggregate infrastructure demand. 5.6 Data from the Multipurpose Household Budget Survey' on total income, cash income and discretionary incomes of rural and urban households located in the Mountains, Hills and Terai were combined with projected population distributions to assess the distribution of discretionary and cash income shown in Table 25. Increases in discretionary income shown in the Table are an Table 25 DISTRIBUTION OF DISCRETIONARY AND TOTAL CASH INCOMES Mountain Hitt Teral NepaL RuraL Rural Urban RuraL rban TotaL C--------------------MiL ons----------------- PoPuLation 1991 1.44 7.55 0.86 7.79 0.82 18.46 Distribution (%) (7.8) (40.9) (4.7) (42.2) (4.4) (100) 2010 1.74 8.79 2.67 11.85 2.27 27.31 Distribution (%) (6.4) (32.2) (9.8) (43.4) (8.3) (100) -----------Constant 1990 USS Miions---------- Discretionary Income 1991 40.0 175.0 49.9 189.8 27.6 482.2 2010 48.3 203.8 154.8 288.7 76.5 772.1 Increase 8.3 28.8 104.9 98.3 48.9 289.3 Distr. of Increase (%) (3) (10) (36) (34) (17) (100) Total Cash Income 1991 45.9 270.5 108.6 257.0 57.9 739.9 2010 55.5 314.9 337.3 390.9 160.3 1258.9 Increase 9.6 44.4 228.7 133.9 102.4 519.0 Distr. of Increase (%) (2) (9) (44) (26) (20) (100) indicator of the evolution of infrastructure demand, particularly for consumption infrastructure. The largest proportion of the total increase in discretionary income occurs in the urban Hills (36%), followed by the rural Terai (34%). Urban Terai accounts for another 17%. Together these three groups (urban Hills, and rural and urban Terai) while accounting for only 61.5% of the population in the year 2010, account for 87% of the increase in discretionary income. The i' MuLtipurpose Household Budget Survey, Nepal Rastra Bank, Kathmandu, 1989. - 38 - remaining 38.5% of the population located in the rural areas of the Hill and Mountain zones, account for only 13% of the increase in discretionary incomes. 5.7 Cash incomes are a good indicator of overall economic activity in various parts of the country, and therefore the spatial distribution of cash income is an indicator of the distribution of infrastructure demand in general, and of the demand for social overhead capital in particular. The analysis of total cash incomes indicates that increases in cash income are even more strongly concentrated in the urban areas and the rural Terai. Rural Hill and Mountain populations account for only 11% of total cash income even though they constitute almost 40% of the population. Based on cash income, the urban sector accounts for 63% of the increase in infrastructure demand, even though they constitute only 18% of the population in the year 2010. Rural-vs-Urban Infrastructure Demand 5.8 According to these indicators, the rural sectors should receive no more than 37% to 47% of total infrastructure investment, whereas the urban sector should receive between 53% and 63%. Although the rural population in the year 2010 may still constitute more than 80% of the population, their share of infrastructure demand would likely be below 50%. In fact, the simplifying assumptions underlying this analysis make these conclusions conservative. Growth in per capita incomes would increase the share of urban areas in total infrastructure demand, through increases in the rates of urbanization. Nepal is presently at a very low level of urbanization (9%), which is among the lowest in the world. The above analysis assumes that by the year 2010, urbanization will reach 18% which would still be among the lowest in the world. If in fact urbanization exceeds these projections, and this could very easily be the case, then the rural share of infrastructure demand would reduce correspondingly. B. Investment Levels 5.9 Estimation of an appropriate level of future investments in infrastructure is fraught with numerous difficulties. However, indicative levels can be projected using estimated ICORs and projections for aggregate demand for infrastructure. The previous section provided estimates of future aggregate demand levels based on cross-country comparisons of infrastructure demand and the level of per 'capita GDP. To derive the investment needed to create the capacity to meet those levels of aggregate demand requires adoption of sectoral ICORs appropriate for each infrastructure sector. However, sectoral ICORs can vary widely among countries, and temporally due to a number of reasons such as utilization levels of existing infrastructure stock, efficiency of capital utilization, dependence of sectoral output on performance in other sectors, macroeconomic factors affecting overall economic performance, etc. 5.10 Some estimates of sectoral ICORs are available for Nepal, and these are presented in Annex VIII, Table 8.4. The Table also shows comparable ICORs for India. In general, Nepal and India appear to have similar levels of economic performance when viewed in relation to international comparators!". Over the period 1965-81, both countries experienced GDP growth rates in the 2% to 4% range, and overall ICORs have ranged between 5 and 7. Over the same period, LDCs 16/ See "Savings, Investment and Trade in the Third WorLd", Panchamukhi, V.R., et at, New Dethi, 1987. - 39 - in general appear to have experienced GDP growth rates ranging from less than 2% to over 8%, while ICORs have ranged from less than 3 to greater than 9. Hence, ICORs estimated for the Indian economy may be taken as indicative of the likely levels of ICORs for Nepal. 5.11 Based on the aggregate demand projections (Table 24) and sectoral ICORs, Table 26 presents High and Medium estimates for investment needs into the future. As was stated earlier, the medium scenario corresponds to present levels of demand in the economy (present elasticity estimate). In the near term, therefore, the medium scenario would be applicable. In the longer term, if the Nepalese economy were to transform itself into a more infrastructure intensive economy, the higher projections (elasticity one standard error above estimate) would apply. These projections, however, do not take into account any serious lag effects between investment levels and output increases. If a 5-year lag were to be assumed, then the investment level shown in Table 26 for a given 5-year period could be increased to correspond with the level shown for the following period. TabLe 26 INFRASTRUCTURE INVESTMENT NEEDS IMPLIED BY GROWTH IN DEMAND (miLLions of 1990 USS) Infrastructure Sectors 1991 - 1995 1996 - 2000 2001 - 2005 2006 - 2010 High Med. High Med. High Med. High Med. a/ Transport & Communications AnnuaL Increase in Demand 23 13 34 19 49 27 73 38 AnnuaL Investment LeveL 230 130 340 190 490 270 730 380 Public Sector Investment b/ 115 65 170 95 245 135 265 190 5-Year Public Investment 575 325 850 475 1225 675 1325 950 Water Supply & Seweraqe Annual Increase in Demand p/ 2 1 3 2 5 3 7 4 AnnuaL Investment LeveL 35 20 51 29 74 41 110 57 Public Sector Investment 1/ 32 18 46 26 67 37 99 51 5-Year PubLic Investment 160 90 230 130 335 185 495 255 a/ High and Medium estimates correspond to High and Mediun demand forecast from Table 25. b PubLic investment as a percentage of total investment is taken as 50% for transport and communications and 90% for water supply and sewerage. c/ Demand for water suppLy and sewerage assumed to be 10% of demand in transport and communications. 5.12 Table 27 compares investment needs estimated using aggregate demand projections and ICORs with the investments in the Seventh Five-Year Plan (7FYP, 1986-90), and planned investments in the Eighth Plan (8FYP, 1993-1997), for the water supply and sanitation and transport and communications sectors. Clearly, in the water supply and sanitation sectors, the planned level of investments in the Seventh Plan are considerably below the levels needed to meet the estimated demand, particularly in the case of the estimates which assume a 5-year lag. For the transport and communications sector, investment levels appear to roughly correspond with those estimated based on the "High" demand scenario. This may be a slightly higher level of investment than desirable; however, as was noted earlier, the precision of the estimates are not sufficient to categorically assert that the Eighth Plan investments proposed for transport and communications is excessive. - 40 - TabLe 27 ESTIMATED INVESTMENT LEVELS AND FIVE YEAR PLANS (Constant 1990 US$ MiLLions) Scenarios Water Supply & Transport & Sanitation Communications Seventh Five Year Plan (1986-90) 54 540 Eight Five Year Plan (1992-97) 165 a/ 850 Estimated Five-Year Investment Needs 1991-1995 High 160 575 Mediun 90 320 1996-2000 High 230 850 Medium 130 475 Estimated Investment Needs 5-Years Lag 1991-1995 High 230 850 Medium 130 475 1996-2000 High 335 1225 Medium 185 675 a/ Based on the estimates in paragraph 4.31 Source: Five Year PLan investments from "Approach to the Eight Plan 1992-1997", HMG Planning Commission, Kathmandu, 1991. C. Infrastructure Spending and Resource Mobilization 5.13 In a survey of 44 low income countries, data for infrastructure spending by central governments was available for 18 countries for the year 1985. For these 18 countries their central governments have devoted an average 3.2% of GDP to infrastructure spending, while for Nepal the central government spent about 5.2% of GDP on infrastructure. The only countries of this group that spent a greater share of their GDP on infrastructure were Malawi (7.8%), Ethiopia (5.8%), Vanuatu (5.5%) and Pakistan (5.4%). It is not clear that these countries should be spending more of their respective GDPs than does Nepal, nor is it clear that Nepal should be devoting a greater share of GDP to infrastructure than do the other 13 countries in the sample. What is clear, however, is that it does not seem that the share that Nepal does spend on infrastructure is particularly odd based on this inter-country comparison. 5.14 It is, of course, impossible to categorically declare that a certain proportion of central government spending should be devoted to infrastructure. Certainly in Nepal, the share of infrastructure spending in the development budget is high, approximately 50%. And, the development budget is also relatively large compared to overall government spending, about two-thirds. Overall, infrastructure spending represents one-third of all central government spending. The obverse is that recurrent spending on infrastructure is rather low at only 1.6% of total government spending. This points up the need to ascertain the adequacy of spending on operations and maintenance (O&M) in relation to new capital spending. 5.15 Town and local development expenditures are especially small in Nepal; as a percentage of HMGN's total development spending between 1980-85 these expenditures ranged between 6.2% and 1.7%, and as a percentage of GDP they ranged between 1.0% and 0.2%. The low levels of local government expenditures reflect the near absence of any significant resource mobilization at the local level in Nepal. - 41 - 5.16 While overall spending on infrastructure has been comparable to that of other low income countries, domestic resource mobilization by the central government in Nepal has been at relatively low levels, although rising slightly during the 1980s. For instance, central government revenues during the 1980s averaged only about 9% of GDP, whereas in 1985 the average ratio of current central government revenues to GDP for low income countries of the world came to about 15.4%.-' This ratio has risen in Nepal, from 8.2% in 1982 to 10.1% in 1989. This low level of revenues to GDP is indicative of a relatively weak tax effort. On the surface, it appears that there is great potential for the central government to increase its revenue take considerably, although this requires both political will and administrative capacity. A systematic comparison of Nepal's effort to raise revenues with that in other countries indicates (see Annex VIII, paras. 23 to 26) that HMG could raise an additional 4% to 8% of GDP without imposing taxes higher than international norms. 5.17 Local government bodies (district and lower level) are dependent on HMG for about 90% of their revenues. On a per capita basis, own source revenues for local governments (not including municipalities) ranged between NRe. 0.22 and NRs. 1.908' ($0.01 to $0.10) in the mid-1980s. Even in a country as poor as Nepal, this amount of locally generated revenues is extremely low. About ten times this amount is allocated to local government by HMG. Much of the allocation of funds to local governments is based on population size and district resources. There is apparently no aspect of matching grants or other specific incentives for district level mobilization of resources. 5.18 There are 33 municipal governments in Nepal, each of which generates revenues for local uses from the octroi (a local duty on the movement of goods), property taxes and various fees. The octroi is by far the major source of revenues for these municipalities, averaging around 80% of all revenues and grants. In addition, municipalities receive specific grants from the central government, but these grants only average about 10% of all financial resources available to the municipalities. As a share of Nepal's GDP, municipal revenues are rather insignificant, ranging from 0.09% of GDP to 0.23% of GDP during 1984- 89. As a share of urban incomes municipalities total revenues and grants averaged only about 1.2% during 1985-89. Clearly the magnitudes are not great. Data from a selected number of countries indicate that property taxes range from 5% to 25% of recurrent receipts of local governments (see World Development Report, 1988). In Nepal, property taxes come to well below 1% of municipal taxes. Property taxation has a number of advantages over other types of taxation, especially compared to octroi, and is an untapped source of local government financing. D. Improving Domestic Resource Mobilization 5.19 To the extent possible costs and benefits of public services should be directly linked through user charges. When specific services are provided to specific users relevant charges should be levied for those services. When broad services are delivered to specific geographic locations specific fees, charges 17/ See TabLe 2.2 in WorLd Development Report, WorLd Bank, 1988. 21 See report to the Asian Development Bank: "Decentralization in NepaL", Bienen, H., Kapur, D. et aL, Princeton University, 1988. - 42 - and taxes should be imposed upon the residents in the area. User charges can promote greater economic efficiency by (a) allocating services according to the marginal benefit/marginal cost principle and (b) by causing users to demand higher quality of service. When users are not required to pay for such services through user charges they are less likely to effectively lobby for high quality service. At the same time, since the users are not required to pay charges they will tend to "over-consume" the service in question, lobby for services that are not economically justified or create inefficient congestion in public services. Pricing of Infrastructure Services 5.20 There are many administered prices in Nepal. In addition to user charges collected by various government agencies, there are a number of services provided by public enterprises whose prices are regulated by government. The reasons for such regulation include: regulation of monopolies; generation of appropriate rates of return on public capital; social goals that require subsidization to promote "merit goods"; and to make services available to the poor. 5.21 Water Supply prices in Nepal are extremely low, and full cost recovery for both urban and rural water supply schemes will require substantial increases in water tariffs. In the larger urban areas under the responsibility of the Nepal Water Supply Corporation, tariffs for water supply were revised in 1990 after 9 years without any increases, and were again increased 100 percent in January 1993 to NRs 5.00/1000 litres. In the case of the Kathmandu Valley, where existing groundwater sources are being rapidly depleted, the cost of schemes to bring in water from outside the Valley are estimated to require a 300 percent real increase in prevailing tariffs over the next 10 years. 5.22 Irrigation plays an important role in the agricultural development of the country. At present, the total irrigated area of the country is limited, at about 13% of all cultivated land. Over 80% of the total irrigation facilities are concentrated in the Central Terai. Only very few areas in the Hills enjoy irrigation facilities. According to numerous reports there is a radical difference in private and public irrigation schemes in the Terai. Public irrigation schemes have the potential to supply water reliably to about 5% of the country's cultivated land, yet the actual area supplied is considerably less. This poor performance is due to a combination of inadequate design, lack of a tertiary distribution networks, and woefully inadequate spending on operations and maintenance. One study found that it costs the government NRa. 3,096 to deliver only NRs. 678 worth of water to farmers. The study concludes that most government irrigation projects are not functional, mainly due to poor maintenance. In contrast, privately run irrigation schemes, which account for about four-fifths of all areas under irrigation, cost about one-fifteenth the per hectare cost of public schemes. In addition, the private schemes are adequately maintained and cover operating costs on their own. Water charges on publicly provided services are very low. The annual rate of NRs. 200 per hectare for surface irrigation and NRs. 400 per hectare for deep tubewells are insufficient to meet operations and maintenance expenditures. 5.23 Transport facilities in Nepal are generally operated at very low utilization levels, and hence the opportunities for imposing user charges in the form of tolls are extremely limited. With the exception of some urban streets in Kathmandu, road use is well below capacity even in the industrial "ribbon zones" where the highest traffic levels are only on the order of 800 vehicles per - 43 - day. Funding of roads may therefore be best accomplished using a variety of taxes, such as excise taxes on fuel, etc., and dedicating such tax revenues for the road sector. 5.24 Creating a Road Maintenance Fund financed with a dedicated share of road user charges for road maintenance is being considered. The Fund would assign specific revenues, usually from sources such as fees or percentages of certain types of tax revenues, to specific road expenditure categories. The attractiveness of a Road Maintenance Fund as a concept is that by linking revenues to a share of specific expenditures (to be complemented with central Government resources) make it possible to ensure that payments to contractors are timely and the expenditure program is adequately funded. Hence, tying excise taxes on fuel to road maintenance can ensure that as long as fuel is bought and roads are travelled there will be adequate funding for maintenance of roads. Additionally, the concept of road user charges is an extension of the benefit principle of taxation, where beneficiaries of government services not only pay for those services but where those fees and taxes that are paid are directed back to the provision of those very services. The Road Maintenance Fund has at least two other potential benefits. First, it can provide greater stability and continuity in the funding of specific services, hence ensuring timely and adequate operations, maintenance and expansion. Second, by linking fees and taxation to ear-marking for specific purposes it may make such revenue generation more palatable to tax payers, and hence more politically feasible. 5.25 However, clear and transparent guidelines are needed to avoid possible problems with the Road Maintenance Fund. For instance, lack of performance budgeting and improved accountability may lead to a misallocation of funds, where programs of lesser economic and social worth may receive greater funding than other programs, especially in light of fiscal austerity. By the same token, the Road Maintenance Fund may reduce flexibility of budgeting and infringe on the power and discretion of the executive branches of government. Not all the issues considered to be problems will be universally seen as such. Given the nature of the executive branches of governments it may make good policy to impose restrictions on their powers and discretion. In the case of Nepal, however, given recent developments of the past few years in terms of political liberalization, it may impede the political and administrative development of the country if ear-marking were to occur on a grand scale. 5.26 Generally, World Bank experience points to the advantages of Road Maintenance Funds. A recent paperJ' provides adequate evidence of instances where dedicated shares of road user charges should be considered. Among the instances where it might be useful with regard to Nepal, are: (a) Where the extension of the benefit principle is most clearly. served by the Road Maintenance Fund. That is, where the beneficiaries of spending can clearly be linked to a revenue source. For instance, a portion of the excise taxes on fuel can be dedicated for road maintenance; and (b) A Road Maintenance Fund is necessary because there is reason to believe that important programs will otherwise not be adequately 1' McCleary, U., OThe Earmrking of Goverrment Revenues: A Review of Some World Bank Experience", The World Bank Research Observer, Vol. 6, No. 1, January 1991. - 44 - funded. This seems to be the case in Nepal, where funding for operations and maintenance is well below optimum. Yet, this mechanism would not solve the issue of why operations and maintenance have consistently been under-funded in Nepal, and there are very definite budgeting issues involved that need to be addressed in other fora. Improving Local Revenue Systems 5.27 Efforts to decentralize government responsibilities, especially to the municipalities, may yield considerable benefits in terms of raising accountability and making government more responsive to the electorate. This is not, however, a sine qua non. It should also be kept in mind that in terms of resource mobilization and allocation there has been almost no progress at the local levels, and perhaps some backsliding. In addition, although there have been efforts to improve administrative capacity of municipal governments, such as the Management Support for Urban Development (MSUD) project, administrative and analytic capacities at local levels remain weak. 5.28 A report on the finances of local municipalities' describes the resource mobilization efforts as almost exclusively relying on the octroi, with low level of central government grants, very little reliance on direct taxes (e.g. professional and property taxes), and none or negligible reliance on user- based fees. The municipal revenue system can best be characterized as inefficient and difficult to administer, mainly due to the heavy reliance on the octroi.U' While the MSUD team clearly feels the need to replace the entire octroi with more direct taxes, they also realize that this cannot be done quickly and easily. Because these municipalities are so dependant on the octroi, removing the octroi is difficult since these municipalities could wind up with very limited revenues. In fact it may be argued that no effort should be made to dismantle the octroi while local government resources remain so severely constrained. Rather, efforts should concentrate on developing new revenue sources, thereby reducing the reliance on octroi. 5.29 There is a great deal of scope for improving the ways revenues are generated at the local level in Nepal. As discussed above, greater reliance on marginal cost pricing could be used to enhance both the allocation of government provided services as well as to mobilize greater domestic resources. At the same time, there are some very fundamental improvements that could be made to the overall revenue structure of municipal financing in Nepal. It is suggested that such a fundamental program would comprise three aspects: (a) Greatly reduce reliance on the octroi; (b) increase reliance on user charges; and (c) increase drastically the amount of revenues from property taxation. "Resource Mobilization for Urban Development: Financial Points of Vieio, Tutaur, Raju, UNDP/WorLd Bank Project (NEP/88/046). 2' A naber of reports discuss the inefficiency and primitiveness of the octrof. See Stout, Don et at, NOctroi Tax Study.N NSUD Project Study Report. 1990: "A Study of Local Taxation in Nepat", MSUD. 1990); Tuladhar, Raju "The Octrol: Its Structure, Role and Issues in Nunicipat Finance, NSUD, 1990. - 45 - The property tax has several advantages over other types of taxes. First and foremost, all municipalities contain properties, hence there is a base. Second, the property tax, combined with good government can be self-liquidating. That is, where good government provides high quality, desired public services, the value of property rises. Hence, if it can be ensured that the property tax will be imposed jointly with improved services, then rising property taxes would be offset by increased land values. Property taxes are primarily imposed on the wealthier segments of society and with some specific exemptions can be fine-tuned to ensure their progressivity. Finally, the tax on land is a tax on an economic rent and hence is non-distortionary. Thus, property taxes are efficient relative to almost any other tax. Poverty Concerns 5.30 Poverty concerns are of great importance in Nepal; with a per capita income of only $154 in 1991, only ten countries of the world were poorer. The recommendations for tax restructuring and marginal cost pricing made here are generally progressive in income. For instance, the octroi imposes an internal trade tax, which tends to be borne more heavily by poorer segments of society, while a property tax is, in the first instance, imposed on the wealthier (i.e. land owning) segments. Marginal cost pricing generally tends to exempt the poorest of the poor from paying for services that they cannot at any rate take advantage of. These basic tenets are, of course, generalizations and greater study and targeting of tax incidence and expenditure are necessary before such sweeping generalizations can be asserted with any degree of certainty. VI. ENVIRONMENTAL CONCERNS FOR INFRASTRUCTURE DEVELOPMENT 6.1 A key environmental concern for Nepal is the impact of development on the forest resources and the fragile eco-syetems of the Himalayas. Figure 3 shows the distribution of forest cover in Nepal in 1980, and as can be seen a significant part of the forests are located in the Far-West, and in particular, the Far-Western Terai which has been the destination of much of the migration in recent years. Management of these forest resources in the face of increased population pressures is critically important, and to a great extent will depend on coordinating infrastructure development in these areas within an overall program of forest resource management. 6.2 Figure 3 also shows the extent of forest degradation in the early 1980s, based on data from the Land Resource Mapping Projects'. Table 28 shows changes in forest area for the various ecological zones between 1979 and 1986 and shows that a majority (more than 90%) of the loss in forest cover has taken place in the Terai. The most severe degradation appears to have been in the Central and Western Terai with 27% of the forests in districts such as Chitwan and Rupandehi classified as degraded. Adjacent districts such as Bara and Nawalparasi showed 16% to 18% of forests as degraded. The western and eastern extremities of the Terai appear to have suffered less degradation. In the Western region, forest degradation seems to have been more severe in the Hills than in the Terai. It is possible that in the two areas, Central Terai and Western Hills, forests have been degraded for different reasons. In the Central Terai, the presence of a better road network has facilitated greater access to L2 "Land Resource Mapping Project", HMGN, Kathmandu, Nepat, 1986. - 46 - forests, whereas in the Western Hills, degradation appears to have been caused by local populations with poor access to other types of fuel, having to rely more heavily on fuel wood as the main source of energy. Table 28 CHANGES IN AREA OF NATURAL AND ENRICHED FORESTS 1978/79 - 1985/86 ('000 ha.) Percentag Change Physiographic Region 1978-1979 1985-1986 Difference 1978-1985 Annual Terei 587 445 -142 -24.1 -3.9 SiwaLiks 1,445 1.434 - 11 - 0.8 -0.1 MiddLe Mountains 1r791 1,781 - 10 - 0.6 0.0 High Mountains 1,628 1.634 + 6 0.4 0.0 High Himet 154 155 + 1 - 0.6 -0.0 TotaL 5r605 5r449 -156 - 2.8 -0.4 Source: Master PLan for The Forestry Sector, 1988 6.3 Regressions carried out using data on the extent of forest degradation in the Hills with the availability of roads, population density and per capita agricultural output (a measure of rural poverty) showed weak correlations; however, forest degradation was best explained by rural incomes which had a negative coefficient, indicating that greater rural poverty increased the reliance of the population on forest resources. Road density also had a negative correlation with forest degradation in the Hills, indicating that where there was improved access to alternative fuels, the reliance on forests for fuel wood decreases. (see Annex II, Figure 2.12). 6.4 In addition to lose of forest resources and bio-diversity, poorly managed forests can cause severe soil erosion. Soil loss by different forms of land management types (see Table 29) shows that certain types of management involving sloping terraces and degraded range land are major sources of soil loss in Nepal. There is also a significant amount of soil loss in the Siwalik zone and mountainous zone which occurs naturally and is a major source of the sediment in Nepalese rivers. In planning future infrastructure development in the Terai, considerable attention needs to be given to ensuring that such development is properly managed particularly with respect to the provision of roads and their design and construction. 6.5 Specific examples of efforts undertaken to address the linkage between infrastructure development and environmental consequences in the roads sector, illustrate the sorts of innovative approaches to environmental impact mitigation - 47 - Table 29 SOIL LOSS RATE UNDER DIFFERENT LAND USES Land Type Soil Loss (tons/hayr) Well managed forest land 5-10 Well managed rice terraces 5-15 Poorly managed sloping terraces 20-100 Degraded range land 40-200 WelL managed maize terrace 5-10 Source: Laban, P., Field Measurement on Erosion and Sedimentation in Nepal, ItMP, Kathmandu, Nepe!, 1978. which can be adopted. The Jiri Road Project!F illustrates the importance of road design to minimizing environmental damage. Some of the measures adopted in this project included: proper drainage of water-saturated slopes and spring run- off; discharge of side drains into natural brooks, rivulets and rivers; and use of checkdams to protect steep gullies. In the case of the Tukis road, the use of a cold (rather than hot) application bitumen binder saved about 1000 hectares of forest which otherwise would have been destroyed to obtain fuelwood to heat the bitumen. Current Environmental Initiatives in Nepal 6.6 The Government has taken several steps in recent years to control impacts on the environment, including: (a) incorporation of specific' environmental considerations in policies and programs in the Seventh Plan (1985-1990); (b) formulation of a National Conservation Strategy for Nepal; (c) issuance of a general policy directive in August 1990 requiring that development projects adequately assess environmental aspects prior to implementation; (d) preparation of draft national Environmental Impact Assessment guidelines by the National Planning Commission; (e) specifying industrial policy that requires effective means to prevent and minimize environmental pollution when establishing new enterprises or expanding existing ones; and (f) requiring existing industries to install pollution abatement equipment (e.g. Hetauda Cement Factory - electrostatic precipitators, Himal Cement Factory - scrubbers, other cement factories and magnetite producers - bag filters). E" Schaffner, U., "Road Construction in the Nepal Himalaya: The Experience from the Lamosangu-Jfri Road Project". ICIMOD Occasional Paper No. 8, Kathmandu, Nepal, March 1987. See also the uReport on Rural Hilt Roads in Palpa, by Fonseka and Soe, for the Rasuwa-Nuwakot Integrated Development Project, January 1991. 24 National Report for UN Conference on Environment and Development, Nepal May 1991. - 48 - Figure 3: Forest Cover and Degraded Forests. 1980 IBRD 2468 NEPAL FOREST COVER AND DEGRADED FORESTS, c. 1980 d Use FORESTS AS PERCENT OF TOTAL LAND <10% 10-25% 25-50% > 50% Degraded Forest Land PERCENTAGE OF FOREST LAND DEGRADED <%5-10% 10-15% 15.20% 20-25% > 25% BakGopTed-noma~n ..d and #he bon e -*- m on- dufh, npd. -o unply -n Ih. par & %h w"ri Bank &~ ~n um~n . 49& ^.. y~ y«- d ~a -uch b ..d.' MRCH 199 - 49 - Further steps are planned by the Ministry of Industry to control the location of pollution-prone industries. The government is also considering the establishment of an environmental unit in the Ministry of Industry for monitoring purposes, the development of guidelines for the disposal of toxic wastes and the development of a comprehensive industrial envir6nmental information system. VII. MAIN CONCLUSIONS AND RECOMMENDATIONS 7.1 Key objectives for infrastructure development strategy in Nepal are set out as a matrix in the executive summary, and the main recommendations of this report are summarized below: (a) Planned investments in infrastructure appear to be spatially distorted, with considerable emphasis on providing infrastructure in the Hills (North-South roads, connecting roads to district headquarters), whereas the potential for economic growth as well as recent migration indicates that a greater emphasis on the Terai would produce the greatest economic benefits. (b) Urban infrastructure development should receive priority attention with allocations of about 55 percent of the total infrastructure investments. Urban development should address the needs of rapidly growing Terai towns such as Birganj, Janakpur and Mahendranagar, in addition to the efforts already being made to improve infrastructure in Kathmandu Valley. (c) Infrastructure provision in the Western Terai, particularly of feeder roads to the East-West Highway can produce large gains in agricultural output, and should be used as instruments to manage the rapid growth of population which is occurring in that area, and to ensure that development in this ecologically sensitive area takes place in a sustainable manner. (d) Completion of the East-West Highway in the Western Terai will increase population pressures in that area, and special care is needed to ensure that the forest resources of the area are managed in a sustainable manner. (e) Road densities in Nepal are considerably below comparators of other low income countries, and should be increased in order to improve agricultural productivity through both providing better access to markets and inputs, in particular, road densities in the Terai should probably be doubled. Investments in roads should not however be at the expense of maintenance, expenditures for which need to be increased significantly. (f) There is a need to carefully review critical needs in the aviation sector, particularly in the areas of navigation aids and other aviation safety enhancements, and prepare a viable investment program for the sector. (g) The level and quality of water supply and sanitation coverage is extremely poor particularly in the parts of the country outside of - 50 - Kathmandu Valley, urban water supply coverage is deteriorating, and sanitation coverage is negligible, the costs of improving coverage outside of Kathmandu are affordable provided HMG/N can address the institutional and resource mobilization issues in the sector. (h) Domestic resource mobilization is extremely weak, particularly at the local government level, and the Government's tax effort can be increased by 50 percent based on international norms, and most of these increases should occur at the local government level through introduction of user fees and property taxes; such improvements in resource availability at the local level are critical to adequate maintenance of existing infrastructure, and to improvements in infrastructure provision. (i) Based on the analysis of the spatial distribution of future growth in infrastructure demand, and of growth in economic output, it would appear that a majority of infrastructure investment should go to the urban areas of the country (about 55% of infrastructure investment) and rural Terai (about 30%) which together should receive between 85 and 90 percent of total infrastructure investment, with rural Mountain and Hill areas receiving only 10 to 15 percent; any significant deviation from these indicative proportions is likely to result in a misallocation of scarce investment resources. Present HMG/N investment plans appear to be primarily based on equity concerns which may be overly influenced by present (and probably somewhat dated) assessments of needs in various parts of the country. 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