The World Bank. FOR omcwl. USE ONLY OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 21.

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Dmme The World Bank FOR omcwl. USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO TRE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 21.6 MILLION NARAYANIII TO THE KINGDOM OF NEPAL FOR A f IRRIGATION PROJECT June 2, 1986 Report No. P-4332-NEP This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Is contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS US$1.0 = KRs 20.5 ABBREVIATIONS AND ACRONYMS AG - Auditor General AIC - Agricultural Inputs Corporation BSC - Branch Secondary Canal CCA - Cultivated Commanded Area DG - Director General (DIHM and DOA) DIHM - Department on Irrigation, Hydrology and Meteorology DOA - Department of Agriculture FAO - Food and Agriculture Organization GM - General Manager coi - Government of India HMGN - His Majesty's Government of Nepal ICB - International Competitive Bidding IDA - International Development Association LCB - Local Competitive Bidding M&E - Monitoring and Evaluation MOA - Ministry of Agriculture MSC - Main Secondary Canal MWR - Ministry of Water Resources NEC - Nepal Eastern Canal NZIDB - Narayani Zone Irrigation Development Board NZIDP - Narayani Zone Irrigation Development Project (Stages I, II and III areas) O&M - Operation and Maintenance SA - Special Account SDC - Swiss Development Cooperation Stage I Area - Narayani Zone-Blocks I-VI--15,900 ha Stage II Area - Narayani Zone-Blocks VII-XII--12,800 ha Stage III Area - Narayani Zone--Blocks XIII-XV--8,700 ha TC - Tertiary Canal T&V - Training and Visit System (of Agricultural Extension) USAID - United States Agency for International Development WUG - Water Users' Group FISCAL YEAR July 16 - July 15

3 FOR OFFICIAL USE ONLY NEPAL NARAYANI III IRRIGATION PROJECT Credit and Project Summary Borrower: Amount: Terms: Kingdom of Nepal SDR 21.6 million (US$24.5 million equivalent) Standard Project Objective The main objectives of the Project are to increase and Description: dry-season agricultural production and reduce the risks to monsoon crop production by introducing an equitable, predictable and reliable irrigation system in the Narayani irrigation scheme. The proposed project is the third phase of an IDA-supported program and would complete the development of irrigation and drainage infrastructure over about 37,400 ha served by the Nepal Eastern Canal in the Narayani Zone of the Central Region of Nepal. The project would also provide for: flood protection and river training works; improvements to village roads and canal service roads; support to agricultural extension and research; a regional workshop; training of project staff; consulting services; funding for project establishment and O&M; a small component for groundwater development; and monitoring and evaluation. In view of the experience with the implementation of the first and second projects, no major risks are anticipated regarding the physical implementation of the project. Possible risks that could affect project objectives include: HMG's failure to make adequate provisions for OEM financing after contributions from the credit phase out at the end of implementation; a major flood damage to the main canal and other essential irrigation infrastructure; and inadequate water management. With respect to these risks, the cost of project establishment and ObM would be financed under the credit on a declining basis; special training would be provided to project staff in water management and water users' groups would be strengthened; and project planning and design would enable the introduction of a water management system that would enable the irrigation service to be timely, reliable and equitable. This document has a rstricted distribution and may be used by recipients only in the performance of their offiil duties Its contents may not otherwie be disclsed without World Dank authoriation.

4 Estimated Costs: a1 US$ Millions- Project Component Local Foreign Total NEC Improvement and Repairs to the Tilawe Barrage Irrigation and Drainage (Stage III Areas) Irrigation and Drainage (Stage I and II Areas) Flood Control and River Training Upgrading of Road Network Equipment and Radio-Communication System Regional Workshop Technical Support Establishment and O&N Land Acquisition and Crop Compensation TOTAL BASE COSTS Contingencies Physical Contingencies Price Contingencies TOTAL PROJECT COSTS Financing Plan: b/ -- US$ Millions-- Local Foreign Total IDA SDC HMGN TOTAL a/ Not including taxes and duties estimated at about US$0.5 million. b/ SDC grant is denominated in Swiss Francs and is fixed at 15 million Swiss Francs: the US$ equivalent of 7.5 million (using exchange rate of April 22, 1986) may vary with exchange rate movements. Cofinancing is on a joint basis following Bank Group's procurement and consultants guidelines.

5 -iii- Estimated Disburseuents: IDA FY FY87 FY88 FY89 FY90 FY91 FY92 FY93 FY94 a/ (a) For IDA Credit (b) For SDC Grant Annual Cumulative Annual Cumulative Rate of Return: 21 percent Appraisal Report: NEPAL: Narayani III Irrigation Project, Report No NEP, dated June 2, 1986 Map: IBRD a/ One semester.

6 INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A NARAYANI III IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Kingdom of Nepal in an amount of SDR 21.6 million (US$24.5 million equivalent) on standard IDA terms to help finance the Narayani III Irrigation Project. Cofinancing has been arranged with the Swiss Development Cooperation (SDC) for a grant of Sw F 15.0 million (about US$7.5 million equivalent). PART I - THE ECONOMY 1/ 2. The most recent economic report, Nepal: Prospects for Eccnomic Adjustment and Growth (Report No NEP), was distributed to the Executive Directors on December 17, The principal features and recent performance of the economy are described below. Country data are shown in Annex I. 3. Nepal is one of the least-developed countries in the world. Per capita income is estimated at US$170 (1983) and health and education standards are well below the average for South Asia. Life expectancy at birth is about 46 years, infant mortality is about 145 per 1,000 and adult literacy is only 19 percent. The population, estimated to be 16.3 million (mid-1984), grew at a rate of about 2.7 percent per year between 1971 and About 95 percent of the population lives in rural areas. 4. Population density with respect to arable land (394 persons per sq km) has reached very high levels, and cultivation has been extended to marginal lands and forests. Forests have been denuded further to meet the growing demand for fuelwood, on which Nepal depends for more than 90 percent of its energy consumption, mostly for household cooking and heating. Because of deforestation and excessive grazing on hills and mountains, when rainfall is abundant, accelerated soil erosion occurs causing rivers to silt and flood with consequent loss of agricultural productivity. 5. Agriculture, largely rainfed, accounts for nearly 60 percent of Nepal's GDP and merchandise exports and provides the main source of livelihood to more than 90 percent of the population. Crop production 1/ Substantially unchanged from Cottage and Small Industries II Project (Report No. P-4295, dated April 24, 1986).

7 -2- accounts for about 60 percent of agricultural output, livestock for 30 percent, and forestry for 10 percent. Apart from agricultural land, Nepal's only other important exploitable resources are hydropower and tourism. Exploitation of its vast hydropower resources will depend upon the Government's ability to enter into complex agreements with neighboring countries regarding the use and development of water resources and the exchange of water-related benefits. The tourism sector, based primarily on Nepal's Himalayan environment provides about 20 percent of the country's foreign exchange earnings, but accounts for only about 1 percent of GDP. 6. Following centuries of self-imposed isviation, efforts to develop the economy of Nepal began in the mid-1950s--a time when the country had virtually no physical infrastructure, an ancient administrative system, and very limited educational and health services. Between 1955 and 1975, the country's primary development goal was to build basic infrastructure and provide a basis for future economic growth. Reasonably good progress has been made. A basic road network now exists. Schools accommodating almost half of the children of primary school age have been built, as have a number of secondary schools and a national university. A rudimentary hospital system, including rural health posts, has also been established. Then, in the Fifth Five-Year Plan the Government shifted its development objectives to stress accelerating economic growth and creating employment, as well as raising living standards. These objectives were reiterated in the Sixth Plan (FY81-FY85) and in the Seventh Plan (FY86-FY90), which also appropriately assigned high priority to developing agriculture, small-scale industries and Nepal's abundant water resources. Additionally, both Sixth and Seventh Plans stressed the need to conserve soil, control population growth, make better use of existing infrastructure, expand absorptive capacity and develop human resources. But despite rapid expansion of development expenditures, supported by growing foreign assistance, from US$103 million (7 percent of GDP) in FY75 to US$421 million (18 percent of GDP) in FY85, per capita real income grew at only 0.5 percent annually during this period. 7. The country's difficult terrain, landlocked position, and poor natural resource base have contributed to its disappointing economic performance. Other important factors are the Government's severely limited capacity to manage the economy and to administer rapidly expanding development programs. 8. Over the past ten years, public expenditures have continued to grow faster than revenues, with increasing shares of the growing budget deficits financed by aid flows. The situation deteriorated sharply, starting in FY83 when large unanticipated emergency expenditures due to a drought necessitated recourse to significant domestic bank borrowings. The budget position has remained unstable since then, and the continued reliance on domestic bank financing has created inflationary pressures. Serious balance of payments problems have also emerged in the past three years as the cumulative result of a decade of poor economic management, as characterized by low real GDP growth, and dwindling agricultural surpluses for export. The external pay-

8 -3- ments position remained precarious in FY84 and FY85, with the country continuing to lose foreign exchange reserves. By June 1985, gross official international reserves had declined to the equivalent of 1.6 months of imports compared with the peak of 6.2 months at the end of FY To restore financial stability, the Government needs urgently to step up domestic resource mobilization while stringently controlling the growth of expenditures in order to reduce domestic bank borrowings. As a result of efforts to improve income tax assessment and collection and to apply indirect taxes, revenues have steadily increased, but the tax structure remains inelastic and narrowly based. Immediate reform should be geared to rationalizing the structure of taxation and widening the tax base, for example, by reducing income tax exemptions and deductions and eliminating sales tax rate differentials between imported and domestically-produced goods. 10. To control expenditure, the Government must contain the growth of wages and salaries, now the largest component in the regular budget. A freeze on further civil service hiring is required over the next few years. Implicitly, selective redeployment of positions is also required in order to achieve priority objectives in some sectors. Also, in the wake of a hefty 35 percent general salary increase introduced in FY85, no increases should be allowed in the Sev-enth Plan period. Additionally, public enterprise reform must be pursued in order to reduce subsidy and transfer payments to public corporations, some of which are causing a serious drain on the budget. Development expenditures should be directed toward activities that will produce economic results efficiently and quickly. To this end, existing productive capacity and infrastructure need to be strengthened to increase their usage, for example, through measures to improve operations and maintain roads and irrigation canals. Resources for new investments should be directed to activities that will earn additional foreign exchange for the economy within short gestation periods. To lessen the burden of counterpart funding, the Government should take a critical look at the pipeline of ongoing operations and re-evaluate the returns to the economy of completing each project. Tough decisions will likely be requi:ed to postpone, re-design or cancel any ongoing project that does not measure up to the criteria applied. 11. Concurrently, additional foreign exchange needs to be generated through export promotion and efficient import substitution in order to stabilize the country's precarious external payments position and to accelerate real GDP growth in the medium to longer term. To improve its agricultural trade position, the Government's immediate priority should be to secure an adequate supply of foodgrains (rice, maize, wheat) and principal food crops (sugar, oil seeds) to eliminate the sporadic requirement for food imports in years when the monsoon fails. An effort should also be made over the longer term to promote the export of minor cash crops such as ginger and cardamom. The key elements to improve agricultural production over the medium term include: improvements in the supply and distribution of agricultural inputs; increased access by farmers to credit; investments in transport, storage and

9 -4- other basic infrastructure to facilitate marketing; and a more effective and flexible agricul.ural pricing policy. The development of cottage and small industries (CSI) should also receive high priority over the next few years because of their potential for earning foreign exchange. Currently, the output from CSI, such as carpets, ready-made garments, and handicrafts, accounts for 30 percent of Nepal's total merchandise exports. In recent years, the Government has legislated a wide range of fiscal and administrative incentives to stimulate private investment in CSI as well as the export of CSI products. Implementation of these measures, together with the alleviation of severe transport and transit constraints, constitute essential elements of an export trade promotion strategy for Nepal. 12. In late 1985, the Government took major first steps toward stabilizing, and stimulating growth of, the economy. Effective November 30, 1985, the Nepalese Rupee was devalued by about 14 percent. Subsequently, the Government introduced a financial stabilization program as part of a 13-month standby arrangement with the International Monetary Fund. Major features of the program are: (a) maintenance of a flexible exchange rate policy; (b) restraints on public regular and development expenditures; (c) strengthened tax administration to help reduce the budget deficit; (d) restraint on the creation of domestic credit, especially bank credit to the public sector; (e) maintenance of key bank deposit rates at positive real levels; (f) increases in the prices charged by public enterprises and a reduction in the subsidies received by them; (g) restraint on external comr mercial borrowing; (h) increased numbers of licenses for commercial imports; (i) abolition of a 10 percent cash subsidy on exports; and (j) a number of procedural and institutional reforms liberalizing and rationalizing the trade and exchange regime. 13. The tasks that Nepal must undertake to address its multiple long-term development problems are challenging. While it attempts to mobilize domestic resources to finance about percent of development expenditures, external assistance at concessional terms will continue to play an important role in financing investment and achieving economic growth. In the last three years, aid commitments to Nepal have averaged US$250 million per year, and have almost entirely been in the form of grants or concessional credits with grant elements exceeding 70 percent. Gross disbursements grew from about US$130 million in FY81 to US$165 million in FY85. Nearly 70 per_ent of total aid disbursements have come from members of the Nepal Aid Group, formed in 1976 and now comprising eight Developing Assistance Committee (DAC) countries and four multilateral agencies. 14. By December 1984, Nepal's official foreign debt outstanding and disbursed amounted to about US$430 million. As virtually all loans have been concessional, debt-service payments, including payments to the International Monetary Fund (IMF), have remained small in relation to exports of goods and services: in FY85, debt-service payments amounted to about US$17 million, equivalent to 5 percent of exports of goods and services. These payments

10 -5- over the medium term, are anticipated to remain at about 7 percent of Nepal's exports of goods and services. PART II - BANK GROUP OPERATIONS 15. Bank Group operations in Nepal began in 1969 with an IDA credit of US$1.7 million equivalent for a telecommunications project. Since then, 43 additional credits have been approved, bringing total IDA assistance to Nepal to US$599.1 million equivalent, net of cancellations. In view of Nepal's many development needs, this assistance has been for projects in a wide variety of sectors. Five of these sectors account for about 90 percent of IDA credits by-amount: irrigation/agriculture (US$192.0 million for 16 projects); water supply and sewerage (US$46.8 million for three projects); power and energy (US$168.0 million for four projects); telecommunications (US$41.7 million for four projects); and highways (US$67.0 million for three projects). The proposed credit of US$24.5 million would be the second to be approved in FY86. No Bank loans have been made to Nepal. IFC has made three investments in Nepal, the first in FY75 (US$3.1 million) for the expansion of the Soaltee Hotel project in Kathmandu, the second in FY82 (DM 14.5 million) to Nepal Orind Magnesite Company for the mining and production of dead burnt magnesite, and a third approved in FY84, but not yet signed to NepaL Metal Company (DM 7.8 million), for a zinc/lead mining and concentrates project. Annex II contains a summary statement of IDA credits and IFC operations as of March 31, Bank Group lending to Nepal has been modest until now, considering the country's need for external assistance. The international community has shown considerable interest in Nepal's economic development and, to date, shortage of funds has not been a major bottleneck. The main constraint on the utilization of increased aid has been Nepal's limited absorptive capacity, affecting the pace of project preparation and implementation. The Bank Group has provided assistance to the Government in project preparation through two Technical Assistance Credits (Cr. 659-NEP and 1379-NEP) and by acting as Executing Agency for a number of technical assistance projects financea by UNDP. Project completion reports have been prepared for six projects: First Telecommunications (Cr. 166-NEP), First Highways (Cr. 223-NEP), Tourism (Cr. 291-NEP), Birganj Irrigation (Cr. 373-NEP) the Settlement (Cr. 505-NEP), Bhairawa-Lumbini Irrigation (Cr NEP), and the First Rural Development (Cr. 617-NEP) Projects. 17. In recent years Bank lending has attached particular importance to (a) agriculture (including irrigated agriculture) and forestry; (b) population control; and (c) education and training. Agriculture, a main source of livelihood to over 90 percent of the population, accounts for about 60 percent of CDP and of merchandise exports. The primary objective of our Lending in this sector is to increase production and employment. To that end, we will emphasize actions and investments aimed at improving the supply of inputs, strengthening support services to maximize benefits from existing

11 -6- infrastructure and equipment, upgrading the irrigation network, and improving operation and maintenance in medium and large scale irrigation projects. In forestry, the Bank Group will support reforestation schemes at the community level. Investments in agriculture and forestry would have to be supplemented by effective programs to control population growth, particularly in the hill areas, where a rapidly growing need for food, fuelwood and fodder is causing serious environmental degradation. The manpower development objectives will be to improve the quality of primary education and to increase the supply of trained technical manpower for public administration. Outside these three areas of primary emphasis, Bank Group involvement would concentrate in areas where investments would complement growth in production capacity. Accordingly, we plan to maintain some support to the power sector which previously abeorbed a significant portion of our lending; we envisage our future role in the sector more as a provider of technical assistance and a catalyst for mobilizing additional external resources. In the transport sector, our plan is to combine technical assistance through sector work with selected interventions designed to facilitate regional integration and improved rural access to markets and input supplies. We also propose to continue supporting cottage industries where previous investments have made a notable contribution to export promotion, import substitution and rural employment generation. 18. In allocating resources, the Bank Group's basic approach will be to strike a proper balance between quick and high yielding investments (e.g., agriculture), which is dictated by Nepal's precarious budgetary and balance of payments position, and an equally important commitment to those sectors whose impact cannot be felt immediately but which nevertheless are vital to the country's long-term development (e.g., population and human resource development). Some of the Bank Group's operations would be deliberately targeted to the poorest and least developed parts of the country, such as the hill area The proposed Narayani III irrigation project would contribute to Nepal's policy objective to utilize more fully, and more rapidly, existing irrigation infrastructure and thereby enable past investments to realize their expected return. The project would complete the construction and development of the physical infrastructure (water distribution system, drainage, farm roads) in the course of which it would apply the lessons learned during the first two phases of the scheme. PART III - SECTORAL BACKGROUND General 20. Agriculture is the mainstay of the economy. However, the resource base for agricultural production is restricted due to the rugged terrain; only about a sixth of the land area (3.1 million ha) is suitable for

12 -7- cultivation, of which some 50 percent is irrigable. Decades of inefficient land use and exploitation of natural resources have resulted in severe agroecological imbalance, particularly in the Hills, and have placed severe constraints on the development of the country. While HMGN's development strategy and investment priorities for the agriculture and rural sectors have been generally consistent with the national and sectoral needs, achievements have fallen short of the targets for the production of basic agricultural commodities, correction of the agro-ecological imbalances, and improvement of the socio-economic conditions in rural areas. This has been so because some of the investment programs were not well designed and many were not effectively implemented due to shortages of skilled manpower and local funds, and weaknesses in the relevant institutions, administrative structure and operational procedures. 21. Agricultural production during the last decade increased only by about 0.7 percent per annum, while population surged by about 2.7 percent per annum, thus leading to a progressively deteriorating food balance. An FAO study on food and security, dated September 1984, estimated that 39 out of the 75 districts currently have a deficit in food production and unless production trends are changed, domestic production of cereals would meet only about 65 percent of Nepal's consumption requirements by year The present forest area in Nepal is about 5.3 million ha. These figures represent a 33 percent reduction in forest areas since Destruction is accelerating because of tree felling for fuelwood and additional cultivable lands, and reduction of regeneration and seedling growth by uncontrolled grazing. As the forests are destroyed and fuelwood sources become remote and relatively inaccessible, use of dried dung and crop residues for fuel is increasing, thereby depriving the soil of what are often the main sources of nutrient replacement and resulting in a continuous declint in productivity. The disappearance of forests is also resulting in increased damage to agricultural lands in the lower catchments of the watersheds and, in general a degradation of the environment. With the increased population pressure on the land, accessible forests in the Hills are faced with the grim possibility of complete denudation within the next 15 years, and those in the Terai within 25 years, unless reforestation and conservation efforts are enhanced. The Irrigation Subsector 23. Water Resource Utilization. Nepal has abundant surface water resources. Annual average discharges of its rivers total about 150 billion m3 and would be capable of irrigating 8 to 10 million ha. However, there are only about 1.3 million ha suitably located for gravity irrigation. The major and minor rivers can serve relatively small command areas in Nepal while they are costly to develop, because of the Large diversion structures needed to spill the huge monsoon floods and the sediments that should be desilted out of the systems every year in very large quantities. The development of these rivers is further constrained by the need for legal

13 -8- agreements with India. Groundwater resources are abundant in the Terai, but development is constrained by lack of infrastructure to keep scattered pumps and engines operating reliably. Electric power to energi,e tubewells is severely restricted in extent and amount, particularly in the more remote parts, but the situation is improving. 24. Irrigation Development. At present, only about 540,000 ha have some form of irrigation, of which about 140,000 ha are under public schemes. The inventory of irrigation facilities (1985) by ecological zones and development regions is as follows: Region Mountain Hill Terai Total Z --( ha) _ Eastern 4,365 75, ,912 18, Central 4,028 34, , , Western 29 38,254 60,990 99, Mid-western 2,254 12,313 32,674 47, Far-western 3,641 8,476 32,438 44, Nepal 14, , , , Z Private sector surface irrigation development consists mostly of simple river and stream diversions which often use temporary weirs to head up the river flows into ungated intakes. It was initiated in the Hills and started to extend into the Terai during the first half of the present century when diversion schemes were constructed by large landowners and farmer groups. 25. The first two government-operated schemes (Mahakali, 4,700 ha, and Chandra, 11,000 ha) were constructed on the Terai during the 1920s. These are based on river diversion and were implemented with the assistance of the Indian government as recompense to Nepal for water rights allotted to much larger irrigation schemes in India. Design parameters were similar to those of the Indian systems of the period: they aimed at spreading water relatively thinly over the largest possible area, to provide drought insurance to kharif crops. The distribution system was developed only to the 700-1,000 ha block level; farmers were expected to build the system beyond it but this expectation did not materialize. Consequently, much of the potential command could not be seeviced. After independence, Indian assistance to construct irrigation schemes in Nepal continued; schemes were based on traditional design concepts, and ended with similar unsatisfactory results. 26. In the late 1970's, HMGN's planning objectives were changed to (a) extend the distribution system down to the 50 ha level; (b) organize Water User Groups (WUGs); and (c) provide agricultural support services to the farmers. This policy change was a corollary to increasing support of the

14 -9- irrigation sector by the World Bank and the Asian Development Bank. A more recent policy trend in the public irrigation sector has been to extend the irrigation infrastructure down to ha areas. IDA Involvement In Irrigation Development 27. The objective of IDA's involvement in the irrigation subsector is twofold: (a) to support the Government's efforts to increase agricultural output for domestic consumption and, to the extent possible, for export; and (b) to assist in strengthening managerial and institutirnal capability as well as sustaining growth in agricultural productivity. As one of the world's poorest countries with a high population growth rate, Nepal must continue to give high priority to increasing employment and agricultural production. Development of water resources will be an important means of achieving this objective. This does not necessarily mean development of only new areas. Under Nepal's L,lnditions, investment enabling improved operation of existing assets is at least as important, if not more so, in the short run. IDA has assisted HMGN to utilize more fully and rapidly irrigation infrastructure already built and thereby enable past investments to realize their full potential. However, there is also a need to improve planning for the long term development of water resources and to coordinate better the activities of the various donors. IDA's assistance in the sector will be geared to these needs. To date, IDA has financed six irrigation projects (of which four are ongoing), one irrigation engineering credit, and irrigation components in three rural development projects. 28. The first project undertaken with IDA assistance was the Birgan Irrigation Project (Narayani Zone) (Cr. 373-NEP, US$ 6.0 million, 1973). Its objective was to complete and upgrade the irrigation and drainage system on 28,700 ha of the 37,400 ha commanded by the Nepal Eastern Canal (NEC) and to provide groundwater irrigation to 2,700 ha, north of the NEC command area, through public tubewell development. Because of implementation delays which led to considerable cost overruns, the surface component was reduced to 16,300 ha, which was designated Stage I. The reduced project was completed in The Project Performance Audit Report (PPAR No of December 30, 1982) concluded that the groundwater component has been less than successful, mainly due to inadequate attention to operation and maintenance (OEM), some well failures, and the then unreliable power supply. 29. The Narayani Zone Irrigation Development Stage II Project (Cr. 856-NEP, US$14.0 million, 1978) followed on the Birganj Irrigation Project. It was designed to develop the 12,700 ha deferred from the Stage I project and to provide intensified agricultural support services. While progress in the achievement of physical targets has been satisfactory, operation and maintenance and the involvement of farmers in water distribution at farm level is still weak. Completion is scheduled for the end of The Bhairawa-Lumbini Groundwater Project (Cr. 654-NEP, US$9.0 million, 1976) represented the first stage of a public sector groundwater

15 -10- irrigation development program in Western Terai. The project provided for the construction of 64 deep tubewell systems serving about 7,600 ha, together with provision of agricultural supporting services. Implementation of project works was delayed by t-o years, resulting in a 20 percent cost overrun. The delay was due to: (a) slow tendering and land acquisition procedures; (b) shortages of construction materials; and (c) inadequate staffing and budget allocations. The credit was fully disbursed in March 1983, when project completion stood at 80 percent (PPAR No of September 20, 1984). 31. A follow-on project, Bhairawa-.umbini Groundwater Project Stage II (Cr NEP, US$16.0 million, 1982) prrvides financing for completion of Stage I works, O& of the completed wells during the 5-year implementation period, including the public tubewells developed under the Birganj Irrigation Project (para. 28), and introduction of imiprovedesign and construction of new tubewell irrigation systems. Performance of completed tubewell systems has suffered from unreliable power supply and shortages of spares for maintenance. Power supply is expected now to improve as the national power grid is nearing completion. Lack of effective agricultural support and difficulties with organization of the farmers into WUGs have been additional obstacles to successful operation; this situation is now gradually improving. 32. The Sunsari-Morang Irrigation and Development Project (Cr. 812-NEP, US$30.0 million, 1978) was designed to restore and improve an existing system, the Chatra Canal command, serving 69,000 ha. The project concept and scope were revised in mid-1983 because of: (a) the desirability of adopting a considerably more detailed approach to managing water distribution than originally envisaged; and (b) the limited implementation and financial capacity of HMGN to develop in one time-slice the whole 69,000 ha. Consequently, the project was divided into 4 stages. The area of the ongoing project (Stage I) was reduced to 12,000 ha. The first stage is expected to be completed by the end of The second stage, covering an additional 23,000 ha, is now under preparation. 33. The Mahakali Irrigation Project (Stage I) (Cr NEP, US$16.0 million, 1981) aimed to rehabilitate and upgrade an existing irrigation system of 3,400 ha on the left bank of the Mahakali (Sarda) River in the Far Western Region and to extend it to 6,600 ha. Implementation is more than a year behind schedule, mainly because of delays in engaging local and foreign consultants, procurement of equipment and materials, and difficult commiunications to the rest of the country. Most of the problems have now been resolved, but the project area has been reduced to 4,700 ha, due to (a) HMGN decision not to release some of the forest lands for agriculture and (b) mapping errors at preparation. The reduced project continues to be viable. Completion is scheduled for The Babai Irrigation Engineering Project (Cr NEP, US$3.5 million, 1981) financed the preparation of detailed designs for the proposed Babai Irrigation Project on 13,500 ha, and for 46 km of the East-West

16 -11- highway. A consulting firm was engaged in 1981 and work has progressed as scheduled. 35. A component of the First Rural Development Project (Cr. 617-NEP, US$8.0 million, 1976), completed in December 1983, provided for improvements of small scale irrigation schemes in the Hills and development of a high-lift scheme on the Batar plateau in Nuwakot District, for a total of approximately 1,900 ha. The small scale irrigation schemes have made a substantial impact on production; the effect of the more complex lift scheme has not been up to expectation. A follow-up project in the same district has been negotiated, and includes a number of additional small schemes. The Second Rural Development Project (Cr. 939-NEP, US$11.0 million, 1979) includes a component for the improvement of small scale Hill Irrigation schemes in the Mahakali Zone. Implementation is progressing slowly. 36. Lessons of Past Investments In Irrigation. The principal lessons learned from IDA's experience with past lending in the subsector include the need to: (a) bring the water distribution network closer to the farmer's fields; (b) provide closer technical supervision of design and construction parameters, and operation of the completed parts of the project; (c) increase the emphasis on staff training and institution building; (d) increase the involvement of farmers in water management through proper training and organization and giving their groups the necessary statutory powers to carry out their roles; (e) increase O&M expenditures; and (f) improve cost recovery mechanism. The rates charged have not only failed to cover operating and maintenance costs, but the collection mechanisms have been weak. A basic reformulation of charges and collection mechanisms is needed to reduce the budgetary burden on HMGN. PART IV - THE PROJECT 37. The Project was appraised in November/December Negotiations were held in Washington, D.C., between April 16 and 22, The Nepalese delegation was led by Mr. C.D. Bhatt, Director General, Department of Irrigation, Hydrology and Meteorology. The Staff Appraisal Report titled Narayani III Irrigation Project (Report No NEP) dated June 2, 1986 is being circulated separately. A supplementary Project Data Sheet is attached as Annex III. Project Description 38. The objectives of the project are to increase dry-season agricultural production by introducing an equitable, predictable and reliable irrigation system in the Narayani irrigation scheme. The project would have the following components: (a) improvements to the NEC and extensive repairs to the Tilawe Barrage, which was damaged during the 1985 monsoon; (b) development of the Stage III area (8,700 ha) including about 40 shallow tubewells to support

17 -12- early rice nurseries; (c) improvement and repairs in the Stage I and II areas (28,700 ha); (d) flood protection and river training works; (e) improvement of the road network; (f) provision of vehicles and equipment to support project construction and maintenance activities and radio communication equipment for improvement of project operation; (g) establishment of a regional workshop; (h) provision of technical assistance for consultancies, staff training, strengthening agricultural extension and research and studies, including planning and design, of suitable irrigation projects in the Terai; and (i) support of project establishment and O&M costs. 39. The project will use water from the Candak River, an international water way, in accordance with a treaty dated December 4, 1959, as amended, between Nepal and India. It has been designed taking into account the provision of such treaty. The rehabilitation works under the project would include embankments for flood protection to be constructed at the Bagmati and Lal Bakeya, as well as Eavrangia, Tilawe, Bangari and Posaha Rivers. None of the works will adversely change the quality or quantity of water flows downstream; and, as the proposed project is a rehabilitation operation, notification to the downstream riparian is not required pursuant to OMS The Narayani scheme is probably the most important irrigation rehabilitation operation in Nepal. It is expected to serve as a model for rehabilitating existing irrigation schemes as well as for the planning and design of new projects and the development of effective and sustainable operational systems. The lessons of past lending outlined above are taken into account in its design. To encourage farmers to use dry season irrigation, the tertiary canals would be constructed down to the 4-ha area. Within this area, construction and maintenance of field channels and water distribution would be undertaken by the farmers themselves organized as water users groups (WUGs). The WUGs would be constituted as statutory bodies by December 31, 1986, and established concurrently with the completion of the infrastructure, thereby ensuring the close involvement of farmers in water management. The technical staff will be trained by the project while the WUGs as well as individual farmers would be given training through the agricultural extension service system. HMGN would be required under this project to make appropriate budgetary allocations for financing O&M, and the project includes a study, scheduled to be concluded by June 1987, of the physical and budgetary requirements for O&M. Consultant services would be provided under the project to assist with various aspects of project implementation. Finally, the cost recovery mechanism would be strengthened through the transfer of responsibility for collecting water charges from the project management to the Land Revenue Department and through adjustment (every two years) of the level of water charges from August 31, 1988 onwards. Detailed Features 41. Improvement of NEC. Improvements started under the first and second projects would be completed so that NEC can operate at design capacity.

18 -13- These include: brick lining of about 3 km of canal section; protection of canal slopes (2 km); strengthening of embankients (3.5 km); improvements of service roads (18.5 km); and provision of check and cross drainage structures, cart and foot bridges. 42. Before the NEC was constructed, a barrage on the Tilawe River commanded some 6,500 ha, most of which was later integrated into the NEC command. The barrage was extensively damaged during the 1985 monsoon. Since its diverted waters continue to be required within, and upstream of, the NEC cgmmand, it would be rebuilt and its flood protection works strengthened. 43. Stage III Area Development. The area (8,700 ha) would be provided with main secondary canals (MSC), several branch secondary canals (BSC) totalling about 120 km, and about 85 structures including culverts, crossdrainage structures and drops as required. Tertiary canal (TC) turnouts would be fixed-discharge structures, each commanding about 30 ha. To encourage dry season irrigation, the TCs would be constructed down to the 4-ha area. Within this area, water distribution would be arranged by the farmers themselves. Construction of field channels from the 4-ha point would be undertaken by WUCs. To ensure irrigation water for early rice nurseries, the project would construct about 40 shallow tubewells where water supplies are not available from other sources. An internal drainage system would evacuate surplus irrigation and excess rainwater during the monsoon. The area would require about 74 km of major drains and 95 km of minor drains, as well as field drains. The existing construction camp would be extended to accommodate staff required to supervise new construction. Upon completion of construction activities the buildings and offices would be used by the O&M staff. 44. Stage I and II Area Works. To improve the distribution system within the Stage I and II areas (28,700 ha), the project would construct or rehabilitate about 450 structures, including ungated control structures, and calibrated offtakes from the NEC to the MSC and the BSC canals. About 1,000 fixed, ungated turnouts from the TCs servicing the 30 ha areas and about 7,000 outlets serving the 4 ha sub-areas would also be provided. In addition, about 85 km of secondary canals and 1,730 km of the TC system would be repaired and the TCs would be extended to the 4 ha level. The WUGs would be provided with a layout plan of the field channels below the 4 ha outlets, which they would construct themselves. Any structures that may be required below the TC outlets would be constructed by the project. In addition, improvements would be made to the natural and constructed drains and to their related structures, including completion of the missing portion of major drains within the Stage I and II areas and the pertinent field drains. 45. Flood Protection and River Training Woiks. Two rivers, the Lal Bakeya and the Bagmati, regularly inundate adjacent lands in the Stage III area. To adequately rehabilitate the Narayani Irrigation scheme, retaining embankments would be constructed on critical reaches at the Bagmati and Lal Bakeya Rivers. The embankments would be grassed over and protected by trees.

19 -14- In addition, flood protection works would include short-cut channels and new flood embankments at four other rivers (Navrangia, Tilawe, Bangari and Posaha). 46. Improvement to Village and Service Roads. Roadworks would include: (a) about 91 km of link roads connecting villages and storehouse locations to the NEC service road; (b) gravelling of part of the existing MSC and BSC service roads in the Stage I and II areas; tc) construction of gravelmetalled service roads on the MSC and BSC in the Stage III area; and %d) upgrading about 152 km of existing roads and constructing about 60 km of new roads, also in the Stage III area. Service roads would be constructed along all main and secondary drains. 47. Vehicles and Equipment. New equipment for constructing project works and spares for equipment already with the project would be provided, as well as office, survey, design and drawing equipment. An internal radio network would support management of new construction, and subsequent operation of the canal system. Subject to agreement with COI, it is proposed that the project head office should be linked to key points on the Indian Eastern Canal System, to better manage water supplies to the NEC command. It was agreed with HHCN that it would, not later than July 1, 1987, issue all the necessary authorizations and permits to enable NZIDB to install the internal radio communications facilities required. 48. Regional Workshop. A regional workshop would be established to service vehicles and equipment from this and other public irrigation projects in the eastern Terai. 49. Technical Support. Consultants services of about 280 man-months would be required to assist project management with various engineering, design, construction supervision, in-service training tasks, and studies of other irrigation schemes elsewhere in the Terai. It was agreed with HMCN that it would retain consultants whose qualifications, terms of reference and period of employment are acceptable to IDA; their selection will be in accordance with Bank/IDA guidelines on employing consultants. 50. In-service training of the project staff, initiated under the Stage I and II projects, wo'ald be strengthened. Provision would be made under the project to (a) construct or rehabilitate and equip training facilities; (b) engage instructors, and (c) prepare training curricula. The project would also support overseas training in irrigation system design, construction and management. 51. The agricultural extension service is organized according to the T&V system, under the IDA-supported second agricultural extension project. To serve the special extension requirements of irrigated agriculture, the proposed project would finance one additional Assistant Agricultural Development Officer and a Subject Matter Specialist in irrigated agriculture in each district, to concentrate on the canal-irrigated areas. Adaptive

20 -15- agricultural research, appropriate to the project, would be carried out within the NEC command area in cooperation with the Department of Agriculture and funded by the project. 52. Monitoring and Evaluation. The project would provide facilities and equipment to monitor and evaluate the progress of project construction and performance of commissioned works. Special attention would be paid to water deliveries and agricultural production performance. 53. Support of Project Establishment and O&M Costs. Incremental staff salaries and allowances-about 65 percent of the total salaries and allowances--and other establishment and O&M costs would be financed by the Swiss Development Cooperation (SDC) under the project at a declining rate during project implementation, as follows: HMCN's Fiscal Year SDC MlGN to to onwards O&M funding of irrigation schemes has until now been based on financial norms not related to physical and staffing requirements: budgetary allocations in surface-irrigated areas are only NRs 140/ha; a tentative estimate of the appropriate figure is about NRs 370/ha. The extent and frequency of repairs and routine maintenance would be regularly reviewed. It has been agreed with HMGN that it would, through NZIDB: (a) by December 31, 1986, carry out, under terms of reference satisfactory to IDA, a detailed study of the physical and budgetary requirements for operation and maintenance of all works under the project; (b) furnish, by June 30, 1987, a report summarizing the results and recommendations of the study to IDA for its review and comments; and (c) thereafter, taking into account IDA's comments, if any, implement the results and recommendations of the study. To permit disbursement for project establishment and O&M costs, assurances were obtained from HMGN that it would: (a) by March 31 of each year, starting in 1987 for FY87/88, submit to IDA for review and comments, its estimates of salaries and allowances for project staff and estimates of operation -ad maintenance costs (excluding establishment costs); and (b) taking into account IDA's comments, make the required budgetary allocations to adequately cover O&M costs. 55. Design and Contracting Packages. Consultants engaged under the previous projects have prepared the Narayani III feasibility study and are preparing revised final designs and contracting packages for the

21 -16- construction season, taking into account modifications suggested during project appraisal. Most of the individual works planned are relatively minor, and the actual work experience gained under the Stage I and II projects have given a good basis for cost estimations on Stage III works. To help ensure prompt startup of the project, completing satisfactorily revised detailed designs for at least the construction season would be a condition of credit effectiveness. Organization and Management 56. Operation and Maintenance of public irrigation in Nepal is the responsibility of the Department of Irrigetion, Hydrology and Meteorology (DIHM), which is part of the Ministry of Water Resources (MWR). The Secretary, MWR, is the chief executive officer. The DIHM is headed by a Director-General, usually an engineer. Responsibility for constructing the large public irrigation projects rests with their Boards, established under the Development Board Act. The Secretary of HWR is the Chairman of all these boards; members are representatives fron the concerned ministries, entities related to rural development and the senior regional officers of the concerned ministries. 57. Narayani Zone Irrigation Development Board (N2IDB). The NZIDB, formed in 1973 for executing the Stage I project, would oversee the execution of the proposed project. At present it has 14 members, including representatives from the Ministries of Finance, Agriculture and Land Reform, the Planning Commission, the Directors-General of DIHM and of DOA, and the Regional Directors of DIHM and DOA (Central Region). The project's General Manager (GM) is its Member-Secretary. The Board's functions include: (a) approval of annual budget proposals for executing, implementing and operating the project; (b) senior staff appointments; (c) award of large construction and consultancy contracts; (d) semi-annual reviews of implementation programs and progress; (e) coordination of policy matters on programming, budget and finance, and (f) determination of the level of water charges. 58. The Chief Executive Officer of the project is the GM, appointed by the Minister of Water Resources, in consultation with the Secretary, MWR, and the Director-General of DIHM. It has been agreed with HMGN that it would, at all times, maintain in NZIDB a General Manager whose qualifications, experience and terms of reference shall be satisfactory to the Association. 59. The GM, the heads of all the operating divisions and the project consultants are in Birganj. The GM's responsibilities include: (a) preparation of the annual engineering work program, budget and staff requirements; (b) administration of project staff, including consultants; (c) authorization of construction by force account and of civil works and equipment contracts up to the limits of his financial authority; and (d) coordination of all project activities at the Regiona' and District

22 -17- levels. The project staff is organized into administrative, finance, design and construction, mechanical and the recently formed operation and maintenance divisions. Monitoring and evaluation (M&E) is at present carried out by a small section. 60. Proposed Organization. HMGI is considering a reduction of the membership of the NZIDB. The Secretary of MWR would continue to be its Chairman; others would be the Directors-General of DIHM and DOA, and one representative each from the Ministry of Finance and the Planning Commission. The GM of the project would continue to be its Secretary. The Board would meet four times a year to consider policy and inter-agency coordination issues. To reduce the Board's involvement in day-to-day issues, the GM would be given increased authority to approve contracts for civil works and for equipment purchase. The main changes in project organization would be as follows: (a) the Administrative Division's responsibilities in connection with water charge assessment and collections would cease with the proposed transfer of this function to the Revenue Department; (b) the Finance Division would continue to function without substantial changes; (c) the Design and Construction Division's design and survey section would be strengthened and its functions adapted to the changing scope of works; more engineers would be assigned to the section who would be suitably trained to ensure that they can design and supervise civil works and structures according to the principles and concepts of the project; eventually part of the division's staff would form a small nucleus in the O&M Division for any future development work; (d) the Operation and Maintenance Division's Operations Section would operate the system from the beadworks to the 30-ha area, and allocate the water and monitor deliveries; the Maintenance Section would maintain the system to the 30 ha turnouts, all the drainage system, flood control works and roads; (e) the Mechanical Division would administer and operate the Regional DIHM Workshop; and (f) the Monitoring and Evaluation (M&E) Unit would become a division and would collect and analyze pertinent data on project planning, implementation and performance, particularly with respect to (i) construction targets, progress and quality control findings; (ii) actual disbursements compared to targets; (iii) effectiveness of water management: timeliness and quantity of deliveries compared to projected schedules; (iv) operations and effectiveness of WUGs in securing compliance of their members to their directives; (v) maintenance costs; (vi) agricultural progress in terms of changing patterns of land use, cropping patterns, or any institutional changes in tenancy agreements; (vii) support given by the agricultural supporting services; and (viii) water charge collection. It would also be responsible for the preparation of progress reports. 61. To enable project mnnagement to carry out its functions, it would be a condition of effectiveness that IMGN authorize all the required project staff positions in a manner satisfactory to the Association. 1MGN would, at all times, continue to provide all staff positions required for effective project management.

23 In-service training would place special emphasis on survey, design, construction supervision, quality control for irrigation and drainage systems and associated civil works, and design and layout of field channels below the TC outlet. Appropriate training would be provided to canal operators in operation and maintenance of the system within their required scope of work responsibilities, and to WUC members in improved irrigation techniques. HCGN has agreed to cause NZIDB to: (a) submit an overall training program to IDA by January 1, 1987, for its approval; (b) by January 1 of each year comencing on January 1, 1987, submit to IDA for its approval the annual training program for the following fiscal year; and (c) thereafter, promptly begin implementation of the approved annual programs not later than April 1 of each year. Water Management 63. Nepal's agreement with India specifies that up to 24.1 m3/sec (850 cusecs) be delivered to the head of NEC from the Don Branch whenever required, except during closure periods for scheduled repairs and maintenance. In the past, principally because the NEC command area has not been fully developed, actual deliveries were well below authorized quantities. In addition, the NEC system obtains, or has the potential to develop, a limited supply from local sources. three rivers are diverted through small barrages which serve distribution systems that interlink with the NEC system. Fourteen other streams which cross the NEC can, potentially, be developed. However, supplies in all these rivers are unreliable towards the end of the dry season. Private shallow tubewells, a more reliable source, contribute to supplies; and their number is increasing. 64. The water management program is designed to: (a) deliver water in a timely and equitable manner to all farmers in the project area so that they fairly share available supplies; (b) deliver water to each farmer at a flow rate that enables efficient on-farm irrigation; (c) notify farmers of the time they will receive their allocations by preparing operation schedules which take account of the physical constraints of the network and the expected water supplies at the head of the NEC; and (d) so far as possible, adapt the delivery schedules to crop requirements. 65. To achieve the water allocation objectives, the NEC system would be operated at two distinct but interdependent management levels. The canal system from the NEC headworks down to tertiary outlets would be operated and maintained by the project through the Operations Section of the O&M Division. Below the turnout, the TC and field channel systems (down to tho farmgate) would be managed by the WUGs. It would be the individual farmer's responsibility to manage supplies on his farm. A regular maintenance program would ensure that the management system outlined is able to function. Performance would be monitored. To ensure effective and equitable water distribution, HKGN agreed that it would by January 31, 1987 adopt and thereafter implement a detailed water management plan for the irrigation scheme in the project area satisfactory to IDA.

24 -19- Water User Groups (WUCs) 66. An essential prerequisite for successful operation below the TC turnout would be to organize the water users within the 30 ha area. As far as topography allows, the WUGs' area of activity would coincide with the local administrative Wards. Thus, Ward leaders may well become WUG leaders, thereby ensuring continuity of the traditionally established leadership. The Chairmen and members of the WUGs would be trained in the procedures to be followed. Their first task would be to construct the field channel systems, according to designs and layouts provided by project management. Structures would be built by the project. It has been agreed with HMGN that: (a) in tertiary commands where there is already an irrigation service, water users' groups will be established by December 31, 1986; and (b) it would cause its NZIDB to establish water users' groups along each new tertiary canal not less than six months before the tertiary is scheduled to begin operation. 67. To enable the WUGs to perform these functions effectively, they need statutory powers. Accordingly, it was agreed with HMGN that it would, by December 31, 1986, constitute the Water Users' Groups as statutory bodies, which would grant them authority to (a) supervise the distribution of water amongst their members in proportion to the size of their landholding; (b) cause their members to construct and maintain the field channels adjoining their holdings and any other sections of the field channels that do not skirt commandable areas; (c) in case of default, arrange for such work to be done at the cost of the defaulters, provided, however, that if the WUGs fail to maintain their part of the distribution system, the work will be carried out by HMCN at the cost of the WUG concerned. Cost Recovery 68. The Boards which have been established in each of the major irrigation projects are at present responsible for determining the level of, and -ecovering, water charges within their jurisdictions. In the Narayani project, the NZIDB charges farmers NRs 100/ha for a one-season crop and NRs 200/ha for sugarcane. This is equivalent to an average of about NRs 140/haf per year at present irrigation intensities. Recovery from surface water schemes has been only about 15 percent on the average, which reflects in part farmers' reluctance to pay for an unreliable and inequitable service. However, recovery in the adjacent area served by public tubewells (under the Birganj Groundwater Scheme) has been significantly better, partly due to the more reliable and equitable service and partly due to more effective enforcement (a farmer is usually supplied with water only upon the presentation of payment for the last delivery); collection rates in this case are reported to be around 70 percent. 69. Substantial improvements in recovery are possible when the quality of the irrigation service is improved. Once farmers have realized the benefits of a reliable irrigation service, it should be possible to increase the level

25 -20- of charges and, more importantly, to improve collection rates. Assessment under the project would be simplified by replacing the existing rates with a flat annual rate on the cultivated command area (CCA). Responsibility for collection would be transferred to the Revenue Department which has the legal power to enforce payment. Water deliveries in other irrigation projects in the Terai (e.g., Sunsari-Morang and Mahakali) are expected to operate along similar principle., and following an assessment of the lessons learned in Earayani in revising its cost recovery system, the other schemes are also expected to charge a flat rate. As the service, and the benefits from irrigation improve, it should ba possible to gradually increase the water charge to cover, at least, full O&M costs and, taking into account farmers' payment capacity, part of capital costs. 70. An agreement was reached with HMCN that it would: (a) by December 31, 1986, introduce a flat rate of not less than NRs 200lha/yr on all commandable land in Narayani that receives an assured surface water supply, and increase water charges in the Birganj Groundwater Scheme to not less than NRa 400/ha/yr; and (b) charge its Revenue Department by July 16, 1987, with the duty of collecting water charges in the Narayani Scheme. In addition, an agreement was reached with HMGN that it would, by August 31, 1988, and thereafter every two years, review and if required, revise the assessment and collection procedures and adjust, as required, the level of water charges in the project area to ensure that, by fiscal 1993, and thereafter, water charges would cover the full O&M costs and a reasonable portion of capital costs, taking into account the farmers' payment capacity. Commitments for recovering O&M costs and such portion of capital costs that lie within the farmers' payment capacity exist in all major irrigation projects supported by IDA (e.g., Kahakali, Bhairawa-Lumbini, Narayani II and Sunsari Morang) as well ac projects supported by the Asian Development Bank; between them, they cover about 95 percent of all public irrigation schemes in the Terai. The delivery of reliable water supply, the provision for improved operation and maintenance and the transfer of recovery responsibility to the Revenue Department under this project would result in significant improvements in cost recovery. To ensure that the reforms introduced under this project are extended to other major projects after a brief trial period, HMGN agreed to complete, by April 1, 1989, a study of how these reforms can be applied to all other major irrigation projects (larger than 2,500 ha) in Nepal and to prepare and furnish to IDA, for its review and comnents, the results and recoumendations of the study. Upon receipt of IDA's comment's, if any, HHGN would implement the recommendations of such study. The timing of the study would take into account the need to: rehabilitate the water distribution system; make available reliable water supply to the farmers; and test the farmers' response in terms of their willingness and capacity to pay water charges. Project Cost and Financing 71. Total project costs are estimated at US$35.5 million equivalent, excluding taxes and duties. The foreign exchange component would be US$20.5 million or about 58 percent of total project costs. Costs are based on

26 -21- estimated prices of April Physical contingencies have been assumed at the rate of 15 percent on civil works and 10 percent on equipment, and amount to about US$2.9 million. Pr1re contingencies, which amount to about US$6.8 million, reflect expected inflation rates over the project period. The same rates have been assumed for local and foreign expenditures: 7 percent in through , 5.5 percent in , and 4 percent thereafter. 72. The proposed credit of US$24.5 million would finance 69 percent of total project costs. The Swiss grant of about US$7.5 million (Sw F 15.0 million) would finance 21 percent. The combined external financing (US$32.0 million) would represent 90 percent of total project costs. Cofinancing would be on a joint basis following Bank Group's procurement and consultants guidelines. Allocation of the credit and grant by categories is shown in Annex V. The balance of capital and recurrent expenditures over the implementation period would be met by HMGN from its development budget, for which adequate funds were allocated under the Seventh National Plan ( ). The credit would be made to HMGN on standard IDA terms. Procurement and Disbursement 73. Major civil works to be financed under the project would cost about US$17.5 million (about 50 percent of total cost), including physical and price contingencies but excluding land acquisition, engineering and administration costs. All the major works would be packaged under one contract to attract competition from large contractors and be procured under ICB procedures. This would enable planning a more continuous work program by the contractor by switching between activities according to seasons and site accessibility. The estimated cost of other miscellaneous and dispersed minor works procured under LCB procedures satisfactory to IDA would be about US$2.1 million. Force account work would amount to about US$0.6 million. Operation and maintenance and establishment costs amount to US$7.3 million. Of this amount salaries and allowances of incremental project staff and other management costs, estimated at US$4.3 million, would not involve procurement. Of the maintenance works, US$2.0 million would be implemented by small contracts and procured through LCB procedures satisfactory to IDA, and the remaining US$1.0 million would be implemented by HMGN's departmental forces. This component would be financed by SDC on a declining basis, with HMGN's share increasing accordingly (para 53). 74. Equipment and vehicles would cost approximately US$Z.7 million, inciuding physical and price contingencies. Heavy equipment, vehicles and workshop facilities (US$1.9 million) would be grouped into appropriate packages of US$100,000 or more, and procured through ICB procedures. Light equipment, motorcycles, bicycles and diesel generators (US$0.8 million), would be purchased at various times over the project life; they are available locally and would be purchased through limitee international shopping from at least three qualified suppliers eligible under the Bank's guidelines. Local purchase would ensure servicing facilities and spares. Costs for the consulting services are estimated at about US$3.9 million, including physical

27 -22- and price contingencies. This component would be financed by SDC. Selection of consu'lants would be in accordance with Bank/IDA guidelines. Training, MaE, and agricultural research costs are estimated at US$0.5 million and will be financed by IDA. Bicycles for extension staff (US$0.1 million) would be procured under limited international shopping from at least three qualified suppliers eligible under Bank guidelines; buildings (US$0.4 million) would be constructed by force account. Other items would not involve bidding. 75. Bidding packages for works estimated to cost more than US$0.5 million, and all ICB packages for goods and services, would be subject to standard IDA pre-action review. Such packages would account for about 90 percent of the total estimated value of the civil works and about 70 percent of the goods and services. The remaining contracts would be subject to post-action review by IDA. 76. The proceeds of the IDA credit and the Swiss grant would be disbursed over seven years against: (a) 100 percent of expenditures on civil works; (b) 100 percent of foreign expenditures, 100 percent of local expenditures based on ex-factory costs and 70 percent of other expenditures on items procured locally, on vehicles and equipment; (c) 100 percent of expenditures for technical services; and (d) 90 percent of expenditures on O&M, establishment costs and salaries and allowances for project staff for FY87, FY88 and FY89, 70 percent in FY90 and FY91, 50 percent in FY92 and 25 percent in FY93. Disbursements for payments of less than NRs 500,000 for works (including departmental works), NRs 250,000 for goods, staff costs for training, adaptive and engineering research, monitoring and evaluation and the costs for special surveys and study tours would be against statements of expenditures. The supporting documentation would be retained by NZIDB for review by IDA. Full documentation would be required for all other disbursements. 77. Special Account. To ease the burden on HMGN between incurring authorized expenditures and obtaining reimbursements from IDA, a special account would be established which would be equivalent to approximately four months of estimated expenditures or US$0.4 million equivalent. Payments out of this account shall be made exclusively for project components to which IDA contributes and according to IDA's guidelines governing payments from such accounts, including prior submission of two confirmed copies of the contract against which payments are made, except in the case of statements of expenditure which will follow the normal procedure whereby HMG would retain supporting documents for review by IDA. Reimbursement applications for expenditures to be funded through the special account would be accompanied by certified statements of transaction. Accounts and Audits 78. imgn has, in the past, been in arrears with audit covenants of irrigation projects. Following a recent intensive follow up and review, the situation is now improving, and good progress is being made toward full

28 -23- compliance with covenants. It was agreed that HMGN would cause DIHM and NZIDB to: (a) maintain separate records and accounts for all project expenditures in accordance with sound accounting principles; (b) have such accounts, including the Special Account, audited by an independent auditor acceptable to IDA, in accordance with sound auditing principles; the audit report would include a statement verifying that funds advanced by IDA to the special account had been used for the purpose for which they were provided; %c) forward to IDA such accounts, together with the auditor's reports, within nine months after the end of each fiscal year; (d) include in the annual audit reports, submitted to IDA, a separate opinion from the auditor as to whether the disbursements made on the basis of statement of expenditures were in respect to goods and services received and incurred for the purposes of the project. Benefits, Justification and Risk 79. Agricultural benefits from the project would derive mainly from extending the command area by 8,700 ha and by providing a more efficient irrigation service to the entire command. The annual incremental agricultural production at full project development is expected to be about 68,500 tons of foodgrains, 6,800 tons of oilseeds and about 16,800 tons of sugarcane. The value added of agricultural production is estimated to increase by about NRs 206 million (US$8.8 million) per year. About 31,500 farm families would benefit directly from this project. The increase in employment opportunities would result in 9,300 full time farm jobs. Project construction work would provide employment to about 7,500 unskilled laborers over seven years. As a result of the project, annual farm incomes on the typical one hectare farm are expected to increase from an average of about NRs 7,000 to about NRs 14,200 and the incidence of poverty among farm families would be substantially r2duced. 80. The economic rate of return (ERR) is about 21 percent. The results of the sensitivity analysis indicate that only large deviations of expected benefits (by -61 percent) or construction costs (by +203 percent) could make the scheme economically unviable. Perceived project risks are the following: (a) if provisions for operation and maintenance were to be only half that required after IDA assistance for the project is completed, the ERR could decline to 11 percent; however, HMGN awareness of the linkage between adequate 0&M and cost recovery, and the legal agreements with IDA reduce such risk; (b) the Indian authorities could fail to provide water from the Don Branch to NEC in the quantities assumed; this risk is small since flows in the Candak River are more than adequate for all project needs; moreover, provisions have been made under the project for better coordination between the NZIDB and the Bihar authority responsible for management of the Indian Eastern Canal System; the assumed supplies may in fact improve, particularly in respect to releases prior to the wet season; (c) a major flood could damage the Don Branch or NEC: both canals cross difficult country and have many cross drainage structures over rivers and torrent beds; however, in the past both the Indian and Nepalese authorities have been able to repair any

29 -24- damage quickly, so that the risk of interruption to supplies for periods that would affect crop yields in the kharif to a significant extent is small; and (d) NZIDB could experience difficulties in implementing an efficient water management system. Much of the benefit is predicated on the assumption that the system would be managed to provide a secure, equitable and timely water supply to all farmers in the command. Implementation of any management system demands the cooperation of all parties, and increased farmer discipline will be needed to reduce the risk of failure. However, at least a part of past indiscipline has developed because design deficiencies made it difficult to provide reliable and equitable service to water users. Since it will be possible to manage the canal system in a manner which is less susceptible to abuse, and the WUGs would be strengthened and accorded legal status, the risk of a major failure of water management would be much reduced. PART V - RECOMMENDATION 81. I am satisfied that the proposed credit would comply with the Articles of the Association and recommend that the Executive Directors approve the proposed credit. A. W. Clausen President Attachments Washington, D.C. June 2, 1986

30 -25- ANNEX I -A I L s k Page 1 of 6 - OCUALun,U i o Al i6m ls t1@~~lmst CUC PTMAT^zX 1geOL). tilesl UICKNI 8 llcws U & SCIZrAC A FA PCIFLC lgk 19701, "la ria& A Ann CT D sq. a) TOTAL AORICOLTUUAL GM Nu F (on) I011.t (RILOURAU O OIL NUlVVALIT) S P1MATIm A1 VTAL nmstz S POWMUATION.09D0-AR (THOUANDS) a""1 POFU1 CE OP 0,TAL) P0CULTIOU POJUCTIOII6 ncusation IS W 2000 C7ELL) 24.5 STAROIUM F0OII6TTi (PULL) 74.0 PorUlATioN ilibi 1.6 FOaUsT mai 133 go. W ug SQ. Ms. SAL. LAM 26G POPULATION act STRUCTURE CZ) 0-14 TU I1s- TN " AND AlOVE * POPULATZOi CRfUM RATE CZ) TOTAL u 2.3 Utuu CRUDE UZOTI RanE (VEX TNOOS) * cuim D13 au (M TOUS) CROss UOoucTIo1 RATE : s TAMMYT PLANIUI ACWTOIS. 4UI1 (C3003) USR (I OF AI UN) FOD AD HUTrITO LNU of 1OOD nod. MI CAPITA ( ) PEIL CAPITA SU"LY OF CALORIES CZ Oar R3WeNTS) PROTEIN (cuns Fm DAT) S.3 OF WHICH MANAL AND PULSE Ic CHMD (ACES 1-4) DEAN RAZE LIFE EPECT. AT URTS (YEARS) swant IlOrT. RALTE (PER TlltNS) ACCZ5SSTO SAFE WATE (1POP) TOTAL Id URBAN S3.0t 77.2 RURAL '- b i ACCESS TO EXCRETA DISPOSAL (S OF POPULATION) TOTAL Id 7.6 SO.1 UR1I S RUAL Id 5.5 I6.7 POPULATION PER PNYSICIAS Ia Id POF. PER NURSINGII PERSON to d POP. PER HOSPITAL BED TOTAL /f URIAS *50.0 o b51.6 RURIAL, b.9 ADEISSIONS PER HOSPITAL BED *1.1 AVERAGE SIZE OF NtOISEHOLD TOTAL URBAN... - RURAL.... AVERAGE tlo. Of PERSONS/RO04 TOrAL.... URBAN RURAL.... PERNTACS Of WCLLI3 WIM ELECT. TOTAL UoRn" RURAL.....

31 -26- ANNEX I STABLECs 3~ Page 2 of 6 NcPAL - SOCAL INDICATOUS DATA SHEET NEPAL naxnsct GRoun (ItmGD AVENS= Ia MST (1OST RECENT STLNATE) /b RECANT LOW INCU. RIDDLE INCUS 196&L 1970lb ESTmtAT!!b ASIA 6 PACItIc ASIA & PACIFIC ADJUISTCED ENOLUIENT RATIOS PntI f TOTAL IALE PENAL= * SrCoNDARS: TOTAL KtLC PUBIS 2.V VOCnowSa CZ or S5DNUMW) a Ia PUPL-TEASER RATIO PRZnr SECOMNhA PASSESOER CARS/STOUSAND P1P RADIO RZCKERS/tTOUSMID FOP J TV IRECMVRSITNOUSND Pay UEWSPAPE ("UDILY GICEAL INTEREST") CIRCLATO PUr THWSn POPULATION CUlI. ANNAL ATTENDANCE/C*PITA TOTAL LABOR, FOCE (T110S) PUBIS (PFCU t) ACUICEL7URX (UNCUT) Y /d INDUSY (PECENT) PARTICIPATION IA= (PECENIT) TOTL MALE EALS b.8 ECONOMaC WmNIDCICY RATO InSc DINSTIS72[ carc w VIVATE ECCDk RECEIVED BY RICHEST 5O OE OUSZEI.LDS /c RICGEST 202 o0 ROUSULD,S g *- 4U.0 LOUEST 202 OP HOUSSIIOLDS rc.. b.4 LOVES 40S OF IOUSEOLDS c Pe t TASCT C- ESTMLATED ABSOLUTE POVERTY INCOME LEVEL (USS PER CAPITA) URSA RURAL ESTDATED RELATIVE POVERTY ICUE EVEL. (USS FM CAPrTA) URBAN RURAL i ESTlATIED POP. BELOW ABSOLUTE POVERTY INCOM LEVEL CZ) URBAN Ic RURAL /c NOT AVAILABLE!IOT APPLICABLE N 0 T E S /a The group averages for each indicator are population-weighted arithmetic means. (average of countries smug the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, *'Data for 1960" refer to any year between 1959 and lvbl: "Data for 197u" between 1969 and 1971; and data for "loet Recent Estimate" between 1981 and /c 1977; Id 1980; /e Personnel in goverant services only; /f i97b; S JUNE. 1955

32 -27- ANNEX I Page 3 of 6 DUWfl1OII5 OF SOCIA INDICATO No Altboho th dau are d raw fro s wrurit elyjudupd tm muhemmade madm mbl. it ho slul uld hum e tha th* y my not be asaruauoly npab b s at i leh e f tdaduddnjem. and cow pu by diffent cean cellig t dat. Tb dataamnofethulm miiie eoicrilin, I -.1ou* i cl _ p The unes tomps an (al dh am ceuaty wup _od the saut c_my md (2) a country goup wits ummuwt hiwr rap Income than the acutry Aoupo utdlub y (uaaptlfor-h les ODi Espormu groupwhem Middie ln Ntb Afris nd Midd Est ig buses. n a pr mociemctl t Waidt.). li. I ac gboup da th ari- ppulpatoen _i athic _ sum feroc indiator and showe only whmajority dth _ aii i* a op hdaa f tor idater. Slhne die mrcounutm ong the indatendp w ilabilityofd mand is noe unife uuan mu_ beaetid mm inamg ate..indiator toaa Thme ave ar7e only umsiul ia cmpsulu hde wvalue aw indkatori * -ang uma ARlEA (thouand sq.knl) Crud AWh Rate (pr s as.md)-number of live births in the year Tera-Totai surfac area comprising land area and inlad wates; per thousand of mid-year population; and 1983 data. 1960, 1970 and 1983 data. Crud Dewd Rae (per ah.usued)-number of deaths in the year Agdubwml-Estinte of agricultural ar uw temp rily or per thousand of mid-year population; 1960, and 1933 data. permanently for crops pastur market and kitcben gardena or to Gr Repedelm Rae-Averap number ofdaulghters a woman he fallow, anc 19U2 data. will bear in her normal rproductive period if she expeiences prsnt age-speckfc rcrlity mnes; usually five-year avenges ending GNP PEl CAPIfA (US)-CNP per capta estites at cunent arwket pm. calculated by s-me conversion method as World in an b flenda e ra.rs (rh -Aanu awn- Bask Atlas ( basis): 1933 data. xer of accepton of binh-control devices under auspice of national ENERGY CONSUMPTION PER CAPITA-Annual appare raiy planning progrm. consumption of commercal priay enemy (coal and lignite. PIelr'4smn (peror Gf-ir)e bao-the percenpetroleum. natunl gs and hydro- nucear and geothermal ele- tap of married women orchili-bearing age who a practicing or tricity) in kilograms of oil equivalent per capita; , an whose husbands are practicing any form of contraception. Women 1982 datl of child-bearing age are generally women aged although for sme countries contraceptive usge is measured for other age POPULATION AND VITAL STATSlTICS groups. Tol Ptp.kd... and 1983 data. Mid- Yew (rhomvd-as of July 1; 1960, FOOD AND NUITION Index effod PdPwcdo Per Capt ( I00--lndex of per Urha PopsWin. (ptrcent of treal)-ratio of urban to total capita annual production of all food commodities. Production population; different definitions of urban areas may affect compar- exelude animal feed and see for agicultue. Food commodities ability of data among countries; and 1983 data. include primary commodities (e.g. sutgcane instead of sugars hbpulaoa- PA*cris which are edible and contain nutrients (e.g. coffee and tea are fopueaior u Yer 200TheI projection of population for excluded); they comprise cereals. root crops. pulses. oil seeds. made for each economy separately. Starting with information on vegetables. fruts. nuts. suprcane and sugar beets. livestock. and total population by age and sex. fertility rates. mortality rates. and livestock products. Aggrepte production of each country is Sased iternational migration in the base year thes pneters on national average producer pnce weights: and were projected at five-year intervals on the basis of generalized 1982 data. assumptions until the population became stationary. -p Capita Sapl f Colories (prewr qfrequn- rsj-comput- Staltonarv popultio Is one in which age- and sex-specific morulity rates have not changed over a long period. while age-specific ed from calorie equivalent of net food supplies available in countrv per capita per day. Available supplies compnse domestic producfertility rates have simultaneously remained at replacement level tion. imports less exports. and changes in stock. Net supplies (net reproduction rate- 1). In such a population. the birth rate is exclude animal feed. seeds for use in agricultn.re. quantities used in constant and equal to the death rate. the age structure is also food processing. and losses in distribution. Requirements were constant. and the growth rate is zero. The stationary population estimated by FAO based on physiological needs for normal act% it' size was estimated on the basis of the projected characteristics of and health considering environmental temperature. body weights. the population in the year and the rate of decline of fertility age and sex distribution of population. and allowing In percent for rate to replacement lemel waste at houshiold level: and 1982 data Popvdation Monsenuwn-Is the tendency for population growth to Per Capita Supply of Protein (ranes per diayj-prolein contenl 0o continue beyond the time that replacement-level fertility has been per capita net supply of food per dav. Net supply of food is defined achieved: that is. even after the net reproduction rate has rcached as above. Requirements for all countnes established by USDA unity. The momentum of a population in the year t is measured as provide for minimum allowances of 60 grams of total protein per a ratio of the ultimate stationary pop':lation to the population in day and 20 grams of animal and pulse protein. ol which 111 grams the year r. giwen the assumption that fertility remains at replace- should be animal protein. These standards are lower than tholt of ment level from year t onward data. 75 grams of total protein and 23 erams of animal proeeiii a- an Pop-lation Denstyr average for the world. proposed by FAQ in the Third %korld;i ood Per sq.km.-mzd-year population per square kilometer t100 hec- Supply and 19x2 data. tares) of total area: and 1983 data Per Capita Protein Suppl fram Ainimal and Pulse-Pr.'iin arpi;. Per rq km ajret ultural land-computed as above for agricultural oftfood dern ed from aninmals and pukes in eram' per dl. 1i. 'h5 land oniv and 19N2 data 1970 and 19'' dant Ppulatien Age Snrrsare (percentj-children t0-14 years). work- Child (ages 1-4l Death Rate (pei rhousand)-n umber otitdt.1:.u,' ingaget15-64 vears). and reured (65 years and over) as percentage children aged 1-4 years per thousand children in the %ame age of mid-year population: and 1983 data. group in a yven year. For most developing countries data derned from life tables: and 1983 data. Pepuulusien Gmrhwr Rate (perceiu-ttal---annual growth rates of total mnid-year population for and HEALTH Papulaion Grouwt Rate (percerat)j-nau-annual growth rates Life Epecatncy at Birth (yea-)--number of years a neobom of urban population for and data. infant would live if prevailing patterns of mortalitv for all people

33 -28- ANNEX I Page 4 of 6 at tbh due of of ha birth wa to sty th - throughout it Ufb; Ap&meee Raia. - prxay. ed aceuer-toui stude e 1960, 1970 ad 1963 data. rold In pimary Nd sedary levs dvded by numbers of h Mwhjt Raw (pm hed)-number of Iifas who die tache in dn coronapondlg bveb. bore rechig on yer of ap pr tdound live births In a give year 19ff0, 1970 and 1913 data. CONSUMPTION Aeer is SO POW f(pwe ef p8p.mkj-i ar4 _end. Cue c pmie d Po cae_-sn r cnxurd-numbar or poopla (toal, nuae, and rurl) with reasonable p-r motor cas adng ls than eight penon; excludes ambulmain to safwar sup*y (lahad tetd sfac wats or ancs, hre and miliuty vehil untregtd but umminmiend wa term ald that ffo prde Jau.o Raeeive (par rhe.uuodppapsulera)-all tpes of receivers b ursholas. sprinp ana snitary wels) a peronp of their rpec. for mdio broadcts to sgeneal pubicper thousnd at pulawdon dve p In an urba ae a public fountan or stoapost excluds un-flcesed recve In counti and In yer when lobated not - taon M0 maoms ha a houms y be c d repsrtion of radio s wu In dffn; data for ecent yems ay * being wit rsnable aosns or the ho_ In rura am not b compa al sines most countrie abolished licensing. eoableorao would Imply that houewwife orminbers oftbeor t hous o do mo have to sed a disproportionate pan of the day elude unlfensed Ts _toalpublk per thond populuion ine f i txh a* filawt nee ds * In u and inyvans wben registration of TV mm was Acces a._ EeaDpearpu peun.)-..hm id _d ared-number of peope (total urban, and ural) srved by without treamt, of human excrt and waste-water by water- Fdodl publautio devoted primaiy to recordingeneril news bon systms or the - of pit pr sn d similar inaldtionl It i cowdderd to be dailyf ifk appear at least tour times a wek. acnm Exct disposl dbposl a poeta may indude of their rpecdve the colecdton and diposl populations. with or k1fs age dcruao GeIre of (PUP &pand daly ge neinet newspapr, dte averdeid as a tpadm. pa Ptosinh-fpulation divided by number of p1> ti physidi qualif from a medcl shool at university lvl. Ch_ Amul AUIAdI pur Capita pm Yaw-Based on the number or ticets sold duriw the year. including admisions to AhuIde per NIA Po.-Rpultion divided by number of driemv denems and moble units. pnaicag male and fema grduate psedal nurses and nusing auxi;lad nun, astunt nure, LAO FORaCe patie per Hspbd So&-eo4, w,, _ed rw-pudo, e i- Econom y ve p nv (total, urban, and ral) ided by their res number of duding armed forces and unemployed but excluding houswives, hospital beds available in public and private, genal ads d students, etc.. coverinn populatio of all age Definitions in hospials and rehbilit cne. Hopits re esbl various countrie arn not comparab; and 1983 daut pemamdy staffed by at la one physicnl Esablshments proyv.n (F_eo)-Femal labor fame as pemntage of total labor iding pricpaly cuodil cae are not included- Rural hospitl torce. owevr, include halt and meddal otes not permanently safred A rkde (preema)-labor force in farming. forestry. hunting by a physicin (but by a medical aisnt, nurse, midwife, etc.) and flshing as percentage of total labor force; and 1980 which offer in-patient acoim tion and provide a limited ranp dat of medical facilities. bhusri (perej-labor torce in urping. constmction, manu- Ad.minm per H.aital ejh-total number of admissions to or tacturing and electricity, water and ps as pecetage of toul labor discharges from hospitals divided by the nunber of beds. force; and 1980 data. PoUI WG Rare (po,-4l mrk, adfa-particdp on HOUSING or activity rt are computed as total male, and fenale labor formc A4a Siw of Howelw (persaas per.s*h.d)-4orc4 wa, a pemtage of total male and female population of all ags and rro-a household consists of a group ofindividual who share repectivdr, and 1983 data. These ane based on ILO's Living quarnts and their mai meals. A boarder or lodger mry or. paricipation raes reflting a-sex str cture of the population. and nay not be included in the household for statsticl purpose long time trend. A few estiutes are from mntional soure APwg NwnMr of Pain per RAoo-taual, urban, end nrua- Econk Depend r Rato-Ratio or population under 15. and Averagc pumber oa persons per room in all urban, and rural 65 and over. to the working age population (those aged occupied conventional dwellings, respectivly. Dwelings exdude non-permanent structures and unoccupied parts. INCOME DISTRIBlTION Percenage of Dwellns _rit Elkciriery-rtal. urba, and rural- Perceaege of Toel Diwposable Iome (borh i casa and kind)- Convcntional dwelling with electricity in living quarters as percentage oa total urban. and rural dwelinp respectively. Accnring to percentile groups of households ranked by total house- hold income. EDUCATION POVERTY TARGET GROUPS Adsanred EmwLlwr Ratos The following estimates are very approximate measures of poverty Prmary school - total. maki and female-gross total male and level. and should be interpreted with considerable caution. female enrolment of all ages at the primary level as percentages of Estimaed Absolac Pbverry Income Level (3SS per capita)-arban respective primary school-age populations. While many countries consider primary school age w be 6-11 years. others do not. The and rural-absolucte poverty income level is that income level below which a minimal nutritionally adequate diet plus essential differences in country practices in the ages and duration of school non-food requirements is not affordable. are reflected in the ratios given. For some countries with universal Estimaed Relativr Porerry Incomw Level (ESS per capita) -rban educauon. gross enrollment may exceed 100 percent sincc some and rural-rural relative poverty income level is onc-third of pupils are below or above the counrrv's standard primary-school age. average per capita personal income of the country. Crban level is derived from the rural level with adjust-nent for higher cost of Secondary school - total, male and female-computed as above; living in urban areas. secondary education requires at least four years of approved pn- Eshmated Popaaio Below Absolare Poery lxcome Level tpermary instruction; provides gencral vocational or teacher training cent)-urbsn and rural- Percent of population (urban and rural instructions for pupils usually of 12 to 17 years of age; correspond- who are absolute poor. ence courses are generally excluded. Vocational Enroilmeni (percent of secondary)-vocational institu- Comparative Analysis and Dat Division tions include tchnal, industial or other programs which operate Economic Analysis and Projections Department independently or as departments of secondary institutions. June 1985

34 -29- ANNEX I Page 5 of 6 ECONOMIC INDICATORS - NEPAL GNP PUR CAPITA IN 1983: US$170 GROSS DOMESTIC PRODUCT IN 1984/85 ANNUAL RATE OF GROWTH. 1974/ /85 (S. constant prices) US$ Mln. S CDP at Market Prices Gross Domestic Investment Gross Domestic Saving Current Account Balance (arc. official grants) Exports of Goods. NFS Imports of Goods. NFS CUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1982/83 Value Added Value Added Labor Force */ Per Worker US$ ln. S Mln. US$ Agriculture 1, Industry b/ Services Total/Average COVERNMENT FINANCE CENTRL GO W NRs. Mn. _ of GDP 1981/ / / / /85 Current Receipts Regular Expenditures Current Surplus Development Expenditure External Assistance (Net) HONEY. CREDIT AND PRICES (Million NFR. outstanding mid-july) Honey and Quasi Money Bank Credit to Government Bank Credit to Public Enterprises Bank Credit to Private Sector Honey and Quasi Money as Z of GDP General Price Indez (1974/75 = 100) Annual Percentage Changes in: General Price Index Bank Credit to Government Bank Credit to Public Enterprises Bank Credit to Private Sector Note: All conversions to US dollars in this table are at the average exchange rate prevailing during the period covered. Fiscal year data are for Nepalese fiscal year, July 16 - July 15. a/ Total labor force; unemployed are allocated to sector of their no=ral occupation. b/ Includea mining. manufacturing. construction and utilities.

35 -30- ~~~~~~~~Page ANNEX 6 of I / / / /85 MERCHUNDISE EYPORTS 1984/85 (USS Million) US$ Nln. BALANCE o0 PAYMDflS Agricultural products Exports Manufactures Merchendige f.o.b Non-factor Services Total Imports Merchandise c.i.f EXTERNAL DEBT, DECEMBER 31, 1984 Non-factor Services US$ Mln. Resource Gap Public Debt. inc. guaranteed Net factor Income Non-Guaranteed Private Debt - Not Current Transfers Total Outstsnding & Disbursed Current Account Deficit Official Grant Aid DEBT SERVICE RATIO for 1984/85 S Net M&LT Loans Public Debt. inc. guaranteed 5.0 Diobursements Repaymento Capital Plovs N.E.T IBRD/IDA LENDING, Sept (Millions USS) Overell Balance US$ mn. Change in Net Reserves IRBD IDA (-increase) Outstanding & Disbursed Gross Official Reserves Undisbursed (Mid July) Outstanding. incl. undisbursed RATE OF EXCHANGE from March From September From December to September 18, 1981 to December 16, 1982 to May 31, 1983 June 30, 1984 a/ December 31, 1984 US$1.00 = NRs US$1.00 = NRa 13.2 US$1.00 = NRs 14.3 USS1.00 = NRa 16.4 USS1.00 = NRs 18.0 NRa 1.00 = US$ NRa 1.00 = US$ NRa 1.00 = US$ NRa 1.00 = USS NRs 1.00 = USS March June 30, 1985 September 30, 1985 December US$1.00 = NRs 18.1 US$1.00 = NRa 18.1 US$1.00 = NRs 17.3 US$1.00 = ER MeR 1.00 = US$ NRs 1.00 = US$ NRs 1.00= US$0.058 MNs 1.00= US$ S a/ Since June 1, 1983, the Nepal Rastra Bank announces the exchange rate daily. based on a trade-weighted basket, with the US dollar as the intervention carrency. The rate shown here is the mid-rate on the date indicated. South Asia Program February Department

36 -31- Annex II Page 1 of 2 STATUS OF BANK GROUP OPERATIONS IN NEPAL A. STATEMENT OF IDA CREDITS (as of March 31, 1986) a/ & b/ US$ million (net of cancellations) No. Year Borrower Purpose IDA Undisbursed Fourteen credits fully disbursed Kingdom of Nepal Second Water Supply & Sewerage Kingdom of Nepal Technical Education Kingdom of Nepal Irrigation (Sunsari-Morang) Kingdom of Nepal Irrigation (Narayani Zone) Kingdom of Nepal Second Rural Development Kingdom of Nepal Comunnity Forestry Kingdom of Nepal Irrigation (Mahakali) Kingdom of Nepal Third Water Supply & Sewerage c/ 1981 Kingdom of Nepal Grain Storage c/ 1981 Kingdom of Nepal Irrigation (Babai) Kingdom of Nepal Agricultural Extension & Res OOc/ 1981 Kingdom of Nepal Hill Food Production c/ 1982 Kingdom of Nepal Cottage & Small Industries c/ 1982 Kingdom of Nepal Second Education c/ 1982 Kingdom of Nepal Petroleum Exploration Promotion c/ 1983 Kingdom of Nepal Irrigation VI-Bhairawa-Lumbini c/ 1983 Kingdom of Nepal Cash Crop Development c/ 1983 Kingdom of Nepal Technical Assistance II c/ 1984 Kingdom of Nepal Second Forestry c/ 1984 Kingdom of Nepal Karnali Preparation c/ 1984 Kingdom of Nepal Primary Education c/ 1984 Kingdom of Nepal Marsyangdi Hydroelectric Power c/ 1985 Kingdom of Nepal Third Highways c/ 1985 Kingdom of Nepal Agric. Manpower Development c/ 1985 Kingdom of Nepal Industrial Development c/ 1985 Kingdom of Nepal Agricultural Extension II c/d/ 1985 Kingdom of Nepal Telecommunication IV Total, of which has been repaid 1.0 Total now outstanding b/ Total now held by IDA Total undisbursed a/ No Bank loans have been made to Nepal. b/ Prior to exchange adjustments. c/ IDA 6th and 7th Replenishments Credits, principal amounts shown in U.S. dollar equivalent at date of negotiations, as shown in President Reports, and undisbursed amounts shown U.S. dollar equivalent are valued at the exchange rate applicable on the date of this statement. d/ Not yet effective.

37 -32- Annex II Page 2 of 2 B. STATEMENT OF IFC INVESTMENT (as of March 31, 1986) Amount ($ million) Year Obliger Type of Business Loan Equity Total 1975 Soaltee Hotel (Pvt) Ltd. Hotel Nepal Orind Magnesite Mine and process (Private) Limited magnesite ore Total comitments now held by IFC

38 ANNEX III Page 1 of 2 NEPAL NARAYANI III IRRIGATION PROJECT Supplement Data Sheet Section I (a) Timetable of Key Events Time taken by the country to prepare the project: 24 months. (b) The agency which has prepared the project: Narayani Zone Irrigation Development Board, assisted by consultants (c) Date of first presentation to the Bank Group and date of first mission to consider the project: October 1984; June 1985 (d) Date of departure of appraisal mission: November 1985 (e) Date of completion of negotiations: April 1986 (f) Planned date of effectiveness: October 1986 Section II Special IDA Implementation Action None

39 -34- ANNEX III Page 2 of 2 Secticin III Special Conditions Conditions of credit effectiveness (a) (b) submission by HMCN of satisfactorily revised final design and contracting packages for the construction season (para 55); and authorization by HMGN of all staff positions required for project implementation (para 61). Other Conditions (a) (b) (c) HMGN/NZIDB would revise and simplify water charge assessment and collection procedures with the objective of collecting at least full O&M costs in the scheme area by fiscal 1993 (para. 70). Collection of water charges would be done by HMGN's Revenue Department (para. 70). Water users groups would be establised (para 70) and given statutory powers to ensure that they can effectively manage water distribution below the 30 ha outlet (paras. 66,67).

40 -35- ANNEX IV NEPAL NARAYANI III IRRIGATION PROJECT Proposed Procurement Methods (US$ Million) Procurement Method (US$ M) Item ICB LCB Other NA a/ Total Costs Civil Works (17.5) (2.1) (0.6) (20.2) Equipment, vehicles b/ and workshop facilities (1.9) -- (0.8) - (2.7) Consul:ing Services (3.9) - (3.9) Training, agriculture research, monitoring - (0.5) - (0.5) and evaluation Establishment, operation and maintenance (1.6) (0.4) (2.7) (4.7) Land acquisition (0) (0) TOTAL (19.4) (3.7) (6.2) (2.7) (32.0) c/ a/ NA--not subject to procurement. bi/ Procurement under limited international tendering. c/ Figures in parenthesis are amounts to be financed by IDA and SDC.

41 -36- ANNEX V NEPAL NARA"ANI III IRRICATION PROJECT Credit/Grant Allocation (US$N) Amount of Credit/Grant Category Allocated Percent Financed IDA SDC al 1. Civil Works: Z 2. Equipment, vehicles and Z of foreign expenditures workshop facilities 100Z local expenditures of ex-factory costs and 70Z of other locally procured items. 3. Technical services and studies: (a) Consultancies and studies Z (b) Training, agricultural research and monitoring and evaluation Project establishment and O&M costs 2.4} 902 in FY87-89 (escluding salaries) 1 70% in FY in FY92 ) 25% in FY93 5. Salaries and allowances of staff b/ 1.6) 90X in FY in FY90-91 '50X in FY92 } 25% in FY93 6. Unallocated 3.7 Subtotal c/ TOTAL 32.0 a/ Swiss Development Cooperation. b/ For administrative ease, disbursements would be made against total salaries and allowances; the declining disbursement rate would mean that grant allocation represents in the aggregate 851 of the salaries and allowances of incremental staff throughout the project implementation period. c/ Sw F 15.0 Million.

42 VFS - eis i Wz =e 1r3 -wss Xj : <(-9 +.Si: 2'S'xf r>s t,', l.